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, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	90-0023731
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)
7030 Empire Central Drive, Houston TX 77040
(Address of Principal Executive Offices)

(713) 849-9911

(Issuer’s telephone number)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES x    NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    YES o   NO x    

There were 8,815,464 shares of the issuer’s common stock, $.0001 par value, outstanding as of August 8, 2006.

Transitional small business disclosure format: YES o   NO x

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION	1
Item 1.  Financial Statements	1
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.  Controls and Procedures	20
PART II - OTHER INFORMATION	21
Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 4.  Submission of Matters to Vote of Security Holders	21
Item 6.  Exhibits.	21
SIGNATURES	22

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. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those in the forward-looking statements for various reasons, including, but not limited to, the effect of competition, the level of petroleum industry exploration and production expenditures, world economic and political conditions, prices of and the demand for crude oil and natural gas, weather, the legislative environment in the United States of America and other countries, adverse changes in the capital and equity markets, and other risk factors including those identified herein.

ii

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2006			December 31, 2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	364		$	7,377
Accounts receivable, net		16,219			10,407
Inventories, net		13,262			10,658
Other current assets		1,458			234
Total current assets		31,303			28,676
Property, plant and equipment, net		15,503			9,961
Goodwill		24,216			12,388
Intangible and other assets, net		1,540			1,133
	$	72,562		$	52,158
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,009		$	3,805
Accrued liabilities		6,925			3,296
Current portion of long-term debt		2,307			2,016
Current portion of deferred tax liability		319			319
Total current liabilities		17,560			9,436
Long-term debt, less current portion		10,298			7,277
Deferred tax liability, less current portion		254			240
Total liabilities		28,112			16,953
Stockholders’ equity:
Common stock, $.0001 par value; 20,000,000 shares authorized; shares issued and outstanding: June 30, 2006 - 8,814,589 and December 31, 2005 - 8,317,265		1			1
Additional paid-in capital		44,998			39,744
Accumulated deficit		(549	)		(4,540	)
Total stockholders’ equity		44,450			35,205
	$	72,562		$	52,158

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

1

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED INCOME STATEMENTS

(UNAUDITED)

(in thousands, except share data) 

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues	$	22,113		$	12,461		$	38,174		$	23,502
Cost of revenues		13,527			7,197			22,806			14,170
Gross profit		8,586			5,264			15,368			9,332
Expenses:
Selling, general and administrative		4,075			2,186			7,262			4,046
Depreciation and amortization		652			308			1,250			578
Research and development		157			147			312			278
Total expenses		4,884			2,641			8,824			4,902
Income from operations		3,702			2,623			6,544			4,430
Other income (expense):
Interest expense		(252	)		(241	)		(423	)		(438	)
Other, net		10			30			22			41
Total other income (expense)		(242	)		(211	)		(401	)		(397	)
Income before income taxes		3,460			2,412			6,143			4,033
Provision for income taxes		(1,225	)		(423	)		(2,152	)		(576	)
Net income	$	2,235		$	1,989		$	3,991		$	3,457
Basic and diluted earnings per common share:
Basic earnings per common share	$	0.26		$	0.29		$	0.47		$	0.51
Diluted earnings per common share	$	0.24		$	0.26		$	0.43		$	0.46
Weighted average common shares used in computing basic earnings per common share		8,582,259			6,803,846			8,485,450			6,770,904
Incremental common shares from stock options and warrants		706,712			814,852			713,910			781,468
Weighted average common shares used in computing diluted earnings per common share		9,288,971			7,618,698			9,199,360			7,552,372

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

2

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands) 

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	3,991		$	3,457
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,250			578
Change in assets and liabilities:
Accounts receivable		(4,261	)		(1,307	)
Inventories		(216	)		(925	)
Deposits and other		(1,211	)		26
Accounts payable		2,709			(453	)
Accrued liabilities		3,623			640
Deferred tax liability		15			(187	)
Net cash provided by operating activities		5,900			1,829
Cash flows from investing activities:
Acquisition earn-out payment		¾			(154	)
Acquisitions, net of cash acquired		(12,763	)		134
Other assets		(49	)		(238	)
Capital expenditures		(4,283	)		(953	)
Net cash used in investing activities		(17,095	)		(1,211	)
Cash flows from financing activities:
Issuance of stock		871			30
Proceeds from borrowings		11,459			5,153
Repayments of indebtedness		(8,148	)		(5,302	)
Payments to related parties		¾			(338	)
Net cash provided by (used in) financing activities		4,182			(457	)
Net increase (decrease) in cash and cash equivalents		(7,013	)		161
Cash and cash equivalents at beginning of period		7,377			285
Cash and cash equivalents at end of period	$	364		$	446
Supplementary schedule of non-cash investing and financing activities (See Note 3):
Fair value of net assets acquired	$	17,354		$	8,075
Less cash acquired		(208	)		(134	)
Less debt issued		¾			(7,375	)
Less equity issued		(4,383	)		(700	)
Acquisition, net of cash acquired	$	12,763		$	(134	)
Supplemental disclosure of cash flow information:
Interest paid	$	245		$	403
Income taxes paid	$	¾		$	325

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

3

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - General

The information contained in the following notes is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated condensed financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the year ended December 31, 2005 and related notes thereto, included in the Annual Report on Form 10-KSB filed by Flotek Industries, Inc. (“Flotek”) with the Securities and Exchange Commission. All references to the “Company” include Flotek and its wholly-owned subsidiaries unless otherwise indicated or the context indicates otherwise.

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

In the opinion of management, the unaudited consolidated condensed financial statements of the Company include all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of its financial position as of June 30, 2006 and its results of operations and cash flows for the three and six month periods ended June 30, 2006 and 2005. The consolidated condensed statement of financial position as of December 31, 2005 is derived from the December 31, 2005 audited consolidated financial statements. Although management believes the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and cash flow for the six month period ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year.

Certain prior period amounts have been reclassified in the accompanying consolidated condensed financial statements to conform to the current period presentation.

Note 2 - Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".  FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes" and must be adopted by the Company no later than January 1, 2007.  FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns.  The Company is evaluating the impact of adopting FIN 48.

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

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

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

4

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

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

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 as of January 1, 2006. The adoption of SFAS No. 151 has had no material impact on our consolidated financial position, results of operations and cash flows as of June 30, 2006.

Note 3 - Acquisitions

The Company has made three acquisitions in the six months ended June 30, 2006. On January 2, 2006, the Company purchased the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (collectively “Can-Ok”) a downhole oilfield tool company located in Chickasha, Oklahoma. On April 3, 2006, the Company purchased the tangible assets and licensed the rights to exercise the exclusive worldwide rights to a patented gas separator used in coal bed methane production from Total Well Solutions, Inc. (“TWS”). TWS markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin. On June 6, 2006, the Company purchased the assets of LifTech, LLC (“LifTech”) which markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin.

