10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

  [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

Incorporated pursuant to the Laws of the State of Delaware

Internal Revenue Service – Employer Indentification No. 90-0023731

7030 Empire Central Drive, Houston, Texas 77040

(713) 849-9911

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 and 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 [x] No [_]

The number of shares of the Registrant’s common stock outstanding on August 19, 2003 was 6,105,003.

Transitional Small Business Disclosure Format:

Yes [_] No [x]

FLOTEK INDUSTRIES, INC.

TABLE OF CONTENTS

	Page
PART I.    FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statement of Changes in Stockholders' Equity	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	6
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 4.    Controls and Procedures	24
PART II.    OTHER INFORMATION
Item 1.    Legal Proceedings	26
Item 4.    Submission of Matters to a Vote of Secutiry Holders	26
Item 6.    Exhibits and Reports on Form 8-K	27
SIGNATURES	28

PART I — FINANCIAL INFORMATION

Item 1 — Consolidated Financial Statements

FLOTEK INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

	June 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	--		$	--
Accounts receivable, less reserves of $915,855 and $900,067
as of June 30, 2003 and December 31, 2002, respectively		2,733,228			2,034,381
Inventories		1,474,557			1,553,230
Other current assets		196,196			198,055
Assets held for sale from discontinued operations		1,402,470			1,958,610
Total current assets		5,806,451			5,744,276
Property, plant and equipment, net		2,714,984			2,692,059
Goodwill, net		12,266,346			12,266,346
Patents and other intangible assets, net		241,801			237,421
Total assets	$	21,029,582		$	20,940,102
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable	$	3,648,931		$	3,532,924
Current portion of long-term debt		1,170,675			977,695
Accounts payable		3,245,122			2,464,499
Accrued liabilities		174,899			91,971
Amounts due to related parties		736,214			100,892
Liabilities associated with discontinued operations		1,490,751			1,388,261
Total current liabilities		10,466,592			8,556,242
Long-term debt		2,902,326			3,039,649
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000 shares authorized,
no shares issued		--			--
Common stock, $.0001 par value, 20,000,000 shares authorized,
5,813,336 and 5,521,670 shares issued and outstanding as
of June 30, 2003 and December 31, 2002, respectively		581			552
Additional paid-in capital		16,548,127			16,373,156
Accumulated deficit		(8,888,044	)		(7,029,497	)
Total stockholders' equity		7,660,664			9,344,211
Total liabilities and stockholders' equity	$	21,029,582		$	20,940,102

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

1

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenues	$	3,617,869		$	2,877,740		$	6,946,314		$	5,909,395
Cost of sales		2,283,134			1,781,540			4,295,554			3,487,013
Gross margin		1,334,735			1,096,200			2,650,760			2,422,382
Expenses:
Selling, general and administrative		1,279,388			1,201,318			2,220,977			2,284,293
Depreciation and amortization		152,855			123,720			303,704			228,872
Research and development		23,628			43,229			40,687			65,428
Total expenses		1,455,871			1,368,267			2,565,368			2,578,593
Operating income (loss)		(121,136	)		(272,067	)		85,392			(156,211	)
Other income (expense):
Interest expense		(170,297	)		(145,991	)		(300,906	)		(228,745	)
Other, income (expense), net		347			(9,779	)		1,776			170
Total other income (expense)		(169,951	)		(149,301	)		(299,130	)		(228,575	)
Loss from continuing operations		(291,087	)		(427,837	)		(213,738	)		(384,786	)
Loss from discontinued operations		(410,689	)		(752,786	)		(486,974	)		(1,062,591	)
Loss on disposal of discontinued
operations		(1,157,835	)		--			(1,157,835	)		--
Cumulative effect of change in
accounting principal		--			--			--			(452,745	)
Net loss	$	(1,859,611	)	$	(1,180,623	)	$	(1,858,547	)	$	(1,900,122	)
Basic and diluted loss per common
share:
Loss from continuing operations		(0.05	)		(0.09	)		(0.04	)		(0.08	)
Loss from discontinued operations		(0.07	)		(0.15	)		(0.09	)		(0.22	)
Loss on disposal of discontinued
operations		(0.21	)		--			(0.21	)		--
Cumulative effect of change in
accounting principle		--			--			--			(0.09	)
Basic and diluted net loss per
common share	$	(0.33	)	$	(0.24	)	$	(0.33	)	$	(0.39	)
Weighted average number of
shares outstanding		5,635,223			4,910,812			5,578,760			4,901,608

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

2

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

	Common Stock Shares		Common Stock Amount		Additional Paid-in Capital		Accumulated Deficit			Total
Balance at December 31, 2002		5,521,670		552	$	16,373,156	$	(7,029,497	)	$	9,344,211
Common Stock issued for
Stock Grant		125,000		12		74,988		--			75,000
Common Stock issued for Cash		166,666		17		99,983		--			100,000
Net loss		--		--		--		(1,858,547	)		(1,858,547	)
Balance at June 30, 2003		5,813,336		581	$	16,548,127	$	(8,888,044	)	$	7,660,664

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

3

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Six Months Ended June 30,
	2003			2002
Cash flows from operating activities:
Loss from continuing operations	$	(213,738	)	$	(384,786	)
Adjustments to reconcile loss from continuing         operations to net cash used in:
Change in accounting principle		--			452,745
Depreciation and amortization		303,704			228,872
Stock grant		75,000			--
Increase (decrease) in:
Accounts receivable		(698,847	)		(1,399,999	)
Inventories and work in progress		39,474			214,705
Other current assets		1,859			(170,050	)
Deposits and other		--			44,189
Accounts payable and accrued expenses		679,711			41,893
Net cash provided by (used in) continuing operations		209,099			(972,431	)
Net cash provided by (used in) discontinued operations		(748,490	)		(648,497	)
Net cash used in operating activities		(539,391	)		(1,620,928	)
Cash flows from investing activities:
Acquisition of subsidiaries, net		--			(122,250	)
Capital expenditures		(274,323	)		(1,016,452	)
Net cash used in investing activities from continuing
operations		(296,259	)		(1,138,702	)
Net cash used in investing activities from
discontinued operations		--			(180,776	)
Net cash used in investing activities		(296,259	)		(1,319,478	)
Cash flows from financing activities:
Issuance of stock for cash		100,000			--
Proceeds from borrowings		319,993			2,508,436
Repayments of indebtedness		(225,602	)		(535,934	)
Proceeds from related parties		655,322			164,755
Net cash provided by (used in) financing
activities from continuing operations		849,713			2,137,257
Net cash provided by financing activities from
discontinued operations		(14,063	)		572,286
Net cash provided by financing activities		835,650			2,709,543
Net decrease in cash and cash equivalents		--			(230,863	)
Cash and cash equivalents - beginning of period		--			240,438
Cash and cash equivalents - end of period	$	--		$	9,575

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

4

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)

	Six Months Ended June 30,
	2003		2002
Supplemental disclosures of cash flow information:
Acquisition of subsidiaries:
Assets acquired:
Patents and other intangibles	$	--	$	104,466
Goodwill		--		207,250
		--		311,716
Common stock issued		--		(189,466	)
Net cash paid to sellers and transaction costs	$	--	$	122,250
Cash paid for interest	$	194,303	$	186,837

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

5

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 – Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and have been prepared by Flotek Industries, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information relating to the Company’s organization and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted in this Form 10-QSB pursuant to such rules and regulations. These financial statements reflect all adjustments, which the Company considers necessary for the fair presentation of such financial statements for the interim periods presented and the Company believes that the disclosures included herein are adequate to make the interim information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.

Note 2 – Acquisitions

In January 2002, the Company issued 26,116 shares of common stock valued at $82,309 to the former shareholders of Material Translogistics (“MTI”). Under the original acquisition agreement, which had an effective date of June 29, 2001, the shareholders of MTI could receive up to 52,232 additional shares of common stock, contingent upon the execution of two future contracts. One of these contracts became effective in January 2002 and the shares issued above relate to that contract. The other contract had not been executed as of June 30, 2003. See Note 15 of the Notes to Consolidated Financial Statements.

On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000, Inc. (“IBS”), a Denver-based company engaged in the development and manufacturing of environmentally neutral chemicals for the oil industry. IBS is in the development stage and has had limited operating history. The Company paid $100,000 in cash and issued 34,000 shares of common stock valued at $107,157 to acquire IBS. Including legal and other transaction costs, the acquisition resulted in the recording of approximately $197,000 of goodwill and other intangibles. Revenue and operations of IBS were immaterial.

Note 3 – Discontinued Operations

On June 27, 2003, the Company announced its intentions to divest its Equipment Specialties Division located in Duncan Oklahoma. The Company expects to finalize the sale of this division during the third quarter of 2003. The estimated proceeds from the sale are approximately $255,000 and the estimated loss on disposal is $1,157.0 thousand. The loss on disposal is recorded separately on the Consolidated Statement of Operations. Adjustments to the estimated loss, if any, will continue to be recorded through the date on which the transaction closes.

The Equipment Specialties Division is accounted for as a discontinued operation and therefore, the results of operations and cash flows have been removed from the company’s results of continuing operations for all periods presented in this document. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the results of discontinued operations. The Equipment Specialties Division was part of the Equipment Manufacturing segment. The results of Equipment Specialties Division have also been excluded from Results by Segment.

