<PAGE>   1
                       Securities and Exchange Commission

                             Washington, D.C. 20549

                                FORM 10-KSB/A - 1

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                   For the fiscal year ended February 28, 1999

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

                  For the transition period from _____ to _____

                         Commission file number 0-24819

                         AMERICAN ENERGY SERVICES, INC.
                         ------------------------------

           Texas                                            76-0279288
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

                        7224 Lawndale, Houston, TX 77012
                        --------------------------------
                    (Address of principal executive offices)

                                  713-928-5311
                                  ------------
                           (Issuer's telephone number)

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

         Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the registrant'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]

         Issuer's revenues for the most recent fiscal year ended February 28,
1999 were $10,800,686.

         At July 14, 1999, the Common Stock, $.001 par value, of the registrant
held by non-affiliates of the registrant was 307,098 shares. As of that date,
there were 6,198,966 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         There is incorporated by reference in Part III of this Annual Report on
Form10-KSB the information contained in the Registrant's Proxy Statement for the
Company's Annual Meeting of Stockholder's to be held on September 15, 1999.

Transitional Small Business Disclosure Format  (check one):   Yes [  ] No [X]




<PAGE>   2
                                    P A R T I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         American Energy Services, Inc., a Texas corporation, was founded and
incorporated in 1987 ("Old AES"). The Company began active operations in 1989
after acquiring certain operating assets of two other valve manufacturing and
re-manufacturing businesses, CGM Valve, Inc. ("CGM") and American Energy Valves,
Inc. ("AEV"). The Company's current directors, Pat Elliott, Larry Elliott, Sid
McCarra, Mark Elliott and Cary McCarra, were previously associated with CGM and
AEV.


         Seahawk Overseas Exploration Corporation, a California corporation
("Seahawk") was formed in November 1988 to conduct the international operations
of Seahawk Oil International Corporation ("SOIC"). In January 1989, in
conjunction with a planned sale of certain domestic producing oil properties by
SOIC, the shares of stock of Seahawk were distributed to the shareholders of
SOIC, who number over 3000. Seahawk continued operations with little or no
success up until the time of the merger with Old AES, a Texas corporation. In
January 1996, Old AES was merged with and into Seahawk pursuant to an Agreement
and Plan of Merger by and between Old AES and Seahawk. In accordance with the
terms of the merger, (I) Seahawk became the surviving entity although its names
was changed to "American Energy Services, Inc." and (ii) shares of Seahawk stock
were issued to the seven stockholders of Old AES (i.e. the current AES
directors). In February 1996, a new corporation was formed under the name
American Energy Services, Inc., a Texas corporation ("New AES"). Subsequent to
the formation of New AES, Seahawk merged with and into New AES to maintain the
historic domicile of Old AES in Texas and to retain the historical business
name. In addition, the merger was intended to provide the Company with a legal
entity which could enter the public company domain and ultimately, provide
potential captial through the sale of registered securities. The effect of this
merger has been that the Company was able to acquire approximately 1,500
shareholders formerly owning shares of Seahawk stock. As used herein, references
to "AES" or the "Company" refer to New AES, its subsidiaries and predecessors.


Products and Services

         The Company is engaged in providing products and services worldwide to
processing manufacturers, energy companies and engineering/construction
contractors. Principal end-user markets include domestic and international
producers, transporters and refiners of oil and natural gas, as well as the
petrochemical, processing and power generation industries. AES designs,
manufactures, markets and services standard or specialty valves of varying sizes
and pressures used to regulate the movement of liquids, gases, and solid
materials.

         AES utilizes both Company owned and operated manufacturing facilities
and contractually licensed manufacturing subcontractors that are audited for AES
quality to produce the full line of AES standard and engineered valves.

         For much of its standard product manufacturing requirements, the
Company relies on a network of AES-selected subcontractors, all of which are
audited and licensed under internationally recognized quality programs,
including ISO 9000 and API Q1. The use of these subcontractors allows the
Company to reduce its fixed costs my minimizing its investment in plant and
equipment. In addition, by maintaining manufacturing relations and capabilities
internationally, AES has been able to attract additional customers worldwide.

         In addition, the Company designs, engineers and manufactures various
valves at its Houston plant. The facility has full scale manufacturing
capabilities, including large turning and machine centers, heavy-duty cranes,
and full welding capabilities. AES also houses a fully equipped engineering
department with



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computer-aided design ("CAD") system capabilities and metallurgical equipment to
determine American Society of Testing Materials ("ASTM") specified requirements.

Valve Design and Manufacture

         The Company manufactures valves to the following qualifications:
American Petroleum Institute ("API") 6D, API 6A, API 599, API 600, and API 602.
AES is a licensed API monogram holder under specifications 6D and Q1 and its
Quality Assurance Manual is ISO 9000 approved. Steps involved with the design
and manufacture of the Company's valves include (I) consultation with the
customer's project coordinators, (ii) general design work and detailed
engineering, (iii) fabrication and assembly and (iv) final installation.

         The Company's sales personnel and independent marketing
representatives, or agents, initiate sales calls and coordinate bid proposals
with the Company's quotation specialists. The quotation specialists produce
proposals that identify preliminary design and cost estimates for a type of
valve to be utilized for a specific application. AES marketing management must
also determine whether there is a sufficient amount of working capital available
to generate revenue.

         The initial design efforts involve significant communication and
coordination with the customer in order to identify and agree on valve
specifications. For custom-engineered valve projects, design concerts are tested
against established empirical data and previously manufactured valve designs.
AES maintains a source library of valve designs from which to choose and the
Company's CAD capabilities provide readily available and accessible design
parameters. When an order requires standard valve designs, AES' engineering and
quality assurance personnel verify that the Company's "off the shelf" designs
comply with the required specifications. Once the valve application has been
clearly defined, the Company's engineers formulate a design for the manufactured
valve. Project engineers perform complete engineering services, including
mechanical schematics, layouts and drawings. Process and electrical control
systems can also be integrated into the design.

         The manufacturing process involves fabrication and assembly of
component parts to meet specific valve designs and specifications. AES produces
machined assemblies from raw castings and forgings or sourced machined
assemblies from subcontractors, which are inspected fully for material and
tolerance compliance. The assembly groups are then put together as a complete
valve, and function and operation tests are performed. Testing involves
configuring testing procedures and changing the equipment before each test in
order to ensure that the valves meet the particular project's needs and
requirements. The Company believes that its testing of valve integrity is the
basis for providing performance and quality guarantees and total concept
capability. After testing is completed, the valves are prepared for shipment.

         Because the manufacturing process can take from several weeks to
several months, customers frequently request partial shipment of finished
products and components. AES generally invoices customers as deliveries are
made. However, on certain highly specialized products or on large projects, the
Company invoices under a milestone basis. Receivables represent billings on
delivered products or milestone achievements. Revenue is recognized utilizing
the percentage-of-completion method.

New Products and Services

         Since 1993, AES has developed (I) a full line of refinery and process
gate, globe, swing check, and ball valves of varying sizes, (ii) a line of
specialty valve products, designed and manufactured to meet a client's
particular valve application requirements, (iii) and other products, including
lubricated plug valves, rotary control valves, linear control valves, geothermal
through conduit gate valves and pressure seal valves. The Company also offers
trunnion mounted ball valves, and reduced or full bore floating ball valves, in
virtually any metallurgy required.



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         The Company also designs and manufactures specialty valves, such as
high pressure three-way ball valves for high temperature switching service,
metal-seated ball valves for various services including abrasives, three-way
piggable "Y" pattern ball valves for dock-loading applications, rapid shutoff
high pressure flood valves for NASA launch pad facilities, rotary control valves
for quiet operations for the Submarine Division of the U.S. Navy, and cyrogenic
valves for service to minus 150 degrees Celsius.


Quality Commitment and Control

         The Company's comprehensive quality control program is designed to
ensure that valves it manufactures, as well as components purchased from outside
manufacturers, meet AES' standards of quality. The quality control program of
the Company includes inspections at all stages of the design and manufacturing
process at its facility. All purchased components and products assembled by
subcontractors are also inspected to ensure that they perform properly. Thus
far, the Company's management has been satisfied with the quality and
reliability of products assembled by subcontractors. However, there can be no
assurance that such products will always perform properly. The performance
failure of a product could have a material adverse effect on the Company's
business, operating results, and financial condition.

         Since 1989, the Company has manufactured over 70,000 valve units. Due
to AES's commitment to quality, less than one-fifth of one percent of these
units have required any type of field service or plant refitting. The Company is
licensed under internationally recognized quality programs, including API
Specifications 6D, Q1 and its Quality Assurance Manual is ISO 9000 approved.
Additionally, AES has been a member of several standardization societies
including API and ASTM, among others.

Suppliers and Subcontractors


         The Company purchases nearly all castings, forgings, and certain
finished or semi-finished components used in its products from domestic and
international suppliers, including foundries and forging companies, bolt
distributors and soft good distributors. AES performs most of the finished
machining for the Company's engineered products. The Company also assembles
valve components, and performs pressure testing and final preparation of the
finished product. The Company maintains an approved vendor list of sub-suppliers
and sub-assemblies for the final manufacture of equipment by AES for its
clients. Over the past eight years AES has developed a working relationship with
a substantial number of suppliers and sub-vendors. Management believes that
these approved vendors provide adequate availability of alternative sources of
quality supplies for use by the Company. During the year ended February 28,
1999, of all components purchased by AES for its fiscal 1999 sales, the Company
purchased from its leading sub-vendors, DHV and Stoos, 34% and 12%,
respectively. However, the Company has not entered into any agreements or
contracts with either of these leading sub-vendors except for the placement of
specific purchase orders related to the Company's course of business. AES
sources its sub-vendors on a continuing, as needed basis. Terms of sale between
the Company and the sub-vendors are generally either C.O.D. or under an
Irrevocable Letter of Credit payment.


