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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

| | Quarterly Report pursuant to Section 13 or
        15(d) of the Securities Exchange Act of 1934 for the quarterly period
    ended June 30, 2004; or              
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transition report pursuant to Section 13 or
        15(d) of the Securities Exchange Act
        of 1934 for the transition period from ________
    to _________.

Commission File Number0-18754

|Black Warrior Wireline Corp.                              
|----------------------------------------------------------
|                                                          
|(Exact name of registrant as specified in its
    charter)

|                                                                   |                                    
|------------------------------------------------------------------ | -----------------------------------
|Delaware                                                           | 11-2904094                         
|                                                                   |                                    
|(State or other jurisdiction of incorporation
    of organization) | (I.R.S employer identification no.)
|                                                                   |                                    
|100 Rosecrest Lane, Columbus,
    Mississippi 39701               
|                                                                  
|(Address of principal executive
    offices, zip code)            
|                                                                  
|(662) 329-1047                                                    
|                                                                  
|(Issuers
    Telephone Number, Including Area Code)              
|                                                                  

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


|    |   
|--- | --
|YES | NO
|    |   

Indicate by check mark
    whether the registrant is an accelerated filer (as defined in Rule 12b-2
    of the Exchange Act). Yes  No


APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August
        5, 2004, 12,499,528 shares of the Registrant
s Common Stock, $.0005 par
        value, were outstanding.


|
|
|
|

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|                               | BLACK WARRIOR WIRELINE CORP.                               |  |      | 
|------------------------------ | ---------------------------------------------------------- |  | ---- | 
|                               |                                                            |  |      | 
|                               | QUARTERLY REPORT ON FORM 10-Q                              |  |      | 
|                               |                                                            |  |      | 
|                               | INDEX                                                      |  |      | 
|                               |                                                            |  |      | 
|PART I  FINANCIAL INFORMATION |                                                            |  |     
|                               |                                                            |  | Page | 
|                               |                                                            |  |      | 
|                               |                                                            |  |      | 
|Item 1.                        | Financial Statements                                       |  |      | 
|                               |                                                            |  |      | 
|                               | Condensed Balance Sheets  June 30, 2004 (unaudited)       |  |      | 
|                               | and December 31, 2003                                      |  | 3    | 
|                               |                                                            |  |      | 
|                               | Condensed Statements of Operations                        |  |      | 
|                               | Three Months Ended June 30, 2004 (unaudited) and           |  |      | 
|                               | June 30, 2003 (unaudited)                                  |  | 5    | 
|                               |                                                            |  |      | 
|                               | Condensed Statements of Operations                        |  |      | 
|                               | Six Months Ended June 30, 2004 (unaudited) and             |  |      | 
|                               | June 30, 2003 (unaudited)                                  |  | 6    | 
|                               |                                                            |  |      | 
|                               | Condensed Statements of Cash Flows                        |  |      | 
|                               | Six Months Ended June 30, 2004 (unaudited) and             |  |      | 
|                               | June 30, 2003 (unaudited)                                  |  | 7    | 
|                               |                                                            |  |      | 
|                               | Notes to Condensed Financial Statements                   |  |      | 
|                               | Three and Six Months Ended June 30, 2004 (unaudited) and   |  |      | 
|                               | June 30, 2003 (unaudited)                                  |  | 8    | 
|                               |                                                            |  |      | 
|Item 2.                        | Managements Discussion and Analysis of                    |  |      | 
|                               | Financial Condition and Results of Operations              |  | 18   | 
|                               |                                                            |  |      | 
|Item 3.                        | Qualitative and Quantitative Disclosures About Market Risk |  | 29   | 
|                               |                                                            |  |      | 
|Item 4.                        | Controls and Procedures                                    |  | 29   | 
|                               |                                                            |  |      | 
|                               |                                                            |  |      | 
|PART II  OTHER INFORMATION    |                                                            |  |     
|                               |                                                            |  |      | 
|                               |                                                            |  |      | 
|Item 6.                        | Exhibits and Reports on Form 8-K                           |  | 31   | 
|                               |                                                            |  |      | 

2

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PART I  FINANCIAL INFORMATIONItem 1. Financial
Statements

Black Warrior Wireline Corp.
Condensed Balance Sheets

|                                                                           |  |  |                                                                                |            |            |            |            | June 30,    |  |           | December 31, | 
|-------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------ | ---------- | ---------- | ---------- | ---------- | ----------- |  | --------- | ------------ | 
|                                                                           |  |  |                                                                                |            |            |            |            | 2004        |  |           | 2003         | 
|                                                                           |  |  |                                                                                |            |            |            |            | (Unaudited) |  |           |              | 
|ASSETS                                                                     |  |  |                                                                                |            |            |            |           
|Current assets:                                                            |  |  |                                                                                |            |            |            |            |             | 
|                                                                           |  |  | Cash and cash equivalents                                                      |            |            |            | $          | 1,509,501   |  | $         | 4,661,030    | 
|                                                                           |  |  | Restricted cash                                                                |            |            |            |            | 499,822     |  |           | 961,551      | 
|                                                                           |  |  | Accounts receivable, less allowance of $756,130
    and $588,101, respectively |            |            |            | 7,965,837  |             |  | 8,952,348 |             
|                                                                           |  |  | Accounts receivable held for sale                                              |            |            |            | 3,390,811  |             |  |          |             
|                                                                           |  |  | Other receivables                                                              |            |            |            |            | 149,826     |  |           | 179,317      | 
|                                                                           |  |  | Prepaid expenses                                                               |            |            |            |            | 1,629,955   |  |           | 92,471       | 
|                                                                           |  |  | Other current assets                                                           |            |            |            |            | 1,795,589   |  |           | 1,188,079    | 
|                                                                           |  |  |                                                                                |            |            |            |            |            
|                                                                           |  |  |                                                                                |            |            |            |            |             |  |           |              | 
|Total
    current assets                                                   |  |  |                                                                                | 16,941,341 |            |            | 16,034,796 |            
|                                                                           |  |  |                                                                                |            |            |            |            |             |  |           |              | 
|Inventories of tool components and sub-assemblies held for sale, net       |  |  | 5,737,090                                                                      |            |            | 5,206,639  |           
|Property, plant and equipment, less accumulated depreciation               |  |  | 12,533,322                                                                     |            |            | 18,219,437 |           
|Property, plant and equipment held for sale, less accumulated depreciation |  |  | 4,165,465                                                                      |            |            |           |           
|Other assets                                                               |  |  |                                                                                |            | 275,838    |            |            | 448,507     | 
|Other assets held for sale                                                 |  |  |                                                                                | 20,595     |            |            |           |            
|Goodwill and other intangible assets                                       |  |  |                                                                                | 1,237,416  |            |            | 1,492,050  |            
|                                                                           |  |  |                                                                                |            |            |            |            |            
|                                                                           |  |  |                                                                                |            |            |            |            |             |  |           |              | 
|Total
      assets                                                         |  |  |                                                                                | $          | 40,911,067 |            | $          | 41,401,429  | 
|                                                                           |  |  |                                                                                |            |            |            |            |             |  |           |              | 
|                                                                           |  |  |                                                                                |            |            |            |            |             |  |           |              | 

See accompanying notes to the condensed
financial statements.

3

---





|LIABILITIES
            AND STOCKHOLDERS DEFICIT                                      |  |  |             |            |         |             |           
|-------------------------------------------------------------------------------------- |  |  | ----------- | ---------- | ------- | ----------- | ----------
|                                                                                       |  |  |             |            |         |             |           
|Current liabilities:                                                                   |  |  |             |            |         |             |           
|Accounts
            payable                                                           |  |  | $           | 2,653,149  |         | $           | 4,981,558 
|Accounts
          payable held for sale                                               |  |  |             | 2,852,182  |         |             |          
|Accrued
          salaries and vacation                                                |  |  |             | 1,027,115  |         |             | 866,267   
|Accrued
          salaries and vacation held for sale                                  |  |  | 264,316     |            |         |            |           
|Other
          accrued expenses                                                       |  |  |             | 1,107,789  |         |             | 1,523,447 
|Other
          accrued expenses held for sale                                         |  |  |             | 581,846    |         |             |          
|Accrued
          interest payable                                                     |  |  |             | 88,308     |         |             | 94,981    
|Current
          maturities of long-term debt                                         |  |  |             | 18,008,553 |         |             | 18,035,237
|Accrued
          interest payable to related parties                                  |  |  | 16,397,425  |            |         | 14,534,437  |           
|Notes
          payable to related parties, net of unamortized discount                |  |  | 24,484,721  |            |         | 24,402,569  |           
|                                                                                       |  |  |             |            |         |             |           
|                                                                                       |  |  |             |            |         |             |           
|Total
          current liabilities                                                    |  |  |             | 67,465,404 |         |             | 64,438,496
|                                                                                       |  |  |             |            |         |             |           
|Long-term debt, less current maturities                                                |  |  |             | 231,307    |         |             | 356,952   
|Deferred revenue                                                                       |  |  |             |            | 109,975 |             |           
|                                                                                       |  |  |             |            |         |             |           
|                                                                                       |  |  |             |            |         |             |           
|Total
          liabilities                                                            |  |  |             | 67,806,686 |         |             | 64,905,423
|                                                                                       |  |  |             |            |         |             |           
|                                                                                       |  |  |             |            |         |             |           
|Stockholders deficit:                                                                 |  |  |             |            |         |             |           
|Preferred
          stock, $.0005 par value, 2,500,000 shares authorized,              |  |  |             |            |         |             |           
|none
          issued at June 30, 2004 or December 31, 2003                            |  |  |            |            |         |            |           
|Common
          stock, $.0005 par value, 175,000,000 shares authorized,               |  |  |             |            |         |             |           
|12,499,528
          shares issued and outstanding at                                  |  |  |             |            |         |             |           
|June
          30, 2004 and December 31, 2003                                          |  |  | 6,252       |            |         | 6,252       |           
|Additional
          paid-in capital                                                   |  |  |             | 20,275,963 |         |             | 20,275,963
|Accumulated
          deficit                                                          |  |  | (46,573,844 | )          |         | (43,141,023 | )         
|Treasury
          stock, at cost, 4,620 shares at June 30, 2004 and December 31, 2003 |  |  | (583,393    | )          |         | (583,393    | )         
|Loan
          to shareholder                                                          |  |  | (20,597     | )          |         | (61,793     | )         
|                                                                                       |  |  |             |            |         |             |           
|                                                                                       |  |  |             |            |         |             |           
|Total
            stockholders deficit                                                |  |  | (26,895,619 | )          |         | (23,503,994 | )         
|                                                                                       |  |  |             |            |         |             |           
|                                                                                       |  |  |             |            |         |             |           
|Total
            liabilities and stockholders deficit                                |  |  | 40,911,067  |            |         | 41,401,429  |           
|                                                                                       |  |  |             |            |         |             |           



See accompanying notes to the condensed financial statements.