6

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Summarized selected financial information for the discontinued operations is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenue	$	898,902		$	502,553		$	1,490,917		$	1,130,482
Loss from discontinued
operations		(410,689	)		(752,786	)		(486,974	)		(1,062,591	)
Loss on disposal of discontinued
operations		(1,157,835	)		--			(1,157,835	)		--
Cumulative effect of change in
operations		--			--			--			(452,745	)
Net loss from discontinued
operations	$	(1,568,524	)	$	(752,786	)	$	(1,644,809	)	$	(1,515,336	)

The assets and liabilities of discontinued operations have been written down to their estimated sales values and are stated separately as of June 30, 2003 on the Consolidated Balance Sheets. The major asset and liability categories are as follows:

	June 30, 2003		December 31, 2002
Assets held for sale:
Inventory	$	213,491	$	264,487
Property, plant and equipment		1,188,979		1,694,123
Total assets held for sale	$	1,402,470	$	1,958,610
Liabilities - discontinued operations:
Capital lease obligation	$	1,402,326	$	1,388,261
Accounts payable		88,425		--
Liabilities associated with discontinued operations	$	1,490,751	$	1,388,261

Note 4 – Accounts Receivable

At June 30, 2003, the Company had approximately $1,227.0 thousand of accounts receivable from a customer in Venezuela, all of which arose from goods shipped in the first half of 2002. As a result of political instability and work disruptions in the country, these amounts have not been paid within the customary payment terms for this customer. The ultimate customer for these goods is PDVSA, the national oil company of Venezuela. Our customer holds a contract to deliver over $5 million of our proprietary products to PDVSA during the next three years. However, PDVSA has delayed acceptance of the majority of the goods shipped due to the recent political unrest and oil and gas industry work curtailment in Venezuela. The $1,227.0 thousand has not been shipped to the end customer (PDVSA). Operations personnel within PDVSA inform us that our product will be needed as they begin to increase oil production to pre-strike levels. We believe the product will eventually be shipped to PDVSA but we cannot predict when. Thus, we have established a reserve for doubtful accounts for $878.0 thousand, the portion that we believe to be unrealizable if the product is not ultimately delivered to PDVSA. We fully expect, once PDVSA accepts the product, they will pay, as they have in 2002, within their customary payment terms.

7

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Note 5 – Inventories and Work in Progress

Inventories consist of raw materials, finished goods and parts and materials used in manufacturing and construction operations. Finished goods inventories include raw materials, direct labor and production overhead. Inventories are carried at the lower of cost or market using the average cost method. The Company maintains a reserve for impaired or obsolete inventory, which is reviewed for adequacy on a periodic basis. Work in progress consists of percentage of completion revenues recognized in excess of customer billings and deposits and billings in excess of revenues on specific contracts. Inventory held for sale associated with discontinued operations of the Equipment Specialties Division consists of work-in-progress jobs net yet complete and manufacturing parts and materials associated with this business. The components of inventories and work in progress at June 30, 2003 and December 31, 2002 were as follows:

	June 30, 2003			December 31, 2002
Raw materials	$	299,900		$	409,806
Finished goods		1,545,370			1,534,387
Manufacturing parts and materials		29,231			--
Work in Progress		160,212			91,100
Inventory obsolescence reserve		(559,456	)		(482,063	)
Inventories and work in progress, net	$	1,474,557		$	1,553,230

Note 6 – Property, Plant and Equipment

At June 30, 2003 and December 31, 2002, property, plant and equipment was comprised of the following:

	June 30, 2003			December 31, 2002
Land	$	68,000		$	68,000
Buildings and leasehold improvements		1,952,349			1,809,552
Machinery and equipment		873,284			873,626
Furniture and fixtures		64,716			64,716
Transportation		502,624			444,775
Computer equipment		191,103			98,743
Total property and equipment		3,652,076			3,359,412
Less accumulated depreciation		(937,092	)		(667,353	)
Net property and equipment	$	2,714,984		$	2,692,059

8

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Note 7 – Goodwill and Other Intangible Assets

The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) effective January 1, 2002. This statement addresses accounting and reporting for acquired goodwill and intangible assets. In the third quarter of 2002 the Company completed its initial assessment of goodwill impairment as required under SFAS No. 142. In accordance with the transitional provisions of SFAS No. 142, the Company determined, with the assistance of an independent appraiser, that the carrying value of goodwill and related assets of the Equipment Specialties, Inc. (“ES”) reporting unit exceeded its fair value. As of January 1, 2002, there was approximately $1.3 million of goodwill attributable to the Equipment Manufacturing segment which consists of two reporting units, ES and Material Translogistics, Inc. (“MTI”). As a result, the Company recognized a charge to income of $452,745 ($.09 loss per share) for the ES reporting unit which represents all of this unit’s goodwill. Our test concluded there was no impairment for MTI. The goodwill impairment is reflected as the cumulative effect of change in accounting principle during the first quarter of 2002. As of the end of each period presented, all of the Company’s other intangible assets had definitive lives and were being amortized accordingly.

Our impairment testing for all reporting segments will be performed during the 4th quarter of the current and all subsequent years.

Following is a reconciliation of the reported net income (loss) to the adjusted net income (loss) reflecting the impact of the adoption of SFAS No. 142 on all periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Reported net loss:
Reported net loss	$	(1,859,611	)	$	(1,180,623	)	$	(1,858,547	)	$	(1,900,122	)
Add back: Cumlative effect of accounting
change for impairment of goodwill
operations		--			--			--			(452,745	)
Adjusted net loss	$	(1,859,611	)	$	(1,180,623	)	$	(1,858,547	)	$	(1,447,377	)

Basic and diluted loss per share:
Reported net loss	$	(.33	)	$	(.24	)	$	(.33	)	$	(.39	)
Add back: Cumlative effect of accounting
change for impairment of goodwill
operations		--			--			--			(.09	)
Adjusted net loss	$	(.33	)	$	(.24	)	$	(.33	)	$	(.30	)

The Company evaluates the recoverability of its intangible assets subject to amortization in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds the sum of the future undiscounted cash flows attributable to such asset or the business to which such asset relates and the net book value exceeds fair value. As of June 30, 2003, the Company did not recognize any impairment associated with its long-lived assets.

9

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Other intangible assets are comprised of the following:

	June 30, 2003				December 31, 2002
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents	$	292,463	$	113,341	$	266,148	$	102,099
Other Intangibles		104,464		41,785		104,464		31,092
Total	$	396,927	$	155,126	$	370,612	$	133,191

	Aggregate Amortization Expense for the Six Months Ended
	June 30, 2003		June 30, 2002
Patents	$	11,242	$	5,908
Other Intangibles		10,693		10,447
Total	$	21,935	$	16,355

Estimated Amortization Expense:
For the year ended December 31, 2003	$	68,400
For the year ended December 31, 2004	$	57,954
For the year ended December 31, 2005	$	26,616
For the year ended December 31, 2006	$	26,616
For the year ended December 31, 2007	$	26,616

Note 8 – Capital Lease Obligation

On February 28, 2002, the Company sold its rights and obligation to purchase land and buildings covered by a capital lease obligation, together with capital improvements to the property totaling approximately $750,000, to Oklahoma Facilities, LLC (“Facilities”). An officer of the Company has a minority investment interest in and is an officer of Facilities. The total consideration at closing was $1,400,000, with net cash proceeds to the Company of $761,000. The transaction did not generate any gain or loss. The Company simultaneously entered into a capital lease agreement with Facilities under which it is obligated to pay average rent of $18,000 per month for a fixed term of ten years. The Company has the right to buy the property at any time during the first two years of the lease for a fixed price of $1,400,000. The Company also has the option to purchase the building for a fixed price of $420,000 at the end of the ten-year lease term.

The capital lease liability is recorded within Liabilities – Discontinued Operations as presented in Note 3 of the Notes to Consolidated Financial Statements.

10

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following schedules represent the future minimum lease payments under the capital lease as previously reported in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002 and as renegotiated May 8, 2003:

As reported December 31, 2002:
2003	$	226,500
2004		237,000
2005		219,500
2006		216,000
2007		216,000
Thereafter		900,000
Total	$	2,015,000
As renegotiated May 8, 2003:
2003	$	120,000
2004		261,250
2005		289,500
2006		228,250
2007		216,000
Thereafter		900,000
Total	$	2,015,000

As of June 30, 2003, the Company was in arrears in principal and interest payments to Oklahoma Facilities in the amount of $74,500 for its Capital Lease obligation.

Note 9 – Notes Payable

Notes payable at June 30, 2003 and December 31, 2002 consisted of the following:

	June 30, 2003		December 31, 2002
Revolving line of credit, secured by accounts receivable and
inventory, bearing interest at the prime rate plus 1.25%, due in
August 2003, with maximum borrowings of $1,414,085 (1)	$	1,414,085	$	1,414,085
Revolving line of credit, secured by accounts receivable and
inventory, bearing interest at the prime rate plus 1.25%, due in
August 2003, with maximum borrowings of $1,609,116 (2)		1,609,116		1,593,109
Note payable, secured by accounts receivable, bearing interest at the
prime rate plus 4.25%, payable in monthly installments of $8,045
including interest, due upon collection of the pledged accounts
receivable or August 1, 2003, whichever is earlier		495,780		495,780
Note payable, bearing interest at 10% annually, payable in monthly     installments of $8,792 monthly beginning October 1, 2003		100,000		--
Other notes payable		30,000		30,000
Total notes payable	$	3,648,931	$	3,532,924

11

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

On July 25, 2002, the Company borrowed $500,000 under a promissory note from Oklahoma Facilities LLC (“Facilities”). An officer of the Company has a minority investment interest in and is an officer of Facilities. The note is secured by an account receivable from the Company’s major customer in Venezuela. The note requires payments of interest only for the first three months and fixed payments of $8,045 per month thereafter. The note is due upon the collection of the account receivable, but in any event must be paid in full by August 1, 2003. Proceeds from the loan were used to meet general corporate purposes. Interest and principal payments totaling $48,270 as of June 30, 2003, have not been made on this obligation. As of August 6, 2003, the Company was in default and is in negotiations with Facilities to remedy the default. See Note 15 of the Notes to Consolidated Financial Statements.

