10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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 number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	90-0023731
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7030 Empire Central Drive, Houston, Texas	77040
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (713) 849-9911

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange of which registered
Common Stock, $0.0001 par value	American Stock Exchange

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.    Yes  ¨    No  x

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  x

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

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $87,611,000 as of the last business day of the Registrant’s recently completed second fiscal quarter June 30, 2006. As of March 12, 2007, the Registrant had 9,011,472 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2007 annual meeting of shareholders have been incorporated by reference into Part II and III of this Form 10-K.

TABLE OF CONTENTS

PART I		1
Item 1.	Business.	1
Item 1A.	Risk Factors.	4
Item 1B.	Unresolved Staff Comments.	12
Item 2.	Properties.	12
Item 3.	Legal Proceedings.	13
Item 4.	Submission of Matters to a Vote of Security Holders.	13
PART II		14
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	14
Item 6.	Selected Financial Data.	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	28
Item 8.	Financial Statements and Supplementary Data.	29
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	56
Item 9A.	Controls and Procedures.	56
Item 9B.	Other Information.	56
PART III		57
Item 10.	Directors, Executive Officers and Corporate Governance.	57
Item 11.	Executive Compensation.	57
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	57
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	57
Item 14.	Principal Accounting Fees and Services.	57
PART IV		57
Item 15.	Exhibits and Financial Statement Schedules.	57
SIGNATURES		60

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FORWARD-LOOKING STATEMENTS

We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our current belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. The forward-looking statements contained in this Annual Report are based on information as of the date of this Annual Report. Many of these forward looking statements relate to future industry trends, actions, future performance or results of current and anticipated initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on our business, future operating results and liquidity. We try, whenever possible, to identify these statements by using words such as “anticipate,” “believe,” “should,” “estimate,” “expect,” “plan,” “project” and similar expressions. We caution you that these statements are only predictions and are not guarantees of future performance. These forward-looking statements and our actual results, developments and business are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated by these statements. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.

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PART I

Item 1. Business.

General

Flotek Industries, Inc. is a diversified global supplier of drilling and production related products and services to the energy and mining industries. Our core focus is oilfield specialty chemicals and logistics, downhole drilling tools and downhole production tools. Flotek offers its products primarily through its sales organizations, as well as through independent distributors and agents. Flotek was founded in 1985 and is headquartered in Houston, Texas. On July 27, 2005, our common stock began trading on the American Stock Exchange (“AMEX”) under the stock ticker symbol “FTK”. Prior to this date, our common stock was traded on the OTC Bulletin Board under the stock ticker symbol, “FLTK” or “FLTK.OB”. Our website is located at http://www.flotekind.com. Information contained in our website or links contained on our website are not part of this filing. As used herein, “Flotek,” “Company,” “we,” “our” and “us” may refer to Flotek Industries, Inc. and/or its subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationships.

Historical Development

Flotek was originally incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, we approved a change in our corporate domicile to the state of Delaware and a reverse stock split of 120 to 1. On October 31, 2001, we completed a reverse merger with CESI Chemical, Inc. (“CESI”). Since that date, we have entered into the following acquisitions that were outside the ordinary course of our business:

• acquired IBS 2000, Inc., a Denver-based company engaged in the development and manufacturing of environmentally neutral chemicals for the oil industry, on February 19, 2002,

• acquired manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens from Phoenix E&P Technology, LLC on January 28, 2005,

• acquired Spidle Sales and Services, Inc. (“Spidle”), a downhole tool company with rental, sales and manufacturing operations throughout the Rocky Mountains, on February 14, 2005,

• acquired the assets of Harmon’s Machine Works, Inc. (“Harmon”), a downhole oilfield and mining tool company with manufacturing and sales operations located in Midland, Texas, on August 19, 2005,

• acquired the assets of Precision-LOR, Ltd. (“LOR”), a drilling tool rental and inspection service provider in South Texas, on August 31, 2005,

• acquired the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (collectively “Can-Ok”) a downhole oilfield tool company located in Chickasha, Oklahoma on January 2, 2006,

• acquired the tangible assets and licensed the rights to exercise the exclusive worldwide rights to a patented gas separator used in coal bed methane production in the Powder River Basin from Total Well Solutions, LLC. (“TWS”) on April 3, 2006,

• acquired the assets of LifTech, LLC (“LifTech”) which markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin on June 6, 2006,

• acquired the assets of Triumph Drilling Tools, a downhole tool company with rental, inspection and manufacturing operations throughout the Gulf Coast and Mid-Continent regions, on January 4, 2007,

• acquired a 50% partnership interest in CAVO Drilling Motors Ltd Co. on January 31, 2007, a downhole mud-motor company with domestic rentals and international sales operations.

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Description of Operations

Our reportable segments are strategic business units that offer various products and services. Each business segment requires different technology and marketing strategies, and is managed independently. All three segments market products domestically and internationally.

Chemicals and Logistics

The specialty chemical division offers a full spectrum of oilfield specialty chemicals used for drilling, cementing, stimulation, and production. The specialty chemical division provides chemical technology solutions to maximize recovery from both new and mature fields. Two laboratories focus on design, development and testing of new chemical formulations and enhancement of existing products, often in cooperation with our customers. The development of specialty chemicals with enhanced performance characteristics to withstand a wide range of downhole pressures, temperatures and other well-specific conditions is key to the success of this business unit.

The customer base for the specialty chemical business is primarily oil and gas pumping service companies, including both major and independent oilfield service companies. The segment manufactures its products in Oklahoma and The Netherlands. We distinguish ourselves through the strength of our innovative and proprietary products, dedication to product quality and superior customer service. The division’s products provide measurable productivity increases and solutions to environmental problems.

Our logistics division designs, project manages and operates automated bulk material handling and loading facilities for oilfield service companies. The domestic customer base for this segment consists of one major independent oilfield service company which specializes in pressure pumping, cementing and stimulation services. We also contract with international customers to design and project manage the construction of bulk handling facilities. Our client’s bulk facilities handle oilfield products including sand and other materials for well fracturing operations, dry cement and additives for oil and gas well cementing, and supplies and materials used in oilfield operations which we blend to specification.

Drilling Products

The Drilling Products segment is a leading provider of downhole drilling tools used in the oilfield, mining, water-well and industrial drilling sectors. We manufacture, sell, rent and inspect specialized equipment for use with drilling, completion, production and workover activities. Through internal growth and acquisitions, we have increased the size and breadth of our rental tool inventory and geographic scope of operations so that we now conduct operations throughout the United States and in select international market areas. Our rental tools include stabilizers, drill collars, reamers, wipers, jars and mud-motors.

Our sales efforts include centralizers and bits. We manufacture a line of fixed, rigid and integral joint centralizers used in oil and gas well cementing programs to increase the effectiveness of such operations. In addition, we market a wide variety of drill bits including tricone and PDC bits.

Our customers in the Drilling Products segment are primarily oil and gas exploration and production companies, including major oil companies, which own producing oil and gas wells and are involved in the drilling and cementing of oil and gas wells. Marketing for our products is focused primarily in the Gulf of Mexico, Mid-Continent and Rocky Mountain regions of the United States, with international sales conducted through agents.

Artificial Lift

The Artificial Lift (renamed from “Production Products”) segment provides pumping system components including electric submersible pumps (ESP), gas separators, production valves and services. Our products

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address the needs of coal bed methane, traditional gas and heavy crude production. The majority of our products are manufactured in China and assembled and distributed domestically. Our customers are primarily domestic and international oil and gas exploration and production companies.

Product Demand and Marketing

The demand for our products and services is generally correlated to the level of oil and gas drilling activity, workover activity and gas production levels, both in the United States and internationally. We market our products primarily through direct sales to our customers through Company managers and sales employees. We have established customer relationships which provide for repeat sales. The majority of our marketing is currently conducted within the United States. However, we have been expanding our international sales efforts and we expect international sales to continue to increase. Internationally, we operate primarily through agents in Canada, Mexico, Central and South America, the Middle East, Asia and Russia.

Customers

The customers for our products and services include the major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. Although we are not dependent on one or a few major customers, five customers accounted for approximately 30% of consolidated revenue for the year ended December 31, 2006, 32% of consolidated revenue for the year ended December 31, 2005 and 47% of consolidated revenue for the year ended December 31, 2004. The majority of these sales were in the Chemicals and Logistics segment and collectively accounted for approximately 47% of revenue for the segment for the year ended December 31, 2006, 49% of revenue for this segment for the year ended December 31, 2005 and 57% of revenue for this segment for the year ended December 31, 2004. One customer of the five accounted for approximately 8% of consolidated revenue for the year ended December 31, 2006. The same customer accounted for approximately 15% of revenue of our Chemicals and Logistics segment for the year ended December 31, 2006.

Research and Development

We are engaged in research and development activities directed primarily toward the improvement of existing products and services, the design of specialized products to meet specific customer needs and the development of new products, processes and services. We incurred $0.7 million, $0.6 million and $0.3 million in research and development expenses for the years ended December 31, 2006, 2005 and 2004, respectively.

Intellectual Property

We have followed a policy of seeking patent protection both within and outside the United States for products and methods that appear to have commercial significance and qualify for patent protection. The decision to seek patent protection considers whether such protection can be obtained on a cost-effective basis and is likely to be effective in protecting our commercial interests. We believe our patents and trademarks, together with our trade secrets and proprietary design, manufacturing and operational expertise, are reasonably adequate to protect our intellectual property and provide for the continued operation of our business. We maintain patents on our production valve design and casing centralizer design, and trade secrets and pending patents on certain specialty chemicals.

Competition

Our ability to compete in the oilfield services market is dependent on our ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels in our three segments are driven primarily by current and expected commodity prices, drilling rig count, oil and gas production levels, and customer capital spending allocated for drilling and production. The regions in

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which we operate are highly competitive. The competitive environment has intensified as recent mergers among oil and gas companies have reduced the number of available customers. Many other oil and gas service companies are larger than we are and have greater resources than we have. These competitors are better able to withstand industry downturns, compete on the basis of price and acquire new equipment and technologies, all of which could affect our revenue and profitability. These competitors compete with us both for customers and for acquisitions of other businesses. This competition may cause our business to suffer. We believe that competition for contracts will continue to be intense in the foreseeable future.

Raw Materials

The Chemical and Logistics segment’s operations purchase their principal raw material and chemical feed stocks on the open market. Collection and transportation of these raw materials to the Company’s facilities can be adversely affected by extreme weather conditions. Prices for the chemical feed stocks also vary in relation to the general business cycle and global demand. The Drilling Products and Artificial Lift segments purchase their principal raw material and steel on the open market. Except for a few chemical additives, the raw materials are available in most cases from several suppliers at market prices. We use multiple suppliers, both domestically and internationally, for our key raw materials purchases.

Government Regulations

We are subject to federal, state and local environmental and occupational safety and health laws and regulations in the United States and other countries in which we do business. We strive to comply fully with these requirements and are not aware of any material instances of noncompliance. Many of the products within our Chemicals and Logistics segment are considered hazardous or flammable. If a leak or spill occurs in connection with our operations, we could incur material costs, net of insurance, to remediate any resulting contamination.

Employees

As of December 31, 2006, we employed 253 employees, of which 246 were full-time and 7 were part-time. None of our employees are covered by collective bargaining agreements.

Item 1A. Risk Factors.

This document and our other filings with the Securities and Exchange Commission (the “SEC”), and other materials released to the public contain “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may discuss our prospects, expected revenue, expenses and profits, strategies for our operations and other subjects, including conditions in the oilfield service and oil and natural gas industries and in the United States and international economy in general.

Our forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. All of our forward-looking information is, therefore, subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors discussed below.

Risks Related to Our Business

We may pursue strategic acquisitions, which could have an adverse impact on our business.

Our business strategy includes growing our business through strategic acquisitions of complementary businesses. Acquisitions that we may make in the future may entail a number of risks that could adversely affect our business and results of operations. The process of negotiating potential acquisitions or integrating newly

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acquired businesses into our business could divert our management’s attention from other business concerns and could be expensive and time consuming. Acquisitions could expose our business to unforeseen liabilities or risks associated with entering new markets or businesses. Consequently, we might not be successful in integrating our acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention and resources. Even if we are successful in integrating our acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expect from such acquisitions, which may result in the commitment of capital resources without the anticipated returns on such capital. In addition, we may not be able to continue to identify attractive acquisition opportunities or successfully acquire identified targets. Competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions. We also must meet certain financial covenants in order to borrow money under our senior credit facility to fund future acquisitions and to borrow for other purposes which, if not met, could prevent us from making future acquisitions.

If we do not manage the potential difficulties associated with expansion successfully, our operating results could be adversely affected.

We have grown over the last several years through internal growth and strategic acquisitions of other businesses and assets. We believe our future success depends in part on our ability to manage the growth we have experienced. The following factors could present difficulties to our business going forward:

• lack of sufficient experienced management personnel;

• increased administrative burdens; and

• increased logistical problems common to large, expansive operations.

If we do not manage these potential difficulties successfully, our operating results could be adversely affected. In addition, we may have difficulties managing the increased costs associated with our growth, which could adversely affect our operating margins. The historical financial information incorporated by reference herein is not necessarily indicative of the results that we would have achieved had we operated the companies we recently acquired under a fully integrated corporate structure or the results that we may realize in the future.

Our business depends primarily on domestic spending by the oil and gas industry, and this spending and our business may be adversely affected by industry conditions that are beyond our control.

We depend primarily on our customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and gas in the United States. Customers’ expectations for lower market prices for oil and gas may curtail spending thereby reducing demand for our products and services. Industry conditions in the United States are influenced by numerous factors over which we have no control, such as the supply of and demand for oil and gas, domestic and international economic conditions, political instability in oil and gas producing countries and merger and divestiture activity among oil and gas producers. The volatility of the oil and gas industry and the consequent effect on exploration and production activity could adversely affect the level of drilling and production activity by some of our customers. This reduction may cause a decline in the demand for, or adversely affect the price of, our products and services. Reduced discovery rates of new oil and gas reserves in our market areas could also have a negative long-term impact on our business, even in an environment of stronger oil and gas prices, to the extent existing production is not replaced or the number of drilling and producing wells declines because of substantial depletion of existing domestic reserves or the availability of cheaper reserves outside the United States. In addition, domestic demand for oil and gas may be uniquely affected by public attitudes in the United States regarding drilling in environmentally sensitive areas, vehicle emissions and other environmental standards, alternative fuels and taxation of oil and gas and “excess profits” of oil and gas companies, and the potential changes in federal and state regulation and policy that may result from such public attitudes.

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Our future success and profitability may be adversely affected if we or our suppliers fail to develop and introduce new and innovative products and services that appeal to our customers.

The oil and gas drilling industry is characterized by continual technological developments that have resulted in, and likely will continue to result in, substantial improvements in the scope and quality of oilfield chemicals, drilling and artificial lift products and services and product function and performance. As a result, our future success depends, in part, upon our and our suppliers’ continued ability to develop and introduce new and innovative products and services in order to address the increasingly sophisticated needs of our customers and anticipate and respond to technological and industry advances in the oil and gas drilling industry in a timely manner. If we or our suppliers fail to successfully develop and introduce new and innovative products and services that appeal to our customers, or if new market entrants or our competitors offer such products and services, our revenue and profitability may suffer.

Our ability to grow and compete in the future will be adversely affected if adequate capital is not available.

The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. We cannot assure you that our cash flow from operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. For example, our senior credit facility restricts our ability to incur additional indebtedness and requires us to meet certain financial covenants in order to borrow money, including borrowings to fund future acquisitions, a key component of our growth strategy. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

If we lose the services of key members of our management, we may not be able to manage our operations and implement our growth strategy effectively.

We will depend on the continued service of Jerry D. Dumas, age 71, our Chairman and Chief Executive Officer, who possesses significant expertise and knowledge of our business and industry. We do not have an employment agreement with Mr. Dumas, nor do we carry key man life insurance on him. Any loss or interruption of the services of Mr. Dumas could significantly reduce our ability to manage effectively our operations and implement our growth strategy, and we cannot assure you that we would be able to find appropriate replacements should the need arise.

Our current insurance policies may not be adequate to protect our business from all potential risks.

Our operations are subject to hazards inherent in the oil and gas industry, such as, but not limited to, accidents, blowouts, explosions, fires, oil and chemical spills and other hazards. These conditions can cause personal injury or loss of life, damage to property, equipment and the environment, and suspension of oil and gas operations of our customers. Litigation arising from a catastrophic occurrence at a location where our equipment, products or services are being used may result in us being named as a defendant in lawsuits asserting large claims. We maintain insurance coverage that we believe to be customary in the industry against these hazards. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. As a result, losses and liabilities arising from uninsured or underinsured events could have a material adverse effect on our business, financial condition and results of operations.

We are subject to complex federal, state and local laws and regulations that could adversely affect our operations.

Our operations are subject to federal, state and local laws and regulations relating to protection of natural resources and the environment, health and safety, waste management and transportation of waste and other

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materials. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are amended or reinterpreted, or if new laws and regulations become applicable to our operations. Such amendments or reinterpretations of existing laws or regulations and the adoption of new laws or regulations could curtail exploratory or developmental drilling for and production of oil and gas which, in turn, could limit demand for our products and services. In addition, under these laws and regulations, we may become liable for penalties, damages or costs of remediation which could increase our costs of doing business.

We are subject to environmental laws and regulations which expose us to costs and liabilities that could have a material adverse effect on our business, financial condition and results of operation.

Our Chemicals and Logistics segment includes chemical manufacturing, packaging, handling and delivery operations that pose risks of environmental liability that could result in fines and penalties, expenditures for remediation, and liability for property damage and personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations also may include assessment of administrative, civil and criminal penalties, revocation of permits and issuance of corrective action orders.

Laws protecting the environment generally have become more stringent over time and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. The modification or interpretation of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for oil and gas and could severely limit opportunities to sell the Company’s products and services. Some environmental laws and regulations may impose strict liability, which means that in some situations we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or conduct of, or conditions caused by, prior operators or other third parties. Clean-up costs and other damages arising as a result of environmental laws, and costs associated with changes in environmental laws and regulations, could be substantial and could have a material adverse effect on our financial condition.

If we are unable to adequately protect our intellectual property rights our business is likely to be adversely affected.

We rely on a combination of patents, trademarks, non-disclosure agreements and other security measures to establish and protect our proprietary rights. Although we believe that those measures, together with our trade secrets and proprietary design, manufacturing and operational expertise, are reasonably adequate to protect our intellectual property and provide for the continued operation of our business, it is uncertain that the measures we have taken or may take in the future will prevent misappropriation of our proprietary information or that others will not independently develop similar products or services, design around our proprietary or patented technology or duplicate our products or services.

We and our customers are subject to risks associated with doing business outside of the United States which may expose us to political, foreign exchange and other uncertainties.

During the years ended December 31, 2006, 2005 and 2004, approximately 7%, 16% and 14%, respectively, of our consolidated revenue was derived from the sale of products for use outside of the United States. Accordingly, we and our customers are subject to certain risks inherent in doing business outside of the United States, including governmental instability, war and other international conflicts, civil and labor disturbances, requirements of local ownership, partial or total expropriation or nationalization, currency devaluation, foreign exchange control and foreign laws and policies, each of which may limit the movement of assets or funds or result in the deprivation of contract rights or the taking of property without fair compensation. Collections and recovery of rental tools from international customers and agents may also prove more difficult due to the

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uncertainties of foreign law and judicial procedure. We may therefore experience significant difficulty resulting from the political or judicial climate in countries in which we operate or in which our products are used. In addition, from time to time the United States has passed laws and imposed regulations prohibiting or restricting trade with certain nations.

Although most of our international revenue is derived from transactions denominated in United States dollars, we have conducted and likely will continue to conduct some business in currencies other than the United States dollar. We currently do not hedge against foreign currency fluctuations. Accordingly, our profitability could be affected by fluctuations in foreign exchange rates. We have no assurance that future laws and regulations will not materially adversely affect our international business.

Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on our operations and the trading price of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be harmed. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain adequate controls over our financial processes and reporting in the future, including compliance with the obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective controls, or difficulties encountered in their implementation or other effective improvement of our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Risks Related to Our Industry

Volatility or decline in oil and natural gas prices may result in reduced demand for our products and services which may adversely affect our business, financial condition and results of operation.

The markets for oil and natural gas have historically been extremely volatile. We anticipate that these markets will continue to be volatile in the future. Although oil and gas prices have increased significantly in recent years, there can be no guarantees that these prices will remain at current levels. Such volatility in oil and gas prices, or the perception by our customers of unpredictability in oil and natural gas prices, affects the spending patterns in our industry. The demand for our products and services is, in large part, driven by current and anticipated oil and gas prices and the related general levels of production spending and drilling activity. In particular, volatility or a decline in oil and gas prices may cause a decline in exploration and drilling activities. This, in turn, could result in lower demand for our products and services and may cause lower prices for our products and services. As a result, volatility or a prolonged decline in oil or natural gas prices may adversely affect our business, financial condition and results of operations.

Competition from new and existing competitors within our industry could have an adverse effect on our results of operations.

The oil and gas industry is highly competitive and fragmented. Our principal competitors include numerous small companies capable of competing effectively in our markets on a local basis as well as a number of large companies that possess substantially greater financial and other resources than we do. Our larger competitors may be able to devote greater resources to developing, promoting and selling their products and services. We may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly. As a result of this competition, we may experience lower sales or greater operating costs, such as marketing costs, which may have an adverse effect on our margins and results of operations.

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Our industry has experienced a high rate of employee turnover. Any difficulty we experience attracting or retaining personnel could adversely affect our business.

We operate in a highly competitive industry for securing qualified personnel with the required technical skills and experience. Our services require skilled personnel who can perform physically demanding work. Due to industry volatility and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wages that are competitive with ours. As a result, we may not be able to find enough labor to meet our needs, which could limit our growth. In addition, the cost of attracting and retaining qualified personnel has increased over the past several years due to competition, and we expect it will continue to increase in the future. In order to attract and retain qualified personnel we may be required to offer increased wages and benefits. If we are not able to increase the prices of our products and services to compensate for increases in compensation, or if we are unable to attract and retain qualified personnel, our operating results could be adversely affected.

Severe weather could have a material adverse impact on our business.

Our business could be materially and adversely affected by severe weather. Hurricanes, tropical storms, blizzards and cold weather and other weather hazards may cause the curtailment of services, damages to our equipment and facilities, interruptions in the transportation of our products and materials in accordance with contract schedules and loss of productivity. If our customers are unable to operate or are required to reduce their operations due to severe weather, and as a result curtail the purchases of our products and services, our business could be materially adversely affected.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflict involving the United States may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. We may experience loss of business or delays or defaults in payments from payers that have been affected by actual or potential terrorist activities. In addition, such activities could reduce the overall demand for oil and natural gas which, in turn, could reduce the demand for our products and services. We have implemented certain security measures in response to the threat of terrorist activities. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to execute our business strategy.

Risks Related to Our Indebtedness

Our senior credit facility contains certain covenants that may limit our flexibility and prevent us from taking certain actions, which could adversely affect our ability to execute our business strategy.

Our senior credit facility includes a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions, meet our capital needs and execute our business strategy. These covenants, among other things, limit our ability, without the consent of the lender, to:

• incur certain types and amounts of additional debt;

• consolidate, merge or sell our assets or materially change the nature of our business;

• pay dividends on capital stock and make restricted payments;

• make voluntary prepayments, or materially amend the terms, of subordinated debt;

• enter into certain types of transactions with affiliates;

• make certain investments;

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• make certain capital expenditures; and

• incur certain liens.

These covenants may restrict our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities. Our senior credit facility also requires us to maintain certain financial ratios and satisfy certain financial conditions, several of which may require us to reduce our debt or take some other action in order to comply with the covenants. If we fail to comply with these covenants, we could be in default. In the event of a default, our lender could elect to declare all the amounts borrowed, together with accrued and unpaid interest, to be due and payable. In addition, the lender could elect to terminate its commitment to us, and we or one or more of our subsidiaries could be forced into liquidation or bankruptcy. Any of the foregoing consequences could restrict our ability to execute our business strategy.

We may not be able to generate sufficient cash flows to meet our debt service obligations.

Due to an extensive capital expenditure program in 2006 we exceeded the indebtedness covenant, fixed charge coverage ratio and capital expenditures limit set forth in our senior credit facility in 2006. We obtained waivers from our principal lender of those covenants on September 30, 2006 and redefined the covenant limits based on an expanded capital expenditures program. Our ability to generate sufficient cash flows from operations to make scheduled payments on these debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive, regulatory and industry factors, many of which are beyond our control. If we are unable to generate sufficient cash flows or otherwise obtain the funds required to make principal and interest payments on our indebtedness, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure that any refinancing would be possible or that any assets could be sold on acceptable terms or otherwise to meet our debt obligations. Our inability to generate sufficient cash flows to satisfy such obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

Risks Related to the Common Stock

The market price of our common stock could drop significantly following sales of substantial amounts of our common stock in the public markets.

We are unable to predict the amount or timing of sales by the selling shareholders of our common stock, but sales of substantial amounts in the public market could lower the market price of our stock.

The market price of our common stock has been and may continue to be volatile.

The market price of our common stock has historically been subject to significant fluctuations. The following factors, among others, could cause the price of our common stock in the public market to fluctuate significantly:

• variations in our quarterly results of operation;

• changes in market valuations of companies in our industry;

• fluctuation in stock market prices and volume;

• fluctuation in oil and natural gas prices;

• issuance of common stock or other securities in the future;

• the addition or departure of key personnel; and

• announcements by us or our competitors of new business, acquisitions or joint ventures.

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The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the prices of the common stock of many companies, including companies in our industry. The changes often occur without regard to specific operating performance. The price of our common stock could continue to fluctuate based upon factors that have little to do with our company, and these fluctuations could materially reduce our stock price. Class action lawsuits have frequently been brought against companies following periods of volatility in the market price of their common stock. If we become involved in this type of litigation it could be expensive and divert management’s attention and company resources, which could have a material adverse effect on our business, financial condition and results of operation.

An active market for our common stock may not continue to exist or may not continue to exist at current trading levels.

Our common stock is quoted on the American Stock Exchange. While there is currently one specialist in our common stock, this specialist is not obligated to continue to make a market in our common stock. In the event it does not continue to make a market in our common stock, the liquidity of our common stock could be adversely impacted and a stockholder could have difficulty obtaining accurate stock quotes. Trading volume for our common stock has historically been low. Despite the increase in the number of shares of common stock publicly held as a result of a private placement in 2005 and the exercise of warrants, we cannot assure you that an active trading market for our common stock will develop or be sustained.

We have no plans to pay dividends on our common stock, and therefore, investors will have to look to stock appreciation for return on their investments.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. Certain covenants of our senior credit facility restrict the payment of dividends without the prior written consent of the lenders. Investors must rely on sales of their common stock after price appreciation, which may never occur, in order to realize a return on their investment.

Certain anti-takeover provisions of our charter documents and under Delaware law could discourage or prevent others from acquiring our company, which may adversely affect the market price of our common stock.

Our certificate of incorporation and bylaws contain provisions that:

• permit us to issue, without stockholder approval, up to 100,000 shares of preferred stock, in one or more series and, with respect to each series, to fix the designation, powers, preferences and rights of the shares of the series;

• limit the ability of stockholders to act by written consent or to call special meetings;

• prohibit cumulative voting;

• prohibit stockholders from amending or repealing the bylaws;

• require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders.

In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of our stock that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. Our board of directors could choose not to negotiate with an acquirer that it did not feel was in our strategic interest. If the acquirer were discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures, you could lose the opportunity to sell your shares at a favorable price.

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Future issuance of additional shares of our common stock could cause dilution of ownership interests and adversely affect our stock price.

The company may in the future issue its previously authorized and unissued securities, resulting in the dilution of the ownership interests of its current stockholders. We are currently authorized to issue 20,000,000 shares of common stock with such rights as determined by our board of directors. The potential issuance of such additional shares of common stock may create downward pressure on the trading price of our common stock. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock for capital raising or other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock.

We may issue shares of preferred stock with greater rights than our common stock.

Subject to the rules of the American Stock Exchange, our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our common stock. Currently, there are 100,000 preferred shares authorized but none issued. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than holders of our common stock.

Item 1B.     Unresolved Staff Comments.

The Company has no unresolved staff comments as of the date of this report.

Item 2. Properties.

The following table describes the location and general character of the principal physical properties used in each of our company’s businesses as of December 31, 2006.

Segment	Own/Lease	Location
Chemicals and Logistics	Owned	Marlow, Oklahoma
	Leased	Raceland, Louisiana
	Owned	Raceland, Louisiana
	Leased	Denver, Colorado
Drilling Products	Owned	Midland, Texas
	Owned	Robstown, Texas
	Owned	Vernal, Utah
	Owned	Evanston, Wyoming
	Owned	Mason, Texas
	Leased	Houston, Texas
	Owned	Chickasha, Oklahoma
	Leased	Grand Junction, Colorado
	Leased	Lafayette, Louisiana
Artificial Lift	Leased	Gillette, Wyoming
	Owned	Gillette, Wyoming
	Leased	Sheridan, Wyoming
	Leased	Houston, Texas
General Corporate	Leased	Houston, Texas

We consider our facilities to be in good condition and suitable for the conduct of our business.