Customers

         The Company's customers include manufacturers, energy companies,
domestic and international oil and gas producers, transmission and refining
segments of the energy industry, and the petrochemical processing and power
generation industries. End-users of the Company's products consist of a broad
range of industrial, commercial and utility companies. The Company's customer
base is comprised of 300 accounts with over 125 considered active. The Company
markets and sells a vast majority of its products internationally while
marketing domestically through distribution. Over the last ten years, the
Company has placed in service approximately $75 million dollars worth of valve
products.



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<PAGE>   5

         The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Some of the Company's
principal customers include Daelim Engineering and Construction Corporation
("Daelim"), Kuwait Oil Corporation, Petroleos Mexicanos, Bechtel Corporation,
EcoPetrol, British Petroleum, and Parsons Engineering. During the company's
fiscal year ended February 28, 1997, sales to the Company's four largest
customers accounted for 59% of the Company's net sales. For years ended February
28, 1999 and 1998, sales to the Company's largest customer, Daelim in fiscal
1999 and Techint Cotecol S. A. in fiscal 1998, accounted for 30% and 31% of the
Company's net sales, respectively. Due to the nature of the Company's
operations, it is anticipated that significant portions of future revenues may
continue to be attributable to a few customers, although it is likely that the
identity of such customers will change from period to period. Techint Cotecol SA
down-sized it's development, in which AES strongly participated. For this
reason, management believes Techint Cotecol will provide less than 10% of the
gross sales for AES during 1999. Because of the Company's range of gate, globe,
check and ball valves and the variety of applications available to the valves
sold by the Company, the Company maintains a broad customer base within the
various industries it serves.



The Company's products are used by a variety of segments of the general
industries indicated below:

         ENERGY INDUSTRY                    POWER GENERATION
         Refiners and Processors            Co-generators
         Oil and Gas Producers              Utility
         Transmission Companies

         PLASTIC AND PETROCHEMICAL          MINING AND MINERAL PROCESSING
         Petrochemical Complexes            Water and Waste Treatment
         Base Resin Manufacturers           Catalysts
         Base Chemicals                     Steel Mills
                                            Pulp and Paper

MARKETING AND DISTRIBUTION

         DOMESTIC. The Company's domestic (United States, Canada and Mexico)
marketing network consists of a primary distribution relationship with
multifaceted production, general supply companies and specialty valve
distributors. Presently, the Company's distribution activities are in the
initial stages of growth. As of February 28, 1999, AES' distribution backlog was
in excess of $2,000,000.

         INTERNATIONAL. The Company markets its valve products internationally
through a network of independent manufacturer's representative firms or agents
located in every major oil and gas producing and/or consuming country in the
world. The Company maintains relationships with international customers by
regularly sending the Company's international marketing personnel to foreign
countries to discuss local market conditions, to conduct technical presentations
to potential buyers and to participate in point of sale commercial negotiations
during major bid activities. Both domestic and international engineered product
sales involve the Company's technical sales personnel and valve engineering
consultants. The Company's quotation specialists act as liaisons between
customers and the Company's design and engineering group by responding to
customer requests for proposals regarding the cost of a certain quantity of
valves that meet specific design and capability criteria.

         The Company's international markets are divided among the following
areas:

<TABLE>
<S>               <C>                       <C>
         1.       Western Hemisphere:       Mexico, Venezuela, Argentina, Colombia, Peru,
                                            Ecuador, Brazil

         2.       Europe:                   North Sea, Continental Europe, United Kingdom, Russia
</TABLE>



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<PAGE>   6

<TABLE>
<S>               <C>                       <C>
         3.       Africa:                   Nigeria, Algeria, Offshore West Africa, South Africa

         4.       Middle East:              Turkey, Syria, Saudi Arabia, Kuwait, U.A.E., Egypt
         5.       Sub-Continent:            India, Pakistan, Bangladesh

         6.       Pacific Rim:              Singapore, Malaysia, Indonesia, Japan, Korea, Thailand

         7.       China:                    Mainland China, Hong Kong, Taiwan
</TABLE>

         The market and demand for the Company's valves have grown rapidly
recently, primarily as a result of the resurgence of the industries to which the
Company markets. The international energy, chemical, and petrochemical
industries, as well as domestic refining and pipeline markets have experienced
rapid growth. In response to such growth, the Company has opened regional or
country offices staffed by marketing personnel indigenous to the local market
and technically well versed in valve product applications. The Company employs
support personnel in Beijing, China, Seoul Korea, and Calgary, Canada.

         The prospects for the Company depend to a large extent upon the
economic condition of the industries to which the Company markets. Should these
industries experience an economic downturn, there may be a significant reduction
in the demand for the Company's products. Many of the Company's competitors are
significantly larger than the Company and have substantially greater financial
and other resources at their disposal. No assurance, therefore, can be given as
to the Company's ability to compete effectively in the even the industries it
serves experience an economic downturn.

         In addition to direct marketing by independent and Company marketing
representatives, the Company markets its products and services through
catalogues and brochures. The Company also advertises and attends major trade
shows and conventions worldwide.

COMPETITION AND INDUSTRY

         The valve manufacturing industry is highly competitive. Although
reliable comparative figures are not available, the Company believes that its
principal competitors have more extensive and diversified operations and also
have financial, operating and other resources substantially in excess of those
available to the Company. However, personal relationships and interaction with
clients worldwide at their places of business has proven to be a very effective
way of combating competition, developing business and cutting costs. Many years
of experience with international manufacturers and suppliers have allowed the
Company to purchase valve castings and semi-finished components used in its
products at cost competitive prices.

         The Company has also been able to successfully compete because minimal
overhead and fixed manufacturing costs have allowed it to bid and complete
projects at lower prices than its competitors. Many other large traditionally
structured valve manufacturers have a substantial capital investment in domestic
plant and equipment along with continuing monthly maintenance and production
expenses. In contrast, the Company has structured a flexible custom
manufacturing, assembly, testing, and quality verification plant in Houston,
Texas that is staffed by a core group of experienced, quality-oriented valve
experts. The Company's specialized facility is supported and complemented by
both domestic and international quality conscious valve manufacturing
subcontractors that are selectively utilized on a when needed basis - only as
project quality and budget requirements dictate. By outsourcing its
manufacturing requirements, not only has the Company been able to minimize fixed
costs, but it has also established a large network of subcontractors
strategically located throughout the world that can provide annual valve
manufacturing capacity exceeding $100 million.

         The Company competes against numerous valve manufacturers. Several of
the Company's competitors are more established in the industry and have
substantially greater manufacturing, marketing



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and financial resources than the Company. However, the Company plans to remain
competitive by continuing to maintain strict quality standards, respond flexibly
and responsibly to customers' needs, and deliver high quality products on a
reliable basis and at competitive prices.

         Some of the Company's competitors include large, well-established
US-based valve manufacturers with revenues in excess of $200 million, including
Cooper Industries, Crane Valve Company and Zidell Corporation, among others.
These large domestic-based producers, which are established domestically and
internationally, are able to protect their market territories by target pricing,
approval protection, and local relations. Further, their large amount of capital
and reserves allow them to survive difficult economic downturns. Another group
of competitors includes divisional or stand-alone US valve manufacturers with
revenues between $20 million and $100 million, including TK Valve and Tom
Wheatley Valve Corporation, both of which are divisions of Dresser Industries,
Inc.

         The Company also competes with several international competitors
located in various parts of Europe, North and South America and Asia. One group
of international valve manufacturers with which the Company competes, including
Kitz, Grove-Italia and PBV, are recognized, well established, international
valve manufacturers with revenues between $10 million and $1 billion. The
Company also competes with various low cost producers located in Eastern Europe,
India and China.

BACKLOG


         The Company's total backlog of valve manufacturing contracts as of
February 28, 1999 was approximately $5,800,000 (excludes aforementioned
distribution backlog). Approximately 90% of the Company's present backlog of
contracts is at least partially secured for payment by irrevocable letters of
credit, milestones, progress payments, or wire transfer of funds at time of
shipment; however, the majority of the Company's contracts are terminable by the
customer without penalty. Certain of the Company's contracts include a
"cancellation for convenience" section, which provides for AES recovery of costs
incurred to date and related profits. As such, there can be no assurance that
the amount of backlog ultimately will be realized.


INDUSTRY OUTLOOK

         OIL AND GAS PRODUCTION, TRANSMISSION AND REFINING. Both domestic and
international production, transmission and refining markets demand high quality,
reliable and long-lasting products for their facilities. The domestic valve
market has historically been dominated by brand name products; however, given
the economics of domestic deregulation coupled with international end-user
acceptance of low-bid, technically capable valve products, the international
marketplace is expected to provide quality conscious, low-priced valve
manufacturers like the Company with many opportunities.

         PETROCHEMICAL, CHEMICAL AND PROCESSING. Over the last few years, the
Company has experienced an increasing demand from the international
petrochemical and refinery industries for the Company's products. The Company's
current positive outlook is directly impacted by the new construction projects
regularly announced by the worldwide chemical and petrochemical industries.

         POWER GENERATION AND OTHER. The power generation, textile, pulp and
paper, food, and mineral processing industries have historically comprised a
modest amount of the Company's revenues and business development efforts.
However, because the future of these industries is believed by management to
offer the Company opportunities for growth, the Company intends to devote a
greater amount of its marketing and business development efforts to these
industries.