4

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Black Warrior Wireline Corp.Condensed Statements of OperationsFor the three months ended June 30, 2004 and
June 30, 2003

|                                                                                          | June 30, 2004 |            | June 30, 2003 |  
|----------------------------------------------------------------------------------------- | ------------- | ---------- | ------------- | -
|                                                                                          | (Unaudited)   |            | (Unaudited)   |  
|                                                                                          |               |            |               |  
|Revenues                                                                                  | $             | 13,170,348 |               | $
|                                                                                          |               |            |               |  
|Operating costs                                                                           |               | 8,250,732  |               |  
|                                                                                          |               |            |               |  
|Selling, general and administrative expenses                                              |               | 2,459,137  |               |  
|                                                                                          |               |            |               |  
|Depreciation and amortization                                                             |               | 1,538,068  |               |  
|                                                                                          |               |            |               |  
|Income
    from continuing operations                                                     |               | 922,411    |               |  
|                                                                                          |               |            |               |  
|Interest expense and amortization of debt discount                                        |               | (1,188,171 | )             |  
|                                                                                          |               |            |               |  
|Net gain (loss) on sale of fixed assets                                                   |               | (2,291     | )             |  
|                                                                                          |               |            |               |  
|Other income                                                                              |               | 2,020      |               |  
|                                                                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Loss
    from continuing operations before income taxes                                   |               | (266,031   | )             |  
|                                                                                          |               |            |               |  
|Provision for income taxes                                                                |               |           |               |  
|                                                                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Loss
    before discontinued operations                                                   |               | (266,031   | )             |  
|                                                                                          |               |            |               |  
|Discontinued operations (Note 6)                                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Income
           (loss) from operations of discontinued directional drilling
    segment |               | (154,711   | )             |  
|                                                                                          |               |            |               |  
|Provision
    for income taxes                                                            |               |           |               |  
|                                                                                          |               |            |               |  
|Net
    income (loss)                                                                     | $             | (420,742   | )             | $
|                                                                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Net income (loss) per share - basic and diluted:                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Loss
    before discontinued operations                                                   | $             | (.02       | )             | $
|Discontinued
    operations                                                               |               | (.01       | )             |  
|                                                                                          |               |            |               |  
|                                                                                          |               |            |               |  
|Net income (loss) per share - basic and diluted                                           | $             | (.03       | )             | $
|                                                                                          |               |            |               |  

See accompanying notes to the condensed financial statements.

5

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Black Warrior Wireline
      Corp.Condensed Statements of OperationsFor the six months ended June 30,
    2004 and
June 30, 2003

|                                                             | June 30, 2004 |            | June 30, 2003 |  
|------------------------------------------------------------ | ------------- | ---------- | ------------- | -
|                                                             | (Unaudited)   |            | (Unaudited)   |  
|                                                             |               |            |               |  
|Revenues                                                     | $             | 23,709,668 |               | $
|                                                             |               |            |               |  
|Operating costs                                              |               | 15,865,082 |               |  
|                                                             |               |            |               |  
|Selling, general and administrative expenses                 |               | 4,571,020  |               |  
|                                                             |               |            |               |  
|Depreciation and amortization                                |               | 2,737,202  |               |  
|                                                             |               |            |               |  
|Income
    from continuing operations                        |               | 536,364    |               |  
|                                                             |               |            |               |  
|Interest expense and amortization of debt discount           |               | (2,538,437 | )             |  
|                                                             |               |            |               |  
|Net gain on sale of fixed assets                             |               | 54,056     |               |  
|                                                             |               |            |               |  
|Other income                                                 |               | 6,364      |               |  
|                                                             |               |            |               |  
|                                                             |               |            |               |  
|Loss
    from continuing operations before income taxes      |               | (1,941,653 | )             |  
|                                                             |               |            |               |  
|Provision for income taxes                                   |               |           |               |  
|                                                             |               |            |               |  
|                                                             |               |            |               |  
|Loss
    before discontinued operations                      |               | (1,941,653 | )             |  
|                                                             |               |            |               |  
|Discontinued operations (Note 6)                             |               |            |               |  
|                                                             |               |            |               |  
|Income (loss) from operations of discontinued
   directional |               |            |               |  
|drilling segment (including estimated loss on                |               |            |               |  
|disposal of $1,374,939 and $-0-, for the six                 |               |            |               |  
|months ended June 30, 2004 and 2003,                         |               |            |               |  
|respectively)                                                |               | (1,491,168 | )             |  
|                                                             |               |            |               |  
|Provision for income taxes                                   |               |           |               |  
|                                                             |               |            |               |  
|Net loss                                                     | $             | (3,432,821 | )             | $
|                                                             |               |            |               |  
|                                                             |               |            |               |  
|Net loss per share - basic and diluted:                      |               |            |               |  
|                                                             |               |            |               |  
|Loss
    before discontinued operations                      | $             | (.16       | )             | $
|Discontinued
    operations                                  |               | (.12       | )             |  
|                                                             |               |            |               |  
|                                                             |               |            |               |  
|Net loss per share - basic and diluted                       | $             | (.28       | )             | $
|                                                             |               |            |               |  

See accompanying notes to the condensed financial statements.

6

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Black Warrior Wireline Corp.Condensed Statements of Cash FlowsFor the six months ended June 30, 2004 and June
30, 2003

|                                                  |                                                                                                             | June 30, 2004 |            | June 30, 2003 |          
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------- | ---------- | ------------- | ---------
|                                                  |                                                                                                             | (Unaudited)   |            | (Unaudited)   |          
|                                                  |                                                                                                             |               |            |               |          
|Cash flows from operating activities:             | $                                                                                                           | 274,795       |            | $             | 4,018,691
|                                                  |                                                                                                             |               |            |               |          
|                                                  |                                                                                                             |               |            |               |          
|Cash flows from investing activities:             |                                                                                                             |               |            |               |          
|                                                  | Acquisitions of property, plant and equipment                                                               |               | (4,061,699 | )             |          
|                                                  | Decrease in restricted cash                                                                                 |               | 461,729    |               |          
|                                                  | Proceeds from sale of property, plant and equipment                                                         |               | 342,682    |               |          
|                                                  |                                                                                                             |               |            |               |          
|                                                  | Cash
    used in investing activities                                                                       |               | (3,257,288 | )             |          
|                                                  |                                                                                                             |               |            |               |          
|Cash flows from financing activities:             |                                                                                                             |               |            |               |          
|                                                  | Debt issuance costs                                                                                         |               | (16,707    | )             |          
|                                                  | Proceeds from bank and other borrowings                                                                     |               | 2,438,971  |               |          
|                                                  | Principal
             payments on long-term debt, notes payable and capital
             lease obligations |               | (4,184,607 | )             |          
|                                                  | Proceeds (payments) from (on) working revolver, net                                                         |               | 1,593,307  |               |          
|                                                  |                                                                                                             |               |            |               |          
|                                                  | Cash
    provided by (used in) financing activities                                                         |               | (169,036)  |               |          
|                                                  |                                                                                                             |               |            |               |          
|                                                  |                                                                                                             |               |            |               |          
|                                                  | Net
    increase (decrease) in cash and cash equivalents                                                    |               | (3,151,529 | )             |          
|                                                  | Cash and cash equivalents, beginning of period                                                              |               | 4,661,030  |               |          
|                                                  |                                                                                                             |               |            |               |          
|                                                  | Cash and cash equivalents, end of period                                                                    | $             | 1,509,501  |               | $        
|                                                  |                                                                                                             |               |            |               |          
|                                                  |                                                                                                             |               |            |               |          
|Supplemental disclosure of cash flow information: |                                                                                                             |               |            |               |          
|                                                  | Cash paid during the period for:                                                                            |               |            |               |          
|                                                  | Interest                                                                                                    | $             | 682,566    |               | $        
|                                                  |                                                                                                             |               |            |               |          
|                                                  | Income
    taxes                                                                                            | $             |           |               | $        
|                                                  |                                                                                                             |               |            |               |          



See accompanying notes to the condensed financial statements.

7

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BLACK WARRIOR WIRELINE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS

|1. | General
|-- | -------
|  

The accompanying condensed
      financial statements reflect all adjustments that, in the opinion of management,
      are necessary for a fair presentation of the financial position of Black
      Warrior Wireline Corp. (the Company). Such adjustments are of
      a normal recurring nature. The results of operations for the interim period
      are not necessarily indicative of the results to be expected for the full
      year. The Companys Annual Report on Form 10-K for the fiscal year
      ended December 31, 2003 should be read in conjunction with this document.


Business of the Company.
    The Company is an oil and gas service company currently providing various
    services to oil and gas well operators primarily in the continental United
    States and in the Gulf of Mexico. Through August 6, 2004, the Companys
    principal lines of business included (a) wireline services, and (b) directional
    oil and gas well drilling and downhole surveying services. As discussed in
    Note 6, on August 6, 2004 the Company sold its directional drilling division
    to Multi-Shot, LLC, a newly formed Texas limited liability company and such
    business is treated as a discontinued operation for the three and six month
    periods ended June 30, 2004 and 2003. Liquidity.The
        Company reported net income (loss) for the six months ended June 30,
        2004 of approximately ($3,433,000) and for the years ended December 31,
        2003, December 31, 2002, and 2001, of approximately ($5,500,000), ($7,600,000),
        and $5,000,000, respectively. Cash flows provided by operations were
        approximately $275,000 for the six months ended June 30, 2004 and $10,600,000,
        $5,400,000, and $16,350,000 for the years ended December 31 2003, 2002,
        and 2001, respectively. The Company is highly leveraged. The Companys
        outstanding indebtedness includes primarily senior indebtedness aggregating
        approximately $16.8 million at June 30, 2004, other indebtedness of approximately
        $1.4 million and approximately $40.9 million (including approximately
        $16.4 million of accrued interest) owing to St. James Merchant Bankers,
        L.P. (SJMB) and St. James Capital Partners, L.P. (SJCP)
        (collectively St. James) and its affiliates and directors,
        who are related parties. The Companys debt and accrued interest
        owed to related parties is convertible into common stock and is subordinate
        to its Senior Credit Facility with General Electric Capital Corporation
        (GECC). In addition, no repayments of the related party debt or accrued
        interest can be made until the Senior Credit Facility is completely extinguished. As discussed in Note 9 to the Company
s financial
        statements for the year ended December 31, 2003, the Companys Senior
        Credit Facility is subject to affirmative and general covenants and certain
        financial covenants. The Company was in violation of certain of these
        covenants as of December 31, 2001, December 31, 2003 and January 31,
        2004resulting
        in events of default. These covenant violations also resulted in violations
        and events of default of the subordinated debt under the cross default
        provisions of the subordinated debt agreements. All covenant violations
        and events of default were waived as of June 10, 2002 and March 31, 2004
        by the respective debt-holders.