5

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

	Can-Ok		TWS		LifTech
	(in thousands, except share data)
Assets acquired:
Cash	$	38	$	¾	$	170
Accounts receivable, net		476		¾		1,076
Inventory		85		1,603		863
Plant, property and equipment (net)		1,972		170		291
Goodwill		4,923		2,939		3,709
Intangible and other assets		206		160		173
Total assets acquired	$	7,700	$	4,872	$	6,282
Liabilities assumed:
Accounts payable	$	394	$	¾	$	1,100
Accrued liabilities		6		¾		¾
Total liabilities assumed	$	400	$	¾	$	1,100
Net assets acquired	$	7,300	$	4,872	$	5,182
Consideration paid:
Cash	$	6,775	$	4,872	$	1,323
Common stock		525		¾		3,859
Total consideration paid	$	7,300	$	4,872	$	5,182
Common stock shares issued		25,020		¾		178,223

Note 4 - Inventories

The components of inventories for the period ended June 30, 2006 and December 31, 2005 were as follows: 

	For the Period Ended
	June 30, 2006			December 31, 2005
	(in thousands)
Raw materials	$	3,533		$	2,409
Work-in-process		¾			51
Finished goods		10,146			8,603
Gross inventories		13,679			11,063
Less: Slow-moving and obsolescence reserve		(417	)		(405	)
Inventories, net	$	13,262		$	10,658

6

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 5 - Property, Plant and Equipment

For the period ended June 30, 2006 and December 31, 2005, property, plant and equipment was comprised of the following:

	For the Period Ended
	June 30, 2006			December 31, 2005
	(in thousands)
Land	$	461		$	409
Buildings and leasehold improvements		3,306			3,026
Machinery, equipment and rental tools		10,719			7,882
Equipment in progress		3,181			464
Furniture and fixtures		167			123
Transportation equipment		1,709			1,068
Computer equipment and other		467			433
Gross property, plant and equipment		20,010			13,405
Less: Accumulated depreciation		(4,507	)		(3,444	)
Net property, plant and equipment	$	15,503		$	9,961

Note 6 - Goodwill

The Company evaluates the carrying value of goodwill during the fourth quarter of each year and on an interim basis, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a discounted cash flows approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill completed during 2005 resulted in no impairment losses.

7

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 7 - Long-Term Debt

Long-term debt for the period ended June 30, 2006 and December 31, 2005 consisted of the following: 

	For the Period Ended
	June 30, 2006			December 31, 2005
	(in thousands)
Senior Credit Facility
Equipment term loan	$	4,900		$	5,717
Real estate term loan		770			803
Revolving line of credit		4,238			¾
Amendments to Senior Credit Facility
Equipment term loan		1,217			1,289
Real estate term loan		214			222
Promissory notes to stockholders of acquired businesses, maturing February 2008		862			1,004
Other		404			258
Total		12,605			9,293
Less current maturities		(2,307	)		(2,016	)
Long-term debt, less current portion	$	10,298		$	7,277

The Company’s revolving line of credit as amended on August 19, 2005 provided for borrowing through February 14, 2007, bearing interest at prime rate plus 50 basis points. The maximum amount that may be outstanding under the amended line of credit is the lesser of (a) $6,000,000, or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined. The terms are interest-only, maturing February 2007.

On August 8, 2006, the Company again amended the Senior Credit Facility. The maturity date and the maximum amount that may be outstanding were amended on the revolving line of credit. The amended revolving line of credit provides for borrowing through August 8, 2009. The maximum amount that may be outstanding was increased to the lesser of (a) $10.0 million (a $4.0 million increase from the August 2005 amended revolving line of credit of $6.0 million), or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined.

Based on the new maturity date, the current revolving line of credit is classified as long-term debt.

All bank borrowings are collateralized by substantially all of our assets. Bank borrowings are subject to certain financial covenants and a material adverse change subjective acceleration clause. As of June 30, 2006, the Company was in compliance with all covenants.

The Company believes the fair value of its long-term debt approximates the recorded value as of June 30, 2006, as the majority of the long-term debt carries a floating interest rate based on the prime rate.

Note 8 - Common Stock

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

Issued and outstanding as of December 31, 2005	8,317,265
Shares issued for Can-Ok acquisition (See Note 3)	25,020
Shares issued for LifTech acquisition (See Note 3)	178,223
Warrants exercised through June 30, 2006	26,490
Stock options exercised through June 30, 2006	267,591
Issued and outstanding as of June 30, 2006	8,814,589

Note 9 - Earnings Per Share(“EPS”)

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

8

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
	(in thousands, except share data)
Net income	$	2,235	$	1,989	$	3,991	$	3,457
Weighted-average common shares outstanding		8,582,259		6,803,846		8,485,450		6,770,904
Basic earnings per common share	$	0.26	$	0.29	$	0.47	$	0.51
Diluted earnings per common share	$	0.24	$	0.26	$	0.43	$	0.46
Weighted-average common shares outstanding		8,582,259		6,803,846		8,485,450		6,770,904
Effect of dilutive securities		706,712		814,852		713,910		781,468
Weighted-average common equivalent shares outstanding		9,288,971		7,618,698		9,199,360		7,552,372

Note 10 - Stock-Based Compensation

The Company adopted SFAS 123R effective as of January 1, 2006. SFAS 123R requires all stock-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. The Company follows the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock-based compensation had been expensed.

Prior to the adoption of SFAS 123R, the Company accounted for stock based employee compensation under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense is recognized in the financial statements because the exercise price of the employee stock options equals the market price of the common stock on the date of grant.

By accelerating the vesting of all outstanding options as of December 22, 2005 (see Note 2), the Company accounted for the stock options under the rules in effect when the stock options were granted, APB 25, versus SFAS 123R adopted on January 1, 2006.

9

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Under SFAS 123R, the Company’s compensation costs based on the fair value at the grant date for its stock options, net income and EPS would have been reduced to the following pro forma amounts for the prior comparable quarter: 

	For the Three Months Ended June 30, 2005		For the Six Months Ended June 30, 2005
	(in thousands, except share data)
Net income:
As reported	$	1,989	$	3,457
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		¾		¾
Pro forma	$	1,989	$	3,457
Basic earnings per share:
As reported	$	0.29	$	0.51
Pro forma	$	0.29	$	0.51
Diluted earnings per share:
As reported	$	0.26	$	0.46
Pro forma	$	0.26	$	0.46

For the three and six months ended June 30, 2006, the Company did not grant any stock options. As a result, no stock based compensation expense was recorded for the three and six months ended June 30, 2006.

Note 11 - Income Taxes

A reconciliation of the effective income tax rate to the statutory income tax rate is as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Income tax (benefit) at statutory rate		34.0	%		34.0	%		34.0	%		34.0	%
State taxes, net of federal benefit		(0.8	)		2.0			2.2			2.0
Deductible items		(0.3	)		¾			(0.5	)		¾
Change in valuation allowance		¾			(18.5	)		¾			(21.7	)
Other		2.5			¾			(0.7	)		¾
Provision for income taxes		35.4	%		17.5	%		35.0	%		14.3	%

Our effective income tax rate in 2006 and 2005 differs from the federal statutory rate primarily due to state income taxes and changes in the valuation allowances due to the change in management’s estimate of the utilization of net loss carryforwards. A valuation allowance was provided against our net deferred tax assets relating to our net operating losses in the amount that management believes is more likely than not to expire unrealized based on existing carryforward abilities. Certain Internal Revenue Code provisions may limit the use of our net operating loss carryforwards. We continue to assess the limitations on our net operating loss carryforwards, if any, on future periods. We are currently evaluating our historical Canadian performance and associated filings to verify the existence and usage of our Canadian net operating losses. As of June 30, 2006, we had estimated net operating loss carryforwards of approximately $6.3 million, expiring in various amounts in 2017 through 2025.