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<PAGE>   8

TRADEMARKS AND PROPRIETARY RIGHTS

         The Company owns 100% of the Full Port Cartridge Loaded Forged Check
Valve design which has been patented with the United States Patent and Trademark
Office (US Patent No. 5,522,423). The Company is also in the process of
developing several other patents, including a Prescription Compact Thru-Conduit
Terminal Gate Valve and a Three-Port Terminal Switch Valve. The Company has also
registered the names AEV, AES, and AES Accuseal 500 with the United States
Patent and Trademark Office.

RESEARCH AND DEVELOPMENT

         The Company currently conducts regular research and development
activities involving the engineering and design of valve products. During the
fiscal years ended February 28, 1999, 1998, and 1997, approximately $225,000,
$226,000 and $400,500, respectively, was expended in connection with such
activities. Management anticipates that research and development costs as a
percentage of sales will not increase materially from current levels.

ENVIRONMENTAL COMPLIANCE

         The Company's operations are subject to a variety of federal, state and
local laws and regulations, including laws and regulations relating to the
protection of the environment. The Company is required to expend financial and
managerial resources to comply with such laws and related permit requirements in
its operations and anticipates that it will continue to do so in the future.
Although such expenditures historically have not been material to the Company,
the fact that such laws or regulations are changed frequently makes it
impossible for the Company to predict the cost or impact of such laws and
regulations on its future operations. Modification of existing laws or
regulations or the adoption of new laws or regulations affecting the Company's
operations could adversely affect the Company. The Company believes that it
currently is in material compliance with all such applicable laws and
regulations.

EMPLOYEES

         At February 28, 1999, the Company employed 60 persons. None of the
Company's employees are covered by collective bargaining agreements. The Company
considers its employee relations to be satisfactory.

ITEM 2.  PROPERTIES

         The principal offices and manufacturing facilities utilized and owned
by AES are located in Houston, TX. These book value of these facilities amount
to less than ten percent (10%) of the total assets of AES. The Company believes
that its manufacturing facilities will be suitable and adequate to meet
production demands of the near future. In order to take advantage of available
orders, however, AES has plans to build a new facility with greater production
capacity within the next year.

ITEM 3.  LEGAL PROCEEDINGS

         AES is involved in various legal proceedings and claims arising in the
ordinary course of business. In the opinion of management, the amounts of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position or future results of operations of the Company.


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

         There was no matter during the fiscal quarter ended February 28, 1999
that was submitted to a vote of security holders.





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                                   P A R T II

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

         The Common Stock of AES is not currently traded on any stock exchange.
In connection with a migratory merger effective August 22, 1996, pursuant to
which Seahawk was merged with and into the Company, 6,198,966 shares of the AES'
stock were issued to the Seahawk stockholders. Since this merger was solely for
the purpose of change the domicile of the Company, this transaction was deemed
not to constitute a sale in accordance with Rule 145 promulgated pursuant to the
Securities Act. There has been no other issuance of stock by AES during the last
three years.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                    Year Ended February 28,
                                        --------------------------------------------------
                                         1999      1998      1997       1996       1995
                                        --------  --------  --------   --------   --------
                                             (in thousands except per share data)
<S>                                     <C>       <C>       <C>        <C>        <C>
Revenues                                $ 10,800  $ 11,989  $ 10,718   $  5,552   $  8,551
Net Income (loss)                            389       109    (1,225)      (685)         2
Total assets                               8,854     6,181     7,006      5,184      3,236
Long-term debt                             1,288     1,341       491        308        262
Basic and diluted EPS (a)                   0.06      0.02     (0.20)     (0.11)      --
Average shares outstanding - basic (b)     6,199     6,199     6,199      6,199         17
Average shares outstanding - diluted       6,199     6,199     6,199      6,199         17
</TABLE>

(a)  The effects of stock warrants were not included in computing diluted
     earnings per share because the effect was anti-dilutiive.

(b)  On August 28, 1997, AES effected a one for ten reverse stock split. The
     number of shares outstanding and per share amounts have been restated to
     reflect the split (refer to Note 10 of the Notes to Financial Statements.

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

                           FORWARD-LOOKING STATEMENTS

         This material contains "forward-looking" statements as defined in the
Securities and Exchange Acts of 1933 and 1934 that could involve substantial
risk and uncertainties. When expressions include words such as "anticipate",
"believe", "estimate", "intend", "expect", "plan" and when similar expressions
are used, they are intended to identify the statements as forward-looking. The
Company relies on a variety of internal and external information to develop such
statements. Due to the inherent limitations in that development process and the
relatively volatile nature of the industry in which the Company operates, actual
results, performance and achievements may differ materially from results
suggested by these forward-looking statements.

                              RESULTS OF OPERATIONS

Fiscal Year Ended February 28, 1999 versus Fiscal Year Ended February 28, 1998

         Net sales for the Company's fiscal year ended February 28, 1999
("fiscal 1999") decreased $1,187,007 or 10% below the fiscal year ended February
28, 1998 ("fiscal 1998"). This decrease was primarily related to delays in the
completion of certain major valve projects.



                                       9
<PAGE>   10
         Cost of sales in fiscal 1999 decreased $1,295,984 or 14% below fiscal
1998 to $8,305,238. Gross profit for fiscal 1999 was $2,495,448 or 5% greater
than the previous fiscal year. As a percentage of net sales, the Company's gross
profit margin improved from 20% in fiscal 1998 to 23% in fiscal 1999.

         Operating expenses in fiscal 1999 continued the downward trend that
began in fiscal 1998. Fiscal 1999 operating expenses of $1,569,419 were $157,459
or 9% below fiscal 1998. Operating expenses as a percentage of net sales were
essentially the same at 14% for both fiscal years 1999 and 1998.

         Other expenses for fiscal 1999 increased $54,503 of 11% over other
expenses in fiscal 1998 largely due to increased interest expense.

         Net income improved from $109,118 in fiscal 1998 to $361,857 in fiscal
1999, or an increase of 232%. This increase was largely attributable to
management's continuation of certain cost control measures introduced in fiscal
1998 and further utilized during fiscal 1999.

         The increased net income in fiscal 1999 resulted in basic and diluted
earnings per share of $0.05 compared to $0.02 per share in fiscal 1998.

Fiscal Year Ended February 28, 1998 versus Fiscal Year Ended February 28, 1997

         Net sales for the Company's fiscal 1998 increased $1,271,000, or 12%
over the Company's fiscal year ended February 28, 1997 ("fiscal 1997"), to
$11,989,000. The majority of the increase was the result of aggressive sales
efforts initiated during mid-1996 to regain market presence in AES' project
business.

         Cost of sales in fiscal 1998 increased $1,262,000, or 15% over fiscal
1997 to $9,601,000. Gross profit for fiscal 1998 was $2,387,000 and essentially
flat when compared to the gross profit of $2,378,000 in fiscal 1997.

         Operating expenses decreased approximately $1,959,000 or 53%, to
$1,727,000 for fiscal 1998 from $3,686,000 in fiscal 1997. The significant
decrease in operating expenses was primarily attributable to the following
factors: (I) fiscal 19978's operating expenses included $900,000 in bad debts
while fiscal 1998 had only $20,000, and (ii) AES management engaged in certain
cost control measures which further reduced expenses in fiscal 1998. Operating
expenses as a percentage of sales decreased from 34% in fiscal 1997 to 14% in
fiscal 1998.

         Other expenses were down $29,000 from fiscal 1997. The cost of
financing was virtually unchanged, down $5,000 from fiscal 1997, as AES
continued to utilize its project specific financing and operating lines of
credit to support daily operation and organization of AES project business.

         Net income before taxes improved $1,998,000 from a fiscal 1997 pre-tax
loss of $1,820,000 to a fiscal 1998 pre-tax profit of $178,000. The Company
received a future income tax benefit of approximately $596,000 as a result of
those losses from operation in fiscal 1997.
After tax net income improved from a fiscal 1997 loss of $1,225,000 to a fiscal
1998 profit of $109,000.

         On August 28, 1997, the Company effected a 1 for 10 reverse stock split
and outstanding shares decreased to approximately 6,199,000. The effect of the
fiscal 1998 stock split and net income resulted in a basic and diluted income
per share of $0.02.

Impact of Inflation

         An effect of inflation is to increase the prices of labor and raw
materials used to manufacture AES' products, which may require periodic
increases in the prices for the products to maintain gross profit margins.




                                       10
<PAGE>   11

Management does not consider AES to have any unique difficulty in managing the
effects, if any, on its business.

Euro Conversion

         On January 1, 1999, eleven of fifteen countries which are members of
the European Union, introduced the new currency unit called the "euro". Prior to
the full implementation of the new currency on January 1, 2002, there will be a
transition period during which parties may either use their existing currencies
or the euro. However, all exchanges between currencies of the participating
countries must first be converted into the euro, and then into the country's
currency. Although AES has not yet completed a full evaluation of the impact of
the euro, the conversion has not had nor is it expected to have a material
effect on its results of operations.

                         LIQUIDITY AND CAPITAL RESOURCES

         The primary sources of AES' liquidity during the year ended February
28, 1999 were internally generated funds, an increase in accounts payable, and
proceeds from notes payable. These funds were used primarily for costs in excess
of billings on uncompleted projects relating to the percentage of completion
method, and also to pay down notes payable.