At June 30, 2003, the Company was not in compliance on its borrowing base requirements for its revolving lines of credit by the amount of $258,299. The Lender has not determined the impact of the event on the Company’s revolving lines of credit.

⁽¹⁾ Limited to a borrowing base amount calculated as 60% of eligible accounts receivable and inventory.

⁽²⁾ Limited to a borrowing base amount calculated as 50% of eligible accounts receivable and inventory.

Note 10 – Long-Term Debt

Long-term debt at June 30, 2003 and December 31, 2002, consisted of the following:

	June 30, 2003		December 31, 2002
Notes payable to shareholders of acquired businesses, unsecured,
bearing interest at 9% payable quarterly, due in five annual
installments of $200,000 each beginning January 2002 (1)	$	800,000	$	800,000
Note payable to bank, bearing interest at the prime rate plus 1%,
payable in monthly installments of $39,812 including interest,
due in January 2008 (2)		1,935,558		2,025,119
Note payable to bank, bearing interest at the prime rate plus 1%,
payable in monthly installments of $14,823 including interest,
due in September 2004 (3)		266,499		307,375
Construction loan payable to bank, bearing interest at the prime
rate plus 2%, payable in monthly installments of $16,958
including interest, due in December 2003 (4)		759,033		594,740
Mortgage note on property, bearing interest at 10%, payable in
monthly installments of $1,470 including interest, due in
December 2012		107,906		111,228
Note payable to Duncan Area Economic Development Foundation,
unsecured, interest at 6%, payable in monthly installments of
$1,934 including interest, due in May 2006		59,812		68,182
Secured vehicle and other equipment loans		144,173		110,700
Total		4,073,001		4,017,344
Less current maturities		1,170,675		977,695
Long-term debt	$	2,902,326	$	3,039,649

12

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following is a schedule of future maturities of long-term debt:

For the Month Ending June 30, 2003
2004	$	1,170,675
2005	$	875,979
2006	$	884,126
2007	$	907,014
2008	$	164,192
Thereafter	$	71,016

The revolving lines of credit and bank notes payable are owed to the Company’s primary lending bank and are secured by substantially all of the assets of the Company. They have also been personally guaranteed by an officer of the Company.

⁽¹⁾ On February 24, 2003, the Company entered into a forbearance agreement with two shareholders of acquired businesses extending $100,000 each of the principal payments due, under the original promissory note, on January 22, 2003 until June 30, 2003 and September 30, 2003. Interest at 9% under the terms of the original note continues to be payable quarterly. In the event that principal payments are not made when due, a penalty of 5.25% of the outstanding unpaid principal will be assessed and, in addition, interest will default to a rate of 12% per annum until past due amounts are paid. See Note 15 of the Notes to Consolidated Financial Statements.

⁽²⁾ As of June 30, 2003, the Company was in arrears in interest payments in the amount of $12,742.

⁽³⁾ As of June 30, 2003, the Company was in arrears in interest payments in the amount of $1,320.

⁽⁴⁾ As of June 30, 2003, the Company was in arrears in interest payments in the amount of $4,217.

Note 11 – Related Party Transactions

On January 30, 2003, CESI Chemical (“CESI”), a Flotek Industries, Inc. company, entered into an agreement with Stimulation Chemicals, LLC (“SCL”) for the purchase of various raw materials from CESI Chemical suppliers under deferred payment terms. SCL will procure the raw materials as ordered by CESI granting CESI 120 day payment terms for a percent markup on established supplier prices up to a purchase value of $500,000. SCL invoices not paid by CESI within 120 days will bear interest at 1% per month. SCL is owed $480,056 as of June 30, 2003. SCL is owned jointly by Dr. Penny and Mr. Beall, whom are both directors of Flotek Industries, Inc. Dr. Penny is also an employee of the Company.

As of June 30, 2003, the Company was in arrears in interest payments to SCL in the amount of $1,087.

On February 11, 2003, Mr. Dumas, Chairman of the Board and Chief Executive Officer, made a short-term loan to the Company for $135,000 to cover operating cash flow requirements. This note bears interest at 6% annually. As of June 30, 2003, the current balance of the note payable to Mr. Dumas was $115,000. Additional amounts owed to Mr. Dumas as of June 30, 2003 total $141,158 for various operational loans bearing interest of 10% annually.

13

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Note 12 – Stock-Based Compensation

The Company recognizes compensation expense associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. The difference between the quoted market price as of the date of the grant and the contractual purchase price of shares is charged to operations over the vesting period. No compensation cost has been recognized for stock options with fixed exercise prices equal to the market price of the stock on the dates of grant. Pro forma net loss and loss per share disclosures as if the Company recorded compensation expense based on the fair value for stock-based awards have been presented in accordance with the provisions of Statement of Financial Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure", and are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Net loss from continuing operations:
As reported	$	(291,087	)	$	(427,837	)	$	(213,738	)	$	(384,786	)
Stock-based employee compensation
expense determined under fair value-
based method		57,078			--			57,078			--
Pro forma	$	(348,165	)	$	(427,837	)	$	(270,816	)	$	(384,786	)
Basic and diluted loss per
share of common stock:
As reported		(0.05	)		(0.09	)		(0.04	)		(0.08	)
Pro forma net loss		(0.06	)		(0.09	)		(0.05	)		(0.08	)

The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model, as determined with the assistance of a third-party appraiser, with the following assumptions for 2003: expected volatility of 50%; risk-free interest rate of 4.04%; and expected lives of 10 years. The fair value as determined on the date of the grant (April 3, 2003) was $.39 per common share.

On April 3, 2003, a stock grant of 125,000 shares was awarded to Mr. Jerry D. Dumas, Sr., Chairman and CEO of the Company. This award resulted in $75,000 of compensation expense.

Note 13 – Net Income (Loss) Per Common Share

Net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding. The dilutive effect of stock-based compensation and stock options is computed using the treasury stock method. The number of potentially dilutive securities for the three and six months ended June 30, 2003 was 144,136 shares. The potentially dilutive securities for the three and six months ended June 30, 2003 were not included in the computation of diluted earnings per share, since to do so would have been antidilutive due to our net loss position.

14

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Note 14 – Segment Information

The Company’s product lines are divided into three segments within the oilfield service industry:

•  The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used by other oilfield service companies in oil and gas well cementing, stimulation and production.

•  The Equipment Manufacturing segment designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies.

•  The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers.

The Company’s reportable segments are strategic business units that offer different products and services. Each business segment requires different technology and marketing strategies and is managed independently. The accounting policies used in each of the segments are the same as those described in the significant accounting policies disclosed in Form 10-KSB for the year ending December 31, 2002. The Company evaluates the performance of its operating segments based on operating income excluding unusual charges. Intersegment sales and transfers are not material.

The following table presents the revenues and operating income by business segment and on a comparable basis:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenues:
Specialty Chemicals	$	2,610,234		$	1,597,409		$	4,677,420		$	2,900,339
Equipment Manufacturing		436,857			593,761			1,067,017			1,076,001
Downhole Equipment		570,778			686,570			1,201,877			1,933,055
Consolidated	$	3,617,869		$	2,877,740		$	6,946,314		$	5,909,395
Income (loss) from operations:
Specialty Chemicals	$	432,224		$	148,698		$	726,826		$	260,732
Equipment Manufacturing		(26,430	)		18,501			112,037			88,490
Downhole Equipment		(6,585	)		(57,840	)		85,845			396,669
Corporate and Other		(520,345	)		(381,426	)		(839,316	)		(902,102	)
Consolidated	$	(121,136	)	$	(272,067	)	$	85,392		$	(156,211	)

15

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Note 15 – Subsequent Events

On July 28, 2003, the February 24, 2003 forbearance agreements with two shareholder’s of acquired businesses were modified to defer the payments due on June 30, 2003 and September 30, 2003, respectively, to not later than December 31, 2003 and January 22, 2004, respectively with no interest penalty. All other due dates for payments set forth are extended one (1) year from the original due date specified in these notes.

On August 1, 2003, the primary bank lender revolving lines of credit totaling $3,023,151 became due. Except for a borrowing base deficiency of approximately $258,000 these loans are performing as all interest payments are current as of this filing. The primary lender has not indicated, as of this filing, that they will not renew these lines of credit.

On August 6, 2003, the Company was in default on a $500,000 promissory note to Oklahoma Facilities LLC (“Facilities”). This note is secured by an account receivable from the Company’s major customer in Venezuela which has not been paid by that customer. The note was due on the earlier of collection of the pledged accounts receivable or August 1, 2003. Interest and principal payments totaling $48,270, as of June 30, 2003 have not been paid on this obligation. An officer of the Company has a minority interest in and is an officer of Facilities. The Company is in negotiations with Facilities to remedy the default.

As of August 12, 2003, the Company had received, subsequent to June 30, 2003, $175,000 from “accredited investors” for purchase of common stock. These proceeds were used for operating cash flow.