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Item 3. Legal Proceedings.

We are involved, on occasion, in routine litigation incidental to our business.

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

No matters were submitted to a vote of security holders during our fourth quarter of 2006.

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PART II

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

As of July 27, 2005, our common stock began trading on the AMEX under the stock ticker symbol “FTK”. Prior to this date, our common stock was traded on the OTC Bulletin Board under the ticker symbols, “FLTK” or “FLTK.OB”. The following table sets forth, on a per share basis for the periods indicated, our high and low closing sales prices reported by the AMEX, as provided by Yahoo Finance, and the high and low bid information on the OTC Bulletin Board. The OTC Bulletin Board quotations, denoted with a *, were provided by Yahoo Finance and reflect inter-dealer prices, without retail mark-up or commission and may not represent actual transactions.

Fiscal 2006	High		Low
4th Quarter	$	28.05	$	14.19
3rd Quarter	$	20.00	$	13.75
2nd Quarter	$	29.77	$	15.50
1st Quarter	$	28.65	$	18.92

Fiscal 2005	High		Low
4th Quarter	$	22.00	$	17.95
3rd Quarter	$	20.45	$	9.40
2nd Quarter*	$	9.60	$	7.45
1st Quarter*	$	9.25	$	4.00

As of March 1, 2007, our closing stock price, as quoted on the AMEX, was $27.09. As of March 1, 2007, there were 8,961,806 common shares outstanding held by approximately 2,800 holders of record.

Dividend Policy

We have not historically paid cash dividends on our common stock. We intend to retain future earnings to meet our working capital requirements and to finance the future operations of our business. Therefore, we do not plan to declare or pay cash dividends to holders of our common stock in the foreseeable future. In addition, some of our credit agreements contain provisions that limit our ability to pay cash dividends on our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes information regarding our equity securities that are authorized for issuance under individual stock option compensation agreements:

Equity Compensation Agreement Information

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	823,220	$	4.94	428,572

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Item 6. Selected Financial Data.

The following table sets forth certain selected historical financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto which are included elsewhere herein. The selected operating and financial position data as of and for each of the years for the five-years ended December 31, 2006 have been derived from our audited consolidated financial statements, some of which appear elsewhere in this Annual Report on Form 10-K.

	As of and For the Years Ended December 31,
	2006			2005			2004			2003			2002
	(in thousands, except per share data)
Operating Data
Revenue	$	100,642		$	52,869		$	21,881		$	14,844		$	11,341
Operating expenses		81,789			42,755			18,869			19,934			13,954
Income (loss) from operations		18,853			10,114			3,012			(5,090	)		(2,613	)
Interest expense		(1,005	)		(827	)		(691	)		(618	)		(504	)
Other, net		85			86			46			27			—
Provision for income taxes		(6,583	)		(1,653	)		(213	)		—			—
Discontinued operations		—			—			—			(1,703	)		(1,893	)
Cumulative effect of change in accounting principle		—			—			—			—			(453	)
Net income (loss)	$	11,350		$	7,720		$	2,154		$	(7,384	)	$	(5,463	)
Earnings (loss) per share
Basic	$	1.31		$	1.06		$	0.32		$	(1.23	)	$	(1.10	)
Diluted	$	1.22		$	0.94		$	0.31		$	(1.23	)	$	(1.10	)
Depreciation and amortization	$	2,750		$	1,768		$	690		$	713		$	518
Capital expenditures	$	9,201		$	2,397		$	113		$	575		$	1,314
Financial Position Data (end of year)
Property, plant and equipment, net	$	19,302		$	9,961		$	2,117		$	2,645		$	2,692
Total assets	$	82,890		$	52,158		$	15,957		$	13,970		$	20,940
Long-term debt, less current portion	$	8,185		$	7,277		$	5,272		$	2,166		$	3,039
Stockholders’ equity	$	53,509		$	35,205		$	4,823		$	2,560		$	9,345

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.

Executive Summary

We are a global provider of oilfield services and equipment. We focus on serving the drilling-related needs of oil and gas companies primarily through our Chemicals and Logistics and our Drilling Products segments, and the production-related needs of oil and gas companies through our Artificial Lift and Chemicals and Logistics segments.

We were incorporated in 1985 and currently trade on the American Stock Exchange. Our headquarters are in Houston, Texas. We have expanded geographically so that we now have a growing presence in select domestic and international market areas in Oklahoma, Arkansas, New Mexico, the Gulf Coast, the Rocky Mountains, Canada, Mexico, Latin America, South America, Europe and Asia. We market our products domestically and internationally in over 20 countries.

Several factors contributed to our financial performance in 2006, including:

• increased acceptance of our specialty chemicals by the major pumping pressure companies.

• expansion of our rental tool and inspection services with the acquisition of Can-Ok and the purchase of 50 drilling mud motors.

• expansion of our Artificial Lift segment with the acquisition of TWS and LifTech.

• record domestic rig count levels, gas prices and oil prices.

Over the past three years, we have grown both organically and through successful acquisitions of complementary or competing businesses. We continue to actively seek profitable acquisition or merger candidates in our core businesses to either decrease costs of providing products or add new products and customer base to diversify our market. We strive to mitigate cyclical risk in the oilfield service sector by balancing our operations between onshore versus offshore; drilling versus production; rental tools versus service; domestic versus international; and natural gas versus crude oil.

We operate as a diversified oilfield service company through our three business segments. We believe that our product and service offerings and geographical presence through our three business segments provide us with diverse sources of cash flow. Each segment has its own technical expertise and a common commitment to provide its customers with competitively priced quality equipment and services.

• The Chemicals and Logistics segment is made up of two business units. The specialty chemical business unit develops, manufactures and markets specialty chemicals used by oilfield service companies in oil and gas well cementing, stimulation, drilling and production. Our research laboratories support the specific drilling and production needs of our customers. The logistics division designs and manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies.

• The Drilling Products segment rents, inspects, manufactures and markets downhole drilling equipment for the energy, mining, water well and industrial drilling sectors.

• The Artificial Lift segment manufactures and markets artificial lift equipment which includes the Petrovalve line of beam pump components, electric submersible pumps, gas separators, valves and services to support coal bed methane production.

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The customers for our products and services include the major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. Our ability to compete in the oilfield services market is dependent on our ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels in our three segments are driven primarily by current and expected commodity prices, drilling rig count, oil and gas production levels, and customer capital spending allocated for drilling and production.

Critical Accounting Policies and Estimates

Our critical accounting policies and procedures include but are not limited to the following:

Cash and Cash Equivalents

We consider all short-term investments with an original maturity of three months or less to be cash equivalents.

Inventories

Inventories consist of raw materials, finished goods and work-in-process. Finished goods inventories include raw materials, direct labor and production overhead. Inventories are carried at the lower of cost or market using the weighted average cost method. The Company maintains a reserve for slow-moving and obsolete inventories, which is reviewed for adequacy on a periodic basis.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. The cost of ordinary maintenance and repairs is charged to operations, while replacements and major improvements are capitalized. Depreciation or amortization is provided at rates considered sufficient to amortize the cost of the assets using the straight-line method over the following estimated useful lives:

Buildings and leasehold improvements	3-39 years
Machinery, equipment and rental tools	3-7 years
Furniture and fixtures	3-7 years
Transportation equipment	3-5 years
Computer equipment	3-5 years

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds either the fair value or the estimated discounted cash flows of the assets, whichever is more readily measurable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Goodwill and Intangible Assets

Goodwill represents the excess of the aggregate price paid by us in acquisitions over the fair market value of the tangible and identifiable intangible net assets acquired. Separable intangible assets that are not deemed to have indefinite lives will be amortized over their useful lives.

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Financial Instruments

We consider the fair value of all financial instruments (primarily long-term debt) not to be materially different from their carrying values at the end of each fiscal year based on management’s estimate of our ability to borrow funds under terms and conditions similar to those of our existing debt and because the majority of our debt carries a floating rate.

We have no off-balance sheet debt or other off-balance sheet financing arrangements. We have not entered into derivative or other hedging financial instruments.

Revenue Recognition

Revenue for product sales is recognized when all of the following criteria have been met: (i) evidence of an agreement exists, (ii) products are shipped or services rendered to the customer and all significant risks and rewards of ownership have passed to the customer, (iii) the price to the customer is fixed and determinable and (iv) the collectibility is reasonably assured. Accounts receivable are recorded at that time net of any discounts. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of the accounts receivable. Accounts receivable deemed ultimately uncollectible are applied against the allowance for doubtful accounts. Deposits and other funds received in advance of delivery are deferred until the transfer of ownership is complete. Our logistics division recognizes revenue of its design and construction oversight contracts under the percentage-of-completion method of accounting, measured by the percentage of costs incurred to date to the total estimated costs of completion. This percentage is applied to the total estimated revenue at completion to calculate revenue earned to date. Contract costs include all direct labor and material costs and those indirect costs related to manufacturing and construction operations. General and administrative costs are charged to expense as incurred. Changes in job performance and estimated profitability, including those arising from contract bonus or penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which such revisions appear probable. All known or anticipated losses on contracts are recognized in full when such amounts become apparent.

Foreign Currency

We have sales that are denominated in currencies other than the United States dollar. Any foreign currency transaction gains or losses are included in our results of operations. We have not entered into any forward foreign exchange contracts to hedge the potential impact of currency fluctuations on our foreign currency denominated sales.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged to expense as incurred.

Income Taxes

Income taxes are computed under the liability method. We provide deferred income tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts and the respective tax basis of assets and liabilities. These deferred assets and liabilities are based on enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts which are more likely than not to be realized.

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Earnings Per Share

Basic earnings per common share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Dilutive earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding and dilutive effect of stock options.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are reasonable and appropriate, actual results could differ from these estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued its Statement of Financial Accounting Standards No. 157 (FAS No. 157), “Fair Value Measurements.” FAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that FAS No. 157 will have on our results of operations and financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires the analysis of misstatements using both a balance sheet and income statement approach and contains guidance on correcting errors under the dual approach, as well as providing transition guidance for correcting errors existing in prior years. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on our results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 is an interpretation of FASB Statement No. 109 “Accounting for Income Taxes” and was adopted by the Company effective January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns. We are currently in the process of evaluating the impact of FIN 48 on our financial statements.

In May 2005, the FASB issued FASB Statement (“SFAS”) No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 requires that all voluntary changes in accounting principles, including corrections of errors, are retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The Company adopted SFAS No. 154 as of December 31, 2005.

In December 2004, the FASB issued Statement No. 123R, “Share Based Payment” (“SFAS 123R”). This statement revises Statement 123 and supersedes APB 25 and amends FASB Statement No. 95, “Statement of Cash Flows”. SFAS 123R requires companies to expense the fair value of employee services received in exchange for an award of equity instruments, including stock options. SFAS 123R also provides guidance on valuing and expensing these awards, as well as disclosure requirements with respect to these equity arrangements.

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We adopted SFAS 123R effective as of January 1, 2006. We are following the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock based compensation had been expensed, rather than the “modified retrospective” method which would entail restatement of previously published earnings. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. The impact of adoption of SFAS 123R will depend on levels of share-based compensation, particularly stock options, granted in the future and the fair value assigned thereto. The adoption of SFAS 123R has not had a material financial impact on our consolidated financial position, results of operations or cash flows.

On December 22, 2005, the Compensation Committee, on behalf of the Board of Directors (“Board”), approved the acceleration of the vesting of all previously unvested stock options granted under our 2003 and 2005 Long Term Incentive Plans (the “Plans”). The vesting acceleration represents options exercisable for a total of 313,140 shares of our common stock, including a total of 175,875 shares of common stock underlying options held by our executive officers. The options have exercise prices ranging from $4.25 to $9.40 per share. The closing price of our common stock on December 22, 2005 was $18.80. The acceleration of the vesting schedule of the options was effected pursuant to Section 4(c)(x) of the Plans, which authorizes the Board, in its sole discretion, to substitute an accelerated vesting schedule for options granted under the Plans. In most instances, stock options granted under the Plans vested over a four-year period.

The Board imposed selling restrictions on shares received through the exercise of accelerated options. These restrictions prohibit the sale of shares purchased under accelerated options until the date on which the options would otherwise have vested under the original option grants or six months after the date on which the options would otherwise have vested under the original option grants if the employee is no longer employed by the Company.

Results of Operations

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands)
Revenue	$	100,642		$	52,869		$	21,881
Cost of revenue		59,464			30,946			12,529
Gross profit		41,178			21,923			9,352
Gross profit %		40.9	%		41.5	%		42.7	%
Expenses:
Selling, general and administrative costs		18,919			9,486			5,350
Depreciation and amortization		2,750			1,768			690
Research and development costs		656			555			300
Total expenses		22,325			11,809			6,340
Income from operations		18,853			10,114			3,012
Income from operations %		18.7	%		19.1	%		13.8	%
Other income (expense):
Interest expense		(1,005	)		(827	)		(691	)
Other, net		85			86			46
Total other income (expense)		(920	)		(741	)		(645	)
Income before income taxes		17,933			9,373			2,367
Provision for income taxes		(6,583	)		(1,653	)		(213	)
Net income	$	11,350		$	7,720		$	2,154

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Results for fiscal 2006 compared to fiscal 2005—Consolidated

Revenue for the twelve months ended December 31, 2006 were $100.6 million, an increase of 90.4% compared to $52.9 million for the year 2005. Revenue increased in all of our business segments due to increased acceptance of our products, acquisitions completed in the third quarter of 2005 and in 2006, rental revenue from the investment in additional equipment, improved pricing, and opening new operating locations. Revenue increased most significantly due to organic growth of our Chemical and Logistics division, followed by the acquisition of Can-Ok in January, TWS in April and LifTech in June of 2006. These acquisitions accounted for $16.5 million of the increase in revenue, with the remaining $31.2 million coming from internal revenue growth within the Chemicals and Logistics segment and the Drilling Products segment. International revenue made up approximately 6.5% of total revenue in 2006 versus 15.9% in 2005.

Gross profit for the year ended December 31, 2006 increased 87.8% to $41.2 million, or 40.9% of revenue, compared to $21.9 million, or 41.5%, of revenue for the year 2005. The increase in gross profit is due to the increase in revenue in all of our business segments, with high margin tool rentals and specialty chemical sales contributing most significantly. The decrease in gross profit as a percentage of revenue is primarily due to the acquisition of two artificial lift acquisitions which typically have lower margins than our existing businesses.

As the Company matures, and with the addition of new products and services from acquisitions, margins within the segments have shifted. Organically, management’s focus has been placed on expanding sales of our higher margin products and services. This has been offset by the addition of several new products that generate lower margins but complement the existing businesses and allow the Company to cross sell products and services in new markets, and spread corporate costs over a larger base of operations.

Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $18.9 million in 2006 versus $9.5 million in 2005. The largest increase in expenses related to corporate activities which rose to $5.8 million in 2006 compared to $2.9 million in 2005. The increase was driven by a $1.0 million increase in tax, accounting and audit fees associated with Sarbanes-Oxley compliance. In addition, we incurred $0.7 million in professional fees related to due diligence efforts for a significant acquisition terminated in August 2006. The balance of the increase is primarily due to increased sales and field support costs in all three segments.

Depreciation and amortization increased from $1.8 million in 2005 to $2.8 million in 2006. The increase is due to additional depreciable assets resulting from acquisitions and capital expenditures. Approximately $3.2 million was spent in 2006 to expand our chemical manufacturing facilities and $2.9 million to expand our base of rental tools including the purchase of drilling mud motors.

Research and development (“R&D”) costs increased from $0.6 million in 2005 to $0.7 million in 2006 due to the expansion of our product development department. We plan to significantly expand our research efforts in 2007 with a budget that is triple the amount spent in 2006. As part of our research and development program in 2007 we are relocating our development laboratory to The Woodlands, Texas and will have a dedicated experienced sales professional for each major pressure pumping service company. The sales representatives will work directly with our R&D team to develop new products and applications for our customers. We currently employ 14 degreed chemists, 5 of whom have PhD’s. Over the years, we have made a number of technological advances, including the development of an environmentally benign line of specialty chemicals. Substantially all of the new technologies have resulted from requests and guidance from our clients, particularly major oil companies. Research and development expenditures are charged to expense as incurred.

Interest expense was $1.0 million in 2006 versus $0.8 million in 2005. The increase was a result of the increase in our overall debt level associated with acquisitions, coupled with higher variable interest rates. The majority of our indebtedness carries a variable interest rate tied to the prime rate or LIBOR.

A provision for income taxes of $6.6 million was recorded in 2006. An effective tax rate of 36.7% was applied in 2006 versus 17.6% in 2005, resulting in a $4.9 million, or 298.2% increase in the tax provision. The

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significant increase in taxes is a result of an increase in our projected federal statutory rate based on estimated income levels, and an increase in our estimated state income tax liability.

Results for fiscal 2005 compared to fiscal 2004—Consolidated

Revenue increased by $31.0 million or 141.6% for the year 2005 versus 2004. As discussed in the segment analysis that follows, this increase in revenue was due to the expansion of our Drilling Products segment through acquisitions and continued strong performance by our Chemicals and Logistics segment. We expanded our revenue both domestically and internationally, with international revenue making up approximately 15.9% of consolidated revenue.

Gross profit increased by $12.6 million or 134.5% for the year 2005 versus 2004. Gross profit as a percentage of revenue decreased from 42.7% for the year 2004 to 41.5% in 2005. The gross profit is best analyzed on a segment by segment basis, discussed below, as gross profit varies between operating segments and can vary significantly from year to year.

Selling, general and administrative costs increased to $9.5 million for the year 2005 from $5.3 million for the year 2004, however, decreased as a percentage of revenue. Measured as a percentage of revenue, selling, general and administrative costs dropped from 24.5% for the year 2004 to 17.9% in 2005. Significant emphasis continues to be placed on growing revenue while controlling selling, general, and administrative costs across the organization. General and administrative corporate expenses increased to $2.7 million in 2005 from $1.6 million in 2004. As a percentage of revenue, these costs decreased from 7.2% in 2004 to 5.2% in 2005. The absolute increase is due to the continued expansion of the Company and the corporate personnel required to support a growing public company. In 2005, the Company incurred expenses and costs associated with the private placement, proxy statement, and Form SB-2 registration statement, and expenses related to the listing on the American Stock Exchange.

Depreciation and amortization increased $1.1 million or 156.3% for the year 2005 compared to the same period in 2004 as a result of higher levels of property, plant and equipment associated with the drilling tool acquisitions and the expansion of our chemical laboratory and production facilities. In addition, we incurred increased intangible asset amortization associated with acquisition costs and non-compete agreements. During the first nine months of 2005, we depreciated our rentals tools using the straight line method with an estimated useful life of three years. Based on a review of industry practices and tax guidelines we modified the estimated useful life of rental tools from three years to seven years effective October 1, 2005. The change in estimated useful life was made prospectively.

Research and development costs increased due to expansion of our applied research department. We continued to expand our research staff and currently employ twelve degreed chemists, four of whom have PhD’s. Over the years, we have made a number of technological advances, including the development of an environmentally benign line of specialty chemicals. Substantially all of the new technologies have resulted from requests and guidance from our clients, particularly major oil companies. Research and development expenditures are charged to expense as incurred. We intend to continue committing financial resources and effort to the development and acquisition of new products and services.

Interest expense increased from $0.7 million in 2004 to $0.8 million in 2005. The increase was a result of the increase in our overall debt level associated with the acquisition of Spidle, offset by lower interest rates on the senior credit facility obtained in February 2005. Flotek’s senior borrowing rates were reduced approximately 300 basis points as a result of the new financing. The majority of our indebtedness carries a variable interest rate tied to the prime rate.

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Based on our profitability, a $1.7 million provision for income taxes was recorded for the year 2005. The provision was made for estimated federal and state income tax, assuming a portion of our net operating losses would be used to partially offset federal income taxes. The effective income tax rate differs from the statutory rate primarily as a result of anticipated utilization of our net operating loss carryforwards, as well as, a reduction in the valuation allowance against certain deferred tax assets that we now believe are more than likely than not to be utilized in the future.

Results by Segment

Chemicals and Logistics

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands)
Revenue	$	50,545		$	29,638		$	17,983
Gross profit		22,670			11,780			7,467
Gross profit %		44.9	%		39.7	%		41.5	%
Income from operations		16,845			8,188			4,731
Income from operations %		33.3	%		27.6	%		26.3	%

Results for fiscal 2006 compared to fiscal 2005—Chemicals and Logistics

Chemicals and Logistics revenue increased $20.9 million or 70.5% for the year 2006 compared to 2005. The increase in revenue is a result of an increase in volume coupled with higher prices, particularly of our proprietary specialty chemicals. The most significant revenue growth occurred in the Rocky Mountains, Mid-Continent, Permian Basin regions and Canada. Sales of our proprietary biodegradable environmentally benign ‘green’ chemicals grew 217.1% from $8.2 million in 2005 to $26.0 million in 2006. Margins continue to increase as we focus on shifting more of our sales mix to higher margin patented and proprietary products.

Gross profit as a percentage of revenue increased from 39.7% in 2005 to 44.9% in 2006. The increase in gross profit is due to price increases and a reduction in cost of goods as a percentage of total revenue. Margins continue to increase as the sales mix shifts to higher margin patented and proprietary products. Managing chemical feedstock and transportation prices and passing cost increases on to our customers is critical to maintain our gross profits. As of the end of 2006, construction of a 30,000 square foot expansion to our production facilities was substantially completed. This facility triples production capabilities and allows the division to manage larger volumes of inputs to take further advantage of volume pricing discounts.

Income from operations increased from $8.2 million in 2005 to $16.8 million in 2006, and the income from operations as a percentage of revenue increased from 27.6% to 33.3%, respectively.

Results for fiscal 2005 compared to fiscal 2004—Chemicals and Logistics

Chemicals and Logistics revenue increased $11.7 million or 64.8%, for the year 2005 compared to 2004. The increase is due to an increase in the volume of specialty chemicals sales coupled with price increases that were put into effect in 2005. MTI partially offset an approximate 25% decrease in throughput at our Louisiana based bulk handling facility during 2005 as compared to 2004, by increasing revenue associated with the design and construction oversight of bulk handling facilities in Mexico and Texas during 2005. CESI’s focus on applied research has resulted in the penetration of new markets, continued expansion of our customer base, product portfolio and increased margins. CESI differentiates itself through the strength of its innovative and proprietary products, the depth of the laboratory staff, dedication to product quality, and superior customer service.

Fiscal 2005 compared to 2004, international sales grew by 131.3%, outpacing domestic growth. Sales into Mexico, Canada and Russia have been the main drivers for growth in international sales. Domestic sales have continued to grow in our established core markets, the Mid-Continent and Permian Basin, but have increased

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dramatically in the Rocky Mountains and East Texas. We continue to focus on expanding our international sales and expanding the footprint of our domestic sales coverage to increase overall sales and diversify sales concentration risk. Growth of international sales has outpaced our domestic growth, and made up 17.5% of total sales for the year 2005 as compared to 12.5% of total sales for the same period in 2004.

Sales of our proprietary specialty chemicals continued to grow at a strong pace. The sales of our environmentally friendly “green” chemicals increased $4.2 million, or 105.0%, from $4.0 million for the year 2004 compared to $8.2 million for the year ending December 31, 2005. In 2005, our biodegradable specialty chemical additive received approval for use in the North Sea and passed Canadian biotox protocols, further expanding our geographic market penetration. With this approval we began preparations to open our first international operation in The Netherlands to service the European and African markets in 2006. A product that was developed in 2005 and will be marketing in 2006 is an environmentally friendly acid iron control system used to prevent the oxidation and deposition of iron in the formation.

Gross profit increased $4.3 million or 57.8% for the year 2005 compared to 2004. Gross profit as a percentage of revenue decreased from 41.5% for the year 2004 to 39.7% in 2005. The decrease in margin is attributable to an increase in cost of goods sold in our specialty chemical division without concurrently timed equivalent price increases to pass these costs on to our customers. Price increases were implemented in June 2005 and will continue to be evaluated by management throughout 2006.

Income from operations increased $3.5 million, or 73.0%, during 2005 compared to 2004, primarily as a result of increased revenue in the Chemical division and reduction of operating costs as a percentage of revenue. The completion of the Mexico and Texas bulk handling plants also increased revenue and operating income for this segment during 2005. Expansion of our proprietary product line and customer base has driven the increase in sales and operating income during 2005.

Drilling Products

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands)
Revenue	$	36,753		$	21,875		$	3,315
Gross profit		15,172			9,413			1,593
Gross profit %		41.3	%		43.0	%		48.0	%
Income from operations		6,325			4,663			359
Income from operations %		17.2	%		21.3	%		10.8	%

Results for fiscal 2006 compared to fiscal 2005—Drilling Products

During 2005 and 2006 an emphasis was placed on expanding our drilling products sales through acquisition, allowing us to expand geographically and to grow our line of products and services. In August 2005 we acquired the assets of Harmon, a downhole oilfield and mining tool company with manufacturing and sales operations located in Midland, Texas, and the assets of LOR, a drilling tool rental and inspection service provider in South Texas. In January 2006 we acquired the assets of Can-Ok, a drilling tool sales and rental provider in Oklahoma, Louisiana and Arkansas. These acquisitions expanded or provided machining, repair, tool rental and inspection service capability within our drilling products group.

Drilling Products revenue increased $14.9 million or 68.0% for the year 2006 compared to 2005. The drilling tool acquisitions completed in August 2005 and January 2006 coupled with downhole mud motor rentals and higher centralizer sales contributed to the increase in overall sales.

Gross profit increased $5.8 million or 61.2% for the year 2006 compared to 2005. Gross profit as a percentage of revenue decreased from 43.0% in 2005 versus 41.3% for 2006. The decrease in gross profit as a percentage of revenue relates to higher inventory related expenses. In addition we incurred significant costs in building up our capacity and improving overall conditions with our acquired businesses.

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Income from operations increased $1.7 million or 35.6% for the year 2006 compared to 2005. Costs associated with developing our machining and repair capacity, and the expenses required to improve facility conditions and equipment negatively impacts income from operations in 2006 for this division.

Results for fiscal 2005 compared to fiscal 2004—Drilling Products

Drilling Products revenue increased $18.6 million for the year 2005 compared to 2004. This increase relates primarily to the expansion of our segment with the acquisition of Spidle, Harmon and LOR. Spidle contributed $17.0 million in revenue during 2005. Harmon and LOR, which were acquired in the third quarter of 2005, contributed $1.9 million in revenue.

Gross profit increased $7.8 million for the year 2005 compared to 2004. Gross profit as a percentage of revenue decreased from 48.0% in 2004 to 43.0% in 2005. The decrease is attributable to a change in the base of operations with the addition of Spidle, Harmon and LOR. Our Turbeco operations have historically been focused on the manufacturing and marketing of drilling tools. The acquisitions made during 2005 expand drilling tool operations into the manufacturing and marketing of a much broader offering of drilling tools, drilling tool rentals, mud motor rentals and pipe inspection services.

Income from operations increased $4.3 million during 2005 compared to 2004, primarily due to the expansion of the division. We believe we will continue to see improvements in income from operations as a percentage of revenue as we capitalize on the geographic, customer and product synergies among the three acquisitions made this year and the other business units, as well as increased utilization of the inventory acquired with Spidle.

Artificial Lift (previously known as Production Products)

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands)
Revenue	$	13,344		$	1,356		$	583
Gross profit		3,336			464			292
Gross profit %		25.0	%		34.3	%		49.9	%
Income from operations		1,514			180			(356	)
Income from operations %		11.3	%		13.3	%		(61.0	)%

Results for fiscal 2006 compared to fiscal 2005—Artificial Lift

In the second quarter of 2006 we acquired TWS and LifTech as part of our goal to develop a significant Artificial Lift segment and expand our production driven revenue base. The combined companies provide a broad spectrum of electric submersible pumps, gas separators, valves and services to support the coal bed methane producers in the Powder River Basin region and beyond. We believe the recent artificial lift acquisitions will provide additional marketing opportunities for our patented Petrovalve line of pump components, our patented gas separator, and our line of electric submersible pumps.

Management continues to focus on effectively marketing the Petrovalve line of pump components. Our patented guided valves are the only product which can be placed horizontally allowing a pump to be placed at the production zone in horizontally completed wells reducing the effort needed to pump the product to the surface. The Petrovalve can effectively lift highly viscous oil in heavy oil or tar sand production zones. Because of this we signed an exclusive agreement with a major equipment distributor in Canada and have aligned ourselves with a major domestic pump manufacturer to build pumps with our valve.

Revenue was $13.3 million for the year 2006 versus $1.4 million in 2005. Acquisitions accounted for $12.7 million of the increase. The strategic complement of TWS and LifTech, which operate now as Flotek Pump Services, increased the Company’s production activity driven revenue base.