         During the year ended February 28, 1999, working capital improved by
$325,087 to $(860,256) primarily due to the increase in cash and cash
equivalents, the reduction of notes payable, and the net improvement of costs
and billings on uncompleted projects. Although improved when compared to fiscal
1998, the shortage of working capital during fiscal 1999 has resulted in
inefficiencies as well as lost opportunities. The Company has been successful,
in negotiating advance payments from many customers and has pledged against
letters of credit established by customers, however, the working capital
shortage has hindered operations and to some degree, profitability. For that
reason, AES is actively seeking alternative sources of additional capital that
may include debt restructuring, debt and equity offerings, or borrowings
guaranteed by the EX-IM Bank for export sales. However, there is currently no
assurance that such capital will be available when it is required or on terms
that are acceptable to the Company.

         Capital expenditures for fiscal 1999 were $109,201 primarily for an
upgrade of the Company's computer system and software, which was financed by a
capital lease. No additional or significant capital expenditures are expected to
by made in fiscal 2000, unless the efforts to reengineer cash flow and increase
working capital are both successful and significant. Only upon a significant
improvement in working capital and financial position will additional or
significant capital expenditures be considered by management in fiscal 2000, and
then only after exhaustive consideration and within very stringent guidelines.


         Although Company sales generally include a high percentage of export
sales, the exposure to currency rate fluctuations is considered minimal. The
U.S. dollar is the functional currency of the Company and all AES purchase
orders are placed with and paid to the Company in that same currency. Thus, all
sales and receivables are denominated in U.S. dollars.

         The economic downturn in the Pacific Rim has had a minimal impact, if
any at all, on the Company's reported results of operations. Management
believes, however, that the cumulative effect of the region's economic downturn
as it influences the size and timing of expenditures on industrial construction
projects could have an adverse effect on future AES revenues.


                                    YEAR 2000

         The "Year 2000" issue is the inability of computer systems (both
hardware and software) to recognize the change in date from 1999 to 2000. The
issue affects both information technology ("IT") and non-IT





                                       11
<PAGE>   12
systems. Non-IT systems typically include embedded technology such as
micro-controllers. These systems are more difficult to assess and often require
replacement rather than repair.

         The Company has recognized the significant uncertainty associated with
the Year 2000 issue and has tested it products for compliance. It is the
Company's belief that substantially all necessary modifications have been made
to its products.

         AES is in the process of reviewing its internal computer systems. The
Company has contracted with an outside vendor to assess its internal hardware
and software with regard to Year 2000 compliance. To date, no "mission critical"
systems have required significant modification or replacement.

         The Company is also in the process of identifying and communicating
with its suppliers and vendors where failure by such third parties to achieve
Year 2000 compliance could be expected to have a material impact on the Company.
For those suppliers or vendors who may pose a material risk, contingency plans
will be developed.

         AES has not incurred any material expense to date with regard to the
Year 2000 issue and does not expect any future expense related to the issue to
be material. Any costs associated with the issued will be treated as period
costs and expensed as incurred. There can be no assurance, however, that the
Year 2000 will not present problems unforeseen at this time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

         Market risk inherent in financial instruments outside the financial
statements is considered immaterial.

ITEM 8.  FINANCIAL STATEMENTS

         The financial statements required to be filed under this item are
presented elsewhere in this report. Such financial statements are incorporated
by reference under this Item 8. See the index to this information on page 16 of
this Annual Report.

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

         None.





                                       12
<PAGE>   13
                                   P A R T III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information about the directors
and executive officers of the Company:

<TABLE>
<CAPTION>
                  NAME               AGE          POSITION
                  ----               ---          --------
<S>                                  <C>          <C>
         Larry S. Elliott            51           Chairman of the Board, and Senior
                                                  Vice President

         Patrick S. Elliott          55           Director, President, and Chief
                                                  Executive Officer

         Mark P. Elliott             35           Director, Senior Vice President

         Cary P. McCarra             36           Director, Senior Vice President

         Sidney J. McCarra           47           Director, Senior Vice President

         Robert S. Love              46           Vice President, Chief Financial
                                                  Officer
</TABLE>

LARRY S. ELLIOTT - Larry Elliott has served as Chairman of the Board of
Directors of AES since October, 1997, as President of the Company from March,
1989 until appointed Chairman, and as a director since October 1992. He has over
27 years experience in the valve industry, including extensive business travel
and relationships in 45 countries. He is familiar with every major area of the
Company, including sales, engineering, manufacturing, accounting and legal.

PATRICK S. ELLIOTT - Patrick Elliott has served as President of the Company
since October, 1997, Chairman of the Board from March 1989 through September,
1997, as Vice President since March 1989, and as a director since October, 1992.

MARK P. ELLIOTT - Mark Elliott has served as a director of the Company since
October, 1992, and as Vice President since March 1989. During that time, he has
been responsible for marketing and selling the Company's valves and services to
the oil and petrochemical industry. He is currently Senior Vice President of
Sales and leads the efforts of the Company's Sales Department.

CARY P. MCCARRA - Cary McCarra has served as a director of the Company since
October 1992, and as Vice President since March 1989. He has nearly 20 years
experience in the valve industry, including welding, machining, assembly and
testing. He is currently Senior Vice President and is responsible for on-site
inspection tours of all current and potential Company vendors, including
auditing Quality Assurance programs and witnessing procedure implementation.

SIDNEY J. MCCARRA - Sidney McCarra has served as director of the Company since
October 1992 and as Vice President since March 1989, and is currently Senior
Vice President. He has been active in the valve manufacturing and
re-manufacturing industry since 1974. He has served as Vice President of
Procurement and Vice President of Operations. He has been responsible for
purchasing valve products and equipment, including parts, machinery and valves,
and for managing day to day operations, including accounting, collections,
shipping, receiving, and sales. He is currently responsible for locating and
approving new quality vendors, negotiating vendor contracts, and performing
management duties for all foreign operations as it relates to product
distribution and project business.




                                       13
<PAGE>   14

ROBERT S. LOVE - Robert Love is the most recent addition to the Company's
management team (April 1999) and will serve as Vice President and Chief
Financial Officer. He has over twenty years experience in the financial
management of both small companies and Fortune 500 companies. His most recent
experience was with the former Daniel Industries, Inc. a $300 million flow
control company recently acquired by Emerson Electric. While responsible for the
financial management of the company overall, his initial responsibilities
include, but are not limited to, financial reporting, implementation of
(Manufacturing Resource Planning (MRP II), assisting with the implementation of
listing/trading AES stock on a major exchange, and cash flow reengineering.

ITEM 11.  EXECUTIVE COMPENSATION

         The following compensation table sets forth certain information
regarding compensation paid during the fiscal year ended February 28, 1999 to
the executives of the Company.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                  NAME AND
                  PRINCIPAL         FISCAL              SALARY            BONUS
                  POSITION           YEAR                ($)               ($)
                  --------          ------              ------            -----
<S>                                  <C>               <C>                <C>
         Larry S. Elliott
         Senior Vice President       1999              $ 111,000          ---
                                     1998                143,000          ---
                                     ----------------------------------------
                                     1997                126,000          ---
                                     ----------------------------------------
         Patrick S. Elliott
         President                   1999              $  90,000          ---
                                     1998                107,000          ---
                                     ----------------------------------------
                                     1997                100,000          ---
                                     ----------------------------------------
         Mark P. Elliott
         Senior Vice President       1999              $  90,000          ---
                                     1998                100,500          ---
                                     ----------------------------------------
                                     1997                100,000          ---
                                     ----------------------------------------

         Cary P. McCarra
         Senior Vice President       1999              $  90,000          ---
                                     1998                 98,500          ---
                                     ----------------------------------------
                                     1997                100,000          ---
                                     ----------------------------------------
         Sidney J. McCarra
         Senior Vice President       1999              $  90,000          ---
                                     1998                 98,500          ---
                                     ----------------------------------------
                                     1997                100,000          ---
                                     ----------------------------------------
         Robert S. Love
         Vice President              1999                    N/A          N/A
</TABLE>

         Currently there are no options, benefit plans nor employment agreements
between the Company and the officers, with the following exception:

         The Company secured the services of Robert S. Love under an employment
agreement dated April 21, 1999. Further, this agreement includes the issuance of
40,000 stock options granted by the Company to Robert S. Love, to be vested 20%
annually with a strike price of $1.00 per share.



                                       14
<PAGE>   15
COMPENSATION OF DIRECTORS - No director of the Company received any form of
compensation from the Company for any services provided as a director, for
committee participation, or for special assignments.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

         The following table sets forth certain information concerning the
number of shares of Common Stock owned beneficially as of February 28, 1999 by:
(I) each person known to the Company to own more than five percent (5%) of any
class of the Company's voting securities; (ii) each director of the Company; and
(iii) all directors and officers as a group.

<TABLE>
<CAPTION>
           TITLE            NAME AND ADDRESS       AMOUNT AND NATURE PERCENT
          OF CLASS         OF BENEFICIAL OWNER       OF BENEFICIAL OWNER         OF CLASS
          --------         -------------------       -------------------         --------
<S>                        <C>                     <C>                           <C>
          Common Stock     Larry S. Elliott (1)               1,708,678.2          27.56%
                           5319 Mandell
                           Houston, TX 77005

          Common Stock     Patrick S. Elliott (2)             1,767,457.8          28.51%
                           2608 Green Tee
                           Pearland, TX 77581

          Common Stock     Mark P. Elliott                      883,728.9          14.26%
                           3504 E. Circle Drive
                           Pearland, TX 77581

          Common Stock     Sidney J. McCarra                  1,237,425.5          19.96%
                           1903 Orchard Country
                           Houston, TX 77062

          Common Stock     Cary P. McCarra                      294,576.3           4.75%
                           3663 Nasa Road 1, #301
                           Seabrook, TX 77586

          Common Stock     All directors and                  5,891,867.7          95.05%
                           officers as a group
</TABLE>

         Unless otherwise indicated, all shares of Common Stock were held
directly with sole voting and investment powers.