Our current corporate organization structure requires us to file two separate consolidated U.S. Federal income tax returns. As a result, taxable income of one group can not be offset by tax attributes, including net operating losses, of the other group. Accordingly, the effective tax rate in future periods may differ significantly from the expected statutory rates depending on the level of taxable income or loss for each group.

10

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 12 - Related Party Transactions

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

Note 13 - Segment Information

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

The Company has determined that there are three reportable segments:

· The Chemicals and Logistics segment is made up of two business units:

· The CESI chemical business unit develops, manufactures and markets specialty chemicals used by oilfield service companies in oil and gas well cementing, stimulation, drilling and production. Our research laboratories support the specific drilling and production needs of our customers. 

· The Materials Translogistics business unit designs and manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies. 

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

· The Production Products segment manufactures and markets artificial lift equipment which includes the Petrovalve line of downhole beam pump components. We have recently expanded the artificial lift capability of this segment with the acquisition of TWS in April 2006 and LifTech, in June 2006. The acquired companies provide a broad spectrum of electric submersible pumps, gas separators, valves and services to support coal bed methane production. 

The Company evaluates performance based on several factors of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in the consolidated financial statements for the year ended December 31, 2005 and the related notes thereto, included in the Annual Report on Form 10-KSB filed by the Company with the Securities and Exchange Commission. Inter-segment sales are accounted for at fair value as if sales were to third parties and are eliminated in the consolidated financial statements.

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FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Summarized financial information concerning the segments for the three and six months ending June 30, 2006 and 2005 is shown in the following tables: 

	Chemicals and Logistics		Drilling Products		Production Products		Corporate and Other			Total
	(in thousands)
Three months ended June 30, 2006
Net revenues to external customers	$	10,505	$	8,980	$	2,628	$	¾		$	22,113
Income (loss) from operations	$	3,375	$	1,207	$	192	$	(1,072	)	$	3,702
Three months ended June 30, 2005
Net revenues to external customers	$	7,065	$	5,032	$	364	$	¾		$	12,461
Income (loss) from operations	$	1,850	$	1,258	$	10	$	(495	)	$	2,623
Six months ended June 30, 2006
Net revenues to external customers	$	18,381	$	17,072	$	2,721	$	¾		$	38,174
Income (loss) from operations	$	5,287	$	2,987	$	92	$	(1,822	)	$	6,544
Six months ended June 30, 2005
Net revenues to external customers	$	13,193	$	9,606	$	703	$	¾		$	23,502
Income (loss) from operations	$	3,355	$	2,103	$	66	$	(1,094	)	$	4,430

Total assets by reportable segment were as follows: 

	For the Period Ended
	June 30, 2006		December 31, 2005
	(in thousands)
Chemicals and Logistics	$	21,189	$	16,417
Drilling Products		37,363		26,787
Production Products		12,427		1,233
Corporate and Other		1,583		7,721
Total assets	$	72,562	$	52,158

Note 14 - Subsequent Events

On August 8, 2006, the Company amended its Senior Credit Facility. The maturity date and the maximum amount that may be outstanding were amended on the revolving line of credit. The amended revolving line of credit provides for borrowing through August 8, 2009. The maximum amount that may be outstanding was increased to the lesser of (a) $10.0 million (a $4.0 million increase from the August 2005 amended revolving line of credit of $6.0 million), or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined.

Based on the new maturity date, the current revolving line of credit is classified as long-term debt.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Item 1. Financial Statements” contained herein.

Business Overview

We provide a broad range of products and services worldwide, for use in mining and the exploration and production of crude oil and natural gas. We compete in the specialty chemicals and logistics, downhole drilling tool and downhole production tool markets.

We were incorporated in 1985. As of July 27, 2005 our common stock began trading on the American Stock Exchange under the stock ticker symbol “FTK”. Our headquarters are in Houston, Texas, and we have manufacturing operations in Texas, Oklahoma, Louisiana, Utah and Wyoming. We market our products domestically and internationally in over 20 countries.

Our product lines are divided into three segments within the oilfield service industry:

· The Chemicals and Logistics segment is made up of two business units:

· The CESI chemical business unit develops, manufactures and markets chemicals used by oilfield service companies in oil and gas well cementing, stimulation, drilling and production. Our research laboratories support the specific drilling and production needs of our customers.

· The Materials Translogistics business unit designs and manages automated bulk material handling, loading and blending capabilities for oilfield service companies.

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

· The Production Products segment manufactures and markets artificial lift equipment which includes the Petrovalve line of downhole beam pump components. We have recently expanded the artificial lift capability of this segment with the acquisition of Total Well Solutions, Inc. (“TWS”) in April 2006 and LifTech, L.L.C. (“LifTech”), in June 2006. The acquired companies provide a broad spectrum of electric submersible pumps, gas separators, valves and services to support coal bed methane production.

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

Over the last year we have grown our sales internally and through acquisitions. During 2005 and 2006, we have entered into the following acquisitions that were outside the ordinary course of our business: 

·   acquired manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens from Phoenix E&P Technology, LLC (“Phoenix”) on January 28, 2005;

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

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

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

·   acquired the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (“Can-Ok”), a drilling tool sales and rental provider in Oklahoma, Louisiana and Arkansas, on January 2, 2006; and

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·   acquired the assets of TWS, which manufactures, markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers on April 3, 2006.

·   acquired the assets of LifTech, which manufactures, markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers on June 6, 2006.

We continue to actively seek profitable acquisition or merger candidates in our core businesses to either decrease costs of providing products or add new products and customer base to diversify our market.

Results of Operations 

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	22,113		$	12,461		$	38,174		$	23,502
Cost of revenues		13,527			7,197			22,806			14,170
Gross profit		8,586			5,264			15,368			9,332
Gross profit %		38.8	%		42.2	%		40.3	%		39.7	%
Expenses:
Selling, general and administrative		4,075			2,186			7,262			4,046
Depreciation and amortization		652			308			1,250			578
Research and development		157			147			312			278
Total expenses		4,884			2,641			8,824			4,902
Income from operations		3,702			2,623			6,544			4,430
Income from operations %		16.7	%		21.1	%		17.1	%		18.9	%
Other income (expense):
Interest expense		(252	)		(241	)		(423	)		(438	)
Other, net		10			30			22			41
Total other income (expense)		(242	)		(211	)		(401	)		(397	)
Income before income taxes		3,460			2,412			6,143			4,033
Provision for income taxes		(1,225	)		(423	)		(2,152	)		(576	)
Net income	$	2,235		$	1,989		$	3,991		$	3,457

Consolidated - Comparison of Three Months Ended June 30, 2006 and 2005

Total revenues increased by $9.7 million or 77.5% in the second quarter of 2006 versus 2005. Acquisitions accounted for $4.6 million of the increase, with the remaining $5.1 million coming from internal revenue growth within the Chemical and Logistics segment and the established Drilling Products segment.