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Gross profit increased $2.9 million primarily due to the acquisitions. The gross profit as a percentage of revenue decreased from 34.3% in 2005 to 25.0% in 2006. The decrease in gross margin as a percentage of revenue is due to a shift in product mix. The product revenue associated with the two acquisitions are lower margin product sales compared to our existing Petrovalve sales. Although several of our new products generate lower margins, they complement our existing businesses and allow the company to cross sell products and services in new markets, and spread corporate costs over a larger base of operations. We believe we can improve the gross margins of the acquisitions primarily through better supply chain management and product mix.

Income from operations increased from $0.2 million in 2005 to $1.5 million in 2006.

Results for fiscal 2005 compared to fiscal 2004—Artificial Lift

Revenue increased $0.8 million in 2005 compared to 2004 due to sales to customers in Russia, Oman and Venezuela. Gross profit also increased 59.6% in 2005 compared to 2004. The Artificial Lift segment generated $0.2 million in income from operations in 2005 as compared to a loss from operations of $0.4 million in 2004. The turnaround in this group is a result of increased international revenue into Central and South America, Russia and the Middle East.

We are focused on increasing total revenue in 2006 by partnering with pump manufacturers and expanding the segment by broadening our artificial lift products and services. Petrovalve is actively marketed in the U.S., Canada, Mexico, Central America, South America, the Middle East, Russia and Asia. In 2005 Petrovalve has representation in 18 countries.

Capital Resources and Liquidity

Capital resources and liquidity continued to improve during the year ended December 31, 2006 compared to the same period in 2005. During 2006 we generated net income of $11.4 million based on a 36.7% effective tax rate, versus $7.7 million taxed at a 17.6% effective tax rate in 2005. Cash flows from operations increased significantly from $2.1 million in 2005 to $12.4 million in 2006. The improvement in cash flow from operations is a direct result of improved operating results offset by increased estimated tax payments based on the projected increase in our estimated effective tax rate. The decrease in cash and cash equivalents of $6.9 million for 2006 was primarily a result of the acquisitions of Can-Ok, TWS and LifTech coupled with significant capital expenditures to expand our Chemicals and Logistics and Drilling Products operations.

Net working capital uses of cash increased $2.1 million in 2006 versus an increase in uses of cash of $6.1 million for the same period in 2005. The net increases in uses of working capital were primarily driven by a net $7.4 million increase in accounts receivable, a $4.9 million increase in inventory offset by a $10.5 million increase in accounts payables and accrued liabilities. We anticipate working capital requirements to increase as we grow overall sales.

Capital expenditures for 2006 totaled approximately $9.2 million. The most significant expenditures related to the expansion of our chemical manufacturing facilities and base of rental tools including the purchase of drilling mud motors. The expansion of our chemical manufacturing facilities tripled our specialty chemical production capacity. In 2005 and 2006, Flotek has built a significant inventory of downhole mud motors. Based on the success of the motors, Flotek acquired a 50% interest in CAVO in January 2007. CAVO is a complete downhole motor solutions provider specializing in the rental, servicing and sale of high performance mud motors for a variety of drilling applications. Looking to 2007 we anticipate significant capital expenditures associated with the construction of our liquids blending facility in Louisiana and continued expansion of our mud motor fleet.

In February 2005, we obtained the Senior Credit Facility with Wells Fargo which includes a revolving loan agreement, equipment term loans and a real estate term loans. In August 2006 we amended the Senior Credit

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Facility. The amendment to the Senior Credit Facility increased the maximum amount outstanding on the revolving line of credit from the lesser of (a) $10.0 million or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of eligible inventory, as defined. The terms are interest-only, maturing in August 2009.

As of December 31, 2006, we had $2.9 million outstanding under the revolving line of credit of the amended Senior Credit Facility. Bank borrowings are subject to certain covenants and a material adverse change subjective acceleration clause. Affirmative covenants include compliance with laws, various reporting requirements, visitation rights, maintenance of insurance, maintenance of properties, keeping of records and books of account, preservation of existence of assets, notification of adverse events, ERISA compliance, joinder agreement with new subsidiaries, borrowing base audits, and use of treasury management services. Negative covenants include limitations associated with liens, indebtedness, change in nature of business, transactions with affiliates, investments, distributions, subordinate debt, leverage ratio, fixed charge coverage ratio, consolidated net income, prohibition of fundamental changes, asset sales and capital expenditures. As of December 31, 2006 we were in compliance with all covenants except the indebtedness covenant which restricts the Company from exceeding $500,000 in secured indebtedness to finance the purchase of assets necessary in the Company’s ordinary course of business. As of December 31, 2006 the Company had approximately $0.7 million in vehicle loans and capitalized vehicle leases.

In January 2007, we amended the Senior Credit Facility in conjunction with the acquisition of Triumph Drilling Tools. The amendment to the Senior Credit Facility increased the maximum amount outstanding on the revolving line of credit from the lesser of (a) $20.0 million or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of eligible inventory, as defined. The terms of the revolving loan agreement were modified to provide for borrowings that bear interest at LIBOR rate plus 175 basis points maturing in August 2009. The equipment term loan was amended to provide for borrowings of $35.0 million bearing interest at LIBOR rate plus 175 basis points payable over 84 months. The amendment increased many of our principal covenants including our leverage ratio, fixed charge coverage ratio and net capital expenditures. The real estate term loans remained unchanged. Our bank borrowings are collateralized by substantially all of our assets. Based on the amended maturity date, the current revolving line of credit is classified as long-term debt.

We have funded our capital requirements with operating cash flows, debt borrowings, and by issuing shares of our common stock. Common stock issued during 2006 is described below:

• In the acquisition of Can-Ok in January 2006, we issued 25,020 shares of common stock.

• In the acquisition of LifTech in April 2006, we issued 178,223 shares of common stock.

• Warrants to purchase 26,490 shares were exercised with proceeds of approximately $0.3 million paid to the Company.

• Stock options to purchase 300,216 shares (19,750 shares are restricted) were exercised by officers, directors and employees with proceeds of approximately $0.6 million paid to the Company.

Contractual Obligations

	Payments Due by Period
	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
	(in thousands)
Long-term debt obligations	$	10,066	$	2,308	$	6,259	$	1,499	$	—
Capital lease obligations		708		281		421		6		—
Operating lease obligations		1,381		475		569		316		21
Other long-term liabilities		6,300		400		800		800		4,300
Total	$	18,455	$	3,464	$	8,049	$	2,621	$	4,321

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The amount in the other long-term liabilities of the table relates to a guaranteed minimum royalty that we owe per an exclusive license agreement that we entered into with Total Well Solutions, LLC in April 2006.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk.

Certain of the financial instruments we have used to obtain capital are subject to market risks from fluctuations in market interest rates. As of December 31, 2006, we have $9.3 million of variable rate indebtedness within our credit facility. As a result, a fluctuation in market interest rates of one percentage point over the next twelve months would impact our interest expense by approximately $0.1 million.

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Item 8. Financial Statements and Supplementary Data.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by the Securities and Exchange Act of 1934 Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance, not absolute, assurance with respect to the financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2006 as required by the Securities and Exchange Act of 1934 Rule 13a-15(c). In making its assessment, we have utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. We concluded that based on our evaluation, our internal control over financial reporting was ineffective as of December 31, 2006.

Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by UHY LLP, an independent registered public accounting firm, as stated in their report which is included herein.

/S/    JERRY D. DUMAS SR.	/S/    LISA G. MEIER
Jerry D. Dumas Sr.	Lisa G. Meier
Chief Executive Officer	Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Flotek Industries, Inc. and Subsidiaries:

We have audited the accompanying Consolidated Balance Sheets of Flotek Industries, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related Consolidated Statements of Income and Comprehensive Income, Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flotek Industries, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Flotek Industries, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO criteria”), and our report dated March 16, 2007 expressed an unqualified opinion on management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria, and because of the effects of the material weaknesses described therein, the Company has not maintained effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

UHY LLP

Houston, Texas

March 16, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and

Stockholders of Flotek Industries, Inc. and Subsidiaries:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Flotek Industries, Inc. and its Subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the material weaknesses identified in management’s assessment as described below, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting of Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. The following material weaknesses have been identified and included in management’s assessment. The material weaknesses included inadequate staffing within the Company’s accounting and finance department, and a lack of overall effective Company monitoring controls. As a result of these material weaknesses, the Company recorded adjustments to the consolidated financial statements for the year ended December 31, 2006 prior to the issuance of the Company’s consolidated financial statements. Due to the pervasiveness of these deficiencies and the potential misstatements that could occur as a result of these deficiencies, there is a more than remote likelihood that a material misstatement of the annual and interim consolidated financial statements would not have been prevented or detected. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2006, and this report does not affect our report dated March 16, 2007 on those consolidated financial statements.

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In our opinion, management’s assessment that Flotek Industries, Inc. and Subsidiaries did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Flotek Industries, Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2006, and our report dated March 16, 2007 expressed an unqualified opinion.

UHY LLP

Houston, Texas

March 16, 2007

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FLOTEK INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006		2005
	(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	510	$	7,377
Accounts receivable, net of allowance for doubtful accounts of $562 and $67, respectively		19,077		10,407
Inventories, net		17,899		10,658
Other current assets		578		234
Total current assets		38,064		28,676
Property, plant and equipment, net		19,302		9,961
Goodwill		24,185		12,388
Intangible and other assets, net		1,339		1,133
	$	82,890	$	52,158
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,941	$	3,805
Accrued liabilities		7,457		3,296
Current portion of long-term debt		2,589		2,016
Current portion of deferred tax liability		675		319
Total current liabilities		20,662		9,436
Long-term debt, less current portion		8,185		7,277
Deferred tax liability, less current portion		534		240
Total liabilities		29,381		16,953
Commitments and contingencies (See Note 13)
Stockholders’ equity:
Preferred stock, 100,000 shares authorized, none issued		—		—
Common stock, $.0001 par value; 20,000,000 shares authorized; shares issued and outstanding: 8,827,464 shares and 8,317,265 shares, respectively		1		1
Additional paid-in capital		46,661		39,744
Accumulated other comprehensive income		37		—
Retained earnings (accumulated deficit)		6,810		(4,540	)
Total stockholders’ equity		53,509		35,205
	$	82,890	$	52,158

See notes to consolidated financial statements.

33

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands, except per share data)
Revenue	$	100,642		$	52,869		$	21,881
Cost of revenue		59,464			30,946			12,529
Gross profit		41,178			21,923			9,352
Expenses:
Selling, general and administrative costs		18,919			9,486			5,350
Depreciation and amortization		2,750			1,768			690
Research and development costs		656			555			300
Total expenses		22,325			11,809			6,340
Income from operations		18,853			10,114			3,012
Other income (expense):
Interest expense		(1,005	)		(827	)		(691	)
Other, net		85			86			46
Total other income (expense)		(920	)		(741	)		(645	)
Income before income taxes		17,933			9,373			2,367
Provision for income taxes		(6,583	)		(1,653	)		(213	)
Net income	$	11,350		$	7,720		$	2,154
Other comprehensive income:
Foreign currency translation adjustment		37			—			—
Comprehensive income	$	11,387		$	7,720		$	2,154
Basic and diluted earnings per common share:
Basic earnings per common share	$	1.31		$	1.06		$	0.32
Diluted earnings per common share	$	1.22		$	0.94		$	0.31
Weighted average common shares used in computing basic earnings per common share		8,645			7,303			6,659
Incremental common shares from stock options and warrants		649			952			354
Weighted average common shares used in computing diluted earnings per common share		9,294			8,255			7,013

See notes to consolidated financial statements.

34

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
	(in thousands)
Balance January 1, 2004	6,522	$	1	$	16,973	$	(14,414	)	$	—	$	2,560
Common stock issued, net of offering costs	133		—		100		—			—		100
Stock options exercised	15		—		9		—			—		9
Net income	—		—		—		2,154			—		2,154
Balance December 31, 2004	6,670		1		17,082		(12,260	)		—		4,823
Common stock issued, net of offering costs	1,566		—		22,519		—			—		22,519
Stock options exercised	81		—		143		—			—		143
Net income	—		—		—		7,720			—		7,720
Balance December 31, 2005	8,317		1		39,744		(4,540	)		—		35,205
Common stock issued, net of offering costs	203		—		4,383		—			—		4,383
Stock options exercised	301		—		568		—			—		568
Tax benefit of stock options exercised	—		—		1,618		—			—		1,618
Warrants exercised	26		—		348		—			—		348
Foreign currency translation adjustment	—		—		—		—			37		37
Net income	—		—		—		11,350			—		11,350
Balance December 31, 2006	8,847	$	1	$	46,661	$	6,810		$	37	$	53,509

See notes to consolidated financial statements.

35

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2006			2005			2004
	(in thousands)
Cash flows from operating activities:
Net income	$	11,350		$	7,720		$	2,154
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,750			1,768			690
(Gain) loss on sale of equipment		(68	)		1			—
Deferred tax liability		529			(1,231	)		—
Change in assets and liabilities:
Restricted cash		—			37			(37	)
Accounts receivable		(7,427	)		(4,140	)		(1,394	)
Inventories		(4,913	)		(2,946	)		(543	)
Deposits and other		(331	)		(186	)		73
Accounts payable		4,774			(231	)		(320	)
Accrued liabilities		5,772			1,335			995
Net cash provided by operating activities		12,436			2,127			1,618
Cash flows from investing activities:
Proceeds from sale of equipment		309			8			—
Acquisition earn-out payment		—			(154	)		(320	)
Acquisitions, net of cash acquired		(12,763	)		(7,499	)		—
Other assets		(45	)		(248	)		(59	)
Capital expenditures		(9,201	)		(2,397	)		(113	)
Net cash used in investing activities		(21,700	)		(10,290	)		(492	)
Cash flows from financing activities:
Issuance of stock, net of offering costs		915			20,212			109
Proceeds from indebtedness		23,231			17,557			302
Repayments of indebtedness		(21,749	)		(21,777	)		(1,138	)
Payments to related parties		—			(737	)		(114	)
Net cash provided by (used in) financing activities		2,397			15,255			(841	)
Net increase (decrease) in cash and cash equivalents		(6,867	)		7,092			285
Cash and cash equivalents at beginning of year		7,377			285			—
Cash and cash equivalents at end of year	$	510		$	7,377		$	285
Supplementary schedule of non-cash investing and financing activities (See Note 3):
Fair value of net assets acquired	$	17,354		$	17,458		$	—
Less cash acquired		(208	)		(134	)		—
Less debt issued		—			(7,375	)		—
Less equity issued		(4,383	)		(2,450	)		—
Acquisitions, net of cash acquired	$	12,763		$	7,499		$	—
Supplemental disclosure of cash flow information:
Interest paid	$	864		$	810		$	687
Income taxes paid	$	5,380		$	1,994		$	75

See notes to consolidated financial statements.

36

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Business and Basis of Presentation

Flotek Industries, Inc. and subsidiaries was incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, we changed our corporate domicile to the state of Delaware. We are engaged in the manufacturing and marketing of innovative specialty chemicals and downhole drilling and production equipment, and in the management of automated bulk material handling, loading and blending facilities. Flotek serves major and independent companies in the domestic and international oilfield service and mining industries. The Company’s headquarters are located in Houston, Texas, and we have operations in Texas, Oklahoma, Colorado, New Mexico, Louisiana, Utah, Wyoming and The Netherlands. We market our products domestically and internationally in over 20 countries.

The consolidated financial statements consist of Flotek Industries, Inc. and its wholly-owned subsidiaries, collectively referred to herein as the “Company” or “Flotek”. All significant intercompany transactions and balances have been eliminated in consolidation.

Note 2—Summary of Significant Accounting Policies

Consolidation Policy Specifically Described: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary corporations, after elimination of all material intercompany accounts, transactions, and profits. The Company does not have any investment in unconsolidated subsidiaries or non-marketable investments.

Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with an original maturity of three months or less.

Restricted Cash: Restricted cash serves as collateral for a standby letter of credit that provides financial assurance that the Company will fulfill its obligations related to an international contract to design and project manage the construction of a bulk handling facility in Mexico.

Allowance for Doubtful Accounts: The Company performs credit evaluations of the Company customer’s current credit worthiness, as determined by our review of their available credit information. While such credit losses have historically been within our expectations and the provisions established, we cannot give any assurances that we will continue to experience the same credit loss rates that we have in the past. The cyclical nature of our industry may affect our customers’ operating performance and cash flows, which could impact our ability to collect on these obligations. Additionally, some of our customers are located in certain international areas that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect these receivables.

Inventories: Inventories consist of raw materials, work-in-process and finished goods. Finished goods inventories include raw materials, direct labor and production overhead. The Company determines the value of acquired work-in-process inventories by estimating the selling prices of finished goods or replacement cost less the sum of (a) cost to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the completing and selling effort of the Company based on profit for similar finished goods. Inventories are carried at the lower of cost or market using the weighted average cost method. The Company maintains a reserve for slow-moving and obsolete inventories, which is reviewed for adequacy on a periodic basis.

37

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property, Plant and Equipment: Property, plant and equipment are stated at cost. The Company determines the value of acquired property, plant and equipment at the lower of (a) replacement cost or (b) appraised value. The cost of ordinary maintenance and repairs is charged to operations, while replacements and major improvements are capitalized. Depreciation is provided at rates considered sufficient to depreciate the cost of the assets using the straight-line method over the following estimated useful lives:

Buildings and leasehold improvements	3-39 years
Machinery, equipment and rental tools	3-7 years
Furniture and fixtures	3-7 years
Transportation equipment	3-5 years
Computer equipment	3-5 years

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds either the fair value or the estimated discounted cash flows of the assets, whichever is more readily measurable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired net of the fair value of liabilities assumed in the acquisition. SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires that intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change which could potentially result in an impairment.

The impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. If the fair value of the reporting unit is less than the book value (including goodwill) then goodwill is reduced to its implied fair value and the amount of the write-down is charged against earnings.

The Company completed its annual impairment review during the fourth quarter of 2006. No impairment was deemed necessary. Increases in estimated future costs or decreases in projected revenue could lead to an impairment of all or a portion of the Company’s goodwill in future periods.

Financial Instruments: The Company considers the fair value of all financial instruments (primarily accounts receivable and long-term debt) not to be materially different from their carrying values at the end of each fiscal year based on management’s estimate of the collectibility of net accounts receivable and due to our ability to borrow funds under terms and conditions similar to those of our existing debt and because the majority of our debt carries a floating rate.

The Company has no off-balance sheet debt or other off-balance sheet financing arrangements. The Company has not entered into derivatives or other financial hedging instruments.

Revenue Recognition: Revenue for product sales is recognized when all of the following criteria have been met: (i) evidence of an agreement exists, (ii) products are shipped or services rendered to the customer and all significant risks and rewards of ownership have passed to the customer, (iii) the price to the customer is fixed and determinable and (iv) collectibility is reasonably assured. Accounts receivable are recorded at that time, net of any discounts. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of the accounts receivable. Accounts receivable deemed ultimately uncollectible are applied against

38

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the allowance for doubtful accounts. Deposits and other funds received in advance of delivery are deferred until the transfer of ownership is complete.

The Logistics group recognizes revenue of its design and construction oversight contracts under the percentage-of-completion method of accounting, measured by the percentage of costs incurred to date to the total estimated costs of completion. This percentage is applied to the total estimated revenue at completion to calculate revenue earned to date. Contract costs include all direct labor and material costs and those indirect costs related to manufacturing and construction operations. General and administrative costs are charged to expense as incurred. Changes in job performance and estimated profitability, including those arising from contract bonus or penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which such revisions appear probable. All known or anticipated losses on contracts are recognized in full when such amounts become apparent. Bulk material transload revenue is recognized as services are performed for the customer.

Within the Drilling Products segment payments from customers for the cost of oilfield rental equipment that is damaged or lost-in-hole are reflected as revenue with the carrying value of the related equipment charged to cost of sales.

The Company is generally not contractually obligated to accept returns, except for defective products. If a product is determined to be defective, the Company will replace the product or issue a credit memo. Based on historical return rates, no provision is made for returns at the time of sale. All costs associated with product returns are expensed as incurred.

Foreign Currency: The Company has revenue that is denominated in currencies other than the United States dollar. Foreign currency transaction gains or losses are included in the Company’s results of operations. The Company has not entered into any forward foreign exchange contracts to hedge the potential impact of currency fluctuations on our foreign currency denominated revenue.

Research and Development Costs: Expenditures for research activities relating to product development and improvement are charged to expense as incurred.

Income Taxes: Income taxes are computed under the liability method. The Company provides deferred income tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts and the respective tax basis of assets and liabilities. These deferred assets and liabilities are based on enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts which are more likely than not to be realized.

Earnings Per Share: Basic earnings per common share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Dilutive earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding and dilutive effect of stock options and warrants.

Debt Issuance Costs: The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method, which approximates the interest method, over the maturity periods of the related debt.

Stock-Based Compensation: We adopted SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”), effective January 1, 2006. This statement requires all share-based payments to employees, including grants of

39

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

employee stock options, to be recognized in the financial statements based on their grant-date fair values. We did not have any unvested stock options outstanding as of January 1, 2006. We did not issues and stock options or restricted stock during 2006.

Prior to January 1, 2006, we accounted for our stock-based compensation using Accounting Principle Board Opinion No. 25 (“APB No. 25”). Under APB No. 25, compensation expense is recognized for stock options with an exercise price that is less than the market price on the grant date of the option.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are reasonable and appropriate, actual results could differ from these estimates.

Reclassifications: Certain amounts for fiscal 2005 and 2004 have been reclassified in the accompanying consolidated condensed financial statements to conform to the current year presentation.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued its Statement of Financial Accounting Standards No. 157 (FAS No. 157), “Fair Value Measurements.” FAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that FAS No. 157 will have on our results of operations and financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires the analysis of misstatements using both a balance sheet and income statement approach and contains guidance on correcting errors under the dual approach, as well as providing transition guidance for correcting errors existing in prior years. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on our results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 is an interpretation of FASB Statement No. 109 “Accounting for Income Taxes” and was adopted by the Company effective January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns. We are currently in the process of evaluating the impact of FIN 48 on our financial statements.

In May 2005, the FASB issued FASB Statement (“SFAS”) No. 154, “Accounting Changes and Error Corrections”. The Company’s effective date for the pronouncement was December 15, 2005. SFAS No. 154 requires that all voluntary changes in accounting principles, including corrections of errors, are retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The Company adopted SFAS No. 154 as of December 31, 2005.

40

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 2004, the FASB issued Statement No. 123R, “Share Based Payment” (“SFAS 123R”). This statement revises Statement 123 and supersedes APB 25 and amends FASB Statement No. 95, “Statement of Cash Flows”. SFAS 123R requires companies to expense the fair value of employee services received in exchange for an award of equity instruments, including stock options. SFAS 123R also provides guidance on valuing and expensing these awards, as well as disclosure requirements with respect to these equity arrangements.

We adopted SFAS 123R effective as of January 1, 2006. We are following the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock based compensation had been expensed, rather than the “modified retrospective” method which would entail restatement of previously published earnings. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. The impact of adoption of SFAS 123R will depend on levels of share-based compensation, particularly stock options, granted in the future and the fair value assigned thereto. The adoption of SFAS 123R has not had a material financial impact on our consolidated financial position, results of operations or cash flows.

On December 22, 2005, the Compensation Committee, on behalf of the Board of Directors (“Board”), approved the acceleration of the vesting of all previously unvested stock options granted under our 2003 and 2005 Long Term Incentive Plans (the “Plans”). The vesting acceleration represents options exercisable for a total of 313,140 shares of our common stock, including a total of 175,875 shares of common stock underlying options held by our executive officers. The options have exercise prices ranging from $4.25 to $9.40 per share. The closing price of our common stock on December 22, 2005 was $18.80. The acceleration of the vesting schedule of the options was effected pursuant to Section 4(c)(x) of the Plans, which authorizes the Board, in its sole discretion, to substitute an accelerated vesting schedule for options granted under the Plans. In most instances, stock options granted under the Plans vested over a four-year period.

The Board imposed selling restrictions on shares received through the exercise of accelerated options. These restrictions prohibit the sale of shares purchased under accelerated options until the date on which the options would otherwise have vested under the original option grants or six months after the date on which the options would otherwise have vested under the original option grants if the employee is no longer employed by the Company.

Note 3—Acquisitions

The Company purchased from Phoenix E&P Technology, LLC (“Phoenix”), its manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens and assumed accrued liabilities on January 28, 2005. The assets were purchased for $46,640 with a three-year royalty interest on all shale shaker screens produced. No royalty fees were generated during 2006.

On February 14, 2005, the Company completed the purchase of Spidle Sales and Services, Inc. (“Spidle”). The consolidated income statements include the results of operations of Spidle commencing January 1, 2005. A written agreement transferred effective control of Spidle to the Company as of January 1, 2005 without restrictions except those required to protect the shareholders of Spidle. Spidle is accounted for as a wholly-owned subsidiary of the Company.

The purchase price of the Spidle acquisition was allocated to the assets acquired and liabilities assumed based on estimated fair values, following the completion of an independent appraisal and other evaluations. In the twelve months following the acquisition date, we obtained third party inventory replacement cost data, which management believes to be a more accurate estimate of fair value. The acquired assets and assumed liabilities

41

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

were remeasured as of the acquisition date, and depreciation and amortization has been adjusted as if the fair values had been known at the acquisition date. This remeasurement resulted in a reduction in the fair value of the inventory acquired of $2.0 million, an increase in the fair value of property, plant and equipment of $1.8 million, and an increase in the fair value of long-term intangible assets of $0.2 million. The remeasurement resulted in approximately $0.5 million additional depreciation and amortization expense during 2005.

In accordance with SFAS No. 141, “Accounting for Business Combinations”, the excess of the net fair value of the assets acquired over the purchase price was allocated proportionately to reduce the values assigned to non-current assets in determining their fair values. In applying SFAS No. 141 to the transaction, the net value of property, plant and equipment was reduced by $14.1 million. A deferred tax liability of $1.8 million was recorded as a result of the fair value of the assets for book purposes being higher than the tax basis, which is carried at original cost. The total purchase price consisted of $6.1 million in cash, a $1.3 million seller note payable over three years, and 129,271 shares of the Company’s common stock.

	Fair Value Investment			Application of SFAS No. 141			Recorded Investment
	(in thousands)
Cash	$	134		$	—		$	134
Receivables		2,496			—			2,496
Inventories		4,871			—			4,871
Deferred tax asset		74			(74	)		—
Property, plant and equipment		17,485			(14,132	)		3,353
Intangible assets		1,078			(871	)		207
Accounts payable		(928	)		—			(928	)
Accrued liabilities		(113	)		—			(113	)
Federal income taxes payable		(156	)		—			(156	)
Deferred tax liability		—			(1,789	)		(1,789	)
Less: Total purchase price		8,075			—			8,075
Excess of investment over purchase price	$	16,866		$	(16,866	)	$	—

On August 19, 2005, the Company purchased the assets of privately-held Harmon’s Machine Works, Inc., a downhole oilfield and mining tool company located in Midland, Texas, for approximately $4.9 million. The assets acquired included approximately $2.2 million of property, plant and equipment, $0.4 million in accounts receivable, $0.4 million in inventory and approximately $2.1 million in goodwill and other intangible assets. Consideration paid consisted of approximately $3.9 million in cash, $0.6 million in the Company’s common stock and the assumption of $0.2 million of net liabilities. The Company financed the acquisition utilizing an equipment term loan of $1.3 million, an acquisition loan of $1.0 million, a real estate term loan of $0.2 million and $1.3 million of a revolving credit facility (See Note 7). The assets purchased have become part of the Company’s Drilling Products segment.

On August 31, 2005, the Company purchased the assets of privately held Precision-LOR, Ltd. (“LOR”), a drilling tool rental and inspection service provider located in South Texas, for approximately $4.9 million. The assets acquired included approximately $1.3 million of equipment and approximately $3.5 million in goodwill and other intangible assets. Consideration paid consisted of approximately $3.6 million in cash and $1.2 million in the Company’s common stock. Cash proceeds from the Company’s equity issuance were utilized for the purchase. The assets purchased have become part of the Company’s Drilling Products segment.

The Company made three acquisitions in 2006. On January 2, 2006, the Company purchased the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (collectively “Can-Ok”), a downhole oilfield tool

42

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

company located in Chickasha, Oklahoma. On April 3, 2006, the Company purchased the tangible assets and licensed the rights to exercise the exclusive worldwide rights to a patented gas separator used in coal bed methane production from Total Well Solutions, LLC (“TWS”). TWS markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin. On June 6, 2006, the Company purchased the assets of LifTech, LLC (“LifTech”) which markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin.

Acquisitions have been accounted for using the purchase method of accounting under SFAS No. 141 “Accounting for Business Combinations”. The acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Allocation of the purchase price for acquisitions was based on the estimates of fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation within the one year anniversary of the acquisition.