1.   Includes 1,708,679.2 shares owned by the Larry S. Elliott Trust for the
     benefit of Ross S. Elliott and Laura Elise Elliott, the children of Larry
     S. Elliott. Larry S. Elliott, as trustee of this trust, has sole voting and
     dispositive power over the trust assets.

2.   Includes 1,767,457.8 shares owned by the Pat S. Elliott Trust for the
     benefit of Mark P. Elliott, Shannon Elliott and Michelle Elliott, the
     children of Pat S. Elliott. Pat S. Elliott, as trustee of this trust, has
     sole voting and dispositive power over the trust assets.

The Company is not aware of any arrangement which might result in a change of
control in the future.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company intends that any transactions between the Company and its
officers, directors, principal stockholders, affiliates or advisors will be on
terms no less favorable to the Company than those reasonably obtainable from
third parties.






                                       15
<PAGE>   16

                                   P A R T IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      Documents Filed as a Part of this Report


<TABLE>
<CAPTION>
                                                                         Page
                                                                         ----
         1. Financial Statements
<S>                                                                      <C>
            Report of management.......................................  19
            Report of independent accountants..........................  20
            Balance sheets at February 28, 1999 and 1998...............  21 - 22
            Statements of operations for the years ended February 28,
                     1999,1998 and 1997................................  23
            Statement of Comprehensive Income for the years ended
                     February 28, 1999, 1998 and 1997..................  23
            Statements of stockholders' equity for the years ended
                     February 28, 1999, 1998 and 1997..................  24
            Statements of cash flows for the years ended February 28,
                     1999  and 1998....................................  25 - 26
            Notes to financial statements..............................  27 - 35
</TABLE>


         2. All financial statement schedules are omitted because they are not
            applicable or the required information is shown in the financial
            statements or related notes listed above.

         3. Exhibits

         Exhibit
         Number                        Description
         ------                        -----------

         2.1          Articles of Incorporation of the Company, filed as Exhibit
                      2.1 of AES' Report on Form 10-SB filed August 19, 1998,
                      and incorporated by reference herein.

         2.2          Articles of Merger of Seahawk Overseas Exploration
                      Corporation with and into the Company, filed as Exhibit
                      2.2 of AES' Report on Form 10-SB filed August 19, 1998,
                      and incorporated by reference herein.

         2.3          Bylaws of the Company, filed as Exhibit 2.3 of AES' Report
                      on Form 10-SB filed August 19, 1998, and incorporated by
                      reference herein.

         2.4          Form of Common Stock Certificate, filed as Exhibit 2.4 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         2.5          Common Stock Purchase Warrant of Murphy & Co., filed as
                      Exhibit 2.5 of AES' Report on Form 10-SB filed August 19,
                      1998, and incorporated by reference herein.

         6.1          Promissory Note dated November 17, 1997 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $1,200.000, filed as Exhibit 6.1 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.



                                       16
<PAGE>   17

         6.2          Promissory Note dated May 2, 1998 executed by the Company
                      in favor of Metrobank, N.A., in the original principal
                      amount of $2,000,000, filed as Exhibit 6.2 of AES' Report
                      on Form 10-SB filed August 19, 1998, and incorporated by
                      reference herein.

         6.3          Security Agreement dated May 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $2,000,000, filed as Exhibit 6.3 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         6.4          Promissory Note dated February 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $644, 465, filed as Exhibit 6.4 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         6.5          Security Agreement dated February 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $644,465, filed as Exhibit 6.5 of AES'
                      Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         10.1         *Employment Agreement dated April 21, 1999 between AES and
                      Robert S. Love.

         23           Consent of Simonton, Kutac & Barnidge, L.L.P.

         27           Financial Data Schedule

o        Management Contract or compensatory plan or agreement.

         The Company will furnish a copy of any exhibit described above to any
beneficial holder of its securities upon receipt of a written request therefor,
and provided further that such holder pays to the Company a fee compensating the
Company for its reasonable expenses in furnishing such exhibits.


         (b)    AES did not file any report on Form 8-K during the year ended
February 28, 1999.





                                       17
<PAGE>   18
SIGNATURES

         As required by 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.

                                              AMERICAN ENERGY SERVICES, INC.
                                                     (REGISTRANT)

Date:    July 14, 1999                        By: /s/  LARRY S. ELLIOTT
                                                  ------------------------------
                                                  Larry S. Elliott
                                                  Chairman of the Board

         As required by the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                                          DATE
---------                                   -----                                          ----
<S>                                         <C>                                         <C>
/s/  LARRY S. ELLIOTT                       Senior Vice President and Chairman
---------------------------                 of the Board                                July 14, 1999

/s/  PATRICK S. ELLIOTT                     President, Chief Executive Officer and
---------------------------                 Director (Principal Executive Officer)      July 14, 1999

/s/  ROBERT S. LOVE                         Vice President and Chief Financial
---------------------------                 Officer (Principal Financial and
                                            Accounting Officer)                         July 14, 1999

/s/  SIDNEY J. McCARRA                      Senior Vice President and Director          July 14, 1999
---------------------------

/s/  MARK P. ELLIOTT                        Senior Vice President and Director          July 14, 1999
---------------------------

/s/  CARY P. McCARRA                        Senior Vice President and Director          July 14, 1999
---------------------------
</TABLE>




                                       18
<PAGE>   19
                              REPORT OF MANAGEMENT

         The accompanying financial statements of American Energy Services, Inc.
and its consolidated subsidiaries were prepared by management, which is
responsible for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles and include amounts
that are based on management's judgment and estimates.

         The Company maintains a system of internal controls, including
accounting controls. AES believes that its system of internal controls provides
reasonable assurance that assets are safeguarded against losses from
unauthorized use or disposition and that financial records are reliable for use
in preparing financial statements.

         Management also recognizes its responsibility for conducting the
Company's affairs according to the highest standards of personal and corporate
conduct. This responsibility is characterized and reflected in policy statements
regarding, among other things, conduct of the Company's business activities
within the laws of the countries in which the AES operates and avoidance of
potentially conflicting outside business interests by the Company's employees.



/s/  PATRICK S. ELLIOTT
-------------------------------------------
Patrick S. Elliott
President and Chief Executive Officer

/s/  ROBERT S. LOVE
-------------------------------------------
Robert S. Love
Vice President and Chief Financial Officer


July 14, 1999


                                       19
<PAGE>   20

                          Independent Auditors' Report


June 25, 1999

The Board of Directors
American Energy Services, Inc.

We have audited the accompanying balance sheets of American Energy Services,
Inc. as of February 28, 1999, and 1998 and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for the years ended
February 28, 1999, 1998, and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Energy Services, Inc.
February 28, 1999, and 1998 and the results of its operations and cash flows for
the years ended February 28, 1999, 1998, and 1997, in conformity with generally
accepted accounting principles.



SIMONTON, KUTAC & BARNIDGE, L.L.P.

Houston, Texas




                                       20
<PAGE>   21

                         AMERICAN ENERGY SERVICES, INC.

                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                           February 28,
                                                    -------------------------
                                                       1999          1998
                                                    -----------   -----------
Current Assets:
<S>                                                 <C>           <C>
   Cash and cash equivalents                        $   353,510   $    13,786
   Certificates of deposit                               11,223        17,380
   Accounts receivable - trade net of allowance for
   doubtful accounts of $0 and $20,000                  153,191       516,921
   Accounts receivable - other                           68,767        60,686
   Income tax receivable                                147,543       147,543
   Prepaids and other                                   103,834       100,081
   Costs in excess of billings on
     uncompleted contracts                            4,056,295     1,169,885
   Inventories                                        1,337,095     1,495,016
                                                    -----------   -----------
       Total Current Assets                           6,231,458     3,521,298

Property, Plant and Equipment:
   Machinery and equipment                            1,307,682     1.307,682
   Furniture and fixtures                               327,541       219,840
   Vehicles                                              81,553        81,553
   Building and improvements                            221,241       219,741
   Land                                                  76,894        76,894
                                                    -----------   -----------
                                                      2,014,911     1,905,710
Less: accumulated depreciation                         (749,677)     (614,725)
                                                    -----------   -----------
                                                      1,265,234     1,290,985

Trademarks, patents and drawings                        992,086       877,967
Less: accumulated amortization                         (254,721)     (163,937)
                                                    -----------   -----------
                                                        737,365       714,030

Deferred tax asset                                      473,371       500,224

Other Assets                                            147,029       154,399
                                                    -----------   -----------
       Total Assets                                 $ 8,854,457   $ 6,180,936
                                                    ===========   ===========
</TABLE>


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



                                       21
<PAGE>   22
                         AMERICAN ENERGY SERVICES, INC.