Gross profit increased by $3.3 million or 63.1% in the second quarter of 2006 versus 2005. Acquisitions accounted for $1.2 million of the increase. Gross profit as a percentage of sales decreased from 42.2% in the second quarter of 2005 to 38.8% in the second quarter of 2006. Gross profit is best analyzed on a segment by segment basis, as gross profit varies among operating segments and can vary significantly from year to year in certain operating segments.

Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $4.1 million in the second quarter of 2006 versus $2.2 million in the second quarter of 2005. The acquisitions noted above accounted for $0.8 million of the increase. The balance of the increase is primarily due to increased sales and field support costs in the Chemical and Logistics segment and increased administrative staff and professional fees associated with expanding the Company.

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Depreciation and amortization increased from $0.3 million in the second quarter of 2005 to $0.7 million in the second quarter of 2006 due to the increased levels of property, plant and equipment. The increase in property, plant and equipment was primarily due to the addition of assets associated with the drilling tool acquisitions noted above.

A provision for income taxes of $1.2 million was recorded in the second quarter of 2006. An effective tax rate of 35.4% was applied in the second quarter of 2006 versus 17.5% in the second quarter of 2005, resulting in a $0.8 million increase in the tax provision quarter over quarter. The significant increase in taxes is a result of the decreased use of our accumulated net operating losses (“NOL”), an increase in our projected federal statutory rate based on estimated income levels, and an increase in our estimated state income tax liability. The Company’s remaining NOL’s are subject to limitations and are not expected to significantly reduce our effective tax rate going forward. The provision was made for estimated federal income tax, state income tax and alternative minimum tax, which cannot be offset by our NOL carryforwards.

Consolidated - Comparison of Six Months Ended June 30, 2006 and 2005

Total revenues increased by $14.7 million or 62.4% in the first six months of 2006 versus 2005. Acquisitions accounted for $6.8 million of the increase in revenues, with the remaining $7.9 million coming from internal revenue growth within the Chemical and Logistics segment and the Drilling Products segment.

Gross profit increased by $6.0 million or 64.7% in the first six months of 2006 versus 2005. The acquisitions noted above accounted for $2.0 million of the increase. Gross profit as a percentage of sales increased from 39.7% in the first six months of 2005 to 40.3% in the first six months of 2006. The gross profit is best analyzed on a segment by segment basis, as gross profit varies between operating segments and can vary significantly from year to year in certain operating segments.

Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $7.3 million in the first six months of 2006 versus $4.0 million in the first six months of 2005. The acquisitions noted above accounted for $1.4 million of the increase. The balance of the increase is primarily due to increased sales and field support costs in the Chemical and Logistics segment and increased administrative costs and professional fees.

Depreciation and amortization increased from $0.6 million in the first six months of 2005 to $1.3 million in the first half of 2006 due to the increased levels of property, plant and equipment. The increase in property, plant and equipment was primarily due to the addition of assets associated with the drilling tool acquisitions noted above.

A provision for income taxes of $2.2 million was recorded in the first six months of 2006. An effective tax rate of 35.0% was applied in the first half of 2006 versus 14.3% in the first quarter of 2005, resulting in a $1.6 million increase in the tax provision. The significant increase in taxes is a result of the decreased use of our accumulated NOL's, an increase in our projected federal statutory rate based on estimated income levels, and an increase in our estimated state income tax liability. The Company’s remaining NOL’s are subject to limitations and are not expected to significantly reduce our effective tax rate going forward. The provision was made for estimated federal income tax, state income tax and alternative minimum tax, which cannot be offset by our NOL carryforwards.

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Results by Segment

Chemicals and Logistics 

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	10,505		$	7,065		$	18,381		$	13,193
Gross profit	$	4,720		$	2,842		$	7,704		$	5,105
Gross profit %		44.9	%		40.2	%		41.9	%		38.7	%
Operating income	$	3,375		$	1,850		$	5,287		$	3,355
Operating margin %		32.1	%		26.2	%		28.8	%		25.4	%

Chemicals and Logistics - Comparison of Three Months Ended June 30, 2006 and 2005

Chemical and Logistics revenues increased $3.4 million or 48.7% in the second quarter of 2006 compared to 2005. The increase in revenue is a result of an increase in volume coupled with higher prices, particularly of our proprietary specialty chemicals. The most significant sales growth occurred in the Rocky Mountains and South Texas.

The majority of revenue growth is attributed to increased sales of our line of biodegradable environmentally benign ‘green’ chemicals which grew from $1.6 million in the second quarter of 2005 to $4.7 million in the second quarter of 2006. International sales were flat and as a percentage of sales dropped from 12.2% in the second quarter of 2005 to 7.7% in the second quarter of 2006. During the second quarter we recorded the first sale out of the office in the Netherlands which we opened in the first quarter to market our proprietary biodegradable capillary foamers.

Gross profit as a percentage of revenues increased from 40.2% in the second quarter of 2005 to 44.9% in the second quarter of 2006. The increase in gross profit is due to price increases, a reduction in cost of goods as a percentage of total revenues and increased revenues from our higher margin proprietary chemicals. Managing chemical feedstock and transportation prices and passing the increase in the costs on to our customers are critical to maintain our gross profits. We are nearing completion of a 30,000 square foot expansion to our production facilities which will triple our production capabilities and allow us to manage larger volumes of inputs to take further advantage of volume pricing discounts.

Operating income increased from $1.9 million in the second quarter of 2005 to $3.4 million in the second quarter of 2006. The operating profit as a percentage of revenue increased from 26.2% to 32.1%, respectively.

Chemicals and Logistics - Comparison of Six Months Ended June 30, 2006 and 2005

Chemical and Logistics revenues increased $5.2 million or 39.3% in the first six months of 2006 compared to 2005. The increase in revenue is a result of an increase in volume coupled with higher prices, particularly of our proprietary specialty chemicals. The most significant sales growth occurred in the Rocky Mountains and Mid-Continent regions for the first six months of 2006 as compared to 2005.

The majority of revenue growth is attributed to increased sales of our line of biodegradable environmentally benign ‘green’ chemicals which grew from $3.2 million in the first half of 2005 to $7.3 million in the first half of 2006. International sales grew slightly, but decreased as a percentage of sales from 14.3% in the first six months of 2005 to 10.5% in the first six months of 2006.

Gross profit as a percentage of revenues increased from 38.7% in the first six months of 2005 to 41.9% in the first half of 2006. The increase in gross profit is due to price increases and a reduction in cost of goods as a percentage of total revenues. Managing chemical feedstock and transportation prices and passing the increase in the costs on to our customers are critical to maintain our gross profits. We are nearing completion of a 30,000 square foot expansion to our production facilities which will triple our production capabilities and allow us to manage larger volumes of inputs to take further advantage of volume pricing discounts.