8

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Through
      August 25, 2004, the Company has amended the terms of its Senior Credit
      Facility with GECC on eight occasions, the principal effects of which were
      to relax certain of the terms of the financial covenants so as to be more
      favorable to the Company and, in addition, to consent to the sale of the
      Companys directional drilling division. In connection with the March
      31, 2004 amendment to the Credit Facility, the Company is required to maintain
      a cumulative operating cash flow commencing with the month ended February
      29, 2004 (see Note 9 for specified amounts by month and period). Strong and stable
        market conditions and the Companys ability to meet intense competitive
        pressures are essential to the Companys maintaining a positive
        liquidity position and meeting debt covenant requirements. Decreases
        in market conditions or failure to mitigate competitive pressures could
        result in non-compliance with its debt covenants and the triggering of
        the prepayment clauses of the Companys debt. The Company believes
        that if market conditions remain stable throughout 2004, the Company
        will be able to generate sufficient cash flow to meet its working capital
        needs and comply with its debt covenants. If market conditions decline,
        the Company may be required to obtain additional amendments to its Senior
        Credit Facility, or obtain capital through equity contributions or financing,
        including a possible merger or sale of assets, or other business combination.
        The Company can give no assurances that adequate financing could be obtained
        or that a suitable business combination or asset sale could be consummated. On September 14,
        2004, the Companys Credit Facility with General Electric Credit
        Corporation (GECC) will expire. At that time, unless the
        Credit Facility is extended, an estimated $6.9 million in senior secured
        indebtedness, after reflecting a payment of $9.6 million made on August
        6, 2004 out of the proceeds of the sale of the Companys directional
        drilling division, will mature and be payable. In addition, on December
        31, 2004, an additional $23.9 million of subordinated secured indebtedness
        and $17.8 million of accrued interest will be repayable under the terms
        of loan agreements entered into between the Company and the holders of
        that indebtedness. The holders of the subordinated secured indebtedness
        are parties to a Subordination Agreement dated September 14, 2001, entered
        into with GECC and the Company whereby they have agreed to subordinate
        their payments of principal and interest and the lien granted to them,
        to the prior payment of the Companys indebtedness owing to GECC.
        The Companys sale of its directional drilling division on August
        6, 2004 and the application of $9.6 million of the proceeds to the reduction
        of its senior secured indebtedness was the initial step in managements
        plans to extend, restructure or refinance this indebtedness. As of August
        25, 2004, the Company is continuing its efforts through Simmons & Company
        International, as its financial advisor, to examine various alternative
        means to maximize its value to shareholders and repay, refinance or restructure
        its senior secured and subordinated secured indebtedness. These efforts
        are expected to include efforts regarding a possible merger, sale of
        assets or other business combination involving the Company as well as
        a possible reorganization, recapitalization, restructuring and refinancing
        of the Companys obligations. At August 25, 2004, the Company has
        not entered into any definitive agreements with respect to any such transactions,
        other than the sale of its directional drilling division which was completed
        on August 6, 2004, and there can be no assurance that any definitive
        agreements will be entered into or that the Company will be successful
        in pursuing its plans for the repayment, refinancing or restructuring
        of its outstanding indebtedness. In addition, the Company is engaged
        in efforts to refinance its outstanding indebtedness owing to GECC which,
        under the terms of the Companys Credit Facility, will mature on
        September 14, 2004. These negotiations are ongoing but may include a refinancing of the indebtedness for
      a term of up to five years in an aggregate amount of up to $22.0 million
      and on other terms similar to the Companys existing Credit Facility.
      No definitive agreements have been entered into as of August 25, 2004 and
      there can be no assurance that the Company will be successful in refinancing
      its outstanding Credit Facility or that any terms offered will be acceptable
      to the Company. In the event the Companys efforts to refinance its
      Credit Facility are unsuccessful, it is likely that the Company will default
      in the repayment of its indebtedness under its Credit Facility and the
      Companys secured creditors could assert their rights to foreclose
      on
the Companys assets and a stockholders investment in the Company
could be lost. The Company intends to engage in ongoing efforts to pursue these
plans.


9

---





|2. | Stock-Based Compensation
|-- | ------------------------
|  

The Company
    applies principles from SFAS No. 123 in accounting for its stock option plan.
    In accordance with SFAS No. 123, the
  Company has elected not to report the impact of the fair value of its stock
  options in the statements of operations but, instead, to disclose the pro forma
  effect and to continue to apply APB Opinion No. 25 and related interpretations
  in accounting for its stock options. Accordingly, no compensation expense has
  been recognized for stock options issued to employees with an exercise price
  at fair market value or above. Compensation expense for options issued to non-employees
  of the Company are excluded from the pro forma effect below, as compensation
  expense has been recognized in the accompanying financial statements. Had compensation
  cost for all of the
Companys stock options issued been determined based on the fair value at
the grant dates for awards consistent with the methods prescribed in SFAS No.
123 and later in SFAS No. 148, the Companys net income or loss and income
or loss per share would have been decreased or increased to the pro forma amounts
indicated as follows:


|                                                                       |  |   |                    |                 
|---------------------------------------------------------------------- |  | - | ------------------ | ----------------
|                                                                       |  |   | Three Months Ended |                 
|                                                                       |  |   | June 30,           |                 
|                                                                       |  |   | 2004               |                 
|                                                                       |  |   |                    |                 
|Net income (loss) - as reported                                        |  | $ | (420,742           | )               
|                                                                       |  |   |                    |                 
|Less: Total stock-based employee compensation expense
   determined    |  |   |                    |                 
|under
    fair value method for all awards, net of related tax effects |  |   | (35,300            | )               
|                                                                       |  |   |                    |                 
|Net income (loss) - pro forma                                          |  | $ | (456,042           | )               
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    |                 
|Income (loss) per share - as reported (basic and diluted):             |  | $ | (0.03              | )               
|                                                                       |  |   |                    |                 
|Income (loss) per share - pro forma (basic and diluted):               |  | $ | (0.04              | )               
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    | Six Months Ended
|                                                                       |  |   |                    | June 30,        
|                                                                       |  |   |                    | 2004            
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    |                 
|Net income (loss) - as reported                                        |  | $ | (3,432,821         | )               
|                                                                       |  |   |                    |                 
|Less: Total stock-based employee compensation expense determined       |  |   |                    |                 
|under
    fair value method for all awards, net of related tax effects |  |   | (38,300            | )               
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    |                 
|Net income (loss) - pro forma                                          |  |   | (3,471,121         | )               
|                                                                       |  |   |                    |                 
|                                                                       |  |   |                    |                 
|Income (loss) per share
    - as reported (basic and diluted):         |  |   | (0.28              | )               
|                                                                       |  |   |                    |                 
|Income (loss) per share -
    pro forma (basic and diluted):           |  |   | (0.28              | )               
|                                                                       |  |   |                    |                 

10

---







|3. | Earnings Per Share
|-- | ------------------

The calculation of basic and diluted earning per share (EPS) is as follows:

|                  |  | For the Three Months |   | For the Three Months | 
|----------------- |  | -------------------- | - | -------------------- | 
|                  |  | Ended June 30, 2004  |   | Ended June 30, 2003  | 
|                  |  |                      |   |                      | 
|                  |  |                      |   |                      | 
|                  |  | Loss
    Numerator   |   | Shares
  Denominator | 
|                  |  |                      |   |                      | 
|Net income (loss) |  | $(420,742            | ) |                      | 
|Basic and Diluted |  |                      |   |                      | 
|EPS               |  |                      |   |                      | 
|Income (loss)     |  |                      |   |                      | 
|available to      |  |                      |   |                      | 
|common            |  | $(420,742            | ) | 12,499,528           | 
|shareholders      |  |                      |   |                      | 
|                  |  |                      |   |                      | 

|                  |  | For the Six Months     |   | For the Six Months         | 
|----------------- |  | ---------------------- | - | -------------------------- | 
|                  |  | Ended June 30, 2004    |   | Ended June 30, 2003        | 
|                  |  |                        |   |                            | 
|                  |  |                        |   |                            | 
|                  |  | Loss
        Numerator |   | Shares
        Denominator | 
|                  |  |                        |   |                            | 
|Net income (loss) |  | $(3,432,821            | ) |                            | 
|Basic and Diluted |  |                        |   |                            | 
|EPS               |  |                        |   |                            | 
|Loss available to |  |                        |   |                            | 
|common            |  | $(3,432,821            | ) | 12,499,528                 | 
|shareholders      |  |                        |   |                            | 
|                  |  |                        |   |                            | 

Options
 and warrants to purchase 98,794,169 and
  90,810,464 shares of common stock at prices ranging from $0.75 to $6.63 were
  outstanding during the three and six months ended June 30, 2004 and 2003, respectively,
  but were not included in the computation of diluted EPS because the effect
  would be anti-dilutive (see Note 9.). Convertible debt instruments, including convertible interest,
      which would result in the issuance of 54,245,682 and 49,250,416 shares
      of common stock, if the conversion features were exercised, were outstanding
      during the three and six months ended June 30, 2004 and 2003, respectively,
      but were not included in the computation of the diluted EPS because the
      effect would be anti-dilutive. The conversion
      price of these instruments is $0.75 per share as of June 30, 2004 (see
Note 9).




11

---





|4. | Inventories of tool components and sub-assemblies held for sale, net
|-- | --------------------------------------------------------------------
|  

Inventories consist of
    tool components, subassemblies and expendable parts used in directional oil
    and gas well drilling activities. Components, subassemblies and expendable
    parts are capitalized as long-term inventory and expensed based on a per
    hour of motor use calculation and then adjusted to reflect physical inventory
    counts. The Companys classification and treatment is consistent with
    industry practice. These assets were sold on August 6, 2004 as part of the
    sale of the Companys directional drilling division. See Note 6 to Notes
    to Financial Statements.


|   |                              
|-- | -----------------------------
|5. | Commitments and Contingencies
|  

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


|   |                        
|-- | -----------------------
|6. | Discontinued Operations
|  

Sale
      of Directional Drilling Division.     On June 3, 2004, the Company entered into an asset purchase agreement
    with Multi-Shot, LLC, a newly formed Texas limited liability company, with
    respect to the sale of the Companys directional drilling division.
    The transaction was completed on August 6, 2004. The sale included all the
    equipment, inventory, the net working capital of the division and its owned
    real estate and leases. The net working capital of the division sold included
    current assets subject to current liabilities assumed. The purchaser included
    among its members Messrs. Allen Neel, Paul Culbreth and David Cudd who hold
    minority equity interests in Multi-Shot, LLC. Mr. Neel was a former executive
    officer of the Company employed in the directional drilling division and
    Messrs. Culbreth and Cudd were former employees of the directional drilling
    division. The purchase price was $11.0
      million consisting of $10.4 million in cash and approximately $628,000
      payable by assignment and release by the three
    key former Multi-Shot employees of their claims under their employment agreements
    with the Company to change of control payments that may be due in the aggregate
    of that amount. The purchase price was subject to adjustment at and as of
    the closing of the sale for increases and decreases in the divisions
    net working capital of $270,000 as of November 30, 2003 and increases and
    decreases in the divisions inventory of approximately $5,207,000 as
    of December 31, 2003. On the basis of an initial closing date balance sheet
    prepared by the Company and delivered at the closing of the sale on August
    6, 2004, the purchase price was reduced by a net adjustment of approximately
    $22,000. This net adjustment reflected a decrease in net working capital
    subsequent to November 30, 2003 through the closing of approximately $552,000,
    and an increase in inventory value subsequent to December 31, 2003 through
the closing of approximately $530,000.