                           BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                February 28,
                                                          ------------------------
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
Current Liabilities:
   Notes payable                                          $ 2,393,763  $ 2,668,000
   Current portion of long-term obligations                   168,313      144,122
   Current portion of capital leases                           53,723       36,520
   Accounts payable and accrued expenses                    4,330,462    1,658,970
   Billings in excess of costs on uncompleted contracts       145,153      199,029
                                                          -----------  -----------

       Total Current Liabilities                            7,091,414    4,706,641
                                                          -----------  -----------

Long-term obligation, net of current portion                1,153,374    1,245,316
Capital leases, net of current portion                         78,325       59,492

Commitments and Contingencies                                    --           --

Stockholders' Equity:
   Capital stock - no par value, 10,000,000 shares
     authorized; 6,198,966 shares issued and outstanding      218,583      218,583
   Accumulated other comprehensive loss                          --           --
   Retained earnings (accumulated deficit)                    312,761      (49,096)
                                                          -----------  -----------

       Total Stockholders' Equity                             531,344      169,487
                                                          -----------  -----------

       Total Liabilities and Stockholders' Equity         $ 8,854,457  $ 6,180,936
                                                          ===========  ===========
</TABLE>


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


                                       22
<PAGE>   23

                         AMERICAN ENERGY SERVICES, INC.

                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                       For the Years Ended
                                                          February 28,
                                           ------------------------------------------
                                               1999           1998           1997
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
Net sales                                  $ 10,800,686   $ 11,988,693   $ 10,717,563

Cost of sales                                 8,305,238      9,601,222      8,339,696
                                           ------------   ------------   ------------

          Gross Profit                        2,495,448      2,387,471      2,377,867

Operating expenses                            1,569,419      1,726,878      3,686,306
                                           ------------   ------------   ------------

     Income (loss) from operations              926,029        660,593     (1,308,439)

Other expenses (income):
     Interest, net                              540,813        499,955        504,982
     Other, net                                  (3,494)       (17,139)         6,829
                                           ------------   ------------   ------------

                                                537,319        482,816        511,811
                                           ------------   ------------   ------------

          Net income (loss) before taxes        388,710        177,777     (1,820,250)

Income tax (expense) benefit                    (26,853)       (68,659)       595,625
                                           ------------   ------------   ------------

          Net income (loss)                $    361,857   $    109,118   $ (1,224,625)
                                           ============   ============   ============

Basic and diluted income (loss) per share  $       0.05   $       0.02   $      (0.20)
                                           ============   ============   ============

Basic weighted average shares
         Outstanding                          6,198,966      6,198,966      6,198,966
                                           ============   ============   ============

Diluted weighted average shares
         Outstanding                          6,508,914      6,508,914      6,508,914
                                           ============   ============   ============
</TABLE>

                         AMERICAN ENERGY SERVICES, INC.
                        STATEMENT OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                     Year Ended        Year Ended      Year Ended
                                     February 28,     February 28,    February 28,
                                        1999             1998              1998
                                   ---------------  ---------------  ---------------
<S>                                <C>              <C>              <C>
Net income (loss)                  $       361,857  $       109,118  $    (1,224,625)
Other comprehensive income (loss)             --               --               --
                                   ---------------  ---------------  ---------------
Comprehensive income (loss)        $       361,857  $       109,118  $    (1,224,625)
                                   ===============  ===============  ===============
</TABLE>


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




                                       23
<PAGE>   24


                         AMERICAN ENERGY SERVICES, INC.

             STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                         Retained        Total
                                    Capital Stock        Earnings /   Stockholders'
                              ------------------------    (Accum.        Equity /
                                Shares       Amount       Deficit)     (Deficit)
                              -----------  -----------  -----------   -----------
<S>                           <C>          <C>          <C>           <C>
Balance at February 28, 1996    6,198,966  $   154,105  $ 1,066,411   $ 1,220,516

Net loss                             --           --     (1,224,625)   (1,224,625)
                              -----------  -----------  -----------   -----------

Balance at February 28, 1997    6,198,966      154,105     (158,214)       (4,109)

Preferential distribution of
  net Seahawk assets                 --         64,478         --          64,478

Net income                           --           --        109,118       109,118
                              -----------  -----------  -----------   -----------

Balance at February 28, 1998    6,198,966  $   218,583  $   (49,096)  $   169,487

Net income                           --           --        361,857       361,857
                              -----------  -----------  -----------   -----------

Balance at February 28, 1999    6,198,966  $   218,583  $   312,761   $   531,344
                              ===========  ===========  ===========   ===========
</TABLE>


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


                                       24
<PAGE>   25
                         AMERICAN ENERGY SERVICES, INC.

                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                       For the Years Ended
                                                                           February 28,
                                                             ---------------------------------------
                                                                1999           1998         1997
                                                             -----------   -----------   -----------
<S>                                                          <C>           <C>           <C>
Cash Flows from Operating Activities:
   Net income (loss)                                         $   361,857   $   109,118   $(1,224,625)
   Adjustments to reconcile net income (loss) to
     cash provided (used )by operating activities:
     Depreciation and amortization                                25,736       209,407       145,196
      Provision for bad debts                                    105,476        20,000          --
   Loss on disposal of fixed assets                                 --            --           3,392
   Changes in operating assets and liabilities:
       Decrease (increase) in accounts receivable                250,173       872,899      (742,199)
       Decrease in income tax receivable                            --          10,000        75,990
       (Increase) decrease in costs in excess of billings
         on uncompleted contracts                             (2,886,410)   (1,104,949)      392,677
       Decrease in inventories                                   157,921       924,563       122,252
       (Increase) decrease in prepaids and other                  (3,753)      (69,024)       78,982
       Decrease (increase) in deferred tax asset                  26,853        68,659      (568,883)
       Increase in other assets                                    7,370       (93,631)      (37,107)
       (Decrease) increase in accounts payable                 2,671,792      (419,106)       60,649
       (Decrease) increase in other liabilities                    2,643          --            --
       Increase in billings in excess of costs
         on uncompleted contracts                                (53,876)       19,988       179,041
       (Decrease) in deferred income tax liability                  --            --         (26,742)
                                                             -----------   -----------   -----------
           Net Cash Provided (Used) by Operating Activities      860,496       547,924    (1,541,377)

Cash Flows from Investing Activities:
   Purchase of property, plant and equipment                    (109,201)      (49,527)     (176,014)
   Purchase of trademarks, patents and drawings                 (114,119)     (341,783)     (284,452)
   Purchase of certificates of deposit                             6,157       (12,164)         --
                                                             -----------   -----------   -----------
       Net Cash Used in Investing Activities                    (217,163)     (403,474)     (460,466)

Cash Flows from Financing Activities:
   Proceeds from long-term obligations                           129,798     1,199,460        13,749
   Payments of long-term obligations                            (159,170)     (541,217)     (192,468)
   Proceeds from note payable                                  1,053,827     1,554,589     5,451,094
   Payments of note payable                                   (1,328,064)   (2,808,801)   (2,908,777)
   Cash distribution to pre-merger shareholders of
      Seahawk                                                       --          (6,491)         --
                                                             -----------   -----------   -----------
       Net Cash (Used) Provided by Financing Activities         (303,609)     (602,460)    2,363,598
                                                             -----------   -----------   -----------

Net (decrease) increase in cash and cash equivalents             319,724      (458,010)      361,755

Cash and cash equivalents at beginning of year                    13,786       471,796       110,041
                                                             -----------   -----------   -----------

Cash and cash equivalents at end of year                     $   353,510   $    13,786   $   471,796
                                                             ===========   ===========   ===========
</TABLE>

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



                                       25
<PAGE>   26
                         AMERICAN ENERGY SERVICES, INC.

                      STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>
                                                              For the Years Ended
                                                                  February 28,
                                                     ----------------------------------------
                                                         1999          1998          1997
                                                     ------------  ------------  ------------
<S>                                                  <C>           <C>           <C>
Supplemental cash flow information:
   Cash paid during the years for
     Interest                                        $    489,571  $    505,929  $    536,187
                                                     ============  ============  ============
     Income taxes                                    $       --    $       --    $       --
                                                     ============  ============  ============
   Non-cash transactions
     Equipment acquired under long-term obligations  $       --    $     77,192  $    490,404
                                                     ============  ============  ============
</TABLE>


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


                                       26
<PAGE>   27
                            AMERICAN ENERGY SERVICES

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Energy Services, Inc. is a manufacturer of custom-engineered flow
control valves. The Company has sales to customers located throughout the world.


In January 1996, AES completed a merger with Seahawk Overseas Exploration
Company (Seahawk), a California corporation. Seahawk acquired 100% of the
outstanding common shares of AES through the issuance of 58,918,677 shares of
its common stock. The acquisition was accounted for as a purchase with AES as
the acquirer (reverse acquisition). The Company absorbed to net liabilities of
Seahawk and any additional merger costs as a period loss in the fiscal year
ended February 29, 1996. A summary of Seahawk assets as a period loss in the
fiscal year ended February, 1996l, A summary of Seahawks assets and liabilities
and related merger costs are detailed below:


<TABLE>
<S>                                        <C>
Cash                                       $   6,581
Other Assets                                  18,676
Notes payable to shareholders                (76,756)
                                           ---------

      Net Seahawk assets (liabilities)       (51,499)
Related merger costs                         (99,309)
                                           ---------

      AES expense fiscal year end 2/28/96  ($150,808)
                                           =========
</TABLE>


AES's previous shareholders received 95% of the outstanding stock of the
combined enterprise. Under the terms of the merger agreement, the Company merged
with AES in to a newly formed Texas corporation primarily for the purpose of
changing both its domicile from California to Texas and its name to "American
Energy Services, Inc." In addition, the merger was intended to provide the
Company with a legal entity which could enter the public company domain and
ultimately, provide potential capital through the sale of registered securities.
The effect of this merger has been that the Company was able to acquire
approximately 1,500 shareholders formerly owning shares of Seahawk stock. A
capitalization schedule for the fiscal years ended February 29, 1996 and
February 28, 1995 per financial statements as audited by Grant Thornton LLP,
Houston, TX follows:



                                       27
<PAGE>   28
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                         AMERICAN ENERGY SERVICES, INC.
                                 AS MERGED INTO
                    SEAHAWK OVERSEAS EXPLORATION CORPORATION
                             CAPITALIZATION SCHEDULE


<TABLE>
<CAPTION>
                                                                      Balance at                  Balance at
                                                                      February 29,               February 29,
                                                                         1996                        1996
                                                                      ------------               ------------
<S>                                                                   <C>                         <C>
Long term debt                                                         $ 458,682                  $ 465,745

<CAPTION>
Stockholders' Equity:                                                                               Total
                                                              Capital Stock          Retained    stockholders'
                                                          Shares        Amount       earnings       equity
                                                        -----------   -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>           <C>
Balance at March 1, 1994                                     10,000   $     2,000   $ 1,748,830   $ 1,750,830

Stock dividend                                                2,586             0             0             0
Stock issued to employees                                     4,655        302913             0        302913
Net earnings                                                      0             0          2340          2340

                                                        -----------   -----------   -----------   -----------
Balance February 28, 1995                                    17,241       304,913     1,751,170   $ 2,056,083

        Seahawk Overseas Exploration Corporation          3,070,983       277,000      (328,499)      (51,499)
        Assumed retirement of American Energy
                Services, Inc. shares                       (17,241)            0             0             0
        Issuance of Seahawk Overseas Exploration
                Corporation shares and contribution of
                Seahawk net assets to American Energy
                        Services, Inc.                   58,918,677      (328,499)      328,499             0
        Merger costs                                              0       (99,309)            0       (99,309)
        Net loss                                                  0             0      (684,759)     (684,759)
                                                        -----------   -----------   -----------   -----------

Balance at February 29, 1996                             61,989,660   $   154,105   $ 1,066,411   $ 1,220,516
                                                        ===========   ===========   ===========   ===========
</TABLE>

A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statement follows.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid short-term
investments with a maturity of ninety days or less from the purchase date to be
cash equivalents. At February 28, 1999, all certificates of deposit have a
maturity of greater than ninety days and secure outstanding letters of credit.

INVENTORIES - Inventories consist of valve parts and finished goods. Inventories
are valued at the lower of cost or market using the average cost method, which
approximates First-in and First-out (FIFO).




                                       28
<PAGE>   29
                                                  NOTES TO FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


REVENUE RECOGNITION - Revenues from the sale of flow control valves are recorded
when the products are shipped or when title passes. Title passes from seller to
buyer when goods are shipped. In some instances, the buyer will pay in advance
for completed goods just prior to shipment.


Revenues on long-term contracts involving a system of control flow valves for a
single installation are recorded using the percentage-of-completion method
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. The portion of the total
contract price accrued is based on the ratio of costs incurred to date to total
estimated costs on each contract. Losses, if any to be incurred on contracts in
progress, are charged to income in full as soon as they become apparent.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives on a
straight-line basis. Estimated service lives are as follows:

<TABLE>
<CAPTION>
                                                             Estimated
                                                              Service
                                                               Lives
                                                             ----------
<S>                                                       <C>
              Machinery and equipment                           15 years
              Furniture and fixtures                        5 - 10 years
              Vehicles                                           5 years
              Building and improvements                   5 - 31.5 years
</TABLE>

TRADEMARKS, PATENTS AND DRAWINGS - Trademarks, patents and drawings are stated
at cost. Amortization is provided in amounts sufficient to relate the cost of
amortizable assets to operations over their estimated services lives on a
straight-line basis. Estimated service lives are as follows:

<TABLE>
<CAPTION>
                                                              Estimated
                                                               Service
                                                                Lives
                                                              ----------
<S>                                                            <C>
              Trademarks                                       10 years
              Patents                                          17 years
              Drawings                                         10 years
</TABLE>

INCOME TAXES - Deferred income taxes are reported for temporary differences
between items of income or expense REPORTED IN THE FINANCIAL STATEMENTS AND
THOSE REPORTED FOR INCOME TAX PURPOSES. For income tax purposes, the Company
depreciates property, plant and equipment using accelerated methods.

USE OF ESTIMATES - In preparing the financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
the financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.



                                       29
<PAGE>   30

                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income." This statement,
established standards for reporting and displaying comprehensive income and its
components in the financial statements. Under this statement, the Company is
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings in the stockholder's equity section of
the balance sheet. The Company has no other items of other comprehensive income.

EARNINGS (LOSS) PER SHARE - Basic earnings per share has been computed by
dividing net income by the weighted average number of shares outstanding during
the period. Diluted earnings per share has been computed by dividing net income
by the weighted average number of shares plus common stock equivalents
outstanding during the period, computed using the treasury stock method.

RECLASSIFICATIONS -- Certain reclassifications have been made to prior year
amounts in order to conform to the current year classifications.

NOTE 2 - CONTRACTS IN PROGRESS

Information regarding long-term contracts in progress are as follows:

<TABLE>
<CAPTION>
                                                                       February 28,
                                                                  ------------------------
                                                                     1999         1998
                                                                  -----------  -----------
<S>                                                               <C>          <C>
  Expenditures on uncompleted contracts                           $ 4,876,186  $ 1,416,787
  Estimated earnings thereon                                        2,909,811      565,943
                                                                  -----------  -----------
      Costs and estimated earnings on uncompleted contracts         7,785,997    1,982,730
  Less billings applicable thereto                                  3,874,855    1,011,874
                                                                  -----------  -----------
      Total contracts in progress                                 $ 3,911,142  $   970,856
                                                                  ===========  ===========

Included in accompanying balance sheet under following captions:

  Costs in excess of billings on uncompleted contracts            $ 4,056,295  $ 1,169,885
  Billings in excess of costs on uncompleted contracts                145,153     (199,029)
                                                                  -----------  -----------
      Total contracts in progress                                 $ 3,911,142  $   970,856
                                                                  ===========  ===========
</TABLE>


                                       30

<PAGE>   31
                          NOTES TO FINANCIAL STATEMENTS

NOTE 3 - NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                     February 28,
                                                                                 ----------------------
                                                                                   1999        1998
                                                                                 ----------  ----------
<S>                                                                              <C>         <C>
Note payable to a bank with interest at prime (7.75% at February 28, 1999) due
   with principal, principal advances are due on demand, but if no demand is
   made, then in monthly installments of $18,658 including interest, secured by
   substantially all assets of the Company                                       $  220,771  $  644,465

Line of credit agreement with a bank with interest at prime plus 0.5% (8.25% at
   February 28, 1999) due monthly, providing for maximum borrowings of
   $2,000,000, secured by substantially all assets of the Company. Principal
   advances are due on demand; line matures on March 31, 1999 and is
   collateralized by substantially all assets of the Company                      2,000,000   2,000,000

Factoring agreement with Murphy Venture Partners with
   26.5% interest; maturing November, 2004                                          150,000        --

An unsecured line of credit agreement with a bank with interest at prime plus
   1.5% (9.25% at February 28, 1999) due on demand, providing for maximum
   borrowings of $24,000                                                             22,992      23,535
                                                                                 ----------  ----------
         Total notes payable                                                     $2,393,763  $2,668,000
                                                                                 ==========  ==========
</TABLE>

NOTE 4 - LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                     February 28,
                                                                                 ----------------------
                                                                                   1999        1998
                                                                                 ----------  ----------
<S>                                                                              <C>         <C>
Note payable to a bank due in monthly installments of $16,192, including
   interest at prime plus 2% (9.75% at February 28, 1999); due February 17,
   2008, collateralized by machinery equipment, furniture, fixtures and patents  $1,144,599  $1,200,000
Note payable to a bank; due in monthly installments of $3,410, including
   interest at 10.5%; due October 5, 2002; collateralized by land, building,
   equipment and inventory                                                          131,627     156,093
Three notes payable to a bank; due in monthly installments of $371, $231,
   and $479, including interest at 7.5%, 10.5%, and 9.75%; due February 1999
   and August 21, 1999; collateralized by automobiles                                20,584      33,345
Revolving credit facility (unsecured); 9.25% interest
   at February 28, 1999; payable monthly                                             24,577        --
                                                                                 ----------  ----------
Total long-term debt                                                              1,321,387   1,389,438
   Less:  portion due within one year                                               168,313     144,122
                                                                                 ----------  ----------
Long-term debt                                                                   $1,153,374  $1,245,316
                                                                                 ==========  ==========
</TABLE>



                                       31
<PAGE>   32
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4 - LONG-TERM OBLIGATIONS (CONTINUED)


Approximate future maturities of long-term obligations as of February 28, 1999
are as follows:

<TABLE>
<CAPTION>
               For the Years Ended
               -------------------
<S>                                                        <C>
                      2000                                 $     168,313
                      2001                                       247,729
                      2002                                       237,352
                      2003                                       224,988
                   Thereafter                                    367,415
                                                           -------------
                                                           $   1,245,797
                                                           =============
</TABLE>

NOTE 5 - CAPITAL LEASES

The Company is the lessee of certain equipment under capital leases expiring in
various years through 2001. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the lower of the
related lease terms or their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.