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Operating income increased from $3.4 million in the first half of 2005 to $5.3 million in the first half of 2006 and the operating profit percentage increased from 25.4% to 28.8%, respectively.

Drilling Products  

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	8,980		$	5,032		$	17,072		$	9,606
Gross profit	$	3,363		$	2,247		$	7,142		$	3,846
Gross profit %		37.4	%		44.7	%		41.8	%		40.0	%
Operating income	$	1,207		$	1,258		$	2,987		$	2,103
Operating margin %		13.4	%		25.0	%		17.5	%		21.9	%

Drilling Products - Comparison of Three Months Ended June 30, 2006 and 2005

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

Drilling Products revenues increased $3.9 million in the second quarter of 2006 compared to the second quarter of 2005. The acquisitions noted above accounted for $2.2 million of this increase. The remaining increase in sales was due primarily to increased downhole centralizers sales both domestically and internationally.

Gross profit increased $1.1 million in the second quarter of 2006 compared to 2005. The acquisitions noted above accounted for $0.8 million of this increase. Gross profit as a percentage of sales decreased from 44.7% in the first half of 2005 to 37.4% in the first half of 2006. The decrease in gross profit as a percentage of revenues relates to inventory price volatility and equipment sub-rental costs.

Operating income dropped slightly to $1.2 million for the second quarter of 2006 compared to 2005. The decrease in operating income related to inventory price volatility and equipment sub-rental costs was partially offset by increased operating income generated by the acquisitions noted above.

Drilling Products - Comparison of Six Months Ended June 30, 2006 and 2005

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

Drilling Products revenues increased $7.5 million in the first six months of 2006 compared to 2005. The acquisitions noted above accounted for $4.5 million of this increase. The remaining increase in sales was due to increased downhole centralizers sales both domestically and internationally.

Gross profit increased $3.3 million in the first six months of 2006 compared 2005. The acquisitions noted above accounted for $1.6 million of this increase. Gross profit as a percentage of sales increased from 40.0% in the first six months of 2005 to 41.8% in the first half of 2006. 

Operating income increased by $0.9 million for the first six months of 2006 compared to 2005. The acquisitions noted above accounted for $0.4 million of the increase.

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Production Products 

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	2,628		$	364		$	2,721		$	703
Gross profit	$	534		$	174		$	554		$	381
Gross profit %		20.3	%		47.8	%		20.4	%		54.2	%
Operating income	$	192		$	10		$	92		$	66
Operating margin %		7.3	%		2.7	%		3.4	%		9.4	%

Production Products - Comparison of Three Months Ended June 30, 2006 and 2005

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

Production revenues were $2.6 million in the second quarter of 2006 versus $0.4 million in the second quarter of 2005. Acquisitions accounted for $2.3 million of the increase. Gross profit increased $0.4 million due to the acquisitions. The gross margin percentage decreased from 47.8% in the second quarter of 2005 to 20.3% in the second quarter of 2006. We believe we can improve the gross margins of the acquisitions primarily through better supply chain management.

The decrease in gross margin as a percentage of revenues is due to a shift in sales mix. The product sales associated with the two acquisitions are lower margin product sales compared to our existing Petrovalve sales. Management is negotiating more favorable product contracts for the acquired businesses to improve margins on pump and separator sales.

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

Production Products - Comparison of Six Months Ended June 30, 2006 and 2005

Production revenues were $2.7 million in the first six months of 2006 versus $0.7 million in 2005. Acquisitions accounted for $2.3 million of the revenue in first half of 2006. Revenues for the Petrovalve line declined as the first six months of 2005 included a large sale to a customer in Russia. The gross margin percentage decreased significantly from 54.2% in the first six months of 2005 to 20.4% in the first half of 2006, as a result of lower margins on domestic sales versus international sales, and the impact of the acquisitions.

The decrease in gross margin as a percentage of revenues is due to a shift in sales mix. The product sales associated with the two acquisitions are lower margin product sales compared to our existing Petrovalve sales. Management is negotiating more favorable product contracts for the acquired businesses to improve margins on pump and separator sales.

Capital Resources and Liquidity

Capital resources and liquidity continued to improve during the six months ended June 30, 2006 compared to the same period in 2005. During the six months ending June 30, 2006 we generated net income of $4.0 million based on a 35.4% effective tax rate, versus a 14.3% effective tax rate for the same period in 2005. Cash flows from operations were $5.9 million in the six months ended June 30, 2006 versus $1.8 million for the same period in 2005. The improvement in cash flow from operations is a direct result of improved operating results offset by increased estimated tax payments based on the projected increase in our estimated effective tax rate. The decrease in cash and cash equivalents of $7.0 million for the six months ended June 30, 2006 was a result of the acquisition of Can-Ok, TWS and LifTech.

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Net working capital decreased $0.6 million in the six months ended June 30, 2006 versus a net increase of $2.2 million for the same period in 2005. The increase in cash provided by operating activities during the six months ended June 30, 2006 was driven by a net $6.3 million increase in accounts payable and accrued liabilities offset by a $4.3 million increase in receivables and a $0.2 million increase in inventory.

Capital expenditures for the six months ended June 30, 2006 totaled approximately $4.3 million. During the six months ended June 30, 2006, we purchased approximately $2.5 million in rental equipment for our Drilling Products segment and invested $1.6 million to expand our manufacturing plant and research and laboratory facilities within our Chemicals and Logistics segment.

As amended August 19, 2005, our Senior Credit Facility consists of a revolving line of credit, two equipment term loans and two real estate term loans. Our bank borrowings are collateralized by substantially all of our assets. As of June 30, 2006, we had $4.2 million outstanding under the revolving line of credit of the amended Senior Credit Facility. On August 8, 2006, the Company again amended the Senior Credit Facility. The maturity date and the maximum amount that may be outstanding were amended on the revolving line of credit. The amended revolving line of credit provides for borrowing through August 8, 2009. The maximum amount that may be outstanding was increased to the lesser of (a) $10.0 million (a $4.0 million increase from the August 2005 amended revolving line of credit of $6.0 million), or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined. Based on the new maturity date, the current revolving line of credit is classified as long-term debt. Bank borrowings are subject to certain covenants and a material adverse change subjective acceleration clause. Affirmative covenants include compliance with laws, various reporting requirements, visitation rights, maintenance of insurance, maintenance of properties, keeping of records and books of account, preservation of existence of assets, notification of adverse events, ERISA compliance, joinder agreement with new subsidiaries, borrowing base audits, and use of treasury management services. Negative covenants include limitations associated with liens, indebtedness, change in nature of business, transactions with affiliates, investments, distributions, subordinate debt, leverage ratio, fixed charge coverage ratio, consolidated net income, prohibition of fundamental changes, asset sales and capital expenditures. As of June 30, 2006 we were in compliance with all covenants.