12

---



The Asset Purchase Agreement
      provides that within 45 days after the closing, the buyer will prepare
      and deliver a proposed final closing date balance sheet which is to include
      the buyers calculation of the adjustment amounts. The Company can
      dispute these amounts by delivering written objections within 30 days thereafter.
      Any disputes with regard to these amounts that are not resolved by the
      Company and the buyer are to be resolved, based on written submission by
      the parties, by independent accountants whose decision, absent manifest
  fraud, is to be final and binding. As of August 25, 2004, the buyer had not delivered
      its proposed final closing date balance sheet but the Company has been
      orally advised that the buyer intends to deliver a proposed final closing
      date balance sheet that may include adjustments totaling approximately
      $1.0 million, including a decrease in working capital of approximately
      $430,000 and a decrease in inventory value of approximately $591,000. If
      the buyer is successful in these adjustments, this would result in a net
      reduction in the purchase price of approximately $1.0 million. The Company
      expects that it will object in writing to certain or all of these adjustments
      of the purchase price. The bases of the Companys objections must
      await receipt from the buyer of the proposed final closing date balance
      sheet. The Company is unable to estimate the amount, if any, of the reduction
      in the purchase price for the Multi-Shot assets that may be required upon
      resolution of any disputes that may arise between the Company and the buyer.
      Payment of such amount is required to be made within 5 days of the determination
  of the final purchase price adjustments. Out of the net cash
      proceeds from the sale of the Multi-Shot assets, approximately $9.6 million
      was
  applied to the reduction of indebtedness owing to the Companys senior
  secured creditor.


7.Segment and Related Information

At June 30, 2004, the Company is organized into,
  and manages its business based on the performance of two business units. The
  business units have separate management teams and infrastructures that offer
  different oil and gas well services. The business units have been aggregated
  into two reportable segments: wireline and directional drilling, since the
  long-term financial performance of these reportable segments is affected by
  similar economic conditions. As described in Note 6, subsequent to June 30,
  2004, the Company sold its directional drilling division and it is accounted
  for as a discontinued operation for the three and six months ended June 30,
  2004 and 2003. For comparison purposes the directional drilling segment is
  shown in the segment information below.


Wireline- This segment consists of two business units that perform various procedures to evaluate and modify downhole conditions at different stages of
the process of drilling and completing oil and gas wells as well as various times thereafter until the well is depleted and abandoned. This segment engages in onshore and offshore servicing, as well as other oil and gas well service activities
including renting and repairing equipment. The principal markets for this segment include all major oil and gas producing regions of the United States. Major customers of this segment for the quarter ended June 30, 2004 included Burlington
Resources, Apache Energy and Spinnaker Exploration.

13

---



Directional
      Drilling -
    This segment performs procedures to enter hydrocarbon-producing zones directionally,
    using specialized drilling equipment, and expand the area of interface of
    hydrocarbons and thereby greatly enhancing recoverability. It also engages
    in oil and gas well downhole surveying activities. The principal markets
    for this segment include all major oil and gas producing regions of the United
    States. Major customers of this segment for the quarter ended June 30, 2004
    included Encore Operating, Anadarko Petroleum and Chesapeake Operating. The accounting policies
      of the reportable segments are the same as those described in Note 3 of
        the Companys Annual Report of Form 10-K for
      the fiscal year ended December 31, 2003. The Company evaluates the performance
      of its operating segments based on earnings before interest, taxes, depreciation,
      and amortization (EBITDA), which is derived from revenues less operating
      expenses and selling, general, and administrative expenses. Segment information
      for the three and six months ended June 30, 2004 and 2003 is as follows: Three
          months ended June 30, 2004


|                                            |          |            | Directional |             |            | 
|------------------------------------------- | -------- | ---------- | ----------- | ----------- | ---------- | 
|                                            | Wireline |            | Drilling    |             | Total      | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|Segment revenues                            | $        | 13,170,348 |             | $           | 4,978,573  | 
|Segment cost of sales
    and sg&a expenses | $        | 10,188,003 |             | $           | 4,855,237  | 
|Segment EBITDA                              | $        | 2,982,345  |             | $           | 123,336    | 
|Segment Assets                              | $        | 27,495,866 |             | $           | 13,361,179 | 
|                                            |          |            |             |             |            | 
|Three months ended June 30, 2003            |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             | Directional |            | 
|                                            | Wireline |            | Drilling    |             | Total      | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|Segment revenues                            | $        | 12,148,678 |             | $           | 6,874,335  | 
|Segment cost of sales
    and sg&a expenses | $        | 9,355,855  |             | $           | 5,820,312  | 
|Segment EBITDA                              | $        | 2,792,823  |             | $           | 1,054,023  | 
|Segment Assets                              | $        | 31,801,769 |             | $           | 20,751,738 | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|Six months ended June 30, 2004              |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             | Directional |            | 
|                                            | Wireline |            | Drilling    |             | Total      | 
|                                            |          |            |             |             |            | 
|                                            |          |            |             |             |            | 
|Segment revenues                            | $        | 23,709,668 |             | $           | 8,887,314  | 
|Segment cost of sales
    and sg&a expenses | $        | 19,442,138 |             | $           | 8,430,749  | 
|Segment EBITDA                              | $        | 4,267,530  |             | $           | 456,565    | 
|Segment Assets                              | $        | 27,495,866 |             | $           | 13,361,179 | 

14

---







|Six months ended June 30, 2003              |          |            |             |   |            |  |   |            | 
|------------------------------------------- | -------- | ---------- | ----------- | - | ---------- |  | - | ---------- | 
|                                            |          |            |             |   |            |  |   |            | 
|                                            |          |            | Directional |   |            | 
|                                            | Wireline |            | Drilling    |   | Total      | 
|                                            |          |            |             |   |            | 
|                                            |          |            |             |   |            | 
|Segment revenues                            | $        | 22,518,492 |             | $ | 12,087,207 |  | $ | 34,605,699 | 
|Segment cost of sales
    and sg&a expenses | $        | 18,444,688 |             | $ | 10,564,497 |  | $ | 29,009,185 | 
|Segment EBITDA                              | $        | 4,073,804  |             | $ | 1,522,710  |  | $ | 5,596,514  | 
|Segment Assets                              | $        | 31,801,769 |             | $ | 20,751,738 |  | $ | 52,553,507 | 
|                                            |          |            |             |   |            |  |   |            | 

The
    Company has certain expenses that were not allocated to the individual operating
    segments in 2003 but were restated in
  the tables above and below to conform to the 2004 presentation. To fully assess
  the Companys operating results, management believes that, although not
  prescribed under generally accepted accounting principals (GAAP),
  EBITDA is an appropriate measure of the Company
s ability to satisfy capital
  expenditure obligations and working capital requirements. EBITDA is a non-GAAP
  financial measure as defined under SEC rules. The Companys EBITDA should
  not be considered in isolation or as a substitute for other financial measurements
  prepared in accordance with GAAP or as a measure of the Companys profitability
  or liquidity. As EBITDA excludes some, but not all, items that affect net income
  and may vary among companies, the EBITDA presented above and below may not
  be comparable to similarly titled measures of other companies. Management believes
  that income (loss) from operations calculated in accordance with GAAP is the
  most directly comparable measure most similar to EBITDA. EBITDA is defined
  as net income (loss) plus interest expense, depreciation and amortization,
  deferred income taxes and other non-cash items. A reconciliation of total segment
  EBITDA to income (loss) from continuing operations for the three and six months
  ended June 30, 2004 and 2003 is presented as follows:


Three months ended June 30:

|                                                       | 2004 |            | 2003 |  
|------------------------------------------------------ | ---- | ---------- | ---- | -
|EBITDA                                                 |      |            |      |  
|Total segment EBITDA                                   | $    | 3,105,681  |      | $
|Discontinued segment EBITDA                            |      | (123,336   | )    |  
|Depreciation and amortization                          |      | (1,538,068 | )    |  
|Corporate expense allocated to discontinued operations |      | (521,866   | )    |  
|                                                       |      |            |      |  
|Income from continuing operations                      | $    | 922,411    |      | $
|                                                       |      |            |      |  
|ASSETS                                                 |      |            |      |  
|Total segment assets                                   | $    | 40,857,045 |      | $
|Unallocated corporate assets                           |      | 54,022     |      |  
|                                                       |      |            |      |  
|Total assets                                           | $    | 40,911,067 |      | $

15

---





Six months ended June 30:

|                                                       | 2004 |            | 2003 |  
|------------------------------------------------------ | ---- | ---------- | ---- | -
|EBITDA                                                 |      |            |      |  
|Total segment EBITDA                                   | $    | 4,724,095  |      | $
|Discontinued segment EBITDA                            |      | (456,565   | )    |  
|Depreciation and amortization                          |      | (2,737,202 | )    |  
|Corporate expense allocated to discontinued operations |      | (993,964   | )    |  
|                                                       |      |            |      |  
|Income from continuing operations                      | $    | 536,364    |      | $
|                                                       |      |            |      |  
|ASSETS                                                 |      |            |      |  
|Total segment assets                                   | $    | 40,857,045 |      | $
|Unallocated corporate assets                           |      | 54,022     |      |  
|                                                       |      |            |      |  
|Total assets                                           | $    | 40,911,067 |      | $
|                                                       |      |            |      |  