As of July 31, 2003 an employment agreement with a former shareholder of MTI and employee of the Company was terminated. This negates any further obligation for additional shares of common stock of the Company as mentioned in Note 2 of the Notes to Consolidated Financial Statements.

On August 12, 2003 an asset purchase agreement was signed with Special Equipment Manufacturing, Inc. (SEM) for the purchase of certain Equipment Specialties Division (ES) equipment and assets used in the discontinued business. Operations of the business were assumed by SEM on August 1, 2003. The initial sale proceeds from this transaction total approximately $225,000. Dr. Penny, an employee and director of Flotek Industries, Inc., is a majority owner and director of SEM.

16

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Flotek was established in 1985 and is currently traded on the OTC Bulletin Board market. On October 31, 2001, the Company completed a Merger with Chemical & Equipment Specialties, Inc. (“CESI”). The Merger has been accounted for as a reverse acquisition using the purchase method of accounting. In the Merger, the shareholders of the acquired company, CESI, received the majority of the voting interests in the surviving consolidated company. Accordingly, CESI was deemed to be the acquiring company for financial reporting purposes and the historical financial statements of the Company are the historical financial statements of CESI. All of the assets and liabilities of Flotek were recorded at fair value on October 31, 2001, the date of the Merger, and the operations of Flotek have been reflected in the operations of the combined company only for periods subsequent to the date of the Merger.

CESI was incorporated on June 27, 2000 to acquire businesses in the specialty chemical and equipment manufacturing segments of the oilfield service industry. It had no revenues or operations prior to the acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal’s Technology, Inc., and Padko International, Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in June 2001. These five companies are referred to collectively as the “CESI Acquired Businesses”.

The Company’s product lines are divided into three segments within the oilfield service industry:

• The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used by other oilfield service companies in oil and gas well cementing, stimulation and production.

• The Equipment Manufacturing segment designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies.

• The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers.

All of the Company’s businesses serve the oil and gas industry and are affected by changes in the worldwide demand for and price of oil and natural gas. The majority of our products are dependent on the level of exploration and development activity and the completion phase of oil and gas well drilling. Other products and services, such as our Petrovalve downhole pump products and a small number of our specialty chemicals are more closely tied to the production of oil and gas and are less dependent on drilling activity.

The oil and gas industry has continued to improve in 2003. Oil and gas commodity prices have remained strong and the U.S. rig count, as measured by Baker Hughes Incorporated, has continued to strengthen throughout the year. Having begun the year at 837 rigs, the count increased to 962 active rigs at the beginning of the second quarter and is currently at 1,097 rigs. This activity has been underpinned by demand for natural gas required to refill storage, which is still 20% below 2002 levels despite near record levels of injections. Natural gas and crude oil prices have remained strong through the second quarter. The current 12-month strip for natural gas is $4.85/MCF, up from $4.10 in 2002. Although crude prices have softened somewhat since the start of the Iraq war, wellhead and futures prices are still strong with the 12-month strip at $28.61. Our business will continue to benefit from these oil and gas commodity prices and the increase in drilling activity as we have seen in the second quarter.

On June 27, 2003, the Company announced its intentions to divest its Equipment Specialties Division located in Duncan Oklahoma. Company expects to finalize the sale of this division during the third quarter of 2003. The estimated proceeds from the sale are approximately $255,000 and the estimated loss on disposal is approximately $1,158.0 thousand. The loss on disposal is recorded separately on the Consolidated Statement of Operations. Adjustments to the estimated loss, if any, will continue to be recorded through the date on which the transaction closes.

17

The Equipment Specialties Division is accounted for as a discontinued operation and therefore, the results of operations have been removed from the company’s results of continuing operations for all periods presented in this document.

Results of Operations

	Six Months Ended June 30,
	2003			2002
Revenues	$	6,946,314		$	5,909,395
Cost of revenues		4,295,554			3,487,013
Gross margin		2,650,760			2,422,382
Gross margin %		38.2	%		41.0	%
Selling, general and administrative		2,220,977			2,284,293
Depreciation and amortization		303,704			228,872
Research and development		40,687			65,428
Total expenses		2,565,368			2,578,593
Operating income (loss)		85,392			(156,211	)
Operating income (loss) %		1.2	%		(2.6	)%
Interest expense		(300,906	)		(228,745	)
Other income, net		1,776			170
Other expense, net		(299,130	)		(228,575	)
Loss from continuing operations	$	(213,738	)	$	(384,786	)

Total revenues increased by $1,036,919 or 17.5% in the first six months of 2003 compared to the same period in 2002. As discussed in the segment analysis that follows, the Specialty Chemicals segment produced this increase in revenues in 2003 compared to 2002. The Equipment Manufacturing segment, which now excludes the discontinued operating results for Equipment Specialties, please refer to Note 3 of the Notes to Consolidated Financial Statements, was essentially flat between periods, while the Downhole Equipment segment had significantly lower revenues in the first half of 2003 compared to the same period in 2002 due to the Petrovalve line of downhole pump components.

On an aggregate basis, the gross margin as a percentage of revenues decreased from 41.0% in 2002 to 38.2% in 2003. The gross margin is best analyzed on a segment by segment basis, discussed below, as the margin varies significantly between operating segments and can vary significantly from period to period in certain of our operating segments. Gross margin for 2003 and 2002 also includes approximately $686,526 and $209,071; respectively, of selling, general and administrative (SG&A) costs that are considered direct overhead expenditures of providing sales and service. These reclassified costs reduced gross margin as a percentage of revenue for 2003 and 2002 by 10% and 4%; respectively.

SG&A represents the costs of selling and general and administrative expenses not directly attributable to products sold or services rendered. The revenues from services are less than 10% of consolidated revenues and the direct costs of providing these services are included in the cost of revenues. SG&A amounted to 32.0% of revenues in 2003, which is 6.7% lower than 2002, which was 38.7% of revenues. Significant emphasis and effort has been placed on reducing SG&A costs and these costs have decreased between comparable first half year periods for 2003 and 2002 from $2,284,293 for the first six months of 2002 to $2,220,977 for the first six months of 2003. Further reduction of SG&A is possible with respect to legal fees, once the patent litigation suit as described in Part II Item 1 is settled.

18

Depreciation and amortization expense increased $74,832 or 32.7% in the first half of 2003 compared to the same period in 2002. All of this increase is due to depreciation associated with the approximate $1.1 million capital investment at the MTI transload facility in Raceland, Louisiana.

Interest expense increased $72,161 or 32.7% in the first half of 2003 compared to the same period in 2002. The average amount of outstanding debt under the Company’s credit agreements and related party debt was significantly higher in 2003 as a result of the financing of capital expenditures and increased working capital needs between periods. The majority of the Company’s indebtedness carries a variable interest rate tied to the prime rate and is adjusted on a quarterly basis. This variable rate has been falling for the last several quarters.

Loss from discontinued operations decreased $575,617 or 54% in the first six months of 2003 as compared to the same period in 2002. The net loss reflected in 2002 contains approximately $700,000 worth of warranty work provided during that time.

Results by Segment

Specialty Chemicals

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenues	$	2,610,234		$	1,597,409		$	4,677,420		$	2,900,339
Gross margin	$	839,183		$	555,037		$	1,468,945		$	929,361
Gross margin percentage		32.1	%		34.7	%		31.4	%		32.0	%
Operating income	$	432,224		$	148,698		$	726,826		$	260,732
Operating margin percentage		16.6	%		9.3	%		15.5	%		9.0	%

Specialty Chemical revenues increased $1,777,081 or 61.3%, in the first six months of 2003 compared to the same period in 2002. Sales in this segment are heavily dependent on drilling activity and this increase is attributable to a 28% increase in drilling activity in the second quarter of 2003 compared to 2002, as well as market penetration in the US, Canada and Mexico and the addition of environmentally friendly chemicals to the product offering.

The gross margin in this segment slightly decreased from 32% for the first six months of 2002 to 31.4% for the same comparable period in 2003. The majority of this margin reduction is due to increased product costs on select products that we have not been able to pass on to the customer. Approximately one half of this increased cost occurred in the second quarter of 2003 and is directly related to the reduced margins of 2.6%, from 34.7% for the second quarter of 2002 to 32.1% for the second quarter of 2003. We expect margins in this segment to be somewhat lower than last year until we are able to curtail or stop the added product costs associated with a related party procurement arrangement. Reference Note 11 of the Notes to Consolidated Financial Statements. Gross margin for 2003 and 2002 also includes approximately $346,511 and $105,242, respectively, of reclassified overhead costs that are considered direct costs of providing sales and service.

Operating income increased $466,094 or 178.8%, in the first six months of 2003 compared to the same period in 2002, primarily as a result of increased revenues and gross margins between periods. This segment has very good operating leverage from revenue growth as evidenced by the $466,094 increase in operating income yielding 26% of the $1,777,081 revenue increase between periods. SG&A and other costs of operations were kept in line with increased levels of activity.

19

Operating results for the second quarter of 2003 compared to the same period in 2002, were higher for much of the same reasons mentioned above regarding the first six months of 2003.

Equipment Manufacturing

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenues	$	436,857		$	593,761		$	1,067,017		$	1,076,001
Gross margin	$	158,931		$	216,047		$	456,128		$	404,472
Gross margin percentage		36.4	%		44.0	%		42.7	%		37.6	%
Operating income (loss)	$	(26,430	)	$	18,501		$	112,037		$	88,490
Operating margin percentage		(6.1	)%		3.1	%		10.5	%		8.2	%

As discussed in Note 3 of the Notes to Consolidated Financial Statements, the Equipment Specialties reporting unit, which designed, manufactured and rebuilt specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport, is being discontinued with assets held for sale. The remaining operations in this segment consist of the MTI reporting unit which designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. The Equipment Manufacturing segment comparative financial information above relates only to the MTI reporting unit.