The assets acquired, liabilities assumed and consideration paid were as follows for the 2006 acquisitions (in thousands, except share data):

	Can-Ok		TWS		LifTech
Assets acquired:
Cash	$	38	$	—	$	170
Accounts receivable, net		453		—		754
Inventory		85		1,565		863
Plant, property and equipment		1,938		170		291
Goodwill		4,981		2,977		3,898
Intangible and other assets		206		160		173
Total assets acquired	$	7,701	$	4,872	$	6,149
Liabilities assumed:
Accounts payable	$	395	$	—	$	967
Accrued liabilities		6		—		—
Total liabilities assumed	$	401	$	—	$	967
Net assets acquired	$	7,300	$	4,872	$	5,182
Consideration paid:
Cash	$	6,775	$	4,872	$	1,323
Common stock		525		—		3,859
Total consideration paid	$	7,300	$	4,872	$	5,182
Common stock shares issued		25,020		—		178,223

43

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4—Inventories

The components of inventories for the year ended December 31, 2006 and 2005 were as follows:

	December 31,
	2006			2005
	(in thousands)
Raw materials	$	4,415		$	2,409
Work-in-process		700			51
Finished goods (includes in-transit)		13,646			8,603
Gross inventories		18,761			11,063
Less: Slow-moving and obsolescence reserve		(862	)		(405	)
Inventories, net	$	17,899		$	10,658

Note 5—Property, Plant and Equipment

For the year ended December 31, 2006 and 2005, property, plant and equipment were comprised of the following:

	December 31,
	2006			2005
	(in thousands)
Land	$	609		$	409
Buildings and leasehold improvements		3,665			3,026
Machinery, equipment and rental tools		13,941			7,882
Equipment in progress		3,856			464
Furniture and fixtures		318			123
Transportation equipment		2,144			1,068
Computer equipment		491			433
Gross property, plant and equipment		25,024			13,405
Less: Accumulated depreciation		(5,722	)		(3,444	)
Property, plant and equipment, net	$	19,302		$	9,961

Note 6—Goodwill

In February 2002, we acquired IBS 2000, Inc., a Denver-based company engaged in the development and manufacturing of environmentally neutral chemicals for the oil industry. The terms of the acquisition called for an “Earn-Out Payment” based on 25% of the division’s earnings before interest and taxes for the three one-year periods ending on March 31, 2003, 2004 and 2005. During 2004, the Company recorded additional goodwill of $320,012 associated with an earn-out for the period March 31, 2003 through December 31, 2004 to reflect additional acquisition consideration related to this agreement. In the first quarter of 2005 the Company recorded additional goodwill of $153,830 to reflect the final amount of additional acquisition consideration related to this agreement. As of July 31, 2005, $175,411 had been paid. On August 2, 2005, the remaining balance of $298,431 was settled in 34,080 shares of common stock.

We evaluate the carrying value of goodwill during the fourth quarter of each year and on an interim basis, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit

44

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill completed during 2006 resulted in no impairment losses.

The following is a reconciliation of goodwill by segment:

	Chemicals & Logistics		Drilling Products		Artificial Lift		Total
	(in thousands)
Balance at December 31, 2004	$	7,466	$	—	$	—	$	7,466
Earn-out payment		154		—		—		154
Acquisitions		—		4,768		—		4,768
Balance at December 31, 2005		7,620		4,768		—		12,388
Acquisitions		—		4,921		6,876		11,797
Balance at December 31, 2006	$	7,620	$	9,689	$	6,876	$	24,185

Note 7—Long-term Debt

Long-term debt at December 31, 2006 and 2005 consisted of the following:

	December 31,
	2006			2005
	(in thousands)
Senior Credit Facility
Equipment term loan	$	4,317		$	5,717
Real estate term loan		724			803
Revolving line of credit		2,911			—
Amendments to Senior Credit Facility
Equipment term loan		1,165			1,289
Real estate term loan		209			222
Promissory notes to stockholders of acquired businesses, maturing February 2008		740			1,004
Other		708			258
Total		10,774			9,293
Less current portion		(2,589	)		(2,016	)
Long-term debt, less current portion	$	8,185		$	7,277

45

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In February 2005, we obtained the Senior Credit Facility with Wells Fargo which includes a revolving loan agreement, equipment term loans and a real estate term loans. In August 2006 we amended the Senior Credit Facility. The amendment to the Senior Credit Facility increased the maximum amount outstanding on the revolving line of credit from the lesser of (a) $10.0 million or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of eligible inventory, as defined. The terms are interest-only, maturing in August 2009.

As of December 31, 2006, we had $2.9 million outstanding under the revolving line of credit of the amended Senior Credit Facility. Bank borrowings are subject to certain covenants and a material adverse change subjective acceleration clause. Affirmative covenants include compliance with laws, various reporting requirements, visitation rights, maintenance of insurance, maintenance of properties, keeping of records and books of account, preservation of existence of assets, notification of adverse events, ERISA compliance, joinder agreement with new subsidiaries, borrowing base audits, and use of treasury management services. Negative covenants include limitations associated with liens, indebtedness, change in nature of business, transactions with affiliates, investments, distributions, subordinate debt, leverage ratio, fixed charge coverage ratio, consolidated net income, prohibition of fundamental changes, asset sales and capital expenditures. As of December 31, 2006 we were in compliance with all covenants except the indebtedness covenant which restricts the Company from exceeding $500,000 in secured indebtedness to finance the purchase of assets necessary in the Company’s ordinary course of business. As of December 31, 2006 the Company had approximately $0.7 million in vehicle loans and capitalized vehicle leases.

In January 2007, we amended the Senior Credit Facility in conjunction with the acquisition of Triumph Drilling Tools. The amendment to the Senior Credit Facility increased the maximum amount outstanding on the revolving line of credit from the lesser of (a) $20.0 million or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of eligible inventory, as defined. The terms of the revolving loan agreement were modified to provide for borrowings that bear interest at LIBOR rate plus 175 basis points maturing in August 2009. The equipment term loan was amended to provide for borrowings of $35.0 million bearing interest at LIBOR rate plus 175 basis points payable over 84 months. The amendment increased many of our principal covenants including our leverage ratio, fixed charge coverage ratio and net capital expenditures. The real estate term loans remained unchanged. Our bank borrowings are collateralized by substantially all of our assets. Based on the amended maturity date, the current revolving line of credit is classified as long-term debt.

The Company believes the fair value of its long-term debt approximates the recorded value as of December 31, 2006, as the majority of the long-term debt carries a floating interest rate based on the prime rate.

Maturities of debt obligations at December 31, 2006 are as follows (in thousands):

	Debt		Capital Leases		Total
Year Ending December 31,:
2007	$	2,308	$	281	$	2,589
2008		1,753		274		2,027
2009		4,506		147		4,653
2010		1,499		6		1,505
2011		—		—		—
Thereafter		—		—		—
Total	$	10,066	$	708	$	10,774

46

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 8—Common Stock, Stock Options and Warrants

On August 29, 2005, we completed a private offering of 1,300,000 shares of common stock at a price of $16.30 per share to 18 accredited investors. Gross proceeds from the private offering were $21,190,000; costs associated with the offering were $1,381,400. Proceeds from the sale were used for general corporate purposes, strategic acquisitions, and repayment of existing indebtedness. In connection with the sale, we committed with the private placement investors to file a registration statement with the Securities and Exchange Commission (the “SEC”) within 60 days of the completion of the private offering, covering resale of the shares by those investors. We submitted our Form SB-2 registration statement with the SEC on October 28, 2005, within 60 days of the completion of the private offering. The SEC declared the SB-2 effective December 30, 2005.

The amount of common shares issued and outstanding is summarized as follows:

Issued and outstanding as of December 31, 2005	8,317,265
Shares issued for Can-Ok acquisition (See Note 3)	25,020
Shares issued for LifTech acquisition (See Note 3)	178,223
Warrants converted	26,490
Stock options exercised (less restricted shares)	280,466
Issued and outstanding as of December 31, 2006	8,827,464

We have the 2003 and 2005 Long-Term Incentive Plans (the “Plans”) under which our officers, key employees, and non-employee directors may be granted options to purchase shares of our authorized but unissued common stock. As of December 31, 2006, there were no shares available for future grants under the 2003 Plan and 428,572 available under the 2005 Plan. Under the Plans, the option exercise price is equal to the fair market value of our common stock at the date of grant. Options currently expire no later than 10 years from the grant date and generally vest within four years or less. Proceeds received by us from exercises of stock options are credited to common stock and additional paid-in capital.

Additional information with respect to the Plans’ stock option activity is as follows:

	Number of Shares		Weighted- average Exercise Price
Outstanding as of January 1, 2004	657,839		$	1.54
Granted	447,664		$	3.30
Exercised	(15,000	)	$	0.61
Cancelled	(42,500	)	$	0.60
Outstanding as of December 31, 2004	1,048,003		$	2.13
Granted	195,264		$	14.12
Exercised	(80,801	)	$	1.77
Cancelled	(39,030	)	$	4.05
Outstanding as of December 31, 2005	1,123,436		$	4.13
Exercised	(300,216	)	$	1.91
Outstanding as of December 31, 2006	823,220		$	4.94
Options exercisable as of December 31, 2004	560,878		$	2.05
Options exercisable as of December 31, 2005	1,123,436		$	4.13
Options exercisable as of December 31, 2006	823,220		$	4.94

47

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted average contractual life remaining on outstanding stock options was approximately eight years as of December 31, 2006, eight years as of December 31, 2005 and nine years as of December 31, 2004.

As of December 31, 2006, the Company has 20,000 warrants outstanding to purchase common stock. The warrants have an exercise price of $5.42 per share and expired in February 2007.

Note 9—Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is based on the weighted average number of shares outstanding during each period and the assumed exercise of dilutive instruments (stock options and warrants) less the number of treasury shares assumed to be purchased with the exercise proceeds using the average market price of the Company’s common stock for each of the periods presented.

The following table presents information necessary to calculate earnings per share for the periods presented.

	For the Years Ended December 31,
	2006		2005		2004
	(in thousands, except per share data)
Net income	$	11,350	$	7,720	$	2,154
Weighted-average common shares outstanding		8,645		7,303		6,659
Basic earnings per common share	$	1.31	$	1.06	$	0.32
Diluted earnings per common share	$	1.22	$	0.94	$	0.31
Weighted-average common shares outstanding		8,645		7,303		6,659
Effect of dilutive securities		649		952		354
Weighted-average common equivalent shares outstanding		9,294		8,255		7,013

A reconciliation of the number of shares used for the basic earnings per share calculation on a pro forma basis for 2004 had the acquisition of Spidle occurred January 1, 2004 is as follows:

	For the Year Ended December 31,
	2005		2004
	(in thousands, except per share data)
Pro forma revenue	$	52,869	$	38,082
Pro forma income from operations	$	10,114	$	4,520
Pro forma net income	$	7,720	$	2,961
Pro forma weighted-average common shares outstanding		7,303		6,789
Basic earnings per common share	$	1.06	$	0.44

Note 10—Stock Based Compensation Expense

We adopted SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”), effective January 1, 2006. This statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant-date fair values. Compensation cost for awards granted prior to, but not vested, as of January 1, 2006 would be based on the grant date attributes originally used to value those awards for pro forma purposes under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). We adopted SFAS No. 123R using the modified prospective transition method, utilizing the

48

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Black-Scholes option pricing model for the calculation of the fair value of our employee stock options. Under the modified prospective method, we would record compensation cost related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining vesting periods of those awards with no change in historical reported earnings. We did not have any unvested options outstanding as of December 31, 2005 .

Prior to January 1, 2006, we accounted for our stock-based compensation using Accounting Principle Board Opinion No. 25 (“APB No. 25”). Under APB No. 25, compensation expense is recognized for stock options with an exercise price that is less than the market price on the grant date of the option. For stock options with exercise prices at or above the market value of the stock on the grant date, we adopted the disclosure-only provisions of SFAS No. 123. We also adopted the disclosure-only provisions of SFAS No. 123 for the stock options granted to our employees and directors. Accordingly, no compensation cost was recognized under APB No. 25. All of our outstanding options were fully vested as of December 31, 2005 and no additional options or restricted stock were issued in 2006 there were compensation costs related to share-based payments in 2006.

Had compensation expense for the options granted been recorded based on the fair value at the grant date for the options, consistent with the provisions of SFAS 123, our net income (loss) and net income (loss) per share for the years ended December 31, 2005 and 2004 would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts):

	For the Years Ending December 31,
	2005			2004
	(in thousands, except per share data)
Net income:
As reported	$	7,720		$	2,154
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,539	)		(376	)
Pro forma	$	5,181		$	1,778
Basic earnings per share:
As reported	$	1.06		$	0.32
Pro forma	$	0.71		$	0.27
Diluted earnings per share:
As reported	$	0.94		$	0.31
Pro forma	$	0.63		$	0.25

The weighted-average estimated fair value of stock options granted during 2005 and 2004 was $9.41 and $2.22 per share, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Black-Scholes model were as follows for stock options granted in 2005 and 2004:

	For the Years Ended December 31,
	2005	2004
Risk-free interest rate	4.17% – 4.55%	3.82% – 4.38%
Expected volatility of common stock	50%	50%
Expected life of options	10 years	10 years
Vesting period	0 – 4 years	0 – 4 years

49

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully-transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options, and our options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.

On December 22, 2005, the Compensation Committee, on behalf of the Board of Directors (“Board”) approved the acceleration of the vesting of all previously unvested stock options granted under the Company’s 2003 and 2005 Long Term Incentive Plans (the “Plans”). The vesting acceleration represents options exercisable for a total of 313,140 shares of the Company’s common stock, including a total of 175,875 shares of common stock underlying options held by the Company’s executive officers. The options have exercise prices ranging from $4.25 to $9.40 per share. The closing price of the Company’s common stock on December 22, 2005 was $18.80. The acceleration of the vesting schedule of the Company’s options was effected pursuant to Section 4(c)(x) of the Plans, which authorizes the Board, in its sole discretion, to substitute an accelerated vesting schedule for options granted under the Plans. In most instances, stock options granted under the Plans vested over a four-year period.

Note 11—Income Taxes

The following are the components of total income tax expense broken out among the various categories of income in which the provision for income taxes is reported:

	For the Years Ended December 31,
	2006		2005			2004
	(in thousands)
Current:
Federal	$	5,142	$	2,601		$	75
State		594		254			138
Foreign		305		28			—
Total current		6,041		2,883			213
Deferred:
Federal		542		(1,181	)		—
State		—		(49	)		—
Total deferred		542		(1,230	)		—
Provision for income taxes	$	6,583	$	1,653		$	213

Our effective income tax rate in 2006 differs from the federal statutory rate primarily due to state income taxes, permanent tax differences and changes in valuation allowances.

	For Years Ended December 31,
	2006		2005		2004
Federal statutory rate	35.0	%	34.0	%	34.0	%
State income taxes, net of federal benefit	2.2		1.3		5.8
Write-off of NOL deferred tax asset	0.9		—		—
Change in valuation allowance	(0.9	)	(18.0	)	(49.0	)
Other	(0.5	)	0.3		18.2
Effective income tax rate	36.7	%	17.6	%	9.0	%

50

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes at the enacted tax rates in effect when the differences reverse. The components of our deferred tax asset and liabilities are as follows:

	For the Years Ended December 31,
	2006			2005
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	195		$	24
Net operating loss carryforwards		697			2,144
Other deferred assets		21			4
Gross deferred tax assets		913			2,172
Valuation allowance		—			(1,627	)
Gross deferred tax assets after valuation allowance		913			545
Deferred tax liabilities:
Inventory valuations		(624	)		(864	)
Inventory overhead capitalization		(245	)		—
Intangibles		(382	)		(59	)
Property, plant and equipment		(840	)		(181	)
Other deferred assets		(31	)		—
Gross deferred tax liabilities		(2,122	)		(1,104	)
Net deferred tax liabilities	$	(1,209	)	$	(559	)

A valuation allowance was provided in full against our net deferred tax assets due to our uncertainty at the time surrounding the realization of our deferred tax assets in future years. In 2005 management released a portion of the valuation allowance provided against our deferred tax assets as of December 31, 2005 in the amount that management believed would more likely than not be utilized.

Certain Internal Revenue Code provisions such as Section 382 may limit the use of our net operating loss carryforwards, particularly those incurred prior to the reverse merger in 2001. We annually assess the limitations on our net operating loss carryforwards, if any, on future periods. Based on our evaluation, we have written-off the deferred tax asset balance related to net operating loss carryforwards incurred prior to the reverse merger in 2001. This deferred tax asset balance determined to be limited by Section 382 was fully reserved, so the net impact of the deferred tax asset write-off and the associated reserve release resulted in no current effect to our operating results. As of December 31, 2006, we had estimated net operating loss carryforwards of approximately $1.8 million, expiring in various amounts in 2017 through 2026.

Our current corporate organizational structure requires us to file two separate consolidated U.S. Federal income tax returns. As a result, taxable income of one group cannot be offset by tax attributes, including net operating losses, of the other group. We have not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because we intend to permanently reinvest a portion of the unremitted earnings of our non-U.S. subsidiaries in their foreign operations. At December 31, 2006, we had approximately $1 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these funds were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

51

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 12—Related Party Transactions

On January 30, 2003, the Company entered into an agreement with SCL to procure raw materials as ordered by CESI, granting CESI 120 day payment terms for a 15% markup. Dr. Glenn Penny owned 37.06% and Mr. Robert Beall owned 62.94% of SCL. At that time, both owners of SCL were directors as well as principal stockholders of the Company. Dr. Penny was and is an employee of the Company, and Mr. Beall is a former director of the Company. On August 27, 2003, a new agreement was executed for repayment of the outstanding balance of $359,993 beginning September 15, 2003 with monthly principal and interest payments in the amount of $38,600, plus interest of 1% per month on the unpaid balance until paid in full. As of December 31, 2004, the outstanding balance owed to SCL was $347,333. On February 14, 2005, SCL was required to fully subordinate its debt position and defer principal payments for six months in connection with the new senior credit facility. To compensate for the subordination, the interest rate on the note was raised to 21%. On April 1, 2005, 62.94% of the outstanding principal and interest was paid to Mr. Beall to retire his portion of the loan. The remaining principal was converted into a new loan with Dr. Penny, bearing a fixed interest rate of 12.5%, payable over 36 months, maturing April 2008. In September 2005 the loan from Dr. Penny was paid in full with proceeds from the Company’s private offering (See Note 8).

On July 25, 2002, we borrowed $500,000 under a promissory note from Oklahoma Facilities, LLC (“Facilities”). Dr. Penny has a minority investment interest in and is an officer of Facilities. The majority of the note was secured by specific Petrovalve inventory. The note was amended on October 1, 2004, bearing interest at the prime rate plus 7.25%, payable in 36 monthly installments beginning January 1, 2005. On February 14, 2005, Facilities was required to fully subordinate its outstanding debt position in connection with the new senior credit facility. In September 2005 the promissory note with Facilities was paid in full with proceeds from the Company’s private offering.

The Company purchased from Phoenix its manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens on January 28, 2005. The assets were purchased for $46,640 with a three-year royalty interest on all shale shaker screens produced. Phoenix is 75% owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., our Chief Executive Officer and Chairman, and Dr. Penny each have a 2 1/2% indirect ownership interest in CEP, and John Chisholm, a director of Flotek, has a 30% ownership interest in CEP. No royalties were earned during 2006.

Note 13—Commitments and Contingencies

The Company is involved, on occasion, in routine litigation incidental to our business.

The Company has entered into operating leases for office space, vehicles and equipment. Future minimum lease payments under these leases are as follows:

For the Years Ended December 31,	(in thousands)
2007	$	475
2008	$	335
2009	$	234
2010	$	161
2011	$	155

52

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total rent expense under these operating leases totaled approximately $438,000, $181,000 and $205,000 during the years ended December 31, 2006, 2005 and 2004, respectively.

401(k) Retirement Plan

The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the United States. All employees are eligible for the plan upon six months of employment. In March 2006, the Company began matching 0.25% of each employee’s contribution up to 0.75%.

Concentrations

Essentially all of our revenue is derived from the oil and gas industry. This concentration of customers in one industry increases our credit and business risk, particularly given the volatility of activity levels in the industry. The majority of our sales are to major or large independent oilfield service companies with established credit histories, and actual credit losses have been insignificant.

Five customers accounted for 30% of consolidated revenue for the year ended December 31, 2006. The majority of these same customers were also in the Chemicals and Logistics segment of our business, and they collectively accounted for 47% of the revenue in this segment. One customer of the five accounted for 8% of the consolidated revenue for the year ended December 31, 2006. The same customer accounted for 15% of revenue of our Chemicals and Logistics segment for the year ended December 31, 2006.

Five customers accounted for 32% of consolidated revenue for the year ended December 31, 2005. These same five customers were also in the Chemicals and Logistics segment of our business, and they collectively accounted for 49% of the revenue in this segment. One customer of the five accounted for 12% of the consolidated revenue for the year ended December 31, 2005. The same customer accounted for 22% of revenue of our Chemicals and Logistics segment for the year ended December 31, 2005.

The Chemicals and Logistics segment generated the majority of our revenue in 2004. Five customers accounted for 47% of consolidated revenue for the year ended December 31, 2004. These same five customers were also in the Chemicals and Logistics segment of our business and they collectively accounted for 57% of the revenue in this segment.

Note 14—Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

The Company has determined that there are three reportable segments:

• The Chemicals and Logistics segment is made up of two business units. The specialty chemical business unit designs, develops, manufactures packages and sells chemicals used by oilfield service companies in oil and gas well drilling, cementing, stimulation and production. The logistics business unit manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies.

• The Drilling Products segment rents, inspects, manufactures and markets downhole drilling equipment for the energy, mining, water well and industrial drilling sectors.

• The Artificial Lift segment manufactures and markets artificial lift equipment which includes the Petrovalve line of beam pump components, electric submersible pumps, gas separators, valves and services to support coal bed methane production.

53

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in “Note 2: Summary of Significant Accounting Policies.” Inter-segment sales are accounted for at fair value as if sales were to third parties and are eliminated in the consolidated financial statements.

Summarized financial information concerning the segments for the years ending December 31, 2006, 2005 and 2004 is shown in the following tables (in thousands):

	Chemicals and Logistics		Drilling Products		Artificial Lift			Corporate and Other			Total
2006
Net revenue to external customers	$	50,545	$	36,753	$	13,344		$	—		$	100,642
Income (loss) from operations	$	16,845	$	6,325	$	1,514		$	(5,831	)	$	18,853
Depreciation and amortization	$	395	$	2,044	$	154		$	157		$	2,750
Total assets	$	25,459	$	39,748	$	16,860		$	823		$	82,890
Goodwill	$	7,620	$	9,689	$	6,876		$	—		$	24,185
Capital expenditures	$	3,222	$	5,293	$	635		$	51		$	9,201
Interest expense	$	3	$	33	$	6		$	963		$	1,005
2005
Net revenue to external customers	$	29,638	$	21,875	$	1,356		$	—		$	52,869
Income (loss) from operations	$	8,188	$	4,663	$	180		$	(2,917	)	$	10,114
Depreciation and amortization	$	403	$	1,175	$	21		$	169		$	1,768
Total assets	$	16,417	$	26,787	$	1,233		$	7,721		$	52,158
Goodwill	$	7,620	$	4,768	$	—		$	—		$	12,388
Capital expenditures	$	723	$	1,640	$	—		$	34		$	2,397
Interest expense	$	33	$	6	$	1		$	787		$	827
2004
Net revenue to external customers	$	17,983	$	3,315	$	583		$	—		$	21,881
Income (loss) from operations	$	4,731	$	359	$	(356	)	$	(1,722	)	$	3,012
Depreciation and amortization	$	430	$	87	$	31		$	142		$	690
Total assets	$	12,837	$	868	$	1,467		$	785		$	15,957
Goodwill	$	7,466	$	—	$	—		$	—		$	7,466
Capital expenditures	$	67	$	27	$	—		$	19		$	113
Interest expense	$	117	$	12	$	—		$	562		$	691

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FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15—Quarterly Financial Data (Unaudited)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Fiscal Year Total
	(in thousands, except per share data)
2006
Revenue	$	16,061	$	22,113	$	29,196	$	33,272	$	100,642
Gross profit(a)		6,782		8,586		11,943		13,867		41,178
Net income		1,756		2,235		3,509		3,850		11,350
Earnings per share
Basic		0.21		0.26		0.40		0.44		1.31
Diluted		0.19		0.24		0.37		0.41		1.22
2005
Revenue	$	11,041	$	12,461	$	13,303	$	16,064	$	52,869
Gross profit(a)		4,068		5,264		5,727		6,864		21,923
Net income		1,468		1,989		1,769		2,494		7,720
Earnings per share
Basic		0.22		0.29		0.24		0.30		1.06
Diluted		0.20		0.26		0.21		0.27		0.94

(a) -Represents revenue less cost of revenue.

Note 16—Subsequent Events

In January 2007, we amended the Senior Credit Facility in conjunction with the acquisition of Triumph Drilling Tools. The amendment to the Senior Credit Facility increased the maximum amount outstanding on the revolving line of credit from the lesser of (a) $20.0 million or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of eligible inventory, as defined. The terms of the revolving loan agreement were modified to provide for borrowings that bear interest at LIBOR rate plus 175 basis points maturing in August 2009. The equipment term loan was amended to provide for borrowings of $35.0 million bearing interest at LIBOR rate plus 175 basis points payable over 84 months. The amendment increased many of our principal covenants including our leverage ratio, fixed charge coverage ratio and net capital expenditures. The real estate term loans remained unchanged.

On January 4, 2007, the Company completed its acquisition of substantially all the assets of Triumph Drilling Tools, Inc. (“Triumph”) as reported in its Current Report on Form 8-K filed with the SEC on January 10, 2007. The Company paid aggregate consideration of approximately $31 million in cash, consisting of $25 million to the former shareholder and $6 million in the repayment of debt of Triumph.

The Company acquired a 50% partnership interest in CAVO Drilling Motors Ltd Co. (“CAVO”) on January 31, 2007 for approximately $2.5 million in cash, $1.9 million in Flotek common stock and a $1.5 million 6% fixed rate three year seller note. The partnership interest will be reported using the equity method of accounting. CAVO is a complete downhole motor solutions provider specializing in the rental, servicing and sale of high-performance mud motors for a variety of drilling applications. CAVO serves both the domestic and international drilling markets with a customer base extending throughout North America, South America, Russia and West Africa.

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

None.

Item 9A. Controls and Procedures.

The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer, along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective as a result of material weaknesses in internal controls as of December 31, 2006. Our management is responsible for establishing and maintaining internal control over financial reporting (ICFR). Our internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, and therefore can only provide reasonable assurance with respect to financial statement preparation and presentation.

An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis by employees in the normal course of their work.

Our management’s assessment is that the Company did not maintain effective ICFR as of December 31, 2006 within the context of the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our ICFR as designed, documented and tested, we identified two material weaknesses. The material weaknesses in our internal controls related to inadequate staffing within our accounting department and not having adequate monitoring controls in place during the year. As a result of these material weaknesses, the Company recorded adjustments to the financial statements for the year ended December 31, 2006, prior to their issuance, that affected several financial statement line items.

In order to address the material weaknesses identified, management has initiated corrective measures that will continue through 2007 including:

1) Adding experienced personnel to our accounting and financial reporting function to provide the necessary resources to ensure we have effective and timely monitoring controls in place, particularly related to acquisitions. We expect that by adding a senior accounting acquisitions manager and internal audit manager, we will be better able to address technical accounting issues on a timely basis. In addition, we will reevaluate all other finance and accounting needs and personnel and change and enhance, as necessary.

2) Implementation of Rental Tool Management Software (RTMS) to better monitor our drilling tool rental activities.

The Company believes that the above measures will address all matters identified as a material weakness by management and the independent registered public accounting firm. The Company will continue to monitor the effectiveness of its internal controls and procedures on an ongoing basis and will take further actions, as appropriate.

Changes in Internal Control Over Financial Reporting

Except as otherwise discussed herein, there have been no significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. However, the Company made changes to the design and operation of internal control over financial reporting during the fourth quarter in order to increase the design and operating effectiveness of internal controls in connection with implementing Section 404 of the Sarbanes-Oxley Act of 2002. In addition, the Company is currently implementing enhancements to the Company’s internal control over financing reporting to address the material weaknesses described above.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information under the caption “Directors, Executive Officers and Corporate Governance”, which will be contained in our Definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 11. Executive Compensation.

Information under the caption “Executive Compensation”, which will be contained in our Definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, is incorporated herein by reference.