8. Related
Party Transactions

On June
    17, 1999, the Company sold approximately $329,000 of trade accounts receivable,
    which was fully reserved due to the
  customer declaring bankruptcy, to RJ Air, LLC, an entity affiliated with a
  former member of the Companys Board of Directors, for $200,000. As of
  June 30, 2004, the Company has collected $100,000 of the sale price and the
  remaining $100,000 is included in deferred revenue. The Company has executed notes payable to SJCP and SJMB in connection with
    acquisitions and to provide funding for operations. Mr. Charles Underbrink,
    a Director of the Company, is Chairman of St. James Capital Corp. and SJMB,
    L.L.C. and Mr. James Harrison, a Director of the Company, is Chief Financial
    Officer of St. James Capital Corp. and SJMB, L.L.C. St. James Capital Corp.
    and SJMB, L.L.C. are the general partners of SJCP and SJMB, respectively.
    At June 30, 2004 and 2003, notes due to SJMB, SJCP, their principal partners
    and affiliates totalled $24,566,882. The notes bear interest at 15% and permit
    conversion to equity, which would result in substantial dilutions to existing
    shareholders. In connection with the three year employment
      agreement effective January 1, 2002 entered into with Mr. Jenkins to remain
      as the Companys President and Chief Executive Officer, the Company
      agreed to loan Mr. Jenkins $190,000, bearing interest at the applicable
      federal rate, to be repaid at the rate of one-third of the principal, plus
      accrued interest on October 1 of each of the years 2002, 2003 and 2004.
      If Mr. Jenkins remains employed by the Company on September 30 preceding
      the date annual principal and interest is due on the loan, the sum due
      and owing the following day is forgiven. In the event of a Change of Control,
      as defined, the death or permanent disability of Mr. Jenkins or in the
      event his employment is terminated without cause, the entire amount owing
      by Mr. Jenkins is forgiven. The Company is amortizing the loan balance
      into compensation cost over the life of the loan. Compensation expense
      for the three and six months ended June 30, 2004 was approximately $20,598
      and $41,196, respectively. At June 30, 2004, the unamortized balance of
      the loan was approximately $20,598.


16

---







|9. | Issuance of Common Stock
|-- | ------------------------
|  

The Company has outstanding
    at June 30, 2004 common stock purchase warrants, options and convertible
    debt securities entitled to purchase or to be converted into an aggregate
    153,039,851 shares of the Companys common stock at exercise and conversion
    prices ranging from $0.75 to $6.63. Accordingly, if all such securities were
    exercised or converted, the 12,499,528 shares of Common Stock issued and
    outstanding on June 30, 2004, would represent 7.6% of the shares outstanding
    on a fully diluted basis.


|    |             
|--- | ------------
|10. | Income Taxes
|   

The difference between
    the statutory rate and the effective rate relates to federal tax net operating
    loss carryforwards (NOLs) that unless utilized, expire at various dates
    beginning 2010 through 2022. The Companys utilization of NOLs
    is subject to a number of uncertainties including the ability to generate
    future taxable income. Accordingly, full valuation allowances have been provided
    for NOLs generated in each period with no benefits recognized.


|    |                                          
|--- | -----------------------------------------
|11. | Recently Issued Accounting Pronouncements
|   

In
    January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation
    No. 46 (FIN 46), Consolidation of
  Variable Interest Entities. FIN 46 addresses when a company should consolidate
  in its financial statements the assets, liabilities and activities of a variable
  interest entity (VIE). It defines VIEs as entities that either do not have
  any equity investors with a controlling financial interest, or have equity
  investors that do not provide sufficient financial resources for the entity
  to support its activities without additional subordinated financial support.
  FIN 46 also requires disclosures about VIEs that a company is not required
  to consolidate, but in which it has a significant variable interest. The consolidation
  requirements of FIN 46 applied immediately to variable interest entities created
  after January 31, 2003. The Company has not obtained an interest in a VIE subsequent
  to that date. A modification to FIN 46 (FIN 46(R)) was released in December
  2003. FIN 46(R) delayed the effective date for VIEs created before February
  1, 2003, with the exception of special-purpose entities, until the first fiscal
  year or interim period ending after March 15, 2004. FIN 46(R) delayed the effective
  date for special-purpose entities until the first fiscal year or interim period
  after December 15, 2003. The Company is not the primary beneficiary of any
  SPEs at December 31, 2003. The Company adopted FIN 46(R) for non-SPE entities
  as of March 31, 2004. The adoption of FIN 46(R) did not result in the consolidation
  of any VIEs. In May 2003, the FASB
      issued Statement 150, Accounting for Certain
    Financial Instruments with Characteristics of both Liabilities and Equity. This
    Statement establishes standards for classifying and measuring certain financial
    instruments that have characteristics of both liabilities and equity. The
    guidance in Statement 150 became effective June 1, 2003, for all financial
    instruments created or modified after May 31, 2003, and otherwise became
    effective as of July 1, 2003. In November 2003, the FASB deferred for an
    indefinite period the application of the guidance in Statement 150 to non-controlling
    interests that are classified as equity in the
    financial statements of a subsidiary but would
    be classified as a liability in the parents financial statements under
    Statement 150. The deferral is limited to mandatorily redeemable non-controlling
    interests associated with finite-lived subsidiaries. Management does not
    believe it has any involvement with such entities as of June 30, 2004, nor
any financial instruments subject to this statement.


17

---





On March
    31, 2004, the FASB issued a proposed Statement, Share-Based Payment, an Amendment
    of FASB Statements No. 123 and APB No. 95,
  that addresses the accounting for share-based payment transactions in which
  an enterprise receives employee services in exchange for (a) equity instruments
  of the enterprise or (b) liabilities that are based on the fair value of the
  enterprises equity instruments or that may be settled by the issuance
  of such equity instruments. Under the FASBs proposal, all forms of share-based
  payments to employees, including employee stock options, would be treated the
  same as other forms of compensation by recognizing the related cost in the
  income statement. The expense of the award would generally be measured at fair
  value at the grant date. Current accounting guidance requires that the expense
  relating to so-called fixed plan employee stock options only be disclosed in
  the footnotes to the financial statements. The proposed Statement would eliminate
  the ability to account for share-based compensation transactions using APB
  Opinion No. 25, Accounting for Stock Issued to Employees. The Company is currently
  evaluating this proposed statement and its effects on its results of operations. Item 2. Managements Discussion and Analysis
        of Financial Condition and Results of Operations


General

The Companys results of operations are affected
  primarily by the extent of utilization and rates paid for its services and
  equipment. The energy services sector is completely dependent upon the upstream
  spending by the exploration and production side of the industry. A decline
  in oil and gas commodity prices can be expected to result in a decline in the
  demand for the Companys services and equipment. There can be no assurance
  that the Companys revenues in 2004 will equal or exceed its revenues
  in 2003 and prior years. There can be no assurance that the Company will experience
  any increase in the demand for and utilization of its services with corresponding
  increase in its revenues and return to profitability. On September 14, 2004,
      the Companys Credit Facility with GECC will
    expire. At that time, unless the Credit Facility is extended, an estimated
    $6.9 million in senior secured indebtedness, after reflecting a payment of
    $9.6 million made on August 6, 2004 out of the proceeds of the sale of the
    Companys directional drilling division, will mature and be payable.
    In addition, on December 31, 2004, an additional $23.9 million of subordinated
    secured indebtedness and $17.8 million of accrued interest will be repayable
    under the terms of loan agreements entered into between the Company and the
    holders of that indebtedness. The holders of the subordinated secured indebtedness
    are parties to a Subordination Agreement dated September 14, 2001, entered
    into with GECC and the Company whereby they have agreed to subordinate their
    payments of principal and interest and the lien granted to them to the prior
    payment of the Companys indebtedness owing to GECC. The Companys
    sale of its directional drilling division on August 6, 2004 and the application
    of $9.6 million of the proceeds to the reduction of its senior secured indebtedness
    was the initial step in managements plans to extend,
    restructure or refinance this indebtedness. As
    of August 25, 2004, the Company is continuing its efforts through Simmons & Company
    International, as its financial advisor, to examine various alternative means
    to maximize its value to shareholders and repay, refinance or restructure
    its senior secured and subordinated secured indebtedness. These efforts are
    expected to include efforts regarding a possible merger, sale of assets or
    other business combination involving the Company as well as a possible reorganization,
    recapitalization, restructuring and refinancing of the Companys obligations.
    At August 25, 2004, the Company has not entered into any definitive agreements
    with respect to any such transactions, other than the sale of its directional
    drilling division which was completed on August 6, 2004, and there can be
    no assurance that any definitive agreements will be entered into or that
    the Company will be successful in pursuing its plans for the extension, repayment
    or refinancing of its outstanding indebtedness. In addition, the Company
    is engaged in efforts to refinance its outstanding indebtedness owing to
    GECC which, under the terms of the Companys Credit Facility, will mature
    on September 14, 2004. These negotiations are ongoing but may include a refinancing
    of the indebtedness for a term of up to five years in an aggregate amount
    of up to $22.0 million and on other terms similar to the Companys existing
    Credit Facility. No definitive agreements have been entered into as of August
    25, 2004 and there can be no assurance that the Company will be successful
    in refinancing its outstanding Credit Facility or that any terms offered
    will be
acceptable to the Company. In the event the Companys efforts to refinance
its Credit Facility are unsuccessful, the Companys secured creditors could
assert their rights to foreclose on the Companys assets and a stockholders
investment in the Company could be lost. The Company intends to engage in ongoing
efforts to pursue these plans.


18

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Results of Operations - Three and Six Months Ended June 30, 2004 Compared to Three and Six Months Ended June 30, 2003

The
      following table and discussion of results of operations include the Companys
      directional drilling division for comparison purposes.  The Company sold its directional drilling division
        business on August 6, 2004 and the operations of this division are reported
        in the financial statements included in this Report as discontinued operations. The following
          table sets forth the Companys
        revenues from its two principal lines of business for the three and six
        months ended June 30, 2004 and 2003, respectively:


|                     | Three Months Ended |            | Six Months Ended |  
|-------------------- | ------------------ | ---------- | ---------------- | -
|                     |                    | 6/30/04    |                  |  
|                     |                    |            |                  |  
|Wireline             | $                  | 13,170,348 |                  | $
|Directional Drilling |                    | 4,978,573  |                  |  
|                     |                    |            |                  |  
|                     | $                  | 18,148,921 |                  | $
|                     |                    |            |                  |  

Total revenues decreased
    by approximately $874,000 to approximately $18.1 million for the three months
    ended June 30, 2004 and decreased approximately $2.0 million to approximately
    $32.6 million for the six months ended June 30, 2004 as compared to total
    revenues of approximately $19.0 million and $34.6 million for the three and
    six months ended June 30, 2003, respectively. Wireline services revenues
    increased by approximately $1.0 million and $1.2 million, respectively for
    the three and six months ended June 30, 2004 as compared to 2003 while directional drilling
	revenues decreased
  by approximately $1.9 million and $3.2 million, respectively for the three
  and six months ended June 30, 2004 as compared to 2003 as a consequence of
  a decrease in the
demand for the Companys services and the loss of a sales employee in August
2003.