Equipment Manufacturing revenues were essentially flat between the first six months of 2003 compared to the same period for 2002. Increased revenues from opening the bulk material transload facility at Raceland, Louisiana essentially offset reduced revenues from the design and construction of bulk material handling facilities. Contract awards for bulk material handling facilities have declined significantly over the past twelve months due to a lack of customer capital spending and working capital limitations at Flotek Industries, Inc. which limited some customer projects to project management versus lump sum.

Gross margin percentage increased from 37.6% in the first six months of 2002 to 42.7% in the same comparable period for 2003 or 5.1%. This improvement was essentially due to product mix. Gross margin contributed by the bulk material transload facility at Raceland, Louisiana was 8.7% higher than margins contributed by the bulk material facility design and construction portion of this segment. Gross margin, as a percent of revenue, for the bulk material design and construction portion was essentially flat between the first six months of 2003 compared to the first six months of 2002. For 2003 and 2002, gross margin also includes approximately $339,985 and $103,829; respectively, of reclassified overhead costs that are considered direct overhead costs of providing sales and service.

Operating income increased $23,547 or 26.6% in the first six months of 2003 compared to the same period in 2002. This modest improvement is due to the higher margins contributed by the bulk material transload facility and a reduction of SG&A costs between reporting periods for this segment.

Operating results for the second quarter of 2003 compared to the same period in 2002 were lower due to a significant decrease in revenue and gross profit from bulk material facility design and construction projects. There will not be a significant emphasis on growing this business in the second half of 2003 due to working capital constraints and the higher risk of managing these projects.

20

Downhole Equipment

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2003
Revenues	$	570,778		$	686,570		$	1,201,877		$	1,933,055
Gross margin	$	336,620		$	325,117		$	725,687		$	1,088,549
Gross margin percentage		59.0	%		47.4	%		60.4	%		56.3	%
Operating income (loss)	$	(6,585	)	$	(57,840	)	$	85,845		$	396,669
Operating margin percentage		(1.2	)%		(8.4	)%		7.1	%		20.5	%

Downhole Equipment revenues decreased $731,178 or 37.8% in the first six months of 2003 compared to the same period in 2002. This significant decrease is due to reduced sales for the Petrovalve line of downhole pump components as the Turbeco line of casing centralizers has increased 129.5% between years. Petrovalve sales in the first six months of 2002 totaled $1,442,104 and were almost exclusively to one customer in Venezuela. As more fully discussed in Note 4 of the Notes to Consolidated Financial Statements and the Capital Resources and Liquidity section that follows, this customer has not paid for these goods within the customary payment terms. Sales to the Venezuela customer stopped after April 2002 due to political unrest in that country. In addition, oil and gas production workers went on strike in Venezuela in December 2002 further limiting use of tools previously sold. The strike has ended and production is approaching and/or exceeding pre-strike levels. We are optimistic that the customer will begin using our products previously sold but we do not foresee additional large sales to this country in 2003.

Gross margin percentage increased 4.1% from 56.3% in 2002 to 60.4% in 2003. This increase is due to the Turbeco line of casing centralizers. This reporting unit has contributed 92.4% of the gross margin for this reporting segment in the first six months of 2003 compared to the same period in 2002 at significantly improved margins over 2002. The Petrovalve line of downhole pump components did not contribute significantly to the operating results for this segment in the first six months of 2003 due to a lack of significant sales to international customers.

Operating income decreased $310,824 or 78.4% in the first six months of 2003 compared to the same period in 2002. This was due to the significant decline in revenue and gross profit for Petrovalve sales to international customers. SG&A expenses were lower for this segment, between periods, by approximately $60,000 but were not reduced further as we expect improved operating results for this segment in 2003. The Turbeco line of casing centralizers has shown significant improvement over the last several quarters and is now a significant profit contributor to this segment. We expect this reporting unit to continue to grow and produce positive operating results as drilling activity for 2003 continues to improve.

Operating results for the second quarter of 2003 compared to the same period in 2002 improved from an operating loss of ($57,840) in the first six months of 2002 to a reduced loss of ($6,585) in the same comparable period for 2003. This improvement is entirely due to the improved operating results of the Turbeco line of casing centralizers.

21

Capital Resources and Liquidity

In the first six months of 2003, the Company produced a loss from continuing operations of $213,738 and had positive cash flow from continuing operations of $209,099. The loss is the result of lower operating results for the Equipment Manufacturing segment, and higher SG&A and interest costs in the second quarter of 2003 compared to the first quarter of 2003. The positive cash flow from continuing operations is a result of minimal working capital requirements to grow operations in the first half of 2003 primarily for the Specialty Chemical segment and the Turbeco reporting unit which is part of the Downhole Equipment segment.

As of June 30, 2003, net working capital was a negative $4,660,141, resulting in a current ratio of .55 to 1. Accounts receivable have increased due to higher levels of activity for the Specialty Chemical segment and the Turbeco reporting unit which is part of the Downhole Equipment segment during the first six months of 2003. In addition, amounts due to related parties has increased $655,322 during the first six months of 2003 primarily due to an agreement between CESI Chemical (“CESI”), a Flotek Industries, Inc. company, and Stimulation Chemicals, LLC (“SCL”), owned by two directors of the Company, for the purchase of various raw materials from CESI chemical suppliers under deferred payment terms. See Note 11 of the Notes to Consolidated Financial Statements.

Cash and cash equivalents are $0.00 at June 30, 2003. As discussed in Notes 9, 10 and 11 of the Notes to Consolidated Financial Statements, several short-term financing arrangements have been made to help the Company’s working capital requirements until operating cash flows improve. Overall, the level of business activity is increasing and cash flow from operations is improving, but cash flow is still tenuous.

As discussed in Note 4 of the Notes to Consolidated Financial Statements, at June 30, 2003, the Company had approximately $1,227.0 thousand of accounts receivable from a customer in Venezuela, all of which arose from goods shipped in the first half of 2002. As a result of political instability and work disruptions in the country, these amounts have not been paid within the customary payment terms for this customer. The ultimate customer for these goods is PDVSA, the national oil company of Venezuela. Our customer holds a contract to deliver over $5 million of our proprietary products to PDVSA during the next three years. However, PDVSA has delayed acceptance of the majority of the goods shipped due to the recent political unrest and oil and gas industry work curtailment in Venezuela. The $1,227.0 thousand has not been shipped to the end customer (PDVSA). Our contacts within PDVSA inform us that our product will be needed as they begin to ramp up oil production. We believe the product will eventually be shipped to PDVSA but we cannot predict when. Thus, we have established a reserve for doubtful accounts for $878.0 thousand, the portion that we believe to be unrealizable if the product is not ultimately delivered to PDVSA. We fully expect, once PDVSA accepts the product, that they will pay, as they have in 2002, within their customary payment terms. The delay in collecting this accounts receivable has had a significant adverse effect on the cash flow of the Company.

Accounts payable and accrued expenses increased $679,711 during the first six months of 2003. This increase is primarily due to increased litigation payables and Equipment Specialties Division payables retained by the Company on jobs completed or in process that were not held for sale.

On February 28, 2002, the Company sold its rights and obligation to purchase the land and buildings covered by a capital lease obligation, together with capital improvements to the property totaling approximately $750,000 to Oklahoma Facilities, LLC (“Facilities”). An officer of the Company has a minority investment interest in and is an officer of Facilities. This transaction resulted in net cash proceeds to the Company of $761,000. The Company simultaneously entered into an agreement to lease back the facility over ten years. As of June 30, 2003, lease payments totaling $74,500 have not been paid on this indebtedness due to cash flow constraints. This transaction has been recorded as a capital lease as discussed in Note 8 of the Notes to Consolidated Financial Statements and is also included in Liabilities – Discontinued Operations as referenced in Note 3 of the Notes to Consolidated Financial Statements.

Compensation expense of $75,000 was recorded as a result of a 125,000 stock grant awarded to Mr. Jerry D. Dumas, Sr., Chairman and CEO of the Company.

In May 2003, the Company issued 166,666 shares of its common stock in a private offering to “accredited investors” in exchange for $100,000 of subscription proceeds, which was paid by the tender to the Company of $100,000 in cash. These proceeds were used for operating cash flow. See Note 15 of the Notes to Consolidated Financial Statements.

22

The Company has borrowed $319,993 in the first six months on 2003 under its line of credit arrangements, including an approximate $200.0 thousand refinance of the construction loan for the Material Translogistics transload facility in Raceland, Louisiana. In addition, as discussed in Note 10 of the Notes to Consolidated Financial Statements, on February 24, 2003, the Company entered into a forbearance agreement with two shareholders of acquired businesses extending $100,000 each of principal payments due, under the original promissory notes, on January 22, 2003 until June 30, 2003 and September 30, 2003. Interest at 9% under the terms of the original note continues to be payable quarterly. In the event that principal payments are not made when due, a penalty of 5.25% of the outstanding unpaid principal will be assessed and in addition, interest will default to a rate of 12% per annum, until past due amounts are paid.

On July 28, 2003, the February 24, 2003 forbearance agreement was modified to defer the $50,000 payment due June 30, 2003 to on or before December 31, 2003 and the $50,000 payment due September 30, 2003 to January 22, 2004, with no interest penalty. All other due dates for payments set forth in the Promissory Notes are extended one (1) year from the original due date specified in the Promissory Notes.