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

Information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, which will be contained in our Definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information under the caption “Certain Relationships and Transactions with Management”, which will be contained in our Definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

Information under the caption “Principal Accounting Fees and Services”, which will be contained in our Definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

Exhibit Number	Description of Exhibit
3.1	Certificate of Incorporation (incorporated by reference to Appendix E of the Company’s Definitive Proxy Statement filed with the SEC on September 27, 2001).
3.2	Bylaws (incorporated by reference to Appendix F of the Company’s Definitive Proxy Statement filed with the SEC on September 27, 2001).
4.1	Registration Right Agreement, effective as of April 30, 2000, signed in August 2000 (incorporated by reference to Exhibit 4.3 of the Company’s Form 10-QSB for the quarter ended August 31, 2000).
4.2	Form of Warrant to purchase common stock of the Company issued to Wells Fargo National Association dated February 11, 2005 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
4.3	Form of Warrant to purchase common stock of the Company dated August 31, 2000 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).

57

Exhibit Number	Description of Exhibit
4.4	Acquiror Shareholders Agreement dated August 15, 2001 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
4.5	Form of Warrant Agreement to Marlin Investors, LLC (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-QSB for the quarter ended November 30, 1997).
4.6	Subscription and Registration Rights Agreement dated August 29, 2005 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.1	Stock Purchase Agreement dated December 20, 2004 among Flotek Industries, Inc., and the shareholders of Spidle Sales & Service, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K/A filed October 5, 2005).
10.2	Credit Agreement Between Flotek Industries, Inc. and Wells Fargo Bank, N.A. dated February 11, 2005 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.3	Amended and Restated Promissory Note dated October 1, 2004 among Flotek Industries, Inc., and Oklahoma Facilities, LLC (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.4	Promissory Note dated February 7, 2005 among Flotek Industries, Inc. and Stimulation Chemicals, LLC (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.5	Release of Obligation dated April 1, 2005 between Flotek Industries, Inc. and Stimulation Chemicals, LLC (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.6	Promissory Note dated April 1, 2005 between Flotek Industries, Inc. and Dr. Glenn Penny (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.7	Asset Purchase Agreement dated January 25, 2005 between Flotek Industries, Inc. and Phoenix E&P Technology, LLC (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.8	Asset Purchase Agreement dated August 4, 2005 between Flotek Industries, Inc. and Harmon Machine Works, Inc (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.9	Asset Purchase Agreement dated August 25, 2005 between Flotek Industries, Inc. and Precision LOR, Ltd (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.10	First Amendment to Credit Agreement Between Flotek Industries, Inc. and Wells Fargo Bank, N.A. dated August 19, 2005 (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
10.11	2003 Long Term Incentive Plan of the Company (incorporated by reference to Exhibit 10.1 to Form S-8 registration statement filed with the Commission on October 27, 2005).
10.12	2005 Long Term Incentive Plan of the Company (incorporated by reference to Exhibit 10.2 to Form S-8 registration statement filed with the Commission on October 27, 2005).

58

Exhibit Number	Description of Exhibit
10.13	Convertible Loan Agreement dated October 16, 1997 (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-QSB for the quarter ended November 30, 1997).
10.14	Promissory Note to Chisholm Energy Partners, LLC (incorporated by reference to Exhibit 10.10 of the Company’s Form 10KSB for the year ended February 28, 1999).
10.15	Asset Purchase Agreement dated January 2, 2006 among Flotek Industries, Inc. and Can-Ok Field Services, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-QSB for the quarter ended March 31, 2006).
10.16	Asset Purchase Agreement dated January 2, 2006 among Flotek Industries, Inc. and Stabilizer Technology, Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-QSB for the quarter ended March 31, 2006).
10.17	Asset Purchase Agreement dated April 3, 2006 among Total Energy Technologies, LLC, USA Petrovalve, Inc. and Total Well Solutions, LLC. (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-QSB for the quarter ended June 30, 2006).
10.18	Exclusive License Agreement dated April 3, 2006 among Flotek Industries, Inc., USA Petrovalve, Inc. and Total Well Solutions, LLC. (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-QSB for the quarter ended June 30, 2006).
10.19	Asset Purchase Agreement dated June 6, 2006 among LifTech, LLC, its owners and USA Petrovalve, Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-QSB for the quarter ended June 30, 2006).
10.20	Membership Interest Purchase Agreement dated October 5, 2006 between Turbeco, Inc. and the owner of a 50% interest in CAVO Drilling Motors, Ltd Co. (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-QSB for the quarter ended September 30, 2006).
10.21	Asset Purchase Agreement dated November 17, 2005 among Teal Supply Co., dba Triumph Drilling Tools, Inc., Turbeco Inc. and Michael E. Jensen.
10.22	Amended and Restated Credit Agreement Between Flotek Industries, Inc. and Wells Fargo Bank, N.A. dated January 4, 2007.
21.1	List of Subsidiaries (incorporated by reference to same numbered exhibit to Form SB-2 Registration Statement (file no. 333-129308) filed with the Commission on October 28, 2005).
23	Consent of UHY LLP.
31.1	Rule 13a-15(e) and 15(d)-15(e) Certification of Chief Executive Officer.
31.2	Rule 13a-15(e) and 15(d)-15(e) Certification of Chief Financial Officer.
32.1	Certification of Periodic Report by Chief Executive Officer.
32.2	Certification of Periodic Report by Chief Financial Officer.

59

SIGNATURES

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

FLOTEK INDUSTRIES, INC.
By:	/s/     JERRY D. DUMAS, SR.
	Jerry D. Dumas, Sr.
	Chairman and Chief Executive Officer

Date: March 16, 2007

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

Signature	Title	Date
/s/    JERRY D. DUMAS, SR.         Jerry D. Dumas, Sr.	Chairman and Chief Executive     Officer	March 16, 2007
/s/    LISA G. MEIER         Lisa G. Meier	Chief Financial Officer and Vice     President	March 16, 2007
/s/    JAMES A. JOWETT         James A. Jowett	Chief Accounting Officer	March 16, 2007
/s/    JOHN W. CHISHOLM         John W. Chisholm	Director	March 16, 2007
/s/    GARY M. PITTMAN         Gary M. Pittman	Director	March 16, 2007
/s/    BARRY E. STEWART         Barry E. Stewart	Director	March 16, 2007
/s/    RICHARD O. WILSON         Richard O. Wilson	Director	March 16, 2007
/s/    WILLIAM R. ZIEGLER         William R. Ziegler	Director	March 16, 2007

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EX-10.21

Exhibit 10.21

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT, dated as of November 17, 2006 (the “Agreement”), is by and among Turbeco, Inc., a Texas corporation (the “Buyer”), and Teal Supply Co., a Texas corporation d/b/a Triumph Drilling Tools, Inc. (the “Company”) and Michael E. Jensen (the “Shareholder”).

W I T N E S S E T H:

WHEREAS, Buyer desires to purchase from the Company, and the Company desires to sell to Buyer, substantially all of the assets of the Company; and

WHEREAS, the Shareholder owns all of the issued and outstanding stock of the Company and thus would derive a substantial benefit from the consummation of the transaction contemplated herein;

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I

THE PURCHASE

Section 1.1. Purchase. On and subject to the terms and conditions of this Agreement, at the Closing, Buyer will purchase from the Company, and the Company will sell to Buyer, the following assets, rights, properties, and interests of the Company (the “Acquired Assets”):

(a) The rental tools, equipment, computers, office supplies, vehicles, and fixtures, and other items of tangible personal property of the Company, including specifically but not limited to the items described on Schedule 1.1(a) (the “Tangible Personal Property”);

(b) The leasehold rights of the Company with respect to the real property described on Schedule 1.1(b) (the “Leased Real Estate”);

(c) The leasehold rights of the Company with respect to the items of personal property which are described on Schedule 1.1(c) (the “Leased Personal Property”);

(d) The rights of the Company under the agreements, instruments, and documents listed on Schedule 1.1(d) and all purchase orders, equipment rental agreements and sales orders entered into by the Company in the ordinary course of business subsequent to the execution of this Agreement but prior to the Effective Time (collectively, the “Assigned Agreements”);

(e) All of the files books, and records of the Company;

(f) The inventories of finished goods, tooling inventory, parts, work in progress and raw materials of the Company as of the Effective Time;

(g) The accounts receivable of the Company as of the Effective Time (the “Accounts Receivable”);

(h) The cash and other working capital of the Company as of the Effective Time; and

(i) All of the goodwill of the Company and all of the rights of the Company to use the tradename “Triumph Drilling Tools, Inc.” or any similar name (subject to the permitted use provided for in Section 5.7).

Section 1.2. Excluded Assets. Notwithstanding the foregoing, the Acquired Assets shall not include the assets listed on Schedule 1.2.

Section 1.3. Purchase Price for Acquired Assets. As consideration for the sale to it of the Acquired Assets, at Closing, Buyer shall:

(a) Pay in cash to Whitney National Bank the amount necessary to satisfy the loans from Whitney National Bank to the Company secured by the Acquired Assets thereby obtaining a release of lien on the Acquired Assets;

(b) Pay in cash to the Company an amount equal to Thirty One Million Dollars and No/100 less the amount paid to Whitney National Bank described in Section 1.3 (a) hereof;

(c) Assume from the Company liability for the accounts payable of the Company set forth on the December 31, 2006 Financial Statements; and

(d) Assume from the Company liability for the accrued liabilities, including but not limited to sales tax payable, payroll taxes (federal and state withholdings), accrued year end bonuses, and accrued insurance audit of the Company set for on the December 31, 2006 Financial Statements.

Section 1.4. Assumption of Liabilities. Except as provided for in Section 1.3, Buyer has not and will not assume from the Company any liability or obligation.

Section 1.5. Allocation. The parties will allocate for all purposes (including, but not limited to, financial accounting and tax purposes) the purchase price of the Acquired Assets as indicated on Schedule 1.5.

Section 1.6. Closing. The closing (the “Closing”) of the transactions contemplated by this Agreement (the “Transaction”) shall take place at the offices of the attorneys for Buyer in

2

Houston, Texas as promptly as practicable (but in any event within five (5) business days) following the date on which the last of the conditions set forth in Article VI is fulfilled or waived, or at such other time and place as Buyer and the Company shall agree. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” The Closing will be effective as of January 4, 2007 (the “Effective Time”). At the Closing, each of the parties hereto will perform such acts and deliver such documents as are required pursuant to the terms hereof to be delivered at Closing.

Section 1.7. Property Taxes. Any general property and/or ad valorem tax assessed against or pertaining to the Acquired Assets for the taxable period that includes the date of the Closing shall be prorated between Buyer and the Company.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to the Company and Shareholder as follows:

Section 2.1. Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Texas and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted.

Section 2.2. Authority; Non-Contravention; Approvals.

(a) Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the Transaction. This Agreement has been approved by the Board of Directors of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize the execution and delivery of this Agreement or the consummation by Buyer of the Transaction, including, without limitation, under the applicable requirements of any securities exchange. This Agreement has been duly executed and delivered by Buyer, and, assuming the due authorization, execution and delivery hereof by the Company, constitutes a valid and legally binding agreement of Buyer enforceable against it in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors’ rights generally and (ii) general equitable principles.

(b) The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the Transaction do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Buyer under any of the terms, conditions or provisions of (i) the charter or bylaws of Buyer, (ii) any

3

statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Buyer or any of its respective properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Buyer is now a party or by which Buyer or any of its respective properties or assets may be bound or affected.

(c) No declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by Buyer or the consummation by Buyer of the Transaction.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF THE COMPANY AND THE SHAREHOLDER

The Shareholder and the Company jointly and severally represent and warrant to Buyer that:

Section 3.1. Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the properties owned, leased, or operated by it or the nature of the business conducted by it makes such qualification necessary. True, accurate and complete copies of the Company’s Articles of Incorporation, as amended, and Bylaws, in each case as in effect on the date hereof, including all amendments thereto, have heretofore been delivered to Buyer.

Section 3.2. The Shareholder. The Shareholder owns all of the issued and outstanding stock of the Company.

Section 3.3. Authority; Non-Contravention; Approvals.

(a) The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the Transaction. This Agreement has been approved by the Board of Directors and the shareholders of the Company, and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or the consummation by the Company of the Transaction. This Agreement has been duly executed and delivered by the Company and the Shareholder, and, assuming the due authorization, execution and delivery hereof by Buyer, constitutes a valid and legally binding agreement of the Company and the Shareholder, enforceable against the Company and the Shareholder in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors’ rights generally and (b) general equitable principles.

4

(b) Except as set forth in the Disclosure Schedule delivered by Seller to Buyer in connection with this Agreement (the “Disclosure Schedule”), the execution and delivery of this Agreement by the Company and the Shareholder and the consummation by the Company and the Shareholder of the Transaction do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the charter or bylaws of the Company, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, or any agreement to which the Company is now a party or by which the Company or any of its respective properties or assets may be bound or affected.

Section 3.4. Financial Statements. Company has furnished Buyer with balance sheet, income statement and statement of cash flow for Company as of December 31, 2005, and Company has furnished Buyer its unaudited balance sheet and income statement for the nine month period ended September 30, 2006 (collectively, the “Financial Statements”). The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied, and are accurate and complete (except, in the unaudited statements, for the absence of footnote disclosures and for the absence of normal year-end audit adjustments which are not material in the aggregate) and fairly present the financial condition and result of operations of the Company.

Section 3.5. Absence of Undisclosed Liabilities. The Company is not subject to any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities or obligations (a) which are provided for in the Financial Statements or reflected in the notes thereto, (b) which were incurred after September 30, 2006, and were incurred in the ordinary course of business and consistent with past practices, or (c) liabilities or obligations under this Agreement.

Section 3.6. Absence of Certain Changes or Events. Except as disclosed in the Disclosure Schedule, since September 30, 2006, the business of the Company has been conducted in the ordinary course of business consistent with past practices, and there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a material adverse effect with respect to the Acquired Assets or the business of the Company.

Section 3.7. Accounts Receivable. The Accounts Receivable of the Company are valid, genuine and subsisting, arise out of bona fide sales and delivery of goods, performance of services or other business transactions in the ordinary course of business and are current and

5

collectible. Each of such Accounts Receivable will be collected in full, without any set-off and without resort to litigation, within 180 days after the Closing except for uncollectible invoices which are normally charged off as bad debt expense on the financial statements of the Company in the normal course of business activities.

Section 3.8. Inventory. The inventory reflected in the September 30, 2006 Financial Statements (the “Inventory”) consists of items that are usable and saleable in the ordinary course of business by the Company. Except as disclosed in the Disclosure Schedule, all items included in the Inventory are owned by the Company free and clear of any lien or encumbrance, and are not missing (except for sales made in the ordinary course of business since September 30, 2006) or obsolete, and are in good condition.

Section 3.9. Tangible Assets. The Tangible Personal Property and the Leased Personal Property constitute all of the tangible personal property necessary for the conduct by the Company of its business as now conducted. The Company has good and indefeasible title to the Tangible Personal Property, free and clear of all mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever. The Tangible Personal Property and Leased Personal Property are in good, serviceable condition and fit for the particular purposes for which they are used in the business of the Company, subject only to normal maintenance requirements and wear and tear reasonably expected in the ordinary course of business. Schedule 1.1(d) contains an accurate description of the rental agreements now in force with respect to the rental tools of the Company, and the location of all such rental tools.

Section 3.10. Intellectual Property. The Company does not possess, own, or use any patents, trademarks, service marks, trade names, copyrights, trade secrets and other proprietary rights and processes that are material to the business of the Company as now conducted other the trademark “Triumph Drilling Tools, Inc.”

Section 3.11. Employee Benefits. The Disclosure Schedule contains a complete list of employee benefit or welfare plans of the Company. All such plans have and are in compliance with applicable law, including but not limited to the Employee Retirement Income Security Act of 1974.

Section 3.12. Litigation. There are no claims, suits, actions, or proceedings pending or, to the Knowledge of all of the Shareholder, threatened against or relating to the Company, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. Except as described in the Disclosure Schedule, the Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. For purposes hereof, “Knowledge” means actual knowledge after reasonable inquiry

Section 3.13. No Violation of Law. The Company is not in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law) of any governmental or regulatory body or authority. No investigation or review by any governmental

6

or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. The Company has all permits (including without limitation environmental permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted (collectively, the “Company Permits”). The Company is not in violation of the terms of any Company Permits and is not required to possess any other permit, license, franchise, variance, exemption, order or other governmental authorization, consent or approval.

Section 3.14. Suppliers, Customers, and Distributors. Since January 1, 2006 there has not been (a) any material adverse change in the business relationship of the Company with any such material suppliers, customers, and distributors of the Company; or (b) any change in any material term (including credit terms) of the agreements with any such person.

Section 3.15. Labor Matters. Except as set forth in the Disclosure Schedule, (a) there are no material controversies pending or, to the Knowledge of the Company, threatened between the Company on the one hand and any of its employees on the other, (b) the Company is not a party to a collective bargaining agreement of other labor union contract applicable to persons employed by the Company, nor does the Company have any Knowledge of any activities or proceedings of any labor union to organize any such employees, (c) the Company is not a party to any written agreement, memorandum, or understanding with respect to the employment of any individual, and (d) neither the Company or the Shareholder are aware of any intention of any employee to terminate his or her employment with the Company, either as a result of the Transaction or otherwise.

Section 3.16. Material Contracts. Schedule 1.1(d) lists all agreements, leases, commitments, contracts, undertakings or understandings to which the Company is a party, including but not limited to service agreements, manufacturing agreements, purchase or sale agreements, supply agreements, distribution or distributor agreements, real estate leases, purchase orders, customer orders and equipment rental agreements (the “Listed Agreements”). Each Listed Agreement is a valid, binding and enforceable agreement of the Company and, to the Knowledge of the Shareholder, the other parties thereto. There has not occurred any breach or default under any Listed Agreement on the part of the Company or, to the Knowledge of all of the Shareholder, any other parties thereto. No event has occurred which with the giving of notice or the lapse of time, or both, would constitute a default under any Listed Agreement on the part of the Company, or, to the Knowledge of all of the Shareholder, any of the other parties thereto. There is no dispute between the parties to any Listed Agreement as to the interpretation thereof or as to whether any party is in breach or default thereunder, and no party to any Listed Agreement has indicated its intention to, or suggested it may evaluate whether to, terminate any Listed Agreement.

Section 3.17. Disclosure. No representation or warranty of the Company or Shareholder set forth hereunder or in the schedules attached hereto or in any certificate delivered pursuant to Section 6.3(a) contains any untrue statement of the material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

7

ARTICLE IV

CONDUCT OF BUSINESS PENDING THE CLOSING

Section 4.1. Conduct of Business of the Company. Prior to the Closing, the Company shall operate its business in, and only in, the usual, regular and ordinary course of business in substantially the same manner as operated on the date of this Agreement. Specifically, but not by way of limitation, except as described in the Disclosure Schedule, the Company shall not make any distribution to the Shareholder, pay any bonus to any of its employees, or increase the compensation of any of its employees. The Shareholder will assure that the Company complies with the requirements of this Section.

Section 4.2. Business Organization. Prior to the Closing, the Company and Shareholder shall use their best efforts to (a) preserve intact the business organization of the Company, (b) keep available the services of the officers and employees of the Company, (c) preserve the good will of the Company, (d) maintain and keep the properties and assets of the Company in as good a repair and condition as presently exists, and (e) maintain in full force and effect its insurance coverage of the Company.

ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.1. Cooperation. The Company and the Shareholder shall afford to Buyer and its accountants, counsel, financial advisors and other representatives reasonable access during normal business hours throughout the period prior to and including the Closing to all of the properties, books, and records of the Company (including, but not limited to, tax returns and any and all records or documents which are within the possession of governmental or regulatory authorities, agencies or bodies, and the disclosure of which the Company or the Shareholder can facilitate or control) and, such parties as its representatives may reasonably request. The Company and the Shareholder shall cause to be completed prior to Closing such audits, appraisals, and studies of the Company and the Acquired Assets as shall be reasonably required by Buyer. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company or with the performance of any of the employees of the Company. No investigation pursuant to this Section shall affect any representation or warranty made by any party.

Section 5.2. Further Assurances. The Company and the Shareholder shall execute, acknowledge and deliver or cause to be executed, acknowledged and delivered to Buyer such assignments or other instruments of transfer, assignment and conveyance, in form and substance satisfactory to counsel of Buyer, as shall be necessary to vest in Buyer all of the right, title and interest in and to the Acquired Assets, free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests, and any other document reasonably requested by Buyer in connection with this Agreement.

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Section 5.3. Expenses and Fees. Subject to Section 8.3, all costs and expenses incurred in connection with this Agreement and the Transaction shall be paid by the party incurring such expenses.

Section 5.4. Employee Matters.

(a) Effective immediately following the Closing, Buyer shall offer employment to substantially all of the employees of the Company, terminable at will. In order to facilitate the foregoing, the Company shall, effective immediately following the Closing, terminate the employment of all employees of the Company and take all appropriate steps necessary to comply with applicable law in connection with the termination of such employees.

(b) Notwithstanding anything to the contrary contained in this Section, the parties acknowledge and agree that they do not intend to create any third-party beneficiary rights respecting any employee of the Company as a result of the provisions hereof and specifically hereby negate any intention to so create any third-party beneficiary right.

ARTICLE VI

CONDITIONS TO CLOSING

Section 6.1. Conditions to Obligation of the Shareholder and the Company to Effect the Transaction. Unless waived by the Company, the obligation of the Shareholder and the Company to effect the Transaction shall be subject to the fulfillment on or prior to the Closing Date of the following additional condition:

(a) Buyer shall have performed in all material respects (or in all respects in the case of any agreement containing any materiality qualification) its agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date, and the Company and Shareholder shall have received a certificate executed on behalf of Buyer by the President or a Vice President of Buyer to that effect.

Section 6.2. Conditions to Obligations of Buyer to Effect the Transaction. Unless waived by Buyer, the obligations of Buyer to effect the Transaction shall be subject to the fulfillment on or prior to the Closing Date of the following additional conditions:

(a) The Company and the Shareholder shall have performed in all material respects (or in all respects in the case of any agreement containing any materiality qualification) their agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of the Company and the Shareholder contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date;

9

(b) since September 30, 2006, there shall have been no changes that constitute, and no event or events shall have occurred which have resulted in or constitute, a material adverse effect or change with respect to any of the Acquired Assets or the business or results of operation of the Company; and

(c) The Company and the Shareholder shall have entered into agreements not to compete in the form attached hereto as Exhibit 6.2(c).

ARTICLE VII

INDEMNIFICATION

Section 7.1. Indemnification of Buyer. The Shareholder agrees to jointly and severally indemnify Buyer and its officers, directors, employees and agents against, and hold each of them harmless from and against, any and all claims, actions, causes of action, arbitrations, proceedings, losses, damages, liabilities, judgments and expenses (including, without limitation, reasonable attorneys’ fees) (“Indemnified Amounts”) incurred by the indemnified party as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of the Company or the Shareholder in this Agreement, (b) any violation or breach by the Company or the Shareholder of or default by the Company or the Shareholder under the terms of this Agreement, or (c) relating to or arising from the operation of the Company prior to the Effective Time, or the operation, ownership or use of the Acquired Assets prior to the Effective Time, other than the Assumed Liabilities. The indemnified party shall be entitled to recover its reasonable and necessary attorneys’ fees and litigation expenses incurred in connection with the successful enforcement of its rights under this Section.

Section 7.2. Indemnification of Shareholder and the Company. Buyer agrees to indemnify the Shareholder and Company against, and hold each of them harmless from and against, any and all Indemnified Amounts incurred by the Shareholder or the Company as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of Buyer in this Agreement, (b) any violation or breach by Buyer of or default by Buyer under the terms of this Agreement or (c) relating to or arising from the operation, ownership or use of the Acquired Assets subsequent to the Effective Time. The Shareholder and the Company shall be entitled to recover their reasonable and necessary attorney’s fees and litigation expenses incurred in connection with the successful enforcement of their rights under this Section.

Section 7.3. Procedure. The defense of any claim, action, suit, proceeding or investigation subject to indemnification under this Article VII shall be conducted by the indemnifying party. If the indemnifying party fails to conduct such defense, the indemnified parties may retain counsel satisfactory to them and the indemnifying party shall pay all reasonable fees and expenses of such counsel for the indemnified parties promptly as statements therefor are received. The party not conducting the defense will use reasonable efforts to assist in the vigorous defense of any such matter, provided that such party shall not be liable for any

10

settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any indemnified party wishing to claim indemnification under this Article VII, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the indemnifying party (but the failure so to notify a party shall not relieve such party from any liability which it may have under this Article VII except to the extent such failure materially prejudices such party). If the indemnifying party is responsible for the attorneys’ fees of the indemnified parties, then the indemnified parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more indemnified parties.

Section 7.4. Express Negligence Rule. The indemnification obligations under this Article VII shall apply regardless of whether any suit or action results solely or in part from the active, passive or concurrent negligence of the indemnified party. The rights of the parties to indemnification under this Article VII shall not be limited due to any investigations heretofore or hereafter made by such parties or their representatives, regardless of negligence in the conduct of any such investigations.

ARTICLE VIII

MISCELLANEOUS

Section 8.1. Termination. This Agreement may be terminated at any time prior to the Closing, as follows:

(a) The Company shall have the right to terminate this Agreement:

(i) if the representations and warranties of Buyer shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of the subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 30 days after written notice of such failure is given to Buyer by the Company;

(ii) if the Transaction is not completed by January 31, 2007 (provided that the right to terminate this Agreement under this Section 8.1(a)(ii) shall not be available to the Company if the failure of the Company to fulfill any obligation to Buyer under or in connection with this Agreement has been the cause of or resulted in the failure of the Transaction to occur on or before such date);

(iii) if Buyer (A) fails to perform in any material respects any of its covenants (or in all respects in the case of any covenant containing any materiality qualification) in this Agreement and (B) does not cure such default in all material respects (or in all respects in the case of any covenant containing any materiality qualification) within 30 days after written notice of such default is given to Buyer by the Company.

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(b) Buyer shall have the right to terminate this Agreement:

(i) if the representations and warranties of the Shareholder shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of such subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 30 days after written notice of such failure is given to the Company by Buyer;

(ii) if the Transaction is not completed by January 31, 2007 (provided that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to Buyer if the failure of Buyer to fulfill any obligation to the Company under or in connection with this Agreement has been the cause of or resulted in the failure of the Transaction to occur on or before such date); or

(iii) if the Company (A) fails to perform in any material respect (or in all respects in the case of any covenant containing any materiality qualification) any of its covenants in this Agreement and (B) does not cure such default in all material respects (or in all respects in the case of any covenant containing any materiality qualification) within 30 days after notice of such default is given to the Company by Buyer.

Section 8.2. Effect of Termination. In the event of termination of this Agreement by either Buyer or the Company pursuant to the provisions of Section 8.1, this Agreement shall forthwith become void and there shall be no further obligations on the part of the Company or Buyer or their respective officers or directors, or the Shareholder (except as set forth in this Section 8.2 and in Sections 5.3, 8.9 and 8.10, all of which shall survive the termination). Nothing in this Section 8.2 shall relieve any party from liability for any breach of this Agreement.

Section 8.3. Remedies. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding in addition to any other relief to which it or he may be entitled at law or equity.

Section 8.4. Notices. All notices, consents, demands or other communications required or permitted to be given pursuant to this Agreement shall be deemed sufficiently given: (i) when delivered personally during a business day to the appropriate location described below or telefaxed to the telefax number indicated below, or (ii) five (5) business days after the posting thereof by United States first class, registered or certified mail, return receipt requested, with postage fee prepaid and addressed:

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If to Buyer:	7030 Empire Central Drive
	Houston, Texas 77040
	Telefax No. (713) 466-8386
With a copy to:	Casey W. Doherty
	Doherty & Doherty LLP
	1717 St. James Place, Suite 520
	Houston, Texas 77056
	Telefax No. (713) 572-1001
If to the Company or the Shareholder:	720 Cantwell Lane
	Corpus Christi, Texas 78408
	Telefax No. (361) 853-2278
With a copy to:	Scott J. Duncan
	Porter, Rogers, Dahlman & Gordon PC
	800 N. Shoreline, Suite 800S
	Corpus Christi, Texas 78401
	Telefax No. (361) 880-5844

Section 8.5. Successors. This Agreement shall be binding upon each of the parties upon their execution, and inure to the benefit of the parties hereto and their successors and assigns.

Section 8.6. Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement or any such other instrument.

Section 8.7. Section Headings. The section headings used herein are descriptive only and shall have no legal force or effect whatsoever. Except to the extent the context specifically indicates otherwise, all references to articles and sections refer to articles and sections of this Agreement, and all references to the exhibits and schedules refer to exhibits and schedules attached hereto, each of which is made a part hereof for all purposes.

Section 8.8. Gender. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural and conversely.

Section 8.9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, U.S.A., applicable to agreements and contracts executed and to be wholly performed there, without giving effect to the conflicts of law principles thereof.

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Section 8.10. Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original.

Section 8.11. Waiver. Any waiver by either party to be enforceable must be in writing and no waiver by either party shall constitute a continuing waiver.

Section 8.12. Entire Agreement. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first set forth above.