We have funded our capital requirements with operating cash flows, debt borrowings, and by issuing shares of our common stock. Common stock issued during the six months ended June 30, 2006 is described below:

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

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

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

·   Stock options to purchase 267,591 shares were exercised by officers, directors and employees with proceeds of approximately $0.5 million paid to the Company.

Impact of Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".  FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes" and must be adopted by the Company no later than January 1, 2007.  FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns.  The Company is evaluating the impact of adopting FIN 48.

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

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

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

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

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

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. We adopted SFAS No. 151 on January 1, 2006.

Item 3.  Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer (collectively, the “Certifying Officers”) have evaluated the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report , and have concluded that, as of the date of this report, our disclosure controls and procedures are effective in enabling us to record, process, summarize, and report information required to be included in our SEC filings within the required time period, and to ensure that such information is accumulated and communicated to our management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Since the date of this report, there have not been any significant changes in our internal controls, or in other factors that could significantly affect these controls subsequent to the date of this report.

In anticipation of our compliance with the Sarbanes-Oxley Act of 2002 (the “Act”), we have increased our finance and accounting staff dedicated to the documentation and testing required under this Act.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

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PART II - OTHER INFORMATION

Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds

On January 2, 2006, we issued 25,020 shares of common stock to a former shareholder of Can-Ok as partial consideration for our purchase of the company’s assets.

At various times during the first quarter of 2006, the Company issued an aggregate of 26,490 shares to holders of outstanding warrants upon the exercise of those warrants, for aggregate proceeds to the Company from the sale of the warrants of $0.3 million in cash.

On June 6, 2006, we issued 178,223 shares of common stock to a former shareholder of LifTech as partial consideration for our purchase of the company’s assets.

The foregoing securities were offered and sold in private transactions in accordance with Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, based on the investment representations and position as informed, accredited investors of the recipients thereof. The sales were made without the use of an underwriter or selling agent, and no commissions or underwriting discounts were paid in connection with such sales.

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

The annual meeting of the stockholders of the Company was held on May 18, 2006, at which meeting the shareholders voted to (1) elect John W. Chisholm, Jerry D. Dumas, Sr., Dr. Glenn S. Penny, Gary M. Pittman, Barry E. Stewart, Richard O. Wilson and William R. Ziegler as directors and (2) ratify UHY Mann Frankfort Stein & Lipp CPA’s LLP as Company auditors. The voting results for each proposal submitted to a vote are listed below.

Election of Directors

All directors serve one year terms. All directors that were nominated were elected to another term. Results of voting were as follows:

John W. Chisholm - 7,409,930 votes for and 49,147 votes withheld.

Jerry D. Dumas, Sr. - 7,166,275 votes for and 292,802 votes withheld.

Dr. Glenn S. Penny - 7,210,548 votes for and 248,529 votes withheld.

Gary M. Pittman - 7,450,540 votes for and 8,537 votes withheld.

Barry E. Stewart - 7,436,558 votes for and 22,519 votes withheld.

Richard O. Wilson - 7,436,058 votes for and 23,019 votes withheld.

William R. Ziegler - 7,436,448 votes for and 22,629 votes withheld.

Ratification of UHY Mann Frankfort Stein & Lipp CPA’s LLP as Company Auditors

7,447,513 votes for, 11,564 votes withheld.

Item 6.  Exhibits.

Exhibit No.	Description of Exhibit
10.1	Asset Purchase Agreement dated April 3, 2006 among Total Energy Technologies, LLC, USA Petrovalve, Inc. and Total Well Solutions, LLC.
10.2	Exclusive License Agreement dated April 3, 2006 among Flotek Industries, Inc., USA Petrovalve, Inc. and Total Well Solutions, LLC.
10.3	Asset Purchase Agreement dated June 6, 2006 among LifTech, LLC, its owners and USA Petrovalve, Inc.
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
32.1	Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer

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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.

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

  

By:	/s/ Lisa Meier
	Lisa Meier
	Chief Financial Officer

August 11, 2006 

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
10.1	Asset Purchase Agreement dated April 3, 2006 among Total Energy Technologies, LLC, USA Petrovalve, Inc. and Total Well Solutions, LLC.
10.2	Exclusive License Agreement dated April 3, 2006 among Flotek Industries, Inc., USA Petrovalve, Inc. and Total Well Solutions, LLC.
10.3	Asset Purchase Agreement dated June 6, 2006 among LifTech, LLC, its owners and USA Petrovalve, Inc.
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
32.1	Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer

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EX-10.1

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT, dated as of April 3, 2006 (the “Agreement”), is by and among Total Well Solutions, LLC, a Wyoming limited liability company (the “Company”), Total Energy Technologies, LLC, a Delaware limited liability company (the “Member”), and USA Petrovalve, Inc., a Texas corporation (“Buyer”).

WITNESSETH:

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

WHEREAS, the Member has an ownership interest in the Company and thus would derive a substantial benefit from the consummation of the purchase transaction contemplated herein;

WHEREAS, the Company, Eric Morrison and Guy Morrison (collectively, the “Morrisons”) have entered into the following agreements concerning the patents listed on Schedule A attached hereto (the “Patents”): (i) that certain Addendum to Agreement dated February 13, 2006 (the “Addendum”), and (ii) that certain Agreement dated April 18, 2005 (the “Morrison Agreement”);

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

ARTICLE I

THE PURCHASE

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

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

(b)All of the following of the Company (collectively, the “Intellectual Property Rights”): (i) inventions and discoveries that may be patentable (exclusive of the Intellectual Property Rights associated with the Gas Separator, (“Inventions”), (ii) all of the rights of the Company pursuant to the Morrison Agreement and/or the Addendum, (iii) all know-how, trade secrets, confidential and proprietary information, technical information, data, process technology, plans, drawings, and blue prints, including, but not limited to, all of the foregoing relating to the Patents) (collectively, “Trade Secrets”), and (iv) trademarks, service marks, trade names, and copyrights.

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

(d)The rights of the Company under the agreements listed on Schedule 1.1(d) (the “Assigned Agreements”);

(e)All of the customer lists, customer files (including credit applications and reports, credit histories and applicable terms and conditions) books, records, ledgers, files, documents, correspondence, plans, studies, and drawings of the Company, including, but not limited to, any tangible renditions of the Intellectual Property;

(f)The inventories of finished goods, tooling inventory, work in progress and raw materials of the Company as of the Effective Time (as hereinafter defined) (the “Purchased Inventory”), which shall specifically include, but shall not be limited to, the inventory listed on Schedule 1.1(f) (the “Scheduled Inventory”);

(g)All of the goodwill of the Company and all of the rights of the Company to use the tradename “Total Well Services” or any similar name (subject to the permitted use provided for in Section 5.6) (the “Tradename”).

Section 1.2The Patents. At the Closing, the Company and the Buyer will enter into and deliver a license agreement in form and content reasonably satisfactory to Buyer and the Company (the “License Agreement”).

Section 1.3.Excluded Assets. Notwithstanding the foregoing, the Acquired Assets shall not include the assets listed on Schedule 1.3.