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Operating
            costs decreased by approximately $274,000 and $1.1 million for the
            three and six months ended June 30, 2004, as compared to the same
            period of 2003. Operating costs were 67.3% and 69.3% of revenues
            for the three and six months ended June 30, 2004 as compared with
            65.6% and 68.3% of revenues for the same periods in 2003. The decrease
            in operating costs was primarily the result of the lower overall
            level of activities in directional drilling in the three and six
            months ended June 30, 2004 compared with 2003. Salaries and benefits
            decreased by approximately $368,000 and $63,000 for the three and
            six months ended June 30, 2004, as compared to the same period in
            2003. Total number of employees increased slightly from 368 at June
            30, 2003 to 379 at June 30, 2004 with the additional employees mainly
            being added in the latter half of the second quarter of 2004. The
            decrease in salaries and benefits is primarily due to the decrease
            in employee levels from 2003 prior to the additional employees added
            in the second quarter of 2004. Selling, general and administrative expenses increased
      by approximately $142,000 to $2.8 million in the three months ended June
      30, 2004 from $2.7 million in the three months ended June 30, 2003 and
      decreased approximately $77,000 for the six months ended June 30, 2004
      to $5.3 million. As a percentage of revenues, selling, general and administrative
      expenses increased to 15.6% in the three months ended June 30, 2004 from
      14.1% in 2003 and increased to 16.2% from 15.5% for the six months ended
  June 30, 2004. Depreciation and amortization increased by
          approximately $418,000 in the three months ended June 30, 2004 to $2.3
          million or 12.9% of revenues, from approximately $1.9 million or 10.1%
          of revenues for 2003. For the six months ended June 30, 2004 depreciation
          and amortization increased by approximately $399,000 to $4.3 million
          or 13.2% of revenues, from approximately $3.9 million or 11.3% of revenues
          for the same period in 2003. Interest expense and amortization of debt
        discount decreased by approximately $179,000 for the three months ended
        June 30, 2004 and decreased by approximately $135,000 for the six months
        ended June 30, 2004 as compared to the same periods in 2003. See Note
        9 of Notes to Financial Statements in the Companys Annual
        Report on Form 10-K for the fiscal year ended December 31, 2003. The Companys net loss for the quarter
        ended June 30, 2004 was approximately $421,000 compared with a net income
        of approximately $603,000 for the quarter ended June 30, 2003. For the
        six months ended June 30, 2004 the Companys net loss was $3.4 million
        compared to a net loss of approximately $694,000 for the same period
        in 2003. The net loss for the quarter ended June 30, 2004 was the result
        of a decrease in demand for the Companys directional drilling services
        which was partially offset by an increase in the demand for the Companys
        wireline services while the increase in the net loss for the six months
        ended June 30, 2004 was the result of the recognition of the estimated
        loss of $1.4 million on the sale of the Companys directional drilling
        division as well as decreased demand for the Companys directional
        drilling services coupled with the loss of a sales employee which was
        partially offset by an increase in demand for the Companys wireline
services


20

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Liquidity and Capital Resources

Cash
    provided by the Companys operating activities
  was approximately $275,000 for the six months ended June 30, 2004 as compared
  to cash provided of approximately $4.0 million for the same period in 2003.
  Cash flows from operating activities decreased by approximately $3.7 million
  during the six months ended June 30, 2004 mainly as a result in the change
  in the Companys prepaid assets associated with the financing of insurance
  premiums as well as the timing of other current assets and current liabilities.
  Investing activities used cash of approximately $4.1 million during the six
  months ended June 30, 2004 for the acquisition of property, plant and equipment
  and was partially offset by approximately $343,000 of proceeds from the sale
  of assets. During the six months ended June 30, 2003, investing activities
  used cash of approximately $1.4 million for the acquisition of property, plant
  and equipment. Financing activities used cash of approximately $4.2 million
  for principal payments on debt offset from proceeds from bank and other borrowings
  of approximately $2.4 million and net draws on working capital revolving loans
  of $1.6 million. For the same period in 2003, financing activities provided
  cash of approximately $4.4 million from proceeds from bank and other borrowings
  offset by principal payments on debt and net payments on working capital revolving
  loans of approximately $3.7 million. The Companys outstanding indebtedness
      includes primarily senior secured indebtedness aggregating approximately
      $16.8 million at June 30, 2004, owed to GECC, other indebtedness of approximately
      $1.4 million, and $24.6 million of principal and $16.4 million of accrued
      interest owed to St. James and its affiliates. GECC Loan Description   On
      September 14, 2001, the Company entered into the Credit Facility with GECC
      providing for the extension of revolving, term and capex credit facilities
      to the Company aggregating up to $40.0 million. The Credit Facility, including
      its subsequent amendments, includes a revolving loan of up to $15.0 million,
      but not exceeding 85% of eligible accounts receivable, a term loan of $17.0
      million, and a capex loan of up to $8.0 million, but not exceeding a borrowing
      base of the lesser of 70% of the hard costs of acquired eligible equipment,
      100% of its forced liquidation value and the Company
s EBITDA for the month
      then ended, less certain principal, interest and maintenance payments.
      Eligible accounts are defined to exclude, among other items, accounts outstanding
      of debtors that are more than 60 days overdue or 90 days following the
      original invoice date and of debtors that have suspended business or commenced
      various insolvency proceedings and accounts with reserves established against
      them to the extent of such reserves as GECC may set from time to time in
      its reasonable credit judgment. Borrowings under the capex loan are at
      the sole and exclusive discretion of GECC. The interest rate on borrowings
      under the revolving loan is 1.75% above a base rate and on borrowings under
      the term loan and capex loan is 2.5% above the base rate. The base rate
      is the higher of (i) the rate publicly quoted from time to time by the
	  Wall
      Street Journal as the base rate on
      corporate loans posted by at least 75% of the nations thirty largest
      banks, or (ii) the average of the rates on overnight Federal funds transactions
      by members of the Federal Reserve System, plus 0.5%. Subject to the absence
      of an event of default and fulfillment of certain other conditions, the
      Company can elect to borrow or convert any loan and pay interest at the
      LIBOR rate plus applicable margins of 3.25% on the revolving loan and 4.0%
      on the term loan and capex loan. If an event of default has occurred, the
      interest rate is increased by 2%. Advances under the Credit Facility are
      collateralized by a senior lien against substantially all of
	  the Companys assets. The Credit Facility expires
      on September 14, 2004. As is described above, the Company is engaged in
efforts to refinance its Credit Facility.


21

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Initial
    borrowings under the Credit Facility advanced on September 14, 2001 aggregated
    $21.6 million. Proceeds of the initial borrowings
  were used to repay outstanding indebtedness aggregating $21.4 million to Coast
  Business Credit, Bendover Company and certain other indebtedness. At June 30,
  2004, borrowings outstanding under the Credit Facility aggregated $16.8 million,
  of which $4.8 million was outstanding under the revolving loan, $7.6 million
  was outstanding under the term loan and $4.4 was outstanding under the capex
  loan. Borrowings under the revolving loan are able to be repaid and re-borrowed
  from time to time for working capital and general corporate needs, subject
  to the Companys continuing compliance with the terms of the agreement,
  with the outstanding balance of the revolving loan to be paid in full at the
  expiration of the Credit Facility on September 14, 2004. The term loan is to
  be repaid in 35 equal monthly installments of $283,333 with a final installment
  of $7,083,333 due and payable on September 14, 2004. At June 30, 2004 the Company
  had available $3.0 million under the revolving loan. The capex loan is available to be borrowed through June 30, 2004,
  as amended by the March 2004 amendment, at the discretion of GECC, and is to
  be repaid in equal monthly installments of 1/60th of each of the amounts
  borrowed from time to time with the remaining outstanding balance of the entire
  capex loan due and payable on September 14, 2004. Borrowings under the Credit Facility may be
      prepaid or the facility terminated or reduced by the Company at any time
      subject to the payment of an amount equal to 1% of the prepayment or reduction
      occurring September 14, 2004. The Company is required to prepay borrowings
      out of the net proceeds from the sale of any assets, subject to certain
      exceptions, or the stock of any subsidiary, the net proceeds from the sale
      of any stock or debt securities by the Company, and any borrowings in excess
      of the applicable borrowing availability, including borrowings under the
      term loan and capex loan in excess of 50% of the forced liquidation value
      of the eligible capex and term loan equipment and borrowings under the
      term loan in excess of 70% of the forced liquidation value of eligible
      term loan equipment. The value of the term loan equipment is established
      by appraisal. Initial borrowings under the Credit Facility
      were subject to the fulfillment at or before the closing of a number of
      closing conditions, including among others, the accuracy of the representations
      and warranties made by the Company in the loan agreement, delivery of executed
      loan documents, officers certificates, an opinion of counsel, repayment
      of the Coast senior secured loan, the extension of the maturity date of
      $24.6 million principal amount of the Companys outstanding subordinated
      notes to December 31, 2004 with no payments of principal or interest to
      be made prior to that date, and the completion of due diligence. Future
      advances are subject to the continuing accuracy of the Companys representations
      and warranties as of such date (other than those relating expressly to
      an earlier date), the absence of any event or circumstance constituting
      a material adverse effect, as defined, the absence of any default
      or event of default under the Credit Facility, and the borrowings not exceeding
      the applicable borrowing availability under the Credit Facility, after
      giving effect to such advance. A material adverse effect is
      defined to include an event having a material adverse effect on the Companys
      business, assets, operations, prospects or financial or other condition,
      on the Companys ability to pay the loans, or on the collateral and
      also includes a decline in the Average Rig Count (excluding
      Canada and international rigs) published by Baker Hughes, Inc. falling
      below 675 for 12 consecutive weeks.