As of August 12, 2003, the revolving lines of credit, totaling $3,023,151 and secured by accounts receivable and inventory due August 1, 2003 have not been renewed by the lender. The Company has borrowings which have exceeded its eligible asset base by $258,299 at June 30, 2003. The Company is current as of August 14, 2003 on all interest payments associated with this revolving line of credit. We expect these lines to be renewed by the bank during August 2003 business. See Note 9 of the Notes to Consolidated Financial Statements.

On August 6, 2003, the Company was in default on a $500,000 promissory note to Oklahoma Facilities LLC (“Facilities”). As discussed in Note 9 of the Notes to Consolidated Financial Statements, this note is secured by an account receivable from the Company’s major customer in Venezuela which has not been paid by that customer. The note was due on the earlier of collection of the pledged accounts receivable or August 1, 2003. Interest and principal payments totaling $48,270 as of June 30, 2003, have not been made on this obligation. An officer of the Company has a minority investment in and is an officer of Facilities. The Company is in negotiations with Facilities to remedy the default.

The Company made debt service payments of $225,602 during the first six months of 2003. The company has estimated minimum debt service payments in 2003 of $1.6 million. This includes minimum principal and interest payments on Related Party indebtedness, Notes Payable, and Long-Term Debt as discussed in Notes 9, 10 and 11 of the Notes to Consolidated Financial Statements.

Capital expenditures in the first six months of 2003 totaled $296,259. These expenditures were primarily for additional improvements at the MTI transload facility in Raceland, Louisiana, and the purchase of a new financial software package and related hardware. The Company has an approved capital budget pool of $515,000 and anticipates using the majority of this pool during 2003 if business conditions continue to improve during the year.

The Company believes its operations are capable of generating sufficient cash flow to meet its debt service obligations if we successfully collect amounts due from our Venezuelan customer. However, the collection of these amounts, and certain other factors involved in executing our business strategy, are beyond our control. While the market we serve continues to steadily improve we believe the Company will need to raise additional capital through the sale of its debt or equity securities to provide the necessary cash flow to grow the business. There can be no assurance that the Company will be able to secure such financing on acceptable terms or raise the required equity.

23

Forward Looking Statements

Except for the historical information contained herein, the discussion in this Form 10-QSB includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “project,” “forecast,” “could” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-QSB regarding the Company’s financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Forward-looking information involves risks and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of operations may vary materially.

While it is not possible to identify all factors, we continue to face many risks and uncertainties that could cause actual results to differ from our forward-looking statements including:

• The Company is dependent on the oil and gas industry, and activity levels in the industry are volatile.

• Oil and gas prices are volatile and have a direct impact on the spending levels of our customers.

• Severe weather conditions, for example, hurricanes, can have a direct impact on activity levels in the affected areas, and oil and gas prices.

• The oilfield service industry is highly competitive and we must compete with many companies possessing greater financial resources and better established market positions.

• The introduction of new products and technologies by competitors may adversely affect the demand for our products and services.

• The Company’s debt service obligations may limit our ability to fund operations and capital spending or provide for future growth.

• Changes in political conditions, governmental regulations, economic and financial market conditions, unexpected litigation and other uncertainties may have an adverse effect on our operations.

Item 4 – Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company’s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation.

24

Within the 90 days prior to the date of this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Primary Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a — 14(c) and 15d — 14 (c) under the Securities Exchange Act of 1934). Based upon the evaluation, the Chief Executive Officer and Primary Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Previously noted weaknesses have been corrected.

25

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Milam Tool Company and the Estate of Jack J. Milam vs. Flotek Industries, Inc., Turbeco, Inc. and Jerry D. Dumas, Sr., individually, C.A. No. H-02-1647 (Jury Demanded), in the United States District Court, Southern District of Texas, Houston Division.

On May 1, 2002, Milam Tool Company and the Estate of Jack J. Milam filed a complaint against Flotek Industries, Inc., Turbeco, Inc. and Jerry D. Dumas, Sr., individually, in the United States District Court for the Southern District of Texas, Houston Division. The complaint asserts that the sale of TURBO-LOK turbulators, which are part of the Company’s Downhole Equipment segment, violates an agreement among the parties and infringes a United States patent controlled by the Plaintiffs. Plaintiffs seek injunctive relief and unspecified damages. The Company has answered the complaint. The Company strongly denies the assertions in the complaint and intends to vigorously contest this matter.

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

On May 22, 2003, Flotek Industries, Inc. held an annual stockholder’s meeting for purposes of considering and voting upon upon the following matters:

Election of Directors. The election of seven directors to serve until the next annual meeting of stockholders of the Company. Directors elected and votes cast were as follows:

Name	Votes For	Votes Against	Votes Withheld
Jerry D. Dumas, Sr.	3,934,809	-	1,586,861
Gary M. Pittman	3,951,839	-	1,569,831
Robert S. Beall	3,951,839	-	1,569,831
Barry E. Stewart	3,951,839	-	1,569,831
John W. Chisholm	3,950,925	-	1,570,745
Glenn S. Penny	3,951,839	-	1,569,831
William R. Ziegler	3,951,839	-	1,569,831

        The above represents all directors of Flotek Industries, Inc.

2003 Long-Term Incentive Plan. This plan is intended to provide employees, directors, consultants and other individuals rendering services to or on behalf of Flotek Industries, Inc. (the “Corporation”) and /or one or more of its subsidiaries an opportunity to acquire an equity interest in the Corporation. The Corporation intends to use the Plan to link the long-term interests of the stockholders of the Corporation and Plan Participants, attract and retain Participants’ services, motivate Participants to increase the Corporation’s value, and create flexibility in compensating Participants. The plan was approved as follows:

	Votes For	Votes Against	Votes Withheld
2003 Long-Term Incentive Plan	3,554,721	16,864	1,950,085

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Item 6 – Exhibits and Reports on Form 8-K

         (a) Exhibits:

         Index to Exhibits

Exhibit Number		Description of Exhibit
10.1		Asset Purchase Agreement dated August 12, 2003 for equipment sale between Flotek Industries, Inc. and Special Equipment Manufacturing, Inc.
10.2	*	The revolving line of credit, totaling $1,609,115.31 due August 1, 2003. Reference Note 9 of the Notes to Consolidated Financial Statements. (This exhibit is incorporated by reference to the Company's Form 10-QSB filed with the Commission on August 14, 2002.)
10.3	*	The revolving line of credit, totaling $1,414,085.31 due August 1, 2003. Reference Note 9 of the Notes to Consolidated Financial Statements. (This exhibit is incorporated by reference to the Company's Form 10-KSB filed with the Commission on April 15, 2002).
10.4	*	Forbearance Agreement dated July 28, 2003 between John Todd Sanner and Flotek Industries, Inc., successor in interest of Chemical & Equipment Specialties, Inc. (This exhibit is incorporated by reference to the Company's Form 10-KSB filed with the Commission on April 15, 2002).
10.5	*	Forbearance Agreement dated July 28, 2003 between Earl E. Schott and Flotek Industries, Inc., successor in interest of Chemical & Equipment Specialties, Inc. (This exhibit is incorporated by reference to the Company's Form 10-KSB filed with the Commission on April 15, 2002).
31.1		Rule 13a-15(e) and 15d-15(e) Certification of Chief Executive Officer.
31.2		Rule 13a-15(e) and 15d-15(e) Certification of Chief Financial Officer.
32		Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer.

         (b) Reports on Form 8-K

        During the quarter ended June 30, 2003, the Company filed the following Current Reports on Form 8-K:

Exhibit Number		Description of Exhibit
(i)	*	Current Report on Form 8-K dated July 3, 2003 reporting under Item 5 - Other events, announcement of the Company's intention to divest its Equipment Specialties Division located in Duncan Oklahoma. (This exhibit is incorporated by reference to the Company's Form 8-K filed with the Commission on July 3, 2003).

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 19, 2003


/s/ Mark D. Kehnemund
—————————————————
Mark D. Kehnemund
Chief Operating Officer & Chief Financial Officer

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EX-10

Exhibit 10.1

ASSET PURCHASE AGREEMENT

        THIS ASSET PURCHASE AGREEMENT (“Purchase Agreement”) is made and entered into as of the 1st day of August, 2003, by and between Special Equipment Manufacturing, Inc. (“Purchaser”), and Flotek Industries, Inc. (“Seller”) with reference to the following circumstances:

    A.        Seller has been engaged in the manufacturing of certain equipment used in the oil and gas well completion industry (the “Business”) and the products manufactured by Seller generally enjoy a good reputation within the oil and gas well completion industry;

    B.        Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, assets of Seller used in connection with the operation of Seller’s Business; and

    C.        Purchaser and Seller desire to effect such acquisition upon the terms and subject to the conditions contained herein.

        NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Purchaser and Seller hereby agree as follows:

    1.        Purchase and Sale of Assets.

        1.01     Agreement to Sell and Purchase.    On the terms and subject to the conditions set forth herein, Seller shall sell, transfer, convey, assign and deliver to Purchaser, and Purchaser shall purchase, at the Closing (as hereinafter defined), the following assets of Seller (collectively, “Purchased Assets”):

    (a)        Fixed Assets.    Fixed assets as listed in Appendix A.

    (b)        Work In Process.    The work in Process defined in Appendix B, calculated as costs-deposits-assumed payables.

    (c)        Warranties.    Buyer will assume warranties on Work in Process as listed in Appendix C. Seller will pay for authorized warranty work as outlined in Appendix D.

    (d)        Work Force.    Selected members of Seller’s assembled work force in place (the “Work Force”) will be assumed by the buyer on August 1, 2003, at the pay rates outlined in Appendix E;

    (e)        Intellectual Property.    Seller will execute an exclusive royalty agreement to sell the buyers intellectual property as outlined in Appendix F.

    (f)        Sub-lease.    Buyer will execute the sublease agreement with Seller of property leased by Equipment Specialties as outlined in Appendix G.

    (g)        Business Records.    All of Seller’s business books and records, operating systems and other information base (the “Business Records”);

    (h)        Know-How.    All of the Seller’s processes, formulas, designs, know-how and any other type or kind of proprietary information related to the Seller’s Business in any form whatsoever (the “Know-How”).

The Purchased Assets shall be conveyed to Purchaser free and clear of all liabilities, obligations, liens and encumbrances excepting only those liabilities and obligations which are expressly assumed by Purchaser hereunder.

        1.02     Definition of “Intellectual Property”.    As used herein, “Intellectual Property” means all domestic or foreign letters patent (including any reissue or re-examination thereof), patent applications (including any continuation, division, renewal or substitute thereof), patent licenses, inventions, software licenses other than licenses which are readily available for purchase by the general public, are subject to a nonexclusive license, and have not been substantially modified, know-how licenses, trade names, trademark registrations and applications, service mark registrations and applications, common law trademarks and service marks, copyrights, copyright registrations and applications, trade secrets, technical knowledge, know-how or other confidential proprietary information capable of being set forth in Appendix F which is owned or used by Seller in its Business.

        1.03     Excluded Assets.    All assets owned or leased by Seller, whether or not used in or which relate to the Business and which are not included in the Purchased Assets, shall be deemed excluded assets (the “Excluded Assets”), including, but not limited to certain inventory, accounts receivable, physical equipment, intangible assets not included in the Purchased Assets, including goodwill.

        1.04     Purchase Price.    In consideration of the sale, transfer, conveyance, assignment and delivery of the Purchased Assets by the Seller to Purchaser, Purchaser agrees to pay Seller a total purchase price of Two Hundred Twenty Five Thousand dollars ($225,000) (“Purchase Price”) with the amounts payable as follows:

    (a)        Sixty Thousand Dollars ($60,000) by cashiers check or by wire transfer to an account specified by Seller at closing;

    (b)        Seller assumes $88,425 in payables as outlined in Appendix B (p. B-4). Buyer will provide evidence from the supplier that transfers the payables from the Seller to the Buyer.

    (c)        Buyer provides 3 monthly payments in the amount of $25,525 for a total $76,575 each payment due and payable on September 31, 2003, October 31, 2003 and November 30, 2003. An interest rate of 6% per annum will be applied to all balances that extend beyond the due date. Final payment may be adjusted subject to mutual approval of Work in Process and any inventory that is agreed upon.

        1.05     No Assumption of Liabilities.    It is understood and agreed between the parties that Purchaser is not assuming and shall not be liable or responsible for any Liability (as hereinafter defined) of Seller. As used herein, the term “Liability” means any liability arising out of or relating to any of the Purchased Assets (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due).

        1.06     Employees.    Purchaser may, in its sole discretion, offer employment to certain employees of Seller, at agreed compensation and with such other employee benefits as may be available from time to time under the various employee benefit plans of Purchaser, to the extent each such employee is eligible under the terms of such plans. Seller will provide medical and dental insurance for the transferred employees that were previously insured by the Seller for a period of up to 60 days while Buyer acquires insurance. Seller will invoice Buyer for the time period Seller insures transferred employees but no more than 60 days.

        1.07     No Interference.    Following the Closing, Purchaser shall have exclusive rights to and ownership of the Purchased Assets and Seller and Shareholders covenant and agree that they shall have no right to, and shall not, direct or interfere with Purchaser’s use of the Purchased Assets.

    2.        Representations and Warranties by Seller and Shareholders.    Seller and Shareholders jointly and severally represent and warrant to Purchaser, as follows:

        2.01     Organization, Standing and Qualification.    Seller is a corporation duly organized, validly existing and in good standing under the laws of Oklahoma. Seller has all requisite corporate power and authority, permits, licenses and approvals required to conduct its business and is entitled to operate the business as it is now being operated and to own or lease its assets as now being owned or leased.

        2.02     Execution, Delivery and Performance of Purchase Agreement; Authority.    Neither the execution, delivery nor performance of this Purchase Agreement by Seller will, with or without the giving of notice or the passage of time, or both, conflict with, result in a default, right to accelerate or loss of rights under, or result in the creation of any lien, charge or encumbrance pursuant to (i) any provision of Seller’s certificate of incorporation or bylaws; (ii) any provision of any material agreement to which Seller is a party or by which Seller or any of the Purchased Assets are bound; (iii) any law or regulation by which Seller or any of the Purchased Assets are bound; (iv) any decree, injunction, judgment or order by which either Seller or any of the Purchased Assets are bound; or (v) any other governmental restriction by which either Seller or the Purchased Assets are bound. Seller does not need to give any notice to, or make any filing with, or obtain the approval or consent of any government or governmental agency prior to the Closing to consummate the transaction contemplated herein.

        Seller has the full power and authority (including all legal power and authority) to execute and to deliver this Purchase Agreement and to perform its obligations hereunder and all corporate proceedings required to be taken to duly authorize the execution, delivery and performance of this Purchase Agreement by Seller have been or, on or prior to Closing, will be properly taken.

        2.03     Valid and Binding Obligation.    This Purchase Agreement constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as enforceability may be restricted, limited or delayed by applicable bankruptcy or other laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity.

        2.04     Title to Purchased Assets.    Seller has and shall deliver to Purchaser good and marketable title to all of the Purchased Assets free and clear of any mortgage, pledge, lien, security interest, encumbrance, restriction, lease or adverse claim of any nature whatsoever.

        2.05     Intellectual Property; Other Purchased Assets.    Appendix F contains a complete and accurate list of all of the Intellectual Property. Except as set forth in Schedule 2.05: (i) Seller owns royalty free the entire right, title and interest in and to the Intellectual Property and the other Purchased Assets (including, without limitation, the right to use and license the same); (ii) there are no pending or threatened actions of any nature affecting the Intellectual Property or the other Purchased Assets; (iii) Seller is not aware of any facts or information that would adversely affect the validity or enforceability of the rights in the Intellectual Property or the other Purchased Assets; and (iv) Seller will assist Buyer as reasonably required to execute any additional documents necessary to perfect the transfer of the rights in the Intellectual Property or the other Purchased Assets performed hereunder.

    3.        Representations and Warranties by Purchaser.    Purchaser represents and warrants to Seller as follows:

        3.01     Organization.    Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Oklahoma, and has full corporate power and authority to: (i) enter into this Purchase Agreement and the related agreements referred to herein; (ii) carry out the transactions contemplated by this Purchase Agreement; (iii) carry on its business as now being conducted; and (iv) own, lease or operate its properties.

        3.02     Execution, Delivery and Performance of Purchase Agreement.    Neither the execution, delivery or performance of this Purchase Agreement by Purchaser will, with or without the giving of notice or the passage of time or both, conflict with, result in a default, right to accelerate or loss of rights under, or result in the creation of any claim, any lien or any encumbrance pursuant to: (i) the certificate of incorporation or bylaws (each as presently in effect) of Purchaser, (ii) any material agreement to which the Purchaser is a party or by which the Purchaser is bound, (iii) to the knowledge of Purchaser after reasonable inquiry, any law or any regulation by which the Purchaser is bound, (iv) any decree, injunction, judgment or order by which the Purchaser is bound, or (v) to the knowledge of Purchaser after reasonable inquiry, any other governmental restriction by which Purchaser is bound. To the knowledge of Purchaser, it does not need to give any notice to, or make any filing with, or obtain the approval or consent of any government or governmental agency prior to the Closing to consummate the transaction contemplated herein.

        Purchaser has the full power and authority to execute and deliver this Purchase Agreement and to perform its obligations hereunder. All proceedings required to be taken to duly authorize the execution, delivery and performance of this Purchase Agreement by Purchaser have been, or on or prior to Closing will be, properly taken.

        3.03     Valid and Binding Obligation.    This Purchase Agreement constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforceability may be restricted, limited or delayed by applicable bankruptcy or other laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity.

    4.        Conditions Precedent to Purchaser’s Obligations.    All obligations of Purchaser hereunder are subject, at the option of Purchaser, to the fulfillment of each of the following conditions at or prior to the Closing, and Seller shall exert its best efforts to cause each such condition to be so fulfilled:

        4.01     Representations and Warranties.    All representations and warranties of Seller and Shareholders contained herein or in any document delivered pursuant hereto shall be true and correct in all material respects when made and shall be deemed to have been made again at and as of the date of the Closing, and shall then be true and correct in all material respects except for changes in the ordinary course of business after the date hereof in conformity with the covenants and agreements contained herein.

        4.02     Covenants, Agreements and Obligations.    All covenants, agreements and obligations required by the terms of this Purchase Agreement to be performed by Seller and Shareholders at or before the Closing shall have been duly and properly performed in all material respects.

        4.03     No Material Adverse Change.    Since the date of this Purchase Agreement there shall not have occurred any material adverse change in the Business or the condition (financial or otherwise), business, properties, assets or prospects of Seller.