COMPANY:
Teal Supply Co., a Texas corporation; dba Triumph Drilling Tools, Inc.
By:	/s/ Michael E. Jensen
	Michael E. Jensen, President
BUYER:
TURBECO, INC a Texas Corporation
By:	/s/ Jerry D. Dumas, Sr.
	Jerry D. Dumas, Sr. President
SHAREHOLDER:
	/s/ Michael E. Jensen
	Michael E. Jensen

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EX-10.22

Exhibit 10.22

AMENDED AND RESTATED CREDIT AGREEMENT

BETWEEN

FLOTEK INDUSTRIES, INC.

AND

WELLS FARGO BANK, N.A.

Dated as of January 4, 2007

TABLE OF CONTENTS

ARTICLE I DEFINITIONS AND ACCOUNTING TERMS		1
SECTION 1.01	Certain Defined Terms	1
SECTION 1.02	Accounting Terms	13
SECTION 1.03	Interpretation	13
ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES		14
SECTION 2.01	The Advances	14
SECTION 2.02	Making the Advances	15
SECTION 2.03	Reduction and Changes in the Commitment	16
ARTICLE III NOTES, INTEREST AND PAYMENT		16
SECTION 3.01	The Notes	16
SECTION 3.02	Interest Elections	17
SECTION 3.03	Interest	18
SECTION 3.04	Principal Payments	19
SECTION 3.05	Voluntary Prepayments	19
SECTION 3.06	Mandatory Prepayments	19
SECTION 3.07	Fees	20
SECTION 3.08	Payments and Computations	20
SECTION 3.09	The Borrower Unconditionally Liable	21
SECTION 3.10	Reserve Requirements; Change in Circumstances	21
SECTION 3.11	Indemnity	22
ARTICLE IV LETTERS OF CREDIT		23
SECTION 4.01	General	23
SECTION 4.02	Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions	23
SECTION 4.03	Expiration Date	24
SECTION 4.04	Reimbursement	24
SECTION 4.05	Obligations Absolute	24
SECTION 4.06	Disbursement Procedures	25
SECTION 4.07	Interim Interest	25
SECTION 4.08	Cash Collateralization	25
ARTICLE V CONDITIONS OF LENDING		26
SECTION 5.01	Condition Precedent to Initial Credit Extension	26
SECTION 5.02	Conditions Precedent to All Advances	27
ARTICLE VI REPRESENTATIONS AND WARRANTIES		28
SECTION 6.01	Organization, Standing and Qualification	28
SECTION 6.02	Authority	28
SECTION 6.03	Financial Condition	28
SECTION 6.04	Litigation	28

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SECTION 6.05	Regulation U	29
SECTION 6.06	Compliance with Law	29
SECTION 6.07	Other Instruments	29
SECTION 6.08	Title to Properties	29
SECTION 6.09	Taxes	29
SECTION 6.10	Environmental Compliance	29
SECTION 6.11	No Default	30
SECTION 6.12	Subsidiaries	30
SECTION 6.13	ERISA	30
SECTION 6.14	Acceptable Security Interest	31
ARTICLE VII AFFIRMATIVE COVENANTS		31
SECTION 7.01	Compliance with Laws, Etc	31
SECTION 7.02	Reporting Requirements	32
SECTION 7.03	Visitation Rights	33
SECTION 7.04	Maintenance of Insurance	33
SECTION 7.05	Maintenance of Properties, Etc	33
SECTION 7.06	Keeping of Records and Books of Account	33
SECTION 7.07	Preservation of Existence, Etc	33
SECTION 7.08	Notification of Adverse Events	33
SECTION 7.09	ERISA Compliance	33
SECTION 7.10	Additional Security	34
SECTION 7.11	Borrowing Base Audits	34
SECTION 7.12	Treasury Management Services	35
SECTION 7.13	Use of Proceeds	35
ARTICLE VIII NEGATIVE COVENANTS		35
SECTION 8.01	Liens	35
SECTION 8.02	Indebtedness	35
SECTION 8.03	Change in Nature of Business	35
SECTION 8.04	Transactions with Affiliates	35
SECTION 8.05	Investments	36
SECTION 8.06	Distributions	36
SECTION 8.07	Subordinated Debt	36
SECTION 8.08	Leverage Ratio	36
SECTION 8.09	Fixed Charge Coverage Ratio	36
SECTION 8.10	Consolidated Net Income	36
SECTION 8.11	Prohibition of Fundamental Changes	36
SECTION 8.12	Asset Sales	37
SECTION 8.13	Capital Expenditures	37
SECTION 8.14	Restrictions on CAVO	37
ARTICLE IX EVENTS OF DEFAULT AND REMEDIES		37
SECTION 9.01	Events of Default	37
ARTICLE X MISCELLANEOUS		40
SECTION 10.01	Amendments, Etc	40

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SECTION 10.02	Notices, Etc	40
SECTION 10.03	No Waiver; Remedies	40
SECTION 10.04	Costs, Expenses and Taxes	40
SECTION 10.05	Right of Set-off	40
SECTION 10.06	Interest	41
SECTION 10.07	Indemnification	41
SECTION 10.08	Binding Effect	42
SECTION 10.09	Governing Law	42
SECTION 10.10	Execution in Counterparts	42
SECTION 10.11	Assignment	42
SECTION 10.12	Separability	42
SECTION 10.13	Limitation by Law	42
SECTION 10.14	Waiver of DTPA Actions	43
SECTION 10.15	Agreement for Binding Arbitration	43
SECTION 10.16	Final Agreement of the Parties	44
Exhibits
Exhibit A	Compliance Certificate
Exhibit B	Working Capital Loan Borrowing Base Certificate
Exhibit C	Form of Request for Advance
Exhibit D	Form of Joinder Agreement
Schedules
Schedule 1.01	Real Property
Schedule 6.12	Subsidiaries
Schedule 8.02	Existing Indebtedness
Schedule 8.08	Existing Investments

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AMENDED AND RESTATED CREDIT AGREEMENT

This Amended and Restated Credit Agreement dated as of January 4, 2007, is between FLOTEK INDUSTRIES, INC., a Delaware corporation (the “Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association (the “Bank”).

A. The Borrower and the Bank are parties to the Credit Agreement (as the same has been amended, supplemented and modified, the “Existing Credit Agreement”) dated as of February 11, 2005 (the “Original Effective Date”).

B. The Borrower has requested that the Existing Credit Agreement be amended and restated in its entirety as more fully set forth herein.

C. The Bank is willing to so amend and restate the Existing Credit Agreement on the terms and subject to the conditions set forth in this Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereby agree as follows:

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms have the following meanings:

“Acceptable Security Interest” means with respect to any Property, a Lien that (i) exists in favor of the Bank, (ii) is superior to all other Liens (except Permitted Liens), (iii) secures the Obligations, and (iv) is perfected and enforceable against all Persons.

“Accounts Receivable” has the same meaning as the term “Accounts” as defined in the Security Agreement to the extent there exists an Acceptable Security Interest on same.

“Acquisition Documents” means the CAVO Acquisition Documents and the Teal Acquisition Documents.

“Acquisitions” means the CAVO Acquisition and the Teal Acquisition.

“Adjusted LIBO Rate” means, with respect to any Eurodollar Advance for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

“Advance” means an advance by the Bank to the Borrower pursuant to Article II.

“Advance Date” means, with respect to each Advance, the Business Day upon which the proceeds of such Advance are to be made available to the Borrower.

Schedule 8.08.1

“Advance Request” means a request by the Borrower for an Advance in accordance with Section 2.02.

“Affiliate” of any Person means any other Person directly or indirectly controlled by, controlling or under common control with such Person, and also includes all general partners in such Person. A Person shall be deemed to control an entity if such Person (i) possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise or (ii) owns directly or indirectly 10% or more of the outstanding Equity Interests of such Person.

“Agreement” means this Credit Agreement, as the same may be amended, supplemented, restated or modified from time to time.

“Alternate Base Rate” means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus  ¹/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

“Bank” has the meaning specified in the introduction to this Agreement.

“Base Rate”, when used in reference to any Advance, refers to whether such Advance bears interest at a rate determined by reference to the Alternate Base Rate.

“Borrower” has the meaning specified in the introduction to this Agreement.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City and Houston, Texas are authorized or required by Law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank eurodollar market.

“Capital Expenditures” means expenditures for plant, property and equipment less the sum of (i) any such expenditures incurred with the proceeds of Indebtedness plus (ii) any reimbursement from customers of “lost in-hole” rental tools.

“CAVO” means Cavo Drilling Motors, Ltd. Co., a Texas limited liability company.

“CAVO Acquisition” means the purchase by the Borrower of a 50% Equity Interest in Cavo Drilling Motors from Preston Phenes pursuant to the terms and conditions of the CAVO Acquisition Documents.

“CAVO Acquisition Documents” means (i) the Membership Interest Purchase Agreement dated as of October 5, 2006, between Preston Phenes and Turbeco, Inc. and (ii) all assignments, agreements and other documents executed and delivered in connection therewith.

“CAVO Regulations” means the letter agreement between B.L. Perez and Turbeco, Inc. setting forth certain matters relating to the operations of CAVO.

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“Change of Control” means (i) any Person or “group” of Persons (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) shall have (A) acquired, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities representing 50% or more of the combined voting power of all outstanding voting securities of the Borrower or (B) obtained the power (whether or not exercised) to elect a majority of the Borrower’s directors or (ii) a majority of the members of the Board of Directors of the Borrower shall not be Continuing Directors.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” has the meaning set forth in the Security Agreement.

“Commitments” means the obligations of the Bank under the terms and conditions set forth in the Loan Documents to make Advances under the Equipment Loan Commitment and the Working Capital Commitment.

“Compliance Certificate” means, as of any date, a certification of the chief financial officer of the Borrower demonstrating compliance by the Borrower and its Subsidiaries with the provisions of Section 8.01 through Section 8.12 and substantially in the form of Exhibit A.

“Consolidated Net Income” means, for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries for such period determined in accordance with GAAP; provided, however, that there shall be excluded:

(i) the income (or loss) of any Person (other than a Subsidiary) in which any Credit Party has an ownership interest, except to the extent that any such income has been actually received by such Credit Party in the form of cash dividends or similar cash distributions,

(ii) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period,

(iii) any aggregate net gain (but not any aggregate net loss) during such period arising from the sale, conversion, exchange or other disposition of capital assets,

(iv) any gains resulting from the write-up of assets (but not any loss resulting from any write-down of assets), and

(v) any net income or gain (but not any loss) during such period from (A) any change in accounting principles in accordance with GAAP, (B) any prior period adjustments resulting from any change in accounting principles in accordance with GAAP, (C) any extraordinary items or (D) any discontinued operations or the disposition thereof.

“Continuing Directors” means the directors of the Borrower on the date hereof and each other director if such director’s nomination for election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors.

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“Credit Extension” means, at the date of such determination, the aggregate amount of all outstanding Advances.

“Credit Parties” means the Borrower and the Guarantors.

“Current Maturities” as of any date means the Indebtedness scheduled to be paid during the twelve month period beginning on such date.

“Deed of Trust” means each mortgage, deed of trust, security agreement, fixture financing statement and assignment of rent executed by the applicable Credit Party to the Bank or the trustee named therein granting Liens on the tracts of real property owned or leased by such Credit Party located in the counties and states shown on Schedule 1.1 or as otherwise required by Section 7.10(b).

“Default” means an Event of Default or any event or condition that, with notice or lapse of time or both would, unless cured or waived, become an Event of Default.

“Dollars” and the sign “$” mean lawful money of the United States of America.

“Domestic Subsidiary” means any Subsidiary of the Borrower organized under the laws of the United States, any state thereof, the District of Columbia or Puerto Rico.

“EBITDA” means, with respect to any period, the sum of (i) the Borrower’s Consolidated Net Income for such period plus (ii) to the extent deducted in determining the Borrower’s Consolidated Net Income, interest expense, taxes, depreciation, amortization and other non-cash charges for such period; provided, however, that EBITDA shall be subject to pro forma adjustments approved by the Bank for acquisitions and dispositions of lines of businesses.

“Effective Date” means the date on which the conditions set forth in Section 5.01 are satisfied.

“Eligible Accounts Receivable” means, as to the Borrower and its Subsidiaries on a consolidated basis at any time of determination, all Accounts Receivable of such Persons, each of which meets all of the following criteria on the date of any determination:

(a) the payment of such Account Receivable is not more than 90 days past the invoice date;

(b) such Account Receivable was created in the ordinary course of business of the Borrower or any Subsidiary;

(c) such Account Receivable represents a legal, valid and binding payment obligation of the account debtor enforceable in accordance with its terms and arises from an enforceable contract, the performance of which, insofar as it relates to such Account Receivable, has been completed by the Borrower or such Subsidiary;

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(d) the Borrower or such Subsidiary has good and indefeasible title to such Account Receivable, and the Bank holds an Acceptable Security Interest in such Account Receivable;

(e) such Account Receivable is not evidenced by a promissory note, chattel paper or other instrument that is not in the actual possession of the Borrower;

(f) such Account Receivable is not subject to any set-off, counterclaim, defense, allowance or adjustment and there has been no dispute, objection or complaint by the account debtor concerning its liability for such Account Receivable, and the Inventory, the sale of which gave rise to such Account Receivable, has not been returned, rejected, lost or damaged;

(g) the account debtor with respect to such Account Receivable is domiciled in and organized under the laws of the United States and such Account Receivable is denominated in dollars;

(h) such Account Receivable, together with all other Accounts Receivable due from the same account debtor, does not comprise more than 25% of the aggregate Eligible Accounts Receivable;

(i) such Account Receivable is not due from the United States government, any state or municipal government or any agency of any of same;

(j) unless otherwise approved by the Bank, such Account Receivable is not due from an account debtor that (i) has at any time more than 20% of its aggregate Accounts Receivable owed to the Borrower more than 90 days past due, (ii) is the subject of a proceeding under the United States Bankruptcy Code or any similar proceeding or (iii) the Bank has notified the Borrower does not have a satisfactory credit standing (as determined in the sole discretion of the Bank);

(k) such Account Receivable is not due from any Affiliate of a Credit Party;

(l) such Account Receivable is not the result of a credit balance relating to an Account Receivable more than 90 days past the invoice date; and

(m) such Account Receivable does not relate to work-in-progress or finance or service charges.

“Eligible Inventory” means inventories of products located in the United States that are not in transit, work in progress, damaged, defective, obsolete, unmerchantable and/or aged more than one year. In addition to the above, Inventory will be deemed Eligible by the Bank subject to inventory test counts conducted during initial and subsequent working capital collateral audits.

“Environmental Laws” means any laws, statutes, regulations, rules, orders or determinations of any governmental authority pertaining to health or the environment in effect in any and all jurisdictions in which the Borrower and its Subsidiaries are or at any time have done business or where the Property of the Borrower or any Subsidiary of the Borrower is located,

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including the Clean Air Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Federal Water Pollution Control Act; the Resource Conservation and Recovery Act; the Safe Drinking Water Act; the Superfund Amendments and Reauthorization Act of 1986; the Toxic Substances Control Act; the Occupational Safety and Health Act; the Federal Insecticide, Fungicide and Rodenticide Act and other environmental conservation and environmental protection laws.

“Equipment” means equipment that is the subject of the appraisal described in Section 5.01(h) and similar equipment acquired by the Borrower or any Subsidiary after the date hereof.

“Equipment Loan” has the meaning specified in Section 2.01(b).

“Equipment Loan Commitment” means the Bank’s Commitment to make Advances in the aggregate amount of $35,000,000.

“Equipment Note” means a promissory note payable to the order of the Bank evidencing the Equipment Loan, together with all modifications, extensions, renewals and rearrangements thereof.

“Equity Interests” means (i) any capital stock, partnership, joint venture, member or limited liability or unlimited liability interest, beneficial interest in a trust or similar entity, or other equity interest in another Person of whatever nature, and (ii) any warrants, options or other rights to acquire such stock or interests.

“ERISA” means the Employee Retirement Income Security Act of 1974 and the regulations promulgated and rulings issued thereunder.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of withdrawal liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

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“Eurodollar”, when used in reference to any Advance, refers to whether such Advance bears interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” means the occurrence of any one or more of the events referred to in Section 9.1 hereof.

“Excess Cash Flow” means, with respect to any fiscal year of the Borrower, an amount equal to (a) the Borrower’s EBITDA for such fiscal year minus (b) without duplication, the sum of (i) taxes actually paid by the Borrower and its Subsidiaries during such fiscal year, (ii) Capital Expenditures of the Borrower and its Subsidiaries actually paid during such fiscal year, (iii) the consolidated interest expense of the Borrower and its Subsidiaries actually paid during such fiscal year, and (iv) scheduled principal payments of Indebtedness of the Borrower and its Subsidiaries during such fiscal year.

“Existing Letters of Credit” means the Letters of Credit (as such term is defined under the Existing Credit Agreement) outstanding as of the Effective Date under the Existing Credit Agreement.

“Final Payment Date” means the date on which all Advances, interest, fees and other amounts payable under any Loan Document (other than obligations for taxes, costs, indemnifications, reimbursements and similar amounts for which no claim or demand for payment has been made) have been paid, the Commitments have terminated and all outstanding Letters of Credit have expired or been terminated.

“Fixed Charge Coverage Ratio” means, at any date of determination, the ratio of (i) EBITDA for the 12 month period ending on such date to (ii) Fixed Charges for such period.

“Fixed Charges” means, with respect to any period, the sum of (i) interest expense, (ii) Current Maturities of Indebtedness, (iii) taxes paid in cash and (iv) Maintenance Capital Expenditures, in each case for such period.

“GAAP” means generally accepted accounting principles as in effect from time to time as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of American Institute of Certified Public Accounting, the Financial Accounting Standards Board and such other Persons who shall be approved by a significant segment of the accounting profession.

“Guarantor” means (i) subject to the release of any of the following as a Guarantor in accordance with the terms of this Agreement, each Subsidiary of the Company listed on Schedule 6.12 that it is a Domestic Subsidiary and (ii) each other Subsidiary of the Borrower that executes a Joinder Agreement in accordance with Section 7.10.

“Guaranty” means the Guaranty dated as of February 11, 2005, executed and delivered by the Subsidiaries of the Borrower party thereto in favor of the Bank.

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“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous materials, substances, or wastes, or flammable, explosive or radioactive materials, or material otherwise regulated under any Environmental Law.

“Hedging Arrangement” means a hedge, call, swap, collar, floor, cap, option, forward sale or purchase or other contract or similar arrangement (including any obligations to purchase or sell any security at a future date for a specific price) that is entered into to reduce or eliminate or otherwise protect against the risk of fluctuations in interest rates, foreign exchange rates or commodity prices.

“Highest Lawful Rate” means at any date the maximum nonusurious interest rate that may under applicable law then be contracted for, charged, received, taken, charged, collected or reserved by the Bank or the Notes or the Obligations.

“Indebtedness” means, for any Person, (i) indebtedness for borrowed money of such Person, (ii) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations of such Person to pay the deferred purchase price of property or services, other than trade payables incurred in the ordinary course of business and not more than 120 days past due, (iv) obligations of such Person as lessee under leases that are or should be, in accordance with GAAP, recorded as capital leases, (v) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, Indebtedness or obligations of others, (vi) all Indebtedness (as defined in the other clauses of this definition) of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a Lien on any Property of such Person, whether or not such Indebtedness is assumed by such Person, and (vii) any Debt of a partnership for which such Person is liable either by agreement or by operation of law but only to the extent of such liability.

“Interest Election Request” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 3.02.

“Interest Payment Date” means (a) with respect to any Base Rate Advance, the last day of each calendar month, and (b) with respect to any Eurodollar Advance, the last day of the Interest Period applicable to such Advance and, in the case of a Eurodollar Advance with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

“Interest Period” means with respect to any Eurodollar Advance, the period commencing on the date of such Advance and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (ii) any Interest Period pertaining to a Eurodollar Advance that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

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“Inventory” has the meaning of such term as defined in the Security Agreement to the extent that there exists an Acceptable Security Interest on same.

“Investment” means any investment so classified under GAAP made by stock purchase, capital contribution, loan or advance or by purchase of property or otherwise, but in any event shall include as an investment in any Person that amount of all Indebtedness owed by such Person and all accounts receivable from such Person that are not current assets and did not arise from services rendered or sales to such Person in the ordinary course of business.

“Joinder Agreement” means a Joinder Agreement in the form of Exhibit D or such other form as the Bank shall approve executed by any new Domestic Subsidiary making such Subsidiary a Guarantor and a party to the Security Agreement.

“LC Disbursement” means a payment made by the Bank pursuant to a Letter of Credit.

“LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower or converted into an Advance pursuant to Section 4.04 at such time.

“Letter of Credit” means any letter of credit issued pursuant to this Agreement.

“Leverage Ratio” means, as of any date of determination, the ratio of (a) Indebtedness of the Borrower at such date less any Indebtedness of CAVO guaranteed by the Borrower to (b) EBITDA for the 12 month period ending on such date.

“LIBO Rate” means, with respect to any Eurodollar Advance for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Bank from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Advance for such Interest Period shall be the rate at which dollar deposits of $1,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Bank in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

“Lien” means with respect to any asset (i) any mortgage, lien, pledge, charge, security interest or encumbrance or any other type of preferential arrangement of any kind in respect of such asset, whether arising by contract, operation of law or otherwise, or (ii) the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.

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“Loan Documents” means this Agreement, the Notes, the Guaranty, the Security Agreement, the Deeds of Trust and any other documents executed by any Person in connection with, as evidence of or as security for, the obligations of any Person hereunder.

“Maintenance Capital Expenditures” means an amount equal to $2,000,000 for each 12 month period.

“Material Adverse Effect” means a material adverse effect (a) on the business, condition (financial or otherwise), results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole; (b) on the legality, validity or enforceability of any Loan Document; (c) on any Credit Party’s ability to perform its obligations under any Loan Document; or (d) the rights and remedies of or benefits available to the Bank under any Loan Document.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Net Proceeds” means with respect to any disposition of assets by the Borrower or any Subsidiary, an amount equal to the gross proceeds in cash (including cash equivalents and any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Disposition, net of attorneys’ fees, accountants’ fees, brokerage, consultant fees, underwriting commissions and other fees and expenses actually incurred in connection with such Disposition and reserves for taxes and other liabilities established in connection with such disposition.

“Obligations” means (a) all principal, interest (including post-petition interest), fees, reimbursements, indemnifications, and other amounts now or hereafter owed by any of the Credit Parties to the Bank under the Loan Documents and any increases, extensions, and rearrangements of those obligations under any amendments, supplements, and other modifications of the documents and agreements creating those obligations and (b) all obligations of any Credit Party owing to the Bank or an Affiliate of the Bank under any Hedging Arrangements that are permitted by the terms hereof.

“Other Instruments” means as to any Person the certificate or articles of incorporation, bylaws, or partnership agreement of such Person and all agreements, loan or credit agreements (other than the Loan Documents), instruments, documents, judgments, orders, writs, injunctions, decrees, determinations, awards, ordinances, laws, rules, statutes, regulations, rulings, franchises, permits or the like to which such Person is a party or by which such Person or any assets of such person may be bound or affected.

“PBGC” means the Pension Benefit Guaranty Corporation and any successor to all or any of its functions under ERISA.

“Permits” means any and all registrations, notifications, licenses, authorizations, permits, certificates, approvals and consents required by any governmental agency or authority.

“Permitted Investments” means (a) readily marketable direct obligations of the United States of America, (b) certificates of time deposit with the Bank, (c) demand deposits with the

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Bank, (d) securities issued or guaranteed by an agency of the government of the United States of America or repurchase agreements collateralized by such securities, (e) prime commercial paper with a credit rating of A-1 or better as published by Standard & Poor’s Ratings Group in its most recent applicable rating publication or a rating of P-1 or better as published by Moody’s Investors Service, Inc. in its most recent applicable rating publication and (f) commercial paper of the Bank.

“Permitted Liens” means (i) Liens granted to the Bank to secure the Obligations, (ii) Liens for taxes, assessments or other governmental charges which are not yet due or which are being actively contested in good faith by appropriate proceedings diligently conducted, (iii) Liens securing Indebtedness permitted pursuant to Section 8.02(c) but only on the Property acquired and improvements and accessions thereto and (iv) Landlord’s, materialmen’s, mechanics’, carriers’, workmen’s, warehouseman’s and repairmen’s liens, and other similar liens imposed by Law arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days or are being contested in good faith by appropriate procedures or proceedings and for which adequate reserves have been established.

“Person” (whether or not capitalized) means an individual, corporation, limited liability company, partnership, joint venture, trust, association, unincorporated organization, receiver, custodian or similar official or any other juridical entity, or a government or any agency or political subdivision thereof.

“Plan” has the meaning set forth in Section 6.13.

“Prime Rate” means a fluctuating interest rate per annum (computed on the basis of a year of 365 (or 366) days for the actual number of days elapsed, including the first day but excluding the last day) as shall be in effect from time to time, which rate per annum shall at all times be equal to the rate of interest announced publicly by the Bank from time to time as the Bank’s prime commercial rate, each change in such fluctuating interest rate to take effect simultaneously with the corresponding change in the Bank’s prime commercial rate. The Prime Rate may not represent the lowest or best rate actually charged to customers of the Bank.

“Pro Forma Fixed Charge Coverage Ratio” means, at any time, the ratio of (i) EBITDA for the 12 month period most recently ended prior to such time for which financial statements are available to (ii) the sum of Fixed Charges for such period plus the payments of principal of the Subordinated Debt from the last day of such 12 month period through such time.

“Property” of any Person means any and all property or assets (real, personal or mixed, tangible or intangible) of such Person.

“Real Estate Loan” has the meaning specified in Section 2.01(c).

“Real Estate Notes” means the promissory notes payable to the order of the Bank evidencing the Real Estate Loan, together with all modifications, extensions, renewals and rearrangements thereof, delivered to the Bank prior to the Effective Date.

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“Real Property” means the real property described on Schedule 1.01 and any additional real property that is subject to the Lien of any Deed of Trust delivered after the date hereof pursuant to Section 7.10(b).

“Request for Advance” has the meaning specified in Section 2.02.

“Restricted Payment” means (a) any payment, dividend or other distribution, direct or indirect, in respect of any Equity Interest in the Borrower or any Subsidiary, except a distribution payable solely in additional Equity Interests in the Borrower, and (b) any payment, direct or indirect, on account of the redemption, retirement, purchase or other acquisition of any Equity Interest in the Borrower or any Subsidiary.

“Security Agreement” means the Security Agreement dated as of February 11, 2005, granting to the Bank a Lien on certain of the assets of the Credit Parties.

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Bank is subject with respect to the Adjusted LIBO Rate, for Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Advances shall be deemed to constitute Eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“Subordinated Debt” means the Indebtedness of the Borrower and its Subsidiaries, calculated in accordance with GAAP, heretofore or hereafter incurred, that is subordinate and subject in right to payment on terms satisfactory to the Bank in its sole discretion and, with respect to the Borrower and its Subsidiaries, includes as of the Effective Date the subordinated indebtedness described on Schedule 8.02 hereto.

“Subsidiary” means, as to any Person (the “parent”), any corporation, partnership or other entity, a majority of the outstanding Equity Interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or similar body of such entity (irrespective of whether or not at the time Equity Interests of any other class or classes of such entity has or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the parent or one or more of the Subsidiaries of the parent.

“Teal Acquisition” means the purchase by the Borrower of assets from Teal Supply Co. pursuant to the Teal Acquisition Documents.

“Teal Acquisition Documents” means (i) the Asset Purchase Agreement dated as of November 17, 2006, between Turbeco, Inc. and Teal Supply Co. and (ii) all assignments, agreements and other documents executed and delivered in connection therewith.

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“Termination Date” means January 31, 2010.

“Type”, when used in reference to any Advance, refers to whether the rate of interest on such Advance is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“Wells Fargo” means Wells Fargo Bank, National Association.

“Working Capital Commitment” means the Bank’s Commitment to make Advances in the aggregate amount of $20,000,000 pursuant to Section 2.01(a) as reduced from time to time pursuant to Section 2.03.

“Working Capital Exposure” means, with respect to the Bank at any time, the sum of the outstanding principal amount of the Working Capital Loan and the LC Exposure at such time.

“Working Capital Loan” has the meaning specified in Section 2.01(a).

“Working Capital Loan Borrowing Base” means, at any time such determination is made, an amount calculated in accordance with the Working Capital Loan Borrowing Base Certificate equal to the sum of (i) 80% of Eligible Accounts Receivables and (ii) the lesser of (A) 50% of the Eligible Inventory and (B) $5,000,000.

“Working Capital Loan Borrowing Base Certificate” means as of any date, a certification to the Working Capital Loan Borrowing Base as of such date substantially in the form of Exhibit B.

“Working Capital Loan Maturity Date” means August 8, 2009.

“Working Capital Note” means a promissory note payable to the order of the Bank evidencing the Working Capital Loan, together with all modifications, extensions, renewals and rearrangements thereof.

SECTION 1.02 Accounting Terms. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP in the preparation of the financial statements referred to in Section 7.02.

SECTION 1.03 Interpretation.