22

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Under the Credit Facility,
      the Company is obligated to maintain compliance with a number of affirmative
      and negative covenants. Affirmative covenants the Company must comply with
      include requirements to maintain its corporate existence and continue the
      conduct of its business substantially as conducted in September 2001, promptly
      pay all taxes and governmental assessments and levies, maintain its corporate
      records, maintain insurance, comply with applicable laws and regulations,
      provide supplemental disclosure to the lenders, conduct its affairs without
      violating the intellectual property of others, conduct its operations in
      compliance with environmental laws and provide a mortgage or deed of trust
      to the lenders granting a first lien on the Companys real estate
      upon the request of the lenders, provide certificates of title on newly
  acquired equipment with the lenders lien noted. Negative covenants the Company may not violate
      include, among others, (i) forming or acquiring a subsidiary, merging with,
      acquiring all or substantially all the assets or stock of another person,
      (ii) making an investment in or loan to another person, (iii) incurring
      any indebtedness other than permitted indebtedness, (iv) entering into
      any transaction with an affiliate except on fair and reasonable terms no
      less favorable than would be obtained from a non-affiliated person, (v)
      making loans to employees in amounts exceeding $50,000 to any employee
      and a maximum of $250,000 in the aggregate, (vi) making any change in its
      business objectives or operations that would adversely affect repayment
      of the loans or in its capital structure, including the issuance of any
      stock, warrants or convertible securities other than (A) on exercise of
      outstanding securities or rights, (B) the grant of stock in exchange for
      extensions of subordinated debt, (C) options granted under an existing
      or future incentive option plan, or (D) in its charter or by-laws that
      would adversely affect the ability of the Company to repay the indebtedness,
      (vii) creating or permitting to exist any liens on its properties or assets,
      with the exception of those granted to the lenders or in existence on the
      date of making the loan, (viii) selling any of its properties or other
      assets, including the stock of any subsidiary, except inventory in the
      ordinary course of business and equipment or fixtures with a value not
      exceeding $100,000 per transaction and $250,000 per year, (ix) failing
      to comply with the various financial covenants in the loan agreement, (x)
      making any restricted payment, including payment of dividends, stock or
      warrant redemptions, repaying subordinated debt, rescission of the sale
      of outstanding stock, (xi) making any payments to stockholders of the Company
      other than compensation to employees and payments of management fees to
      any stockholder or affiliate of the Company, or (xii) amending or changing
  the terms of the Companys subordinated debt.


23

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As amended through March
    2004, the financial covenants require the Company to maintain an increasing
    cumulative operating cash flow at the end of each month, commencing with
    the month ended February 29, 2004, as follows:


|                                         |  |   |                                | 
|---------------------------------------- |  | - | ------------------------------ | 
|Fiscal Month                             |  |   | Cumulative Operating Cash Flow | 
|                                         |  |   |                                | 
|For the 1 Month Ending February 29, 2004 |  | $ | (50,000)                       | 
|                                         |  |   |                                | 
|For the 2 Months Ending March 31, 2004   |  | $ | 200,000                        | 
|                                         |  |   |                                | 
|For the 3 Months Ending April 30, 2004   |  | $ | 500,000                        | 
|                                         |  |   |                                | 
|For the 4 Months Ending May 31, 2004     |  | $ | 850,000                        | 
|                                         |  |   |                                | 
|For the 5 Months Ending June 30, 2004    |  | $ | 1,350,000                      | 
|                                         |  |   |                                | 
|For the 6 Months Ending July 31, 2004    |  | $ | 2,000,000                      | 
|                                         |  |   |                                | 

Cumulative operating cash flow is defined, for the
  period February 29, 2004 through July 31, 2004, as the sum of EBITDA for such
  month minus capital expenditures paid in cash for such month plus EBITDA for
  each preceding month commencing on February 1, 2004 minus capital expenditures
  paid in cash for each preceding month commencing February 1, 2004. For the
  period ended December 31, 2003 and January 31, 2004, the Company was not in
  compliance with a prior cumulative operating cash flow covenant which was waived
  by GECC by the amendment of March 2004. For the period ended June 30, 2004, the Company is in compliance with
      all financial covenants. Events
        of default under the Credit Facility include (a) the failure to pay when
        due principal or interest or fees owing under the Credit Facility, (b)
        the failure to perform the covenants under the Credit Facility relating
        to use of proceeds, maintenance of a cash management system, maintenance
        of insurance, delivery of certificates of title, delivery of required
        consents of holders of outstanding subordinated notes, maintenance of
        compliance with the financial covenants in the loan agreement and compliance
        with any of the loan agreements negative covenants, (c) the failure,
        within specified periods of 3 or 5 days of when due, to deliver monthly
        unaudited and annual audited financial statements, annual operating plans,
        and other reports, notices and information, (d) the failure to perform
        any other provision of the loan agreement which remains un-remedied for
        20 days or more, (e) a default or breach under any other agreement to
        which the Company is a party beyond any grace period that involves the
        failure to pay in excess of $250,000 or causes or permits to cause in
        excess of $250,000 of indebtedness to become due prior to its stated
        maturity, (f) any representation or warranty or certificate delivered
        to the lenders being untrue or incorrect in any material respect, (g)
        a change of control of the Company, (h) the occurrence of an event having
        a material adverse effect, and (i) the attachment, seizure or levy upon
        of assets of the Company which continues for 30 days or more and various
        other bankruptcy and other events. Upon the occurrence of a default or
        event of default, the lenders may discontinue making loans to the Company.
        Upon the occurrence of an event of default, the lenders may terminate
        the Credit Facility, declare all indebtedness outstanding under the Credit
        Facility due and payable, and exercise any of their rights under the
        Credit Facility which includes the ability to foreclose on the Companys
assets.


24

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The Company has amended the terms
of its Credit
  Facility with GECC on eight occasions the principal effects of which were to
  relax certain of the terms of the financial covenants so as to be more favorable
  to the Company and, in addition, to consent to the sale of the directional
  drilling division. There can be no assurance that the Company will be able
  to obtain further amendments to these financial covenants if required or that
  the failure to obtain such amendments when requested may not result in the
  Company being placed in violation of those financial covenants. Before reflecting
  amendments to the Credit Facility made in June 2002 and March 2004, the Company
  was in violation of the financial covenants relating to its fixed charge coverage
  ratio, minimum interest coverage ratio, and ratio of senior funded debt to
  EBITDA in 2001 and cumulative operating cash flow in December 2003 and January
  2004. By amendments to the Credit Facility entered into as of June 10, 2002
  and March 31, 2004, GECC waived these defaults as well as violations relating
  to the Company
s failure to timely deliver its financial statements for the
  year ended December 31, 2001 as required by the Credit Facility and selling
  certain assets in violation of the terms of the Credit Facility. The Company
  agreed to pay GECC a fee of $100,000 in connection with entering into the amendment
  in 2001 and $35,000 in 2004. In connection with the April 2003 amendment to the Credit Facility, the
      Company is required to provide GECC with weekly reports setting forth an
      aging of its accounts payable and weekly cash budgets for the immediately
      following thirteen-week period. Also in connection with entering into that
      amendment, the Company agreed to pay GECC an amendment fee of $100,000,
      of which $50,000 was payable in June 2003 and $50,000 was payable on December
      31, 2003, and a fee of $300,000 in the event of a sale of all the assets
      or stock of the Company or other event that results in a change of control
      of the Company, of which $150,000 was paid on August 6, 2004 at the closing
      of the sale of the directional drilling division. GECC consented to a capex
      loan of $1.0 million to the Company at the time of entering into the April
      2003 amendment. The Company continues to be highly leveraged
        and has an accumulated deficit of $46.6 million. The Company is subject
        to certain debt covenants requiring minimal operational and cash flow
        levels. Failure to comply with these debt covenants and or generate sufficient
        cash flow from operations could significantly impair the Companys liquidity position and could result in the lender exercising prepayment options under the Companys credit facility. While the Company believes that it will have adequate borrowing base and cash flows, it can make no assurances that it will comply with its debt covenants or generate sufficient cash flows to service its debt and fund operations. Should the Company be unable to borrow funds
        under its current credit facility or if prepayment of those borrowings were required, it can make no assurances that alternative funding could
        be obtained. For a complete statement
        of the terms and conditions of the Credit Facility, reference is made
        to the Credit Agreement, filed as an Exhibit to the Companys Current
        Report on Form 8-K for September 14, 2001, the First and Second Amendments
        thereto, filed as exhibits to the Companys Annual Report on Form
        10-K for the year ended December 31, 2001, the Third Amendment thereto,
        filed as an exhibit to the Companys Quarterly Report on Form 10-Q
        for the quarter ended September 30, 2002, the Fourth Amendment and Fifth
        Amendment, filed as Exhibits to the Companys Annual Report on Form
        10-K for the year ended December 31, 2002, the Sixth Amendment and the
        Seventh Amendment filed as Exhibits to the Companys Annual Report
        on Form 10-K for the year ended December 31, 2003, and the Eighth Amendment
    filed as an Exhibit to this Quarterly Report on Form 10-Q.


25

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Sale of Directional Drilling Division.  On June 3, 2004, the Company entered into an asset purchase agreement with
    Multi-Shot, LLC, a newly formed Texas limited liability company, with respect
    to the sale of the Companys directional drilling division. The transaction
    was completed on August 6, 2004. The sale included all the equipment, inventory,
    the net working capital of the division and its owned real estate and leases.
    The net working capital of the division sold included current assets subject
    to current liabilities assumed. The purchaser included among its members
    Messrs. Allen Neel, Paul Culbreth and David Cudd who hold minority equity
    interests in Multi-Shot, LLC. Mr. Neel was a former executive officer of
    the Company employed in the directional drilling division and Messrs. Culbreth
    and Cudd were former employees of the directional drilling division.  The
        purchase price was $11.0 million consisting of $10.4 million in cash
        and approximately $628,000 payable by assignment and release by the three
      key former Multi-Shot employees of their claims under their employment
      agreements with the Company to change of control payments that may be due
      in the aggregate of that amount. The purchase price was subject to adjustment
      at and as of the closing of the sale for increases and decreases in the
      divisions net working capital of $270,000 as of November 30, 2003
      and increases and decreases in the divisions inventory of approximately
      $5,207,000 as of December 31, 2003. On the basis of an initial closing
      date balance sheet prepared by the Company and delivered at the closing
      of the sale on August 6, 2004, the purchase price was reduced by a net
      adjustment of approximately $22,000. This net adjustment reflected a decrease
      in net working capital subsequent to November 30, 2003 through the closing
      of approximately $552,000, and an increase in inventory value subsequent
      to December 31, 2003 through the closing of approximately $530,000. The Asset Purchase Agreement provides that
        within 45 days after the closing, the buyer will prepare and deliver
        a proposed final closing date balance sheet which is to include the buyers
        calculation of the adjustment amounts. The Company can dispute these
        amounts by delivering written objections within 30 days thereafter. Any
        disputes with regard to these amounts that are not resolved by the Company
        and the buyer are to be resolved, based on written submission by the
        parties, by independent accountants whose decision, absent manifest fraud,
        is to be final and binding. As of August 25, 2004, the buyer had not delivered
        its proposed final closing date balance sheet but the Company has been
        orally advised that the buyer intends to deliver a proposed final closing
        date balance sheet that may include adjustments totaling approximately
        $1.0 million, including a decrease in working capital of approximately
        $430,000 and a decrease in inventory value of approximately $591,000.
        If the buyer is successful in these adjustments, this would result in
        a net reduction in the purchase price of approximately $1.0 million.
        The Company expects that it will object in writing to certain or all
        of these adjustments of the purchase price. The bases of the Companys
        objections must await receipt from the buyer of the proposed final closing
        date balance sheet. The Company is unable to estimate the amount, if
        any, of the reduction in the purchase price for the Multi-Shot assets
        that may be required upon resolution of any disputes that may arise between
        the Company and the buyer. Payment of such amount is required to be made within 5 days of
the determination of the final purchase price adjustments.