Section 1.4.Purchase Price for Acquired Assets. As consideration for the sale to it of the Acquired Assets, Buyer shall pay cash at Closing in the aggregate amount of $4,801,520.00 (the “Total Cash Payment”), allocated as follows: (i) $1,790,000.00 to be paid by Buyer to the Morrisons at Closing in satisfaction of the payment required to be made by the Company to the Morrisons pursuant to the Addendum (the “Morrisons Payment”), (ii) $1,623,827.00 to be paid to the TWS Secured Noteholders, in exchange for their Release of UCC-1 filing, (iii) $51,591.00 to be paid to release the liens on the TWS vehiclesand (iii) $1,336,102.00 to be paid by Buyer to the Company at Closing, representing the portion of the Total Cash Payment remaining after the Morrisons Payment has been made (the “Net Cash Payment”).

Section 1.5.Assumption of Liabilities. Buyer has not and will not assume from the Company any liability or obligation.

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Section 1.6.Allocation. The parties will allocate for all purposes (including, but not limited to, financial accounting and tax purposes) the purchase price of the Acquired Assets as indicated on Schedule 1.6.

Section 1.7.Closing. The closing (the “Closing”) of the transactions contemplated by this Agreement (the “Purchase Transaction”) shall take place at the offices of the attorneys for Buyer in Houston, Texas as promptly as practicable (but in any event within five business days) following the date on which the last of the conditions set forth in Article VI is fulfilled or waived, or at such other time and place as Buyer and the Company shall agree. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” The Closing will be effective as of April 3, 2006 (the “Effective Time”).

Section 1.8.Transfer Documents. At the Closing, each of the parties hereto will perform such acts and deliver such documents as are required pursuant to the terms hereof to be delivered at Closing, including but not limited to:

(a)the Company and the Member shall:

(i)execute, acknowledge and deliver to Buyer all deeds, bills of sale, endorsements, assignments, and other good and sufficient instruments of conveyance, sale, transfer and assignment as shall be required to vest effectively in Buyer good and indefeasible title in and to the Acquired Assets, free and clear of all liens or encumbrances, including specifically, but not by way of limitation, an assignment and bill of sale in the form of Exhibit 1.8(a) (the “Assignment”);

(ii)deliver or cause to be delivered to Buyer possession of all of the Acquired Assets capable of being physically delivered; and

(iii)execute and deliver to the Buyer the License Agreement.

(b)Buyer shall:

(i)    deliver to the Company the Net Cash Payment, in the form of bank check or wire transfer; and

(ii)  execute and deliver the Assignment; and

(iii)execute and deliver the License Agreement.

Section 1.9.Property Taxes. Any general property and/or ad valorem tax assessed against or pertaining to the Acquired Assets for the taxable period that includes the date of the Closing shall be prorated between Buyer and the Company.

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ARTICLE II

REPRESENTATIONS AND

WARRANTIES OF BUYER

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

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

Section 2.2.Authority; Non-Contravention; Approvals.

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

(b)The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Buyer under any of the terms, conditions or provisions of (i) the charter or bylaw of Buyer, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Buyer or any of its properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Buyer is now a party or by which Buyer or any of its properties or assets may be bound or affected.

Section 2.3Brokers and Finders. Buyer has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Buyer to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by Buyer of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF THE COMPANY AND THE MEMBER

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

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

Section 3.2.The Member. The Member has an ownership interest in the Company.

Section 3.3.Other Entities. The Company does not own stock or other ownership interests in any other entity.

Section 3.4.Authority; Non-Contravention; Approvals.

(a)The Company has full limited liability company power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been approved by the managers of the Company and the members of the Company to the extent required to consummate this transaction in accordance with applicable law, including but not limited to the laws of the State of Wyoming. No further actions on the part of the Company are necessary to authorize the execution and delivery of this Agreement or the consummation by the Company of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and the Member, and, assuming the due authorization, execution and delivery hereof by Buyer, constitutes a valid and legally binding agreement of the Company and the Member, enforceable against the Company and the Member in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (b) general equitable principles.

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

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Section 3.5.Financial Statements. The Company has furnished Buyer with a balance sheet of the Company as of December 31, 2005, and the related statements of income for the calendar year then ended (including the notes thereto) (collectively, the "Financial Statement"). The Financial Statement have been prepared in accordance with generally accepted accounting principles, consistently applied, and are accurate and complete and fairly present the financial condition and result of operations of the Company.

Section 3.6.Absence of Undisclosed Liabilities. Except as disclosed in the Disclosure Schedule, the Company has not incurred any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities or obligations (a) which are provided for in the Financial Statements or reflected in the notes thereto, (b) which were incurred after December 31, 2005, and were incurred in the ordinary course of business and consistent with past practices, or (c) liabilities or obligations under this Agreement.

Section 3.7.Absence of Certain Changes or Events. Since December 31, 2005, the business of the Company has been conducted in the ordinary course of business consistent with past practices, and there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Material Adverse Effect. Specifically, but not by way of limitation, since December 31, 2005, the Company has not engaged in or been subject to any of the actions described in Section 4.1. "Material Adverse Effect" means any event, occurrence, fact, condition, change, development or effect that is or could reasonably be anticipated to be materially adverse to the business, assets (including intangible assets), liabilities, financial condition, results of operations, properties (including intangible properties) or business prospects of the Company, as applicable, taken as a whole.

Section 3.8.Tangible Assets. The Tangible Personal Property and the Leased Assets constitute all of the tangible personal property necessary for the conduct by the Company of its business as now conducted. The Company has good and indefeasible title to the Tangible Personal Property, free and clear of all mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever. The Tangible Personal Property and Leased Assets are in good, serviceable condition and fit for the particular purposes for which they are used in the business of the Company, subject only to normal maintenance requirements and wear and tear reasonably expected in the ordinary course of business.

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Section 3.9.Employee Benefits. The Disclosure Schedule contains a complete list of “employee welfare plans” (as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 (“ERISA”)) currently maintained by the Company or any person or trade or business under common control with the Company, or in which active or former employees of the Company (collectively, the “Affected Employees”) currently participate (which plans are hereinafter referred to as “Welfare Plans”). The Disclosure Schedule also contains a complete list of “employee pension benefit plans” as that term is defined in Section 3(2) of ERISA maintained by the Company or any person or trade or business under common control with the Company, or in which any such entity currently contributes or is required to contribute or in which Affected Employees currently participate (which plans are hereinafter referred to as “Pension Plans”). Neither the Company nor any of the Affected Employees participate or ever participated in any “multiemployer plan” (as that term is defined in Section 3(37) of ERISA). The Welfare Plans and Pension Plans, and any other plans of the type described in the first two sentences of this Section previously applicable at any time to the Company, are collectively referred to as the “Company Plans”. Each Company Plan is or was in compliance with the provisions of all applicable laws, rules and regulations, including, without limitation, ERISA and the Code. None of the Pension Plans has incurred any “accumulated funding deficiency” (as defined in Section 412(a) of the Code). The Company has not incurred any liability to the Pension Benefit Guaranty Corporation under Section 4062, 4063 or 4064 of ERISA, or any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan. The Disclosure Schedule describes all bonuses and other compensation which will be payable to any of the employees of the Company as a result of the consummation of the Purchase Transaction, and any obligation to pay severance payments.