(a) In this Agreement, unless a clear contrary intention appears:

(i) the singular number includes the plural number and vice versa;

(ii) reference to any gender includes each other gender;

(iii) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision;

(iv) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this

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Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement;

(v) reference to any agreement, document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to any Note includes any note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor;

(vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto;

(vii) the word “including” (and with correlative meaning “include”) means including, without limiting the generality of any description preceding such term;

(viii) with respect to the determination of any period of time, the word “from” means “from and including” and the word “to” means “to but excluding”;

(ix) reference to any law means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time; and

(x) whenever the character or amount of any asset or liability or item of income or expense is required to be determined, such determination shall be made in accordance with GAAP.

(b) The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

(c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision.

ARTICLE II

AMOUNTS AND TERMS OF THE ADVANCES

SECTION 2.01 The Advances.

(a) Subject to the terms and conditions of this Agreement, including those in Article V, the Bank shall make Advances (the “Working Capital Loan”) to the Borrower from time to time on any Business Day during the period from the date hereof until the Working Capital Loan Maturity Date in an aggregate amount not to exceed at any time outstanding the Working Capital Commitment; provided, however, that the Working Capital Exposure shall at no time exceed the lesser of (y) the Working Capital Commitment or (z) the Working Capital Loan Borrowing Base. Within the foregoing limits, the Borrower may borrow, prepay and reborrow pursuant to the terms hereof.

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(b) Subject to the terms and conditions of this Agreement, including those in Article V, the Bank shall make an Advance (the “Equipment Loan”) to the Borrower on the date hereof in an aggregate amount not to exceed the Equipment Loan Commitment. The Borrower may not reborrow amounts repaid with respect to the Equipment Loan. The Equipment Loan Commitment shall terminate at the close of business on the Effective Date.

(c) Prior to the date hereof, the Bank has made Advances to the Borrower having an aggregate principal amount currently outstanding of $932,731 that have been designated as Real Estate Loans under the Existing Credit Agreement. Such Advances shall remain outstanding following the effectiveness of this Agreement and are hereinafter referred to collectively as the “Real Estate Loan”. The Borrower may not reborrow amounts repaid with respect to the Real Estate Loan.

(d) Each Advance shall be either a Base Rate Advance or a Eurodollar Advance as the Borrower may request in accordance herewith. The Bank at its option may make any Eurodollar Advance by causing any domestic or foreign branch or Affiliate of the Bank to make such Advance; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Advance in accordance with the terms of this Agreement.

(e) At the commencement of each Interest Period for any Eurodollar Advance, such Advance shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $1,000,000. At the time that each Base Rate Advance is made, such Base Rate Advance shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $1,000,000; provided that a Base Rate Advance may be in an aggregate amount that is equal to the entire unused balance of the total Working Capital Commitment or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 4.04. Advances of more than one Type may be outstanding at the same time, provided that there shall not at any time be more than a total of four Eurodollar Advances outstanding. Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Advance if the Interest Period requested with respect thereto would end after the maturity date for such Advance.

SECTION 2.02 Making the Advances.

(a) To request an Advance, the Borrower shall notify the Bank of such request (i) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Advance or (ii) in the case of a Base Rate Advance, not later than 11:00 a.m., New York City time, on the date of the proposed Advance. The Borrower shall make each such request by delivery to the Bank of a written Request for Advance in substantially the form of Exhibit C and signed by the Borrower (a “Request for Advance”), and each Request for Advance shall be irrevocable.

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Each Request for Advance shall specify the following information in compliance with Section 2.01:

(i) the aggregate amount of the requested Advance;

(ii) the date of such Advance, which shall be a Business Day;

(iii) whether such Advance is to be a Base Rate Advance or a Eurodollar Advance;

(iv) in the case of a Eurodollar Advance, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”;

(v) the amount of the then effective Working Capital Loan Borrowing Base, the current total Working Capital Exposure (without regard to the requested Advance) and the pro forma total Working Capital Exposure (giving effect to the requested Advance); and

(vi) the location and number of the Borrower’s account to which funds are to be disbursed.

If no election as to the Type of Advance is specified, then the requested Advance shall be a Base Rate Advance. If no Interest Period is specified with respect to any requested Eurodollar Advance, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Each Request for Advance shall constitute a representation that the amount of the requested Borrowing shall not cause the Working Capital Exposure to exceed the Working Capital Commitment.

SECTION 2.03 Reduction and Changes in the Commitment.

(a) The Borrower shall have the right, upon at least three Business Days’ prior written notice to the Bank, to terminate in whole or reduce in part, the unused portion of the Working Capital Commitment; provided, however, that the Borrower may not terminate or partially reduce such Commitment at any time to an amount less than the sum of all Credit Extensions then outstanding under such Commitment; and provided further, that any such partial reduction shall be in amounts of not less than $500,000 and shall be an integral multiple of $25,000. Such notice shall specify the date and the amount of the termination or reduction of the Commitment.

(b) On the Working Capital Loan Maturity Date the Working Capital Commitment shall terminate.

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ARTICLE III

NOTES, INTEREST AND PAYMENT

SECTION 3.01 The Notes.

(a) The aggregate amount of all Advances made by the Bank under the Working Capital Loan shall be evidenced by the Working Capital Note. The aggregate amount of all Advances made by the Bank under the Equipment Loan shall be evidenced by the Equipment Note. The aggregate amount of all Advances made by the Bank under the Real Estate Loan shall be evidenced by the Real Estate Notes.

(b) The Borrower shall pay interest and shall pay principal on the Advances as provided herein. The Bank shall use its best efforts to keep a record of the Advances made by it and the payments received by it with respect to each Note, and the aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on each Note. The failure so to record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under each Note to repay the outstanding principal amount of the Advances together with all interest accruing thereon.

SECTION 3.02 Interest Elections.

(a) Each Advance initially shall be of the Type specified in the applicable Advance Request and, in the case of a Eurodollar Advance, shall have an initial Interest Period as specified in such Advance Request. Thereafter, the Borrower may elect to convert such Advance to a different Type or to continue such Advance and, in the case of a Eurodollar Advance, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Advance, in which event each such portion shall be treated as a separate Advance.

(b) To make an election pursuant to this Section, the Borrower shall notify the Bank of such election by the time that a Request for Advance would be required under Section 2.02 if the Borrower were requesting an Advance of the Type resulting from such election to be made on the effective date of such election. Each such Interest Election Request shall be irrevocable and shall be made by delivery to the Bank of a written Interest Election Request in a form approved by the Bank and signed by the Borrower.

(c) Each Interest Election Request shall specify the following information in compliance with Section 2.01:

(i) the Advance to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Advance (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Advance);

(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Advance is to be a Base Rate Advance or a Eurodollar Advance; and

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(iv) if the resulting Advance is a Eurodollar Advance, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Advance but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

(d) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Advance prior to the end of the Interest Period applicable thereto, then, unless such Advance is repaid as provided herein, at the end of such Interest Period such Advance shall be converted to a Base Rate Advance. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Bank so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Advance may be converted to or continued as a Eurodollar Advance and (ii) unless repaid, each Eurodollar Advance shall be converted to a Base Rate Advance at the end of the Interest Period applicable thereto.

SECTION 3.03 Interest.

(a) Each Base Rate Advance shall bear interest on the unpaid principal amount thereof at a rate per annum equal to the lesser of (i) the Alternate Base Rate minus 0.25% and (ii) the Highest Lawful Rate.

(b) Each Eurodollar Advance shall bear interest on the unpaid principal amount thereof at a rate per annum equal to the lesser of (i) the Adjusted LIBO Rate for the Interest Period in effect for such Advance plus 1.75% and (ii) the Highest Lawful Rate.

(c) Notwithstanding the foregoing, if any principal of or interest on any Advance or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, or any other Event of Default shall occur and be continuing, the Advance shall bear interest on the unpaid principal amount thereof, after, as well as before judgment, at a rate per annum equal to the lesser of (i) 4% plus the rate applicable to Base Rate Advances as provided in paragraph (a) of this Section and (ii) the Highest Lawful Rate.

(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Working Capital Loans, upon termination of the Working Capital Loan Commitment; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Advance, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

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(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Bank, and such determination shall be conclusive absent manifest error.

SECTION 3.04 Principal Payments.

(a) Subject to the mandatory prepayment and acceleration provisions of this Agreement, the Borrower hereby promises to pay the unpaid principal balance of the Working Capital Note on the Working Capital Loan Maturity Date.

(b) The Borrower hereby promises to pay the Equipment Loan in 59 installments of $416,666.67 payable on the last day of each month and a final installment of $10,416,666.67 payable on December 31, 2011.

(c) The Borrower hereby promises to pay the Real Estate Loan in 59 installments of $6,002.43 payable on the last day of each calendar month and a final installment of $733,793.63 payable on December 31, 2011.

SECTION 3.05 Voluntary Prepayments.

(a) The Borrower may prepay the outstanding principal amount of any Advance in whole or in part, together with accrued unpaid interest to the date of such prepayment on the principal amount prepaid. All such prepayments shall be applied first to accrued, but unpaid, interest on such Advance, then to the principal amount of such Advance. Payments of principal on the Equipment Loan and the Real Estate Loan shall be applied to the remaining installments thereof in inverse order of maturity. If the Borrower prepays all or part of the Equipment Loan or the Real Estate Loan prior to the third anniversary of the Original Effective Date, the Borrower shall pay the Bank a prepayment fee equal to 1% of the Commitment amount as of the Effective Date.

(b) The Borrower shall provide to the Bank written notice of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Advance, not later than 11:00 a.m., Houston time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of a Base Rate Advance, not later than 11:00 a.m., Houston time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Advance or portion thereof to be prepaid. Each partial prepayment of any Advance shall be in an amount that would be permitted in the case of an Advance of the same Type as provided in Section 2.02.

SECTION 3.06 Mandatory Prepayments.

(a) In the event any Working Capital Loan Borrowing Base Certificate submitted pursuant to Section 7.02 reflects that the Working Capital Exposure exceeds the Working Capital Loan Borrowing Base, the Borrower shall promptly make a prepayment in an aggregate principal amount equal to such excess.

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(b) Within 15 days after the delivery of annual financial statements of the Borrower and its Subsidiaries for the fiscal year ending December 31, 2007, and each fiscal year thereafter, as contemplated by Section 7.02(a), the Borrower shall repay the Equipment Loan, without premium or penalty, in an amount equal to 50% of Excess Cash Flow for such fiscal year.

(c) Within 90 days after the last day of each fiscal quarter, the Borrower shall prepay the Equipment Loan from the Net Proceeds of any Equipment sold during such quarter that have not been reinvested in similar equipment prior to such 90^th day.

(d) Any prepayment of the Equipment Loan shall be applied to the remaining installments of the Equipment Loan in inverse order of maturity.

SECTION 3.07 Fees.

(a) The Borrower shall pay to the Bank a commitment fee equal to 0.25% per annum on the average daily amount by which the Working Capital Loan Commitment exceeds the outstanding Working Capital Exposure. Such fee is due quarterly in arrears on each March 31, June 30, September 30 and December 31 and on the Working Capital Loan Maturity Date.

(b) The Borrower shall pay to the Bank the following fees with respect to Letters of Credit:

(i) a letter of credit fee for each Letter of Credit issued hereunder in an amount equal to the 1.75% per annum (calculated on the basis of a 360 day year) on the face amount of such Letter of Credit for the period such Letter of Credit is outstanding. Such fee shall be due and payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, and on the Working Capital Loan Maturity Date.

(ii) Such other usual and customary fees associated with any transfers, amendments, drawings, negotiations or reissuances of any Letters of Credit. Such fees shall be due and payable as requested by the Bank in accordance with the Bank’s then current fee policy.

SECTION 3.08 Payments and Computations.

(a) The Borrower shall make each payment or prepayment hereunder and under the Notes not later than 12:00 Noon (Houston, Texas time) on the day when due in Dollars to the Bank at its address referred to in Section 10.02 in same day funds.

(b) Each determination by the Bank of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.

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(c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest.

SECTION 3.09 The Borrower Unconditionally Liable. The Borrower shall be unconditionally liable to the Bank for the principal amount of all Credit Extensions, interest due thereon, and all other amounts due to the Bank hereunder or under any other agreement or security document executed in connection herewith, and shall make prompt and punctual payment when due of such amounts.

SECTION 3.10 Reserve Requirements; Change in Circumstances.

(a) It is understood that the cost to the Bank of making or maintaining any of the Advances may fluctuate as a result of the applicability of, or changes in, reserve requirements imposed by the Board of Governors of the Federal Reserve System. The Borrower agrees to pay to the Bank from time to time, as provided in paragraph (d) below, such amounts as shall be necessary to compensate the Bank for the portion of the cost of making or maintaining Advances resulting from any such reserve requirements to the extent set forth in this Section.

(b) Notwithstanding any other provision herein, if after the date of this Agreement the introduction of any applicable law or regulation or any change in applicable law or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by the Bank with any applicable guideline or request from any central bank or governmental authority (whether or not having the force of law) (i) shall change the basis of taxation of payments to the Bank of the principal of or interest on any Advance made by the Bank or any other fees or amounts payable hereunder, other than (x) taxes imposed on the overall net income or franchise taxes with respect to the Bank or its lending office by the jurisdiction in which the Bank or its lending office has its principal office or by any political subdivision or taxing authority therein (or any tax which is enacted or adopted by such jurisdiction, political subdivision or taxing authority as a direct substitute for any such taxes) or (y) any tax, assessment or other governmental charge that would not have been imposed but for the failure of the Bank to comply with any certification, information, documentation or other reporting requirement, or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Bank, and the result of any of the foregoing shall be to increase the cost to the Bank of maintaining its Commitment or to reduce the amount of any sum received or receivable by the Bank hereunder (whether of principal, interest or otherwise) in respect thereof by an amount deemed in good faith by the Bank to be material, then the Borrower shall pay to the Bank such additional amount as will compensate the Bank for such increase or reduction upon demand by the Bank. Notwithstanding the foregoing, in no event shall the Bank be permitted to receive any compensation hereunder constituting interest in excess of the Highest Lawful Rate.

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(c) If the Bank shall have determined in good faith that the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any lending office of the Bank) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any capital adequacy guidelines under consideration as of the date of this Agreement by the Board of Governors of the Federal Reserve System and the Comptroller of the Currency) (except any such adoption or change reflected in the Adjusted LIBO Rate), has or would have the effect of reducing the rate of return on the Bank’s capital or any corporation controlling the Bank’s capital as a consequence of its obligations hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank’s policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction upon demand by the Bank. Notwithstanding the foregoing, in no event shall the Bank be permitted to receive any compensation hereunder constituting interest in excess of the Highest Lawful Rate.

(d) If the Bank seeks compensation under this Agreement it will notify the Borrower of any event occurring after the date of this Agreement which will entitle the Bank to compensation pursuant to this Section, as promptly as practicable, and in any event within 180 days after it becomes aware thereof and determines to request compensation. A certificate of the Bank setting forth in reasonable detail (i) such amount or amounts as shall be necessary to compensate the Bank as specified in paragraph (a) or (b) above, as the case may be, and (ii) the calculation of such amount or amounts shall be delivered to the Borrower and shall be prima facie evidence of such amount or amounts. The Borrower shall pay to the Bank the amount shown as due on any such certificate within ten days after its receipt of the same.

(e) Failure on the part of the Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any Advance shall not constitute a waiver of the Bank’s rights to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to such Advance, provided that Borrower’s obligation to pay the Bank shall be limited to the increased costs or reduced amount that is attributable to the period commencing 180 days prior to the date on which the Bank gives the Borrower notice under subsection (d) hereof. The protection of this Section shall be available to the Bank regardless of any possible contention of invalidity or inapplicability of law, regulation or condition that has been imposed.

SECTION 3.11 Indemnity. The Borrower shall indemnify the Bank against any loss or reasonable expense which the Bank may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any Advance hereunder the applicable conditions set forth in Article V, (b) any failure by the Borrower to borrow hereunder after a Request for Advance pursuant to Article II has been given, (c) any default in the payment or prepayment of

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the principal amount of any Advance or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by notice of prepayment or otherwise) or (d) the occurrence of any Event of Default. A certificate of the Bank setting forth any amount or amounts which the Bank is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive, if made in good faith, absent demonstrable error. The Borrower shall pay to the Bank the amount shown as due on any certificate within 30 days after its receipt of the same. Notwithstanding the foregoing, in no event shall the Bank be permitted to receive any compensation hereunder constituting interest in excess of the Highest Lawful Rate. Without prejudice to the survival of any other obligations of the Borrower hereunder, the obligations of the Borrower as to any claim under this Section shall survive the termination of this Agreement, the payment or assignment of any of the Notes or any combination of the foregoing provided notice of such claim shall have been given to the Borrower within 180 days after such termination or assignment.

ARTICLE IV

LETTERS OF CREDIT

SECTION 4.01 General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Bank, at any time and from time to time prior to the Working Capital Loan Maturity Date. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. On and after the Effective Date, each Existing Letter of Credit shall be a Letter of Credit issued hereunder.

SECTION 4.02 Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Bank) to the Bank (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with Section 4.03), the amount (in Dollars) of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Bank, the Borrower also shall submit a letter of credit application on the Bank’s standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $1,000,000 and (ii) the total Working Capital Exposure shall not exceed the total Working Capital Loan Commitment.

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SECTION 4.03 Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is 30 Business Days prior to the Working Capital Loan Maturity Date; provided, however, that any Letter of Credit with a one-year tenor may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (ii) above).

SECTION 4.04 Reimbursement. If the Bank makes any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Bank an amount equal to such LC Disbursement not later than 12:00 noon, Houston, Texas time, on (i) the Business Day that the Borrower receives notice of such LC Disbursement, if such notice is received prior to 11:00 a.m., Houston, Texas time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided, however, that, if no Default has occurred and is continuing, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.01(a) an Advance to finance such reimbursement and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Working Capital Advance.

SECTION 4.05 Obligations Absolute. The Borrower’s obligation to reimburse LC Disbursements as provided in Section 4.04 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder. Neither the Bank nor any of its Affiliates shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Bank; provided, however, that the foregoing shall not be construed to excuse the Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Bank’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. In the absence of gross negligence or willful misconduct on the part of the Bank (as finally determined by a court of competent jurisdiction), the Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, with respect to documents presented that appear on their

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face to be in substantial compliance with the terms of a Letter of Credit, the Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

SECTION 4.06 Disbursement Procedures. The Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Bank shall promptly notify the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Bank has made or will make an LC Disbursement thereunder; provided, however, that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Bank with respect to any such LC Disbursement.

SECTION 4.07 Interim Interest. If the Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to the Working Capital Loan; provided, however, that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to Section 4.04, then Section 3.03(c) shall apply.

SECTION 4.08 Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Bank demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Bank, in the name of the Bank, an amount in cash equal to 105% of the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided, however, that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (d) or (e) of Section 9.01. Such deposit shall be held by the Bank as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Bank shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Bank and at the Borrower’s risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. The Bank shall apply moneys in such account to reimburse itself for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated, be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.

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ARTICLE V

CONDITIONS OF LENDING

SECTION 5.01 Condition Precedent to Initial Credit Extension. The obligations of the Bank under this Agreement shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 10.01):

(a) The Bank shall have received the Working Capital Note and the Equipment Note, each duly executed and delivered by the Borrower to the order of the Bank.

(b) The Bank shall have received certified copies of all documents evidencing necessary governmental approvals, if any, with respect to the Loan Documents.

(c) The Bank shall have received a certificate of the Secretary of each Credit Party certifying inter alia, (i) true and correct copies of the organizational documents of such Credit Party, (ii) true and correct copies of resolutions adopted by the Board of Directors (or comparable body) of each Credit Party (A) authorizing the execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party and the incurrence of its obligations thereunder, (B) approving the forms of the Loan Documents that will be delivered at or prior to the Effective Date and (C) authorizing the officers of such Credit Party to execute and deliver the Loan Documents to which it is a party and any related documents, including any agreement or security document contemplated by this Agreement, and (iii) the incumbency and specimen signatures of the officers of such Credit Party executing any documents on behalf of such Credit Party.

(d) The Bank shall have received a certificate of the chief financial officer of the Borrower certifying inter alia, (i) the truth of the representations and warranties made by the Borrower in any Loan Document that will be delivered at or prior to the Effective Date, (ii) the absence of any proceedings for the dissolution or liquidation of the Borrower and (iii) the absence of the occurrence and continuance of any Default.

(e) The Bank shall have received certificates as to existence, qualification and good standing issued by the Secretary of State of each state wherein any Credit Party is or should be qualified to do business as a foreign entity.

(f) The Bank shall have received the written opinion of Doherty & Doherty LLP, counsel for the Borrower, dated the Effective Date, addressed to the Bank.

(g) The Bank shall have received the payment of all fees required to be paid, and all expenses for which invoices have been presented.

(h) The Bank shall have received (i) equipment appraisal reports from Rosen Systems, Inc. and Superior Asset Management and (ii) a working capital collateral audit of accounts receivable and inventory, in each case satisfactory to the Bank in its sole discretion.

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(i) The Bank shall have received a Working Capital Loan Borrowing Base Certificate certified by the chief financial officer of the Borrower.

(j) The Bank shall have received certificates of insurance covering the properties of the Borrower and its Subsidiaries with such insurance carriers, for such amounts and covering such risks as are acceptable to the Bank;

(k) The Equipment Loan and the Working Capital Loan outstanding under the Existing Credit Agreement shall have been prepaid (or prepaid simultaneously with the closing hereunder) together with accrued interest and fees and all other amounts thereunder, and all outstanding Letters of Credit under the Existing Credit Agreement shall be deemed Letters of Credit hereunder.

(l) The Bank shall be satisfied with the form and substance of the Teal Acquisition Documents, the total financing requirements for the Teal Acquisition shall not exceed $31,000,000, the Teal Acquisition shall have been consummated or shall be consummated simultaneously on the Effective Date in accordance with the terms of the Teal Acquisition Documents (without any waiver or amendment of any such terms not approved by the Bank), and the Bank shall have received a certificate to such effect;

(m) Each Guarantor shall have executed and delivered to the Bank an agreement confirming the continued effectiveness of the Guaranty, the Security Agreement and the Deeds of Trust in a form satisfactory to the Bank; and

(n) The Bank shall have received all documents that it may reasonably request relating to any other matters relevant hereto.

SECTION 5.02 Conditions Precedent to All Advances. The obligation of the Bank to make an Advance or issue, amend, renew or extend a Letter of Credit shall be subject to the satisfaction or waiver of the following conditions precedent on the date of such Advance or issuance:

(a) The Bank shall have received the Request for Advance required by Section 2.02 or a request for the issuance, amendment, renewal or extension of a Letter of Credit pursuant to Section 4.02.

(b) No Default has occurred and is continuing or will result from the making of such Advance.

(c) The representations and warranties of the Credit Parties contained in the Loan Documents shall be true and correct as of the date of such Advance, with the same effect as though made on such date.

(d) With respect to Advances under the Working Capital Loan, immediately after giving effect to such Advance, the Working Capital Exposure shall not exceed the lesser of (i) the Working Capital Loan Commitment or (ii) the Working Capital Loan Borrowing Base as set forth in the most current certificate required to be delivered pursuant to Section 7.02.

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(e) No Material Adverse Effect shall have occurred since the Effective Date.

Each Advance hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Advance as to the facts specified in clauses (a) through (e) of this Section 5.02.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES

The Borrower as to itself and its Subsidiaries represents and warrants to the Bank as follows:

SECTION 6.01 Organization, Standing and Qualification. Each Credit Party is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization and is duly qualified and licensed to do business and in good standing in each jurisdiction where the failure to be so qualified, licensed and in good standing would reasonably be likely to result in a Material Adverse Effect.

SECTION 6.02 Authority. The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party are within such Credit Party’s corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) its Other Instruments, or (ii) any applicable law, regulation, ruling or order of any government or governmental entity or any contract to which any Credit Party is a party or by which the property of any Credit Party is bound. This Agreement, the other Loan Documents and the Acquisition Documents constitute the legal, valid and binding obligations of the Credit Parties party thereto enforceable in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the rights of creditors generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 6.03 Financial Condition. The consolidated balance sheets of the Borrower and its Subsidiaries at December 31, 2005 and September 30, 2006, and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the fiscal year and nine month periods then ended, copies of which have been furnished to the Bank and certified by the chief financial officer of the Borrower, fairly present the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP. Since December 31, 2005, there has been no Material Adverse Effect.

SECTION 6.04 Litigation. There is no pending or, to the best knowledge of the Borrower, threatened action or proceeding against or affecting the Borrower or any Subsidiary of the Borrower before any court, governmental agency or arbitrator (i) in which an adverse decision may have a Material Adverse Effect, (ii) that involve any Loan Document, Acquisition Document or the Acquisitions, or (iii) that could impair the consummation of the Acquisitions on the time and in the manner contemplated by the Acquisition Documents.

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SECTION 6.05 Regulation U. The proceeds of the Credit Extensions will be used by the Borrower only for general corporate purposes and without limiting the foregoing, in no event will any proceeds of the Credit Extensions be used to acquire any security in any transaction that is subject to Sections 13 and 14 of the Securities Exchange Act of 1934 or to purchase or carry any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any such margin stock. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying such margin stock.

SECTION 6.06 Compliance with Law. Each of the Borrower and its Subsidiaries is, and at all times since January 1, 2006, has been, in compliance with each law that is or was applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets where the failure to be in compliance could reasonably be expected to result in a Material Adverse Effect; and neither the Borrower nor any of its Subsidiaries has received any notice of, nor does any of them have knowledge of, the assertion by any governmental authority of any such violation or of any obligation of the Borrower or any Subsidiary to undertake any remedial action under any law.

SECTION 6.07 Other Instruments. No Credit Party is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any restriction which would have a Material Adverse Effect.

SECTION 6.08 Title to Properties. Borrower and each of its Subsidiaries has good, indefeasible and insurable title to all its material properties, including all property reflected in the consolidated balance sheet of the Borrower (except for such property as has been sold or otherwise disposed of in the ordinary course of business since the date thereof), free from any Liens except Permitted Liens.

SECTION 6.09 Taxes. Except as disclosed in writing by the Borrower to the Bank prior to the Effective Date, the federal tax returns of each Credit Party and such other tax returns and reports required to be filed with the appropriate governmental agencies in all jurisdictions in which such returns or reports are required to be filed have been filed and all of the foregoing are in all material respects true and correct and complete. Each Credit Party has filed all federal, state and local tax returns and other reports required by law to be filed and have paid all taxes and other similar charges that are due and payable by it.

SECTION 6.10 Environmental Compliance.

(a) The Borrower and each of its Subsidiaries has been and is currently in compliance in all respects with all applicable Environmental Laws, except where such noncompliance is unlikely to have a Material Adverse Effect.

(b) Neither the Borrower nor any of its Subsidiaries has received notice that it is or may be a potentially responsible party for removal or remediation of any Hazardous Substance or petroleum product, or that any Person has or may exert a claim for contribution or reimbursement for such removal or remediation;

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(c) To the best of the Borrower’s knowledge, there has been no release of any Hazardous Substance or petroleum product from, onto or under the Property of Borrower or any Subsidiary of the Borrower which release would have a Material Adverse Effect;

(d) without limiting the foregoing:

(i) There is no existing, or to the best of the Borrower’s knowledge, anticipated order requiring the Borrower or any Subsidiary of the Borrower to clean up or remediate any Hazardous Substance or petroleum product on any property presently or formerly owned, leased or used by the Borrower or any Subsidiary of the Borrower;

(ii) All underground and above ground storage tanks located on the Property of the Borrower or any Subsidiary of the Borrower (“Tanks”) have been registered and all fees required by any Environmental Law have been paid;

(iii) The Borrower and its Subsidiaries and all Tanks are in compliance with Chapter 26 of the Texas Water Code, Chapter 334 of the Texas Administrative Code, the Resource Conservation and Recovery Act and 40 C.F.R. Part 280, as supplemented and amended, including without limitation, requirements for financial assurance, tank replacement, and monitoring.

SECTION 6.11 No Default. Neither the Borrower nor any Subsidiary of the Borrower is in default under any instrument evidencing Indebtedness, and the execution, delivery and performance of this Agreement and the Loan Documents by the Credit Parties will not result in a default in the payment or performance of any obligations or in the performance of any mortgage, lease, contract or other agreement to which the Borrower or such Subsidiary is a party or by which the Borrower or such Subsidiary is or any of the Borrower’s or such Subsidiary’s properties or assets may be bound and no default thereunder has occurred and is continuing.

SECTION 6.12 Subsidiaries. Except as listed on Schedule 6.12, the Borrower has no Subsidiaries.

SECTION 6.13 ERISA. The Borrower and its Subsidiaries and each member of such parties’ “Controlled Group”, within the meaning of Section 414 of the Code or Section 4001(a) of ERISA, have timely fulfilled all their obligations under the minimum funding standards of ERISA and the Code with respect to each “Employee Benefit Plan” (within the meaning of Section 3(3) of ERISA), whether or not terminated, to or with respect to which either the Borrower, any Subsidiary of the Borrower and/or a member of its Controlled Group is making or accruing an obligation to make contributions or within the preceding six years has made or had an obligation to make contributions (a “Plan”) and are (and have been) in compliance in all material respects with the applicable provisions of ERISA, the Code and other law with respect to each Plan. Each Plan is (and/or has been) maintained and operated in compliance in all material respects with the applicable provisions of ERISA, the Code and other law. Neither the Borrower, any of its Subsidiaries nor any member of their Controlled Group:

(a) has sought (or is seeking) a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan;

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(b) has failed to timely make any contribution or payment to or in respect of any Plan, or made any amendment to any Plan that has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code;

(c) has incurred (and no event exists which could result in) any liability under Title IV of ERISA (other than a liability to the PBGC for premiums under Section 4007 of ERISA). No litigation, investigation or claim (other than a routine claim for benefits) is pending or, to the knowledge of the Borrower, threatened or anticipated concerning any Plan and no unfunded liability (whether or not current or contingent) exists under or with respect to any Plan.

SECTION 6.14 Acceptable Security Interest. The Security Agreement is effective to create in favor of the Bank a valid Lien on all right, title and interest of each Credit Party, as applicable, in the Collateral, as security for the Obligations, prior and superior in right to any other Lien (except for Liens permitted by Section 8.01). All financing statements have been filed that are necessary to perfect any security interest created pursuant to the Security Agreement that can be perfected by the filing of such financing statements and all actions necessary to provide control to the Bank, with respect to any Collateral for which control can be established in favor of the Bank have been taken, including delivery of such Collateral to the Bank to the extent such Collateral is certificated or for which possession can provide perfection with respect thereto.

ARTICLE VII

AFFIRMATIVE COVENANTS

Until the Final Payment Date the Borrower as to itself and its Subsidiaries covenants as follows:

SECTION 7.01 Compliance with Laws, Etc.

(a) The Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith by appropriate proceedings diligently conducted and shall comply with and perform and observe all material covenants, provisions and conditions to be performed and observed on the part of the Borrower or such Subsidiary in connection with all of its Other Instruments.

(b) Notwithstanding the foregoing, each of the Borrower and its Subsidiaries shall (i) comply in a timely fashion with, or operate pursuant to valid waivers of, the provisions of all Environmental Laws unless the failure to do so will not have a Material Adverse Effect, (ii) notify each Bank promptly in the event of any actual or alleged material noncompliance with any Environmental Laws or any notice of any actual or alleged obligation to take corrective action with respect to any Hazardous Substance or petroleum product and (iii) promptly forward to the Bank a copy of any claim, judgment,

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order, notice, civil or criminal complaint, actual or threatened Lien, request for injunction, threatened or actual withdrawal of any Permit or other communication or report in connection with any material matter relating to Environmental Laws, Hazardous Substances or petroleum products as it may adversely affect the Borrower or such Subsidiary or any Property of the Borrower or such Subsidiary.

SECTION 7.02 Reporting Requirements. The Borrower will furnish or will cause to be furnished at its expense to the Bank:

(a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such year and the related consolidated and consolidating statements of income and cash flows for such year, audited and bearing an unqualified opinion by independent certified public accountants acceptable to the Bank and certified by the chief financial officer of the Borrower as fairly presenting the financial position of the Borrower and its Subsidiaries as at the dates indicated and in accordance with GAAP together with a statement of such accountants stating that, in making the examination necessary for their report, they obtained no knowledge of any Default, or, if such accountants shall have obtained knowledge of any such Default, specifying the details and the nature and status thereof;

(b) as soon as available and in any event within 25 days after the end of each calendar month of the Borrower, the consolidated and consolidating balance sheets of the Borrower as of the end of such month and the related consolidated and consolidating statements of income and cash flows of the Borrower for such month all in reasonable detail, certified by the chief financial officer of the Borrower as fairly presenting the financial position of the Borrower as at the dates indicated and in accordance with GAAP;

(c) as soon as available and in any event within 25 days after the end of each calendar month, a completed Working Capital Loan Borrowing Base Certificate as of the end of such month;

(d) as soon as available and in any event within 25 days after the end of each fiscal quarter of the Borrower and within 120 days after the end of each fiscal year of the Borrower, a Compliance Certificate from the Borrower as of the end of such period;

(e) as soon as available and in any event within 25 days after the end of each calendar month of the Borrower, a monthly Accounts Receivable aging, accounts payables aging and inventory listing and aging report of Borrower, in form satisfactory to the Bank;

(f) as soon as available and in any event within ten days after the end of each fiscal year of the Borrower, a listing of all Accounts Receivable debtors including physical addresses, contact names and phone numbers;

(g) Within 30 days after the end of each fiscal year of the Borrower, annual operating and capital budgets for the current fiscal year;

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(h) Promptly after the commencement thereof, notice of all actions, suits, investigations and proceedings before any court , tribunal, agency or other governmental authority, affecting the Borrower or any of its Subsidiaries;

(i) As soon as available and in any event within 25-days after the end of each fiscal quarter of the Borrower, an Equipment sales report from the Borrower as of the end of such period; and

(j) such other information as the Bank may from time to time reasonably request.

SECTION 7.03 Visitation Rights. At any reasonable time and from time to time upon prior notice to the Borrower, the Borrower shall permit the Bank or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit and inspect the Properties, Inventory and chattel paper of, the Borrower or any Subsidiary of the Borrower and to discuss the affairs, finances and accounts of the Borrower or such Subsidiary with any officer of the Borrower or such Subsidiary and their independent public accountants.

SECTION 7.04 Maintenance of Insurance. The Borrower shall, and shall cause each Subsidiary of the Borrower to, maintain insurance with responsible and reputable insurance companies in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same trade and general areas in which the Borrower or such Subsidiaries operate. Each liability insurance policy shall name the Bank as an additional insured and each property insurance policy shall name the Bank as loss payee. The Borrower will, and will cause each Subsidiary of the Borrower to, furnish evidence of any such insurance referred to in this Section upon request by the Bank.

SECTION 7.05 Maintenance of Properties, Etc. The Borrower shall, and shall cause each Subsidiary of the Borrower to, maintain and preserve all of its properties, necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted.

SECTION 7.06 Keeping of Records and Books of Account. The Borrower shall, and shall cause each Subsidiary of the Borrower to, keep adequate records and books of account in accordance with GAAP.

SECTION 7.07 Preservation of Existence, Etc. The Borrower shall, and shall cause each Subsidiary of the Borrower to, preserve and maintain its existence, rights, franchises and privileges in the state of its formation and qualify and remain qualified in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations and the ownership of its properties.

SECTION 7.08 Notification of Adverse Events. The Borrower shall notify the Bank of all Events of Default within five days of the occurrence thereof.

SECTION 7.09 ERISA Compliance. The Borrower shall, and shall cause each ERISA Affiliate to, comply in all material respects with the provisions of ERISA, the Internal Revenue Code of 1986, as amended, and all other applicable laws and the regulations and interpretations thereunder.

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SECTION 7.10 Additional Security.

(a) No later than ten days after any Person becomes a Subsidiary, the Borrower shall, and shall cause such Subsidiary (unless it is not a Domestic Subsidiary) and its parent to, execute and deliver a Joinder Agreement under which (i) such Domestic Subsidiary shall grant a security interest in its assets described in the Security Agreement as security for the Obligations and become a Guarantor, and (ii) such parent pledges to the Bank 100% of the common stock or other ownership interests of such Domestic Subsidiary (or 65% of the common stock or other ownership interests of such Subsidiary if it is not a Domestic Subsidiary) and to deliver to the Bank such other documents relating to such Subsidiary as the Bank may reasonably request.

(b) From and after the Closing Date, if (i) the Borrower or any Guarantor acquires any fee interest in real property having a book value in excess of $100,000 or (ii) at the time any Person becomes a Guarantor, such Person owns or holds any such fee interest in real property of such value or any such leasehold interest providing for such rents, such Credit Party shall deliver to the Bank, at its request after such acquisition of such property or leasehold interest or such Person becomes a Guarantor, as the case may be, the following:

(i) A fully executed and notarized mortgage or deed of trust (an “Additional Mortgage”), duly recorded in all appropriate places in all applicable jurisdictions, encumbering the interest of such Credit Party in such property;

(ii) If requested by the Bank, a title report issued by a title company acceptable to the Bank with respect thereto, dated not more than 30 days prior to the date such Additional Mortgage is to be recorded and satisfactory in form and substance to the Administrative Agent, together with copies of any documents listed as exceptions to such title and, to the extent the Borrower or any Subsidiary obtains an owner’s title policy on said property, a mortgagee’s policy in an equal amount insuring the Lien in subsection (i) above; and

(iii) If requested by the Bank, evidence that said property is not in an area designated as prone to flooding or, if so, evidence of flood insurance reasonably satisfactory to the Bank.

SECTION 7.11 Borrowing Base Audits. The Borrower shall, and shall cause each of its Subsidiaries to, permit the Bank, at any reasonable time, and upon reasonable notice, to perform one collateral audit of the assets of the Borrower and its Subsidiaries that comprise the Borrowing Base during each fiscal year; provided, however, that, if an Event of Default has occurred and is continuing, the Bank shall be permitted to conduct additional audits as it determines. Regardless of whether an Event of Default has occurred and is continuing, all such audits shall be performed at the Borrower’s sole cost and expense.

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SECTION 7.12 Treasury Management Services. The Borrower shall maintain in effect the existing depositing services provided by the Bank on an exclusive basis from the Effective Date through the Final Payment Date.

SECTION 7.13 Use of Proceeds. The Borrower shall use the proceeds of the Advances (i) to finance the working capital requirements of the Borrower and its Subsidiaries and for general corporate purposes, (ii) to finance the Teal Acquisition and the CAVO Acquisition and (iii) to refinance the Working Capital Loan and the Equipment Loan outstanding under the Existing Credit Agreement.

ARTICLE VIII

NEGATIVE COVENANTS

Until the Final Payment Date, the Borrower shall not and shall not permit any Subsidiary of the Borrower to:

SECTION 8.01 Liens. Create, incur, assume or suffer to exist any Lien upon or with respect to any of its Properties, now owned or hereafter acquired, or assign or otherwise convey any right to receive income or sell any accounts or notes receivable except Permitted Liens. Notwithstanding the foregoing, the parties acknowledge that they do not intend to subordinate the Lien granted to the Bank to any Permitted Lien that may arise in the future.

SECTION 8.02 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness without the written consent of the Bank except for:

(a) Indebtedness of the Borrower under the Loan Documents,

(b) Indebtedness shown on Schedule 8.02,

(c) Indebtedness in the amount of $1,000,000 or less incurred to finance the purchase price for assets necessary in Borrower’s ordinary course of business,

(d) A guarantee of Indebtedness of CAVO owed to the Bank and outstanding on the date hereof not to exceed $2,200,000 and any extensions, renewals, refinancings and replacements thereof; and

(e) Subordinated Indebtedness owing or to be owing by Turbeco, Inc. to Preston Phenes, in the approximate original principal amount of One Million Five Hundred Forty-Five Thousand Three Hundred Ninety-One and No/100 Dollars ($1,545,391), with a maturity date of September 1, 2009.

SECTION 8.03 Change in Nature of Business. Make any material change in the nature of the business of the Borrower or any Subsidiary of the Borrower as carried on at the date hereof.

SECTION 8.04 Transactions with Affiliates. Make any sale to, make any purchase from, extend credit to, make payment for services rendered by, or enter into any other transaction

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with any Affiliate unless, in each case, such sale, purchase or extension of credit is made or such services are rendered or such other transaction is entered into in the ordinary course of business and on terms and conditions at least as favorable to the Borrower or any Subsidiary of the Borrower as the terms and conditions that would apply in a similar transaction on an arms-length basis with a Person other than such Affiliate.

SECTION 8.05 Investments. Make any Investments in any Person except:

(a) Investments made to officers, employees or shareholders of the Borrower not in excess of $250,000 at any time outstanding;

(b) Investments by the Borrower in its Subsidiaries existing on the date hereof and as set forth in Schedule 6.12; and

(c) Permitted Investments.

SECTION 8.06 Distributions. Directly or indirectly declare, order, pay, make or set apart any sum for any Restricted Payment except for dividends by a Subsidiary to the Borrower or another Subsidiary.

SECTION 8.07 Subordinated Debt. Prepay any Subordinated Debt without the written consent of the Bank, or amend, modify, or change in any way any of the Subordinated Debt so as to change the stated maturity date of the principal of such debt, or any installment of interest thereon, to an earlier date, increase the rate of interest thereon or any premium payable on the redemption thereof, change any of the redemption or subordination provisions thereof (or the definitions of any defined terms contained therein) or otherwise change in any respect materially adverse to the interests of the Bank any of the terms thereof, in each case, without the written consent of the Bank; provided, however, the Borrower may make scheduled principal payments of the Subordinated Debt as they become due if (A) on the due date no Default exists, (B) the Bank has not notified either the Borrower or any holder of Subordinated Debt that a Default then exists or would be created by such payment, (C) the Pro Forma Fixed Charge Coverage Ratio at the time of such scheduled principal payment shall not be less than 1.5 to 1.0 and (D) immediately following such payment the lesser of the Working Capital Loan Borrowing Base and the Working Capital Commitment shall exceed the Working Capital Exposure by at least $500,000.

SECTION 8.08 Leverage Ratio. Permit the Leverage Ratio on the last day of any month to be more than (i) 3.0 to 1.0 for any month ending prior to January 1, 2008, and (ii) 2.5 to 1.0 thereafter.

SECTION 8.09 Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any month to be less than 1.3 to 1.0.

SECTION 8.10 Consolidated Net Income. Permit its Consolidated Net Income to be less than zero (i) for any fiscal quarter or (ii) for any Fiscal Year.

SECTION 8.11 Prohibition of Fundamental Changes. The Borrower shall not, nor shall it permit any of its Subsidiaries to, merge or consolidate with, or acquire all or any substantial part of the assets or class of stock or other ownership interests of, any other Person without the prior written consent of the Bank, except as follows:

(i) any wholly-owned Subsidiary may merge with any other wholly-owned Subsidiary;

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(ii) the Borrower may merge with any wholly-owned Subsidiary so long as the Borrower is the surviving entity.

(iii) the Borrower may consummate the CAVO Acquisition in accordance with the terms of the CAVO Acquisition Documents (without any waiver or amendment of any such terms not approved by the Bank) provided that (A) the Bank shall be satisfied with the CAVO Acquisition Documents, (B) the total financing requirements for the CAVO Acquisition shall not exceed $6,181,564, and (C) the Bank shall have received a certificate to such effect.

SECTION 8.12 Asset Sales. The Borrower shall not, nor shall it permit any of its Subsidiaries to, sell, convey, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, any assets except for:

(a) Sales of inventory in the ordinary course of business;

(b) Sales of Equipment provided that the proceeds of such sales are either reinvested in similar equipment and value or used to prepay the Equipment Loan within 90 days after the end of the fiscal quarter in which such sales were made; and

(c) Sales of assets other than Equipment that do not exceed $250,000 since the Effective Date.

SECTION 8.13 Capital Expenditures. The Borrower shall not permit the aggregate Capital Expenditures by the Borrower and its Subsidiaries in any fiscal year to exceed $10,000,000.

SECTION 8.14 Restrictions on CAVO. The Borrower will not, and will not permit any of its Subsidiaries to, vote for any amendment or termination of the CAVO Regulations, or any other agreement material to CAVO’s operations, except in each case for amendments that would not reduce CAVO’s cash flow and with respect to which the Borrower has provided to the Bank a copy of the proposed amendment at least five days prior to the effective date of such amendment.

ARTICLE IX

EVENTS OF DEFAULT AND REMEDIES

SECTION 9.01 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder:

(a) Any opinion, certification, representation or warranty to the Bank set forth in this Agreement or any other Loan Document or in any certificate required to be

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delivered herewith or therewith (including any Request for Advance) at any time (whether made or delivered on the date of this Agreement or prior to or after such date) shall be false when made or delivered in any material respect;

(b) Any Credit Party shall fail to comply with any of the provisions of any Loan Document other than those obligations referenced in Section 9.01(c) and such event continues for a period of 30 days after the Bank has sent the Borrower notice thereof or the Borrower has actual notice thereof;

(c) The Borrower shall fail to pay any principal or interest of any Note when due, whether by acceleration or otherwise, or any Credit Party shall fail to pay any Obligations owed under any Loan Document when due, in each case within three Business Days from the date when due;

(d) The Borrower or any Subsidiary of the Borrower (i) admits in writing its inability to pay its debts generally as they become due; (ii) is generally not paying its debts as they become due, except if contested in good faith by appropriate proceedings; (iii) files a petition under any bankruptcy law or any insolvency law or similar laws (including, without limitation, the Federal Bankruptcy Code of 1978 or any amendment thereto); (iv) makes a general assignment for the benefit of its creditors; or (v) files a petition or answer seeking for itself, or consenting to or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law referred to in clause (iii) of this paragraph (d) or fails to deny the material allegations of or to contest any such petition filed against it within 60 days;

(e) There is appointed a receiver, custodian, liquidator, fiscal agent or trustee of the Borrower or any Subsidiary of the Borrower or of the whole or any substantial part of the properties or assets of the Borrower or any Subsidiary of the Borrower or any court enters an order, judgment or decree approving a petition filed against the Borrower or any Subsidiary of the Borrower seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law referred to in clause (iii) of paragraph (d) of this Section or an order of relief is entered pursuant to any such law with respect to the Borrower or any Subsidiary of the Borrower and such order, judgment, decree or appointment shall not be dismissed within a period of 60 days;

(f) The Borrower or any Subsidiary of the Borrower fails to pay at maturity or renew any Indebtedness of the Borrower or Subsidiary of the Borrower or the default by the Borrower or any Subsidiary of the Borrower under any note, indenture, mortgage or obligation incurred pursuant thereto, the effect of which default (assuming the giving of notice or the passage of time or both) accelerates, or entitles any Person to accelerate, any maturity thereof or results in the forfeiture by Borrower or such Subsidiary of any of its rights under any such note, indenture or mortgage and the amount of any such Indebtedness (other than Subordinated Debt) individually or in the aggregate exceeds $100,000;

(g) The Borrower or any Subsidiary of the Borrower suffers a final judgment against it which, within 60 days from the date such judgment is entered, shall not have

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been discharged or execution thereof stayed pending appeal unless (i) such judgment is adequately covered by insurance; or (ii) adequate accruals with respect to such judgment have been established in accordance with generally accepted accounting principles and the aggregate amount of all such judgments not adequately covered by insurance is not at any time in excess of $200,000;

(h) The Borrower or any Subsidiary of the Borrower suffers to exist any order, judgment, claim, notice, injunction or decree of any governmental agency in connection with any Environmental Law requiring Borrower to (1) pay any penalty, (2) take corrective action or reimburse any Person for corrective action or (3) correct any violation, if the potential cost to the Borrower and its Subsidiaries of any of same exceeds individually or in the aggregate $200,000 and such order, judgment, claim or notice is not dismissed or continuously stayed or enjoined within a period of five days from the date the Borrower’s payment or corrective action is required;

(i) A Change of Control shall have occurred;

(j) Any material adverse change shall have occurred to the business, condition (financial or otherwise), results of operation or prospects of the Borrower and its Subsidiaries, taken as a whole, since the Effective Date;

(k) Any Loan Document shall at any time and for any reason cease to be in full force and effect and binding on the Credit Party party thereto or shall be contested by any party thereto or any Credit Party shall deny it has any liability under any Loan Document to which it is a party, or any Loan Document shall at any time and for any reason cease to create an Acceptable Security Interest in the Property purported to be subject to such agreement in accordance with the terms of such agreement; or

(l) An ERISA Event shall have occurred.

Upon the occurrence and during the continuance of an Event of Default, the Bank may (i) declare the Bank’s obligation to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) may take any and all actions, including, without limitation, to declare the Notes or any one of them, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon said Note, all such interest and all such amounts shall become and be forthwith due and payable, without grace, demand, presentment for payment, notice of dishonor, default, acceleration of the maturity thereof and of the intent to accelerate the maturity thereof, protest and notice of protest and notice of any kind, filing of suit, diligence in collecting the Note and bringing suit and enforcing of the security rights of the Bank, all of which, except for the notices referred to in Sections 9.01(b) are hereby expressly waived by the Borrower, and thereafter the Bank may pursue any remedy or take any action that it may have hereunder, at law, in equity, or otherwise (including, but not limited to, reducing any claim to judgment) if the Note is not paid at maturity (on demand, by acceleration or otherwise); provided, however, that in the event of an Event of Default described in either clause (d) or (e) above, (A) the obligation of the Bank to make Advances shall automatically be terminated and (B) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.

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ARTICLE X

MISCELLANEOUS

SECTION 10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given;

SECTION 10.02 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopy or communication) and mailed, telecopied or delivered as follows:

(a) if to the Borrower, at its address at 7030 Empire Central Drive, Houston, Texas 77040, Attention: Chief Financial Officer;

(b) if to the Bank, at its address at 1000 Louisiana, 3^rd Floor, T5001-031, Houston, Texas 77002, Attention: Chad Johnson.

All such notices and communications shall when be effective when received.

SECTION 10.03 No Waiver; Remedies. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder or under the Notes shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 10.04 Costs, Expenses and Taxes. The Borrower shall pay on demand all reasonable out-of-pocket costs and expenses of the Bank in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement, the Notes, and the other Loan Documents, including costs associated with field examinations, appraisals and collateral reviews, the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect to advising the Bank as to its rights and responsibilities under this Agreement, and all out-of-pocket costs and expenses, if any, of the Bank in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of this Agreement, the Notes, and the other Loan Documents. If the Borrower fails to perform any agreement contained herein, the Bank may itself perform, or cause performance of, such agreement, and the costs and expenses of the Bank incurred in connection therewith shall be payable and the Borrower hereby promises to pay same, on demand.

SECTION 10.05 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by

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the Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Note, whether or not the Bank shall have made any demand under this Agreement or any such Note and although such obligations may be unmatured. The Bank shall apply any amounts set off as herein described first to the Indebtedness of the Borrower owing under the Notes and the Loan Documents. The Bank shall promptly notify the Borrower after any such set-off and application made by the Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section are in addition to other rights and remedies (including other rights of set-off) that the Bank may have.

SECTION 10.06 Interest. Anything in this agreement or the other Loan Documents to the contrary notwithstanding, the Borrower shall never be required to pay unearned interest on any Note and shall never be required to pay interest on such Note at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest that would otherwise be payable under this Agreement, the other Loan Documents and such Note would exceed the Highest Lawful Rate, or if the holder of such Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest that would increase the effective rate of interest payable by the Borrower under this Agreement and the other Loan Documents to a rate in excess of the Highest Lawful Rate, then (a) the amount of interest that would otherwise be payable by the Borrower under this Agreement, such Note and the other Loan Documents shall be reduced to the highest nonusurious amount allowed under applicable law; and (b) any unearned interest paid by the Borrower or any interest paid by the Borrower in excess of the Highest Lawful Rate shall be credited on the principal of such Note and to the extent any funds remain, refunded to the Borrower. Without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received by the Bank under the Note, or under this Agreement, are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate applicable to the Bank (such Highest Lawful Rate being the Bank’s “Maximum Permissible Rate”) and shall be made, to the extent permitted by usury laws applicable to the Bank (now or hereafter enacted), by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Advances evidenced by said Note all interest at any time contracted for, charged or received by the Bank in connection therewith. If at any time and from time to time (i) the amount of interest payable to the Bank on any date shall be computed at the Bank’s Maximum Permissible Rate pursuant to this Section and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to the Bank would be less than the amount of interest payable to the Bank computed at the Bank’s Maximum Permissible Rate, then the amount of interest payable to the Bank in respect of such subsequent interest computation period shall continue to be computed at the Bank’s Maximum Permissible Rate until the total amount of interest payable to the Bank shall equal the total amount of interest that would have been payable to the Bank if the total amount of interest had been computed without giving effect to this Section.

SECTION 10.07 Indemnification. The Borrower shall indemnify the Bank, the Affiliates of the Bank, and their respective directors, officers, employees, agents, representatives and attorneys of each of them (the “Indemnified Parties”) from, and hold each of them harmless against, any and all liabilities, obligations, losses, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to which any of them may become subject arising out of or based on the Loan Documents but excluding any such liabilities,

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obligations, losses, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever incurred by reason of the gross negligence or willful misconduct of the Indemnified Party. The obligations of the Borrower under this Section shall survive the termination of this Agreement and/or the payment or assignment of the Notes. IT IS THE EXPRESS INTENTION OF THE BORROWER THAT THE INDEMNIFIED PARTIES SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE INDEMNIFIED PARTY OR EACH OF THEM.

SECTION 10.08 Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Bank and thereafter shall be binding upon and inure to the benefit of the Borrower, the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank.

SECTION 10.09 Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of Texas without regard to its choice of law principles.

SECTION 10.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original.

SECTION 10.11 Assignment. The Bank may assign, transfer, convey or sell a participation or otherwise share its respective obligations and benefits hereunder; provided, however, that without the express written consent of the Borrower (which consent shall not be unreasonably withheld) no such assignment, transfer, conveyance or sale shall affect the rights and obligations of the Bank vis-a-vis the Borrower.

SECTION 10.12 Separability. Should any clause, sentence, paragraph or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void shall be deemed to have been stricken herefrom and the remainder shall have the same force and effectiveness as if such part or parts had never been included herein.

SECTION 10.13 Limitation by Law. All rights, remedies and powers provided in this Agreement and the other Loan Documents may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement and the other Loan Documents are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they will not render this Agreement or any other Loan Document invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law.

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SECTION 10.14 Waiver of DTPA Actions. THE BORROWER HEREBY WAIVES ALL PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (AS AMENDED FROM TIME TO TIME, THE “DTPA”) AND EXPRESSLY RECOGNIZES THAT IT (i) HAS ASSETS OF $5 MILLION OR MORE, (ii) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLES IT TO EVALUATE THE MERITS AND RISKS OF THIS TRANSACTION AND (iii) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO THE PARTIES TO THIS CREDIT AGREEMENT.

SECTION 10.15 Agreement for Binding Arbitration.

(a) Any controversy or claim between or among the parties hereto, including but not limited to those arising out of or relating to this Agreement or the Loan Documents, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the rules of practice and procedure for the arbitration of commercial disputes of the American Arbitration Association (“AAA”), and the “special rules” set forth in paragraph (b) below. In the event of any inconsistency, the special rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Agreement or any of the Loan Documents applies in any court having jurisdiction over such action.

(b) The arbitration shall be conducted in Houston, Texas and administered by AAA, who shall appoint an arbitrator; if AAA is unable or legally precluded from administering the arbitration, then the Judicial Arbitration and Mediation Services, Inc. shall serve. All arbitration hearings shall be commenced within 90 days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional 60 days.

(c) Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Agreement or the Loan Documents; or (ii) be a waiver by the Bank of the protection afforded to it by 12 U.S.C. §91 or any substantially equivalent state law; or (iii) limit the rights of the Bank hereto (A) to exercise self help remedies such as (but not limited to) set-off, or (B) to foreclose against any real or personal property collateral, or (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, writ of possession or the appointment of a receiver. The Bank may exercise such self help rights, foreclose upon such Property, or obtain such provisional or ancillary remedies before, during, or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither this exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies.

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SECTION 10.16 Final Agreement of the Parties. THIS AGREEMENT, THE NOTES, THE SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A “LOAN AGREEMENT” AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signatures on following page]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, effective as of the Effective Date.

FLOTEK INDUSTRIES, INC.,
a Delaware corporation
By:	/s/ Jerry D. Dumas, Sr.
	Jerry D. Dumas, Sr.
	Chairman and Chief Executive Officer

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WELLS FARGO BANK, NATIONAL ASSOCIATION
By:	/s/ Chad Johnson
	Chad Johnson
	Vice President

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EX-23

Exhibit 23

CONSENT OF UHY LLP

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Form 10-K of Flotek Industries, Inc. of our reports dated March 16, 2007, with respect to the consolidated financial statements and schedule of Flotek Industries, Inc. as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, Flotek Industries, Inc.’s management assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Flotek Industries, Inc. as of December 31, 2006, which appear in this Annual Report on Form 10-K for the year ended December 31, 2006.

/s/ UHY LLP

Houston, Texas

March 16, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Jerry D. Dumas, Sr., certify that:

1. I have reviewed this annual report on Form 10-K of Flotek Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ JERRY D. DUMAS, SR.

Jerry D. Dumas, Sr.

Chief Executive Officer

Date: March 16, 2007

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Lisa G.Meier, certify that:

1. I have reviewed this annual report on Form 10-K of Flotek Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ LISA G. MEIER

Lisa G. Meier

Chief Financial Officer

Date: March 16, 2007

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ JERRY D. DUMAS, SR.

Jerry D. Dumas, Sr.

Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ LISA G. MEIER

Lisa G. Meier

Chief Financial Officer