Following is a summary of equipment held under capital leases:

<TABLE>
<CAPTION>
                                                            February 28,
                                                     --------------------------
                                                        1999           1998
                                                     -----------    -----------
<S>                                                  <C>            <C>
Machinery and equipment                              $    56,782    $    56,782
Furniture and fixtures                                   146,257         73,976
                                                     -----------    -----------
                                                         203,039        130,758
     Less accumulated depreciation                       (35,074)       (20,324)
                                                     -----------    -----------
                                                     $   167,965    $   110,434
                                                     ===========    ===========
</TABLE>

Future minimum lease payments under capital leases as of February 28, 1999 are
as follows:

<TABLE>
<CAPTION>
               For the Years Ended
               -------------------
<S>                                                                    <C>
                      2000                                             $      53,723
                      2001                                                    52,566
                      2002                                                    39,915
                      2003                                                    13,435
                                                                       --------------

     Total minimum lease payments                                            159,639

                     Less amount representing interest                       (27,591)
                                                                       --------------

                     Present value of net minimum lease payments       $     132,048
                                                                       ==============
</TABLE>

Interest rates on capitalized leases vary and are imputed based on the lower of
the Company's incremental borrowing rate at the inception of each lease or the
lessor's implicit rate of return.





                                       32
<PAGE>   33

                          NOTES TO FINANCIAL STATEMENTS

NOTE 6 - COMMITMENTS AND CONTINGENCIES

The Company leases office space under an operating lease expiring in 1999. For
the years ended February 28, 1999 and 1998, such lease payments amounted to
$41,891 and $49,642.

The minimum future rental commitments under operating leases total $30,540 and
are to be paid during fiscal year 2000.

At February 28, 1999, the Company had $6,301,218 of outstanding letters of
credit.

The Company is engaged in various lawsuits either as plaintiff or defendant. In
the opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
statements.

NOTE 7 - INCOME TAXES

Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities.

The expense (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                      For the Years Ended
                                                         February 28,
                                                -------------------------------
                                                   1999       1998       1997
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
     Current                                    $    --    $    --         --
     Deferred                                      26,853     68,659   (595,625)
                                                ---------  ---------  ---------
   Total  expense (benefit)                     $  26,853  $  68,659  $(595,625)
                                                =========  =========  =========
</TABLE>

A reconciliation of income taxes computed at the statutory Federal income tax
rate and income taxes reported in the statements of earnings follows:

<TABLE>
<CAPTION>
                                                     For the Years Ended
                                                         February 28,
                                               --------------------------------
                                                 1999        1998       1997
                                               ---------   ---------  ---------
<S>                                            <C>         <C>        <C>
     Tax at statutory rate                     $  67,408   $  60,444  $(618,885)
     Non-deductible expenses                       2,617       6,614     20,740
     Other                                       (43,172)      1,601      1,601
                                               ---------   ---------  ---------
          Total expense (benefit)              $  26,853   $  68,659  $(595,625)
                                               =========   =========  =========
</TABLE>

The long-term deferred tax asset results from the following:

<TABLE>
<CAPTION>
                                                          For the Years Ended
                                                             February 28,
                                                   ---------------------------------
                                                     1999        1998        1997
                                                   ---------   ---------   ---------
<S>                                                <C>         <C>         <C>
Bases differences in intangibles and fixed assets  $(393,327)  $(448,551)  $(304,055)
Net operating loss carryforward                      870,742     938,148     862,311
Miscellaneous costs capitalized for tax purposes      (4,044)     10,627      10,627
                                                   ---------   ---------   ---------
                                                   $ 473,371   $ 500,224   $ 568,883
                                                   =========   =========   =========
</TABLE>




                                       33
<PAGE>   34
                          NOTES TO FINANCIAL STATEMENTS



NOTE 7 - INCOME TAXES (CONTINUED)

The Internal Revenue Service is examining the Company's Federal Income Tax
return for the year ended February 28, 1993. Management believes that the
ultimate resolution of the examination will not have a substantial effect upon
the Company's financial condition or results of operation.

NOTE 8 - SIGNIFICANT CUSTOMERS

The Company had sales to one customer that constituted 30% of net sales for the
year ended February 28, 1999 and 31% of net sales for the year ended February
28, 1998.

Foreign sales were 92% and 93% of total sales in 1999 and 1998, respectively.

NOTE 9 - WARRANTS

The Company has issued warrants to the lead investment banker to purchase 5% of
the equity of the Company for approximately $51,000 and are exercisable for a
period of five years after the date of the merger. The number of shares
authorized for grant under this warrant agreement amounted to 309,948 as of
February 28, 1999 and 1998. No warrants have been exercised.

NOTE 10 - REVERSE STOCK SPLIT

On August 28, 1997, the Company effected a one for ten reverse stock split. To
effect the split, the Company's authorized, no par stock decreased to 10,000,000
shares and issued and outstanding shares decreased to 6,198,966 shares.

All references in the accompanying financial statements to the number of common
shares and per share amounts for 1998 have been restated to reflect the stock
split.

NOTE 11 - EARNINGS (LOSS) PER SHARE


Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed similarly, but also provides the effect to the impact of convertible
securities, such as common stock warrants, if dilutive, would have on net income
and average common shares outstanding if converted.

For the years ended February 28, 1999, 1998 and 1997, average shares outstanding
were increased for stock warrants assumed exercised by 309,948 to arrive at
weighted average shares outstanding for purposes of calculating diluted earnings
per share.




                                       34
<PAGE>   35
                          NOTES TO FINANCIAL STATEMENTS



NOTE 12 - PREFERENTIAL DISTRIBUTION

In accordance with the merger agreement, the Company made a preferential
distribution of the net assets of Seahawk to the pre-merger shareholders of
Seahawk. The net assets distributed were as follows:

<TABLE>
<S>                                                          <C>
         Cash                                                $         6,491
         Land                                                          9,676
         Note payable to Directors of Seahawk                        (80,645)
                                                             ---------------
                                                             $       (64,478)
                                                             ===============
</TABLE>


NOTE 13 - NEW ACCOUNTING STANDARDS

As of January 1, 1998, AES adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards of reporting for comprehensive income and
its components in a full set of general-purpose financial statements. Adoption
of this statement had no impact on the Company's net income or stockholders'
equity for any of the periods presented.

AES has also adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," whis is effective for fiscal years beginning after
December 31, 1997. This statement requires disclosures about operating segments
an enterprise is engaged in and the different economic environments in which it
operates. Operating segments are components of the Company that are used
internally for evaluating segment performance and in the determination of
resource allocation to those segments. AES is currently operating as one segment
and reviewed regularly in aggregate. However, when necessary to better
understand performance of other segments, or to access future net cash flows,
the Company will segregate in segments, those components of the business as
warranted.






                                       35
<PAGE>   36

NOTE 14 - GEOGRAPHIC INFORMATION

The Company's revenues by geographical area for the fiscal years ended February
28, 1999, 1998 and 1997, are as follows:


<TABLE>
<CAPTION>
                   February 28,                      February 28,                      February 28,
                       1999                              1999                              1999
                 -----------------                  ----------------                  ----------------
<S>              <C>                <C>             <C>               <C>             <C>
United States         $ 1,296,082   United States       $ 1,078,982   United States       $ 1,178,932
Kuwait                  4,320,274   Columbia              5,035,251   Columbia              3,751,147
Mexico                  1,404,089   Other                 5,874,460   Philippines           1,607,634
Other                   3,780,241                                     Saudi Arabia          1,286,107
                                                                      Other                 2,893,743

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

Totals               $ 10,800,686                      $ 11,988,693                      $ 10,717,563
                     ============                      ============                      ============
</TABLE>


AES recognizes the point of delivery as the basis for attributing revenues from
external customers to individual countries. The "Other" category on the table
above reflects all customers with less than ten percent of total revenues for
each respective fiscal year.




                                       36
<PAGE>   37
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
         Exhibit
         Number                        Description
         ------                        -----------
<S>                   <C>
         2.1          Articles of Incorporation of the Company, filed as Exhibit
                      2.1 of AES' Report on Form 10-SB filed August 19, 1998,
                      and incorporated by reference herein.

         2.2          Articles of Merger of Seahawk Overseas Exploration
                      Corporation with and into the Company, filed as Exhibit
                      2.2 of AES' Report on Form 10-SB filed August 19, 1998,
                      and incorporated by reference herein.

         2.3          Bylaws of the Company, filed as Exhibit 2.3 of AES' Report
                      on Form 10-SB filed August 19, 1998, and incorporated by
                      reference herein.

         2.4          Form of Common Stock Certificate, filed as Exhibit 2.4 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         2.5          Common Stock Purchase Warrant of Murphy & Co., filed as
                      Exhibit 2.5 of AES' Report on Form 10-SB filed August 19,
                      1998, and incorporated by reference herein.

         6.1          Promissory Note dated November 17, 1997 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $1,200.000, filed as Exhibit 6.1 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         6.2          Promissory Note dated May 2, 1998 executed by the Company
                      in favor of Metrobank, N.A., in the original principal
                      amount of $2,000,000, filed as Exhibit 6.2 of AES' Report
                      on Form 10-SB filed August 19, 1998, and incorporated by
                      reference herein.

         6.3          Security Agreement dated May 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $2,000,000, filed as Exhibit 6.3 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         6.4          Promissory Note dated February 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $644, 465, filed as Exhibit 6.4 of
                      AES' Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         6.5          Security Agreement dated February 2, 1998 executed by the
                      Company in favor of Metrobank, N.A., in the original
                      principal amount of $644,465, filed as Exhibit 6.5 of AES'
                      Report on Form 10-SB filed August 19, 1998, and
                      incorporated by reference herein.

         10.1         *Employment Agreement dated April 21, 1999 between AES and
                      Robert S. Love.

         23           Consent of Simonton, Kutac & Barnidge, L.L.P.

         27           Financial Data Schedule
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