Section 3.10.Litigation. There are no claims, suits, actions, or proceedings pending or, to the Knowledge of the Company, threatened against or relating to the Company, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. The Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. For purposes of this Agreement, “Knowledge” means actual or constructive knowledge of officers of the Company after reasonable inquiry.

Section 3.11.No Violation of Law. The Company is not in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable Environmental Law) of any governmental or regulatory body or authority. Except as disclosed in the Disclosure Schedule, as of the date of this Agreement, to the Knowledge of the Company, no investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. The governmental permits or licenses of the Company (the “Permits”) are sufficient for the Company to conduct its business in the manner currently conducted, and the Company is not in violation of the terms thereof. The Company is not in violation of the terms of any of its Permits and is not required to possess any other permit, license, franchise, variance, exemption, order or other governmental authorization, consent or approval.

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Section 3.12.Labor Matters. The Disclosure Schedule sets forth a list of each of the employees of the Company, and a description of the salaries and other compensation payable to such individuals. Except as set forth in the Disclosure Schedule, (a) there are no material controversies pending or, to the Knowledge of the Company, threatened between the Company on the one hand and any of its employees on the other, (b) the Company is not a party to a collective bargaining agreement of other labor union contract applicable to persons employed by the Company, nor does the Company have any Knowledge of any activities or proceedings of any labor union to organize any such employees, (c) the Company is not a party to any written agreement, memorandum, or understanding with respect to the employment of any individual, and (d) neither the Company or the Member are aware of any intention of any employee to terminate his or her employment with the Company, either as a result of the Purchase Transaction or otherwise.

Section 3.13.Customer Relationships. The Disclosure Schedule lists all of the material customers of the Company. Except as set forth in the Disclosure Schedule, there has not been (a) any adverse change in the business relationship of the Company with any customer; or (b) any change in any term (including credit terms) of the agreements with any such customer. The Company has not received any customer complaints concerning its products and services.

Section 3.14.Environmental Matters. Except as set forth in the Disclosure Schedule:

(a)no notice, demand, request for information, citation, summons or order has been received, no complaint has been served, no penalty has been assessed, and no investigation, action, claim, suit, proceeding or review is pending or, to the Knowledge of the Company, is threatened by any governmental entity or other person relating to or arising out of any environmental law;

(b)the Company is and has been in compliance with all Environmental Laws and environmental permits; and

(c)there are no liabilities of or relating to the Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any environmental law and there are no facts, conditions, situations or set of circumstances which could reasonable be expected to result in or be the basis for any such liability.

Section 3.15.Material Contracts. Schedule 1.1(d) lists all agreements, leases, commitments, contracts, undertakings or understandings, to which the Company is a party, including but not limited to service agreements, manufacturing agreements, purchase or sale agreements, master service agreements, supply agreements, distribution or distributor agreements, real estate leases, purchase orders, license agreements, customer orders and equipment rental agreements, in addition to (i) that certain Exclusive Distribution Agreement dated September 1, 2003 between the Company and Tianjin Eastern Pump Company Ltd. (the “Distribution Agreement”), (ii) that certain Manufacturing Services and Supply Agreement dated September 1, 2003 between the Company and Tianjin Eastern Pump Company Ltd, (the “Manufacturing Agreement”), and (iii) the Morrison Agreement and the Addendum (the Assigned Agreements, the Distribution Agreement, the Manufacturing Agreement, the Morrison Agreement and the Addendum are referred to herein collectively as the "Operating Agreements"). Each Operating Agreement is a valid, binding and enforceable agreement of the Company and, to the Knowledge of the Company, the other parties thereto. There has not occurred any breach or default under any Operating Agreement on the part of the Company or, to the Knowledge of the Company, any other parties thereto. No event has occurred which with the giving of notice or the lapse of time, or both, would constitute a default under any Operating Agreement on the part of the Company, or, to the Knowledge of the Company, any of the other parties thereto. There is no dispute between the parties to any Operating Agreement as to the interpretation thereof or as to whether any party is in breach or default thereunder, and no party to any Operating Agreement has indicated its intention to, or suggested it may evaluate whether to, terminate any Operating Agreement.

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Section 3.16Intellectual Property.

(a)Upon the execution and delivery by the Morrisons of a patent assignment with respect to the Patents in form reasonably satisfactory to the Company and the Buyer, the Company has the right to freely use the Patents and the Intellectual Property Rights (collectively, the “Subject Rights”) and, except as indicated on the Disclosure Schedule, owns the Subject Rights, free of any lien or encumbrance. The Company has no obligation to pay royalties or other compensation to third parties in exchange for the right to use any of the Subject Rights. The Company has not assigned, hypothecated or otherwise encumbered any of the Subject Rights.

(b)Upon the execution and delivery by the Morrisons of a patent assignment with respect to the Patents in form reasonably satisfactory to the Company and the Buyer, the Company may freely license, assign or transfer all of the Subject Rights.

(c)The Company has no Knowledge of any infringement by any other person of any of the Subject Rights, and the Company has not entered into any agreement to indemnify any other party against any charge of infringement of any of the Subject Rights. The Company has not and does not violate or infringe any intellectual property right of any other person, and the Company has not received any communication alleging that it violates or infringes the intellectual property rights of any other person. The Company has not been sued for infringing any intellectual property right of another person.

(d)To the knowledge of the Company, all of the issued Patents are currently in compliance with formal legal requirements (including payment of filing, examination, and maintenance fees and proofs of working or use), and are valid and enforceable. No such Patent has been or is now involved in any interference, reissue, reexamination, or opposition proceeding. To the knowledge of Company, there is no patent or patent application of any third party that potentially interferes with any such Patent. None of the Patents have been challenged or threatened in any way or to the knowledge of the Company, is being infringed.

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(e)With respect to each Trade Secret, the documentation, if any, relating to such Trade Secret is current and accurate. The Company has taken all reasonable precautions to protect the secrecy, confidentiality, and value of all Trade Secret (including the enforcement by the Company of a policy requiring each employee or contractor to execute proprietary information and confidentiality agreements substantially in the standard form of the company and all current and former employees and contractors of the company have executed such an agreement). The Company has good title and an absolute right to use the Trade Secrets. The Trade Secrets are not part of the public knowledge or literature, and, to the Knowledge of the Company, have not been used, divulged, or appropriated either for the benefit of any person (other than the company) or to the detriment of the company. To the Knowledge of the Company, no Trade Secret is subject to any adverse claim or has been challenged or threatened in any way or infringes any intellectual property right of any other person.

Section 3.17Inventory. The Purchased Inventory consists of items that are usable and saleable in the ordinary course of business by the Company. All items of Purchased Inventory are owned by the Company free and clear of any lien or encumbrance, and are in good condition. No items of Purchased Inventory are held by the Company on consignment from others. As of the Effective Time the Scheduled Inventory is located on the premises of the Company as the Effective Time as determined by a physical count conducted by the Company.

Section 3.18Solvency. Solvency