        4.04     No Action or Proceedings.    No action or proceeding shall have been instituted or, to the knowledge of Purchaser, threatened for the purpose of or with the probable effect of enjoining or preventing the consummation of the transactions contemplated by this Purchase Agreement.

        4.05    Closing Deliveries.    Seller shall have delivered all of its closing deliveries as set forth in Section 7.02.

    5.        Conditions Precedent to Seller’s Obligations.    All obligations of Seller at the Closing are subject, at the option of Seller, to the fulfillment of each of the following conditions at or prior to the Closing, and Purchaser shall exert its best efforts to cause each such condition to be so fulfilled:

        5.01     Representations and Warranties.    All representations and warranties of Purchaser contained herein or in any document delivered pursuant hereto shall be true and correct in all material respects when made and as of the Closing.

        5.02     Obligations.    All obligations required by the terms of this Purchase Agreement to be performed by Purchaser at or before the Closing shall have been and properly performed in all material respects.

        5.03     No Action or Proceedings.    No action or proceeding shall have been instituted or, to the knowledge of Seller, threatened for the purpose of or with the probable effect of enjoining or preventing the consummation of the transactions contemplated by this Purchase Agreement.

        5.04     Closing Deliveries.    Purchaser shall have delivered its closing deliveries as set forth in Section 7.03.

    6.        Purchase Price Reasonable.    Purchaser hereby acknowledges and agrees that it has had the opportunity to conduct its own investigation and valuation of the Purchased Assets and Purchaser, Seller and Shareholders agree that the Purchase Price represents a reasonable and fair amount to be paid to Seller for the Purchased Assets.

    7.        Closing; Closing Date.    The closing of the transactions contemplated by this Purchase Agreement (the “Closing”) shall take place at the offices of Equipment Specialties on or before August 1, 2003, or as soon thereafter as all of the conditions precedent set forth herein have been satisfied or waived or on such date as the Parties shall otherwise agree (the “Closing Date”).

        7.01     Seller's Deliveries at Closing.    At the Closing, Seller will deliver to Purchaser:

    (a)        Bill of Sale. A Bill of Sale duly executed by Seller for the respective Purchased Assets substantially in the form attached hereto as Exhibit 7.02(a);

    (b)        Other Transfer Documents. Such other good and sufficient instruments of conveyance, assignment and transfer, in form and substance satisfactory to Purchaser, as shall be effective to vest in Purchaser good and marketable title to the Purchased Assets; and

    (c)        Lien Releases. Documents showing the release of any and all security interests and liens on any of the Purchased Assets, in forms acceptable to Purchaser.

        7.02     Purchaser's Deliveries at Closing.    At the Closing, Purchaser will deliver to Seller the Purchase Price.

        7.03     Further Assurances.    At any time and from time to time after the Closing, at Purchaser’s request and without additional consideration, Seller and Shareholders will execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation and take such action as Purchaser may reasonably deem necessary or desirable in order to more effectively transfer, convey and assign to Purchaser, and to confirm Purchaser’s title to all of the Purchased Assets to put Purchaser in actual exclusive possession and exclusive operating control thereof and to assist Purchaser in exercising all rights with respect thereto.

    8.        No Warranties.

        8.01     Disclaimer of Warranties.    Except for the express representations and warranties contained in this Agreement, Seller makes no representations, express or implied, of any kind whatsoever with respect to the condition or quality of the Purchased Assets, or with respect to their merchantability or a fitness for a particular purpose. The Purchased Assets shall be transferred to the Purchaser on an “as is”, “where is” basis.

     9.     Indemnification.

        9.01     Obligation of Seller and Shareholders to Indemnify.    Seller and Shareholders shall indemnify and hold Purchaser harmless from, against and in respect of (i) any and all liabilities, obligations, debts, claims, losses and deficiencies (hereinafter collectively referred to as the “Damages”) incurred by Purchaser, resulting from the breach of any of the representations, warranties, covenants or agreements of Seller contained in this Purchase Agreement, and (ii) any and all actions, suits, proceedings, demands, assessments, judgments, damages, costs and expenses, including reasonable attorney’s fees, and all other damages incident to any of the foregoing.

        9.02     Obligation of Purchaser to Indemnify.    Purchaser shall indemnify and hold Seller harmless, from, against and in respect of (i) any and all Damages incurred by Seller, resulting from the breach of any of the representations, warranties, covenants or agreements of Purchaser contained in this Purchase Agreement and (ii) any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses, including reasonable attorneys fees, and all other damages incident to the foregoing. The indemnification provided in this paragraph 9.02 shall be in addition to such other indemnification as is set forth and provided for in that certain letter agreement of even date by and between Buyer and Sellers.

    10.        General.

        10.01     Payment by Defaulting Party.    In the event that any party (the “Defaulting Party”) defaults in his or its obligations under this Purchase Agreement and, as a result thereof, the other party (“Non-Defaulting Party”) seeks to legally enforce his or its rights hereunder against the Defaulting Party, then, in addition to all damages and other remedies to which the Non-Defaulting Party is entitled by reason of such default, the Defaulting Party shall promptly pay to the Non-Defaulting Party an amount equal to all costs and expenses (including reasonable attorneys’ fees) paid or incurred by the Non-Defaulting Party in connection with such enforcement.

        10.02     Notices.    All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered or certified mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

    (a)        Purchaser: Special Equipment Manufacturing, Inc., 3600 S. 13th St Duncan, OK 73533 Facsimile No.: (580) 252-4227 Attention: John Callihan, President

    (b)           Sellers: Mark Kehnemund, Flotek Industries, Inc., 7030 Empire Central, Houston, TX 77040 Facsimile No.: (713) 466-8386

        10.03     Integration; Amendment.    This writing constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified, amended or terminated except by a written agreement specifically referring to this Purchase Agreement signed by all of the parties hereto.

        10.04     Waiver.    No waiver of any breach or default hereunder shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature.

        10.05     Binding Effect.    This Purchase Agreement shall be binding upon and inure to the benefit of each corporate party hereto, its successors and assigns, and each individual party hereto and his heirs, personal representatives, successors and assigns.

        10.06     Captions.    The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said paragraphs.

        10.07     Counterparts.    This Purchase Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original.

        10.08     Governing Law.    This Purchase Agreement and all amendments thereof shall be governed by and construed in accordance with the law of the State of Oklahoma applicable to contracts made and to be performed therein, without reference to its conflict of laws provisions.

        10.09     Taxes.    The Parties acknowledge that no sales taxes are payable by reason of the transfer of the Purchased Assets contemplated under this Purchase Agreement.

        10.10     Certain Tax Reports.    If required, the Parties agree to file reports and information returns as required by Section 1060 of the Internal Revenue Code of 1986, as amended.

   IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement to be duly executed as of the date first above written.

SELLER:  Flotek Industries, Inc.



/s/ Mark Kehnemund
—————————————————
Mark Kehnemund, Chief Operating Officer

PURCHASER:  Special Equipment Manufacturing, Inc.



/s/ John Callihan
—————————————————
John Callihan, President

Executed this 12th day of August, 2003.

EXHIBITS:

7.02(a) — Form of Bill of Sale

      Exhibit 7.02(a)

Form of Bill of Sale

BILL OF SALE

        This Bill of Sale is made and entered into as of the 1st day of August, 2003 by Flotek Industries, Inc., a Delaware corporation (“Seller”).

        FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy of which are hereby acknowledged, Seller hereby sells, transfers, conveys, assigns and delivers to Special Equipment Manufacturing, Inc., certain property of the Seller used or generated by Seller in the operation of its manufacturing business which assets are described as the Purchased Assets in the Asset Purchase Agreement between the parties dated the 12th day of August, 2003 free and clear of all liens, claims, charges and encumbrances.

        IN WITNESS WHEREOF, Seller has executed this Bill of Sale as of the 12th day of August, 2003.

SELLER:  Flotek Industries, Inc.



/s/ Mark Kehnemund
—————————————————
Mark Kehnemund
Flotek Industries, Inc.
Chief Operating Officer

EX-31

Exhibit 31.1

CERTIFICATION

I, Jerry D. Dumas, Sr., certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Flotek Industries, Inc.

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) 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 quarterly report is being prepared;

b. 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 quarterly report based on such evaluation; and

c. Disclosed in this quarterly report any change in the registrant’s internal controls that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of 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 controls 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 controls.

Date: August 19, 2003


/s/ Jerry D. Dumas, Sr.
—————————————————
Jerry D. Dumas, Sr.
Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Mark D. Kehnemund, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Flotek Industries, Inc.

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) 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 quarterly report is being prepared;

b. 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 quarterly report based on such evaluation; and

c. Disclosed in this quarterly report any change in the registrant’s internal controls that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of 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 controls 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 controls.

Date: August 19, 2003


/s/ Mark D. Kehnemund
—————————————————
Mark D. Kehnemund
Chief Operating Officer & Chief Financial Officer

EX-32

         Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer
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 Quarterly Report of Flotek Industries, Inc. (the “Company”) on Form 10-QSB for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (August 19, 2003), Jerry D. Dumas, Sr., Chief Executive Officer of the Company, and Mark D. Kehnemund, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge 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.

A signed original of this written statement required by Section 906 has been provided to Flotek Industries, Inc. and will be retained by Flotek Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Date: August 19, 2003


/s/ Jerry D. Dumas, Sr.
—————————————————
Jerry D. Dumas, Sr.
Chief Executive Officer

Date: August 19, 2003


/s/ Mark D. Kehnemund
—————————————————
Mark D. Kehnemund
Chief Operating Officer & Chief Financial Officer