26

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


Inflation

The Companys revenues
    have been and are expected to continue to be affected by fluctuations in
    the prices for oil and gas. Inflationary pressures did not have a significant
    effect on the Companys operations in the three and six months ended
    June 30, 2004.


Significant Accounting Policies

The
 Companys
    Discussion and Analysis of Financial Condition and Results of Operations
    is based upon its financial statements,
  which have been prepared in accordance with accounting principles generally
  accepted in the United States. The preparation of these financial statements
  requires the Company to make estimates and judgments that affect the reported
  amounts of assets, liabilities, revenues and expenses, and related disclosures
  of contingent assets and liabilities. On an on-going basis, the Company evaluates
  its estimates, including those related to the allowance for bad debts, inventory,
  long-lived assets, intangibles and goodwill. The Company bases its estimates
  on historical experience and on various other assumptions that are believed
  to be reasonable under the circumstances, the results of which form the basis
  for making judgments about the carrying value of assets and liabilities that
  are not readily apparent from other sources. Actual results may differ from
  these estimates under different assumptions or conditions. The Company maintains allowances for
  doubtful accounts for estimated
      losses resulting from the inability of its customers to make required payments.
      If the financial condition of the Companys customers were to deteriorate,
      resulting in an impairment of their ability to make payments, additional
      allowances may be required. The Companys inventory consists of tool
        components, sub-assemblies and expendable parts used in directional oil
        and gas well drilling activities. Components, sub-assemblies and expendable
        parts are capitalized as long-term inventory and expensed based on a
        per hour of motor use calculation and then adjusted to reflect physical
        inventory counts. The Companys classification and treatment is
        consistent with industry practice. The Company assesses the impairment
	of identifiable intangibles, long-lived
      assets and related goodwill whenever events or changes in circumstances
      indicate that the carrying value may not be recoverable and at least annually
      for goodwill. When the Company determines that the carrying value of intangibles,
      long-lived assets and related goodwill may not be recoverable, any impairment
      is measured based on a projected net cash flows expected to result from
      that asset, including eventual disposition, on a discounted basis. Property and equipment are carried at original cost less applicable depreciation.
      Depreciation is recognized on the straight-line basis over lives ranging
      from two to ten years.


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Major
    renewals and improvements are capitalized and depreciated over each assets
    estimated remaining useful life. Maintenance and repair costs are charged
    to expense as incurred. When assets are sold or
  retired, the remaining costs and related accumulated depreciation are removed
  from the accounts and any resulting gain or loss is included in income. Property
  and equipment held and used by the Company are reviewed for impairment whenever
  events or changes in circumstances indicate that the carrying amounts may not
  be recoverable. The Company estimates the future undiscounted cash flows of
  the affected assets to determine the recoverability of carrying amounts. Warrants
  are valued based upon an independent valuation. The difference between the
  face value of the warrant issued and the value per the valuation is amortized
  into income through interest expense over the life of the related debt instrument.


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

With the exception of
    historical matters, the matters discussed in this Report are forward-looking
    statements as defined under the Securities Exchange Act of 1934, as
    amended, that involve risks and uncertainties. The Company intends that the
    forward-looking statements herein be covered by the safe-harbor provisions
    for forward-looking statements contained in the Securities Exchange Act of
    1934, as amended, and this statement is included for the purpose of complying
    with these safe-harbor provisions. Forward-looking statements include, but
    are not limited to, the matters described herein, including Managements
    Discussion and Analysis of Financial Condition and Results of Operations.
    Such forward-looking statements relate to the Companys ability to generate
    revenues and attain and maintain profitability and cash flow, the stability
    and level of prices for oil and natural gas, predictions and expectations
    as to the fluctuations in the levels of oil and natural gas prices, pricing
    in the oil and gas services industry and the willingness of customers to
    commit for oil and natural gas well services,  the belief of management
    that the sale of its directional drilling division will facilitate a merger,
    sale, refinancing or restructuring of its wireline services business after
    the sale of its directional drilling division, the Companys estimates
    of the adjustments, if any, that it will be required to make to the purchase
    price paid for the sale of the assets of its directional drilling division
    (Multi-Shot division) and the accuracy of any allowances it has heretofore
    made in its financial statements for such adjustments, the ability of the
    Company to engage in any other strategic transaction, including any possible
    merger, sale of all or a portion of the Companys wireline service assets
    or other business combination transaction involving the Companys wireline
    service business, the ability of the Company to raise additional debt or
    equity capital to meet its requirements and to obtain additional financing
    when required, the ability of the Company to extend or restructure its outstanding
    indebtedness at or before maturity or refinance its debt obligations as they
    come due on September 14, 2004 and December 31, 2004 or to obtain extensions
    of the maturity dates for the payment of principal, or to engage in another
    recapitalization transaction, the Companys ability to maintain compliance
    with the covenants of its various loan documents and other agreements pursuant
    to which securities, including debt instruments, have been issued and obtain
    waivers of violations that occur and consents to amendments as required,
    the Companys ability to implement and, if appropriate, expand a cost-cutting
    program, the ability of the Company to compete in the premium oil and gas
    services market, the ability of the Company to re-deploy its equipment among
    regional operations as required, and the ability of the Company to provide
    services using state of the art tooling. The inability of the Company to
    meet these objectives or requirements or the consequences on the Company
    from adverse developments in general economic conditions, changes in
	capital markets,
    adverse developments in the oil and gas industry, developments in international
    relations and the commencement or expansion
  of hostilities by the United States or other governments and events of terrorism,
  declines and fluctuations in the prices for oil and natural gas, and other
  factors could have a material adverse effect on the Company. Material declines
  in the prices for oil and gas can be expected to adversely affect the Companys
  revenues. The Company cautions readers that various risk factors could cause
  the Companys operating results and financial condition to differ materially
  from those expressed in any forward-looking statements made by the Company
  and could adversely affect
the Companys financial condition and its ability to pursue its business
strategy and plans. Readers should refer to the Companys Annual Report
on Form 10-K and the risk factors disclosed therein.


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Item 3. Qualitative and Quantitative Disclosures About
Market Risk

From time to time,the
    Company holds financial instruments comprised of debt securities and time
    deposits. All such instruments are classified as securities available for
    sale. The Company does not invest in portfolio equity securities, or commodities,
    or use financial derivatives for trading or hedging purposes. The Companys
    debt security portfolio represents funds held temporarily pending use in
    its business and operations. The Company manages these funds accordingly.
    The Company seeks reasonable assuredness of the safety of principal and market
    liquidity by investing in rated fixed income securities while, at the same
    time, seeking to achieve a favorable rate of return. The Companys market
    risk exposure consists of exposure to changes in interest rates and to the
    risks of changes in the credit quality of issuers. The Company typically
    invests in investment grade securities with a term of three years or less.
  The Company believes that any exposure to interest rate risk is not material. Under the Credit Facility with GECC, the Company
      is subject to market risk exposure related to changes in the prime interest
      rate. Assuming the Companys level of borrowings from GECC at June
      30, 2004 remained unchanged throughout 2004, if a 100 basis point increase
      in interest rates under the Credit Agreement from rates in existence at
      December 31, 2003 prevailed throughout the year 2004, it would increase
  the Companys 2004 interest expense by approximately $168,000.


Item 4. Controls and Procedures

Under
    the supervision and with the participation of the Companys management, including
    William Jenkins, its President and Chief Executive Officer, and Ronald Whitter, its Chief Financial Officer, the Company
  has evaluated the effectiveness of the design and operation of its disclosure
  controls and procedures as of the end of the period covered by this report,
  and, based on their evaluation, Mr. Jenkins and Mr. Whitter have concluded
  that these controls and procedures are effective, subject to the following.
  Events relating to possible adjustments to the purchase price realized by the
  Company under the terms of the Asset Purchase Agreement relating to the sale
  of its directional drilling division (Multi-Shot division) assets have caused
  management to extend its review of the financial statements included in this
  quarterly report. Management believes that these events are unusual in their
  occurrence and, other than their timing, do not reflect a weakness in the effectiveness
  of the Companys disclosure controls and procedures. There were no significant
  changes in the Companys internal controls or in other factors that could significantly
  affect these controls subsequent to the date of their evaluation.


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




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PART II  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

|(a) | Exhibits |                                                                                                                          
|--- | -------- | -------------------------------------------------------------------------------------------------------------------------
|    |          |                                                                                                                          
|    | 10.37.12 | Eighth Amendment to Credit Agreement with General
       Electric Capital Corporation entered into as of June 16, 2004 *.
|    | 31.1     | Certification of President and Chief Executive
       Officer Pursuant to Rule 13a-14(a)                                 
|    | 31.2     | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)                                                      
|    | 32.1     | Certification of President and Chief Executive
       Officer Pursuant to Section 1350 (furnished, not filed)            
|    | 32.2     | Certification of Chief Financial Officer Pursuant
       to Section 1350 (furnished, not filed)                          
|    |          |                                                                                                                          
|    |          | *    To be filed by amendment.                                                                                           

|    |                                                                                                 |               |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------- | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Reports on Form 8-K                                                                            
|    |                                                                                                 |               |                                                                                                                                                                 
|    | The Company filed the following Current Reports
    on Form 8-K in response to the Items named:
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 | Report Date   | Item                                                                                                                                                            
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 | June 3, 2004  | Item 5. Other Events and Regulation
        FD Disclosure                                                                                                       
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 | June 4, 2004  | Item 7. Financial Statements and
        Exhibits (Press Release dated June 4, 2004)                                                                            
|    |                                                                                                 |               |                                                                                                                                                                 
|    |                                                                                                 | June 25, 2004 | Item 5. Other Events and Regulation FD Disclosure
        and Item 7. Financial Statements and Exhibits (Consent Solicitation Statement
    dated June 25, 2004)



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SIGNATURES

Pursuant to the requirements
    of the Securities Exchange Act of 1934 the Registrant
    has duly caused this Report to be signed on its behalf by the undersigned
    thereunto duly authorized.


|                      |                                          
|--------------------- | -----------------------------------------
|                      | BLACK WARRIOR WIRELINE CORP.             
|                      |                                          
|                      | (Registrant)                             
|                      |                                          
|Date: August 26, 2004 | /S/
    William L. Jenkins               
|                      |                                          
|                      | William L. Jenkins                       
|                      | President and Chief Executive
    Officer
|                      |                                          
|                      | /S/ Ronald Whitter                       
|                      |                                          
|                      | Ronald Whitter                           
|                      | Chief Financial Officer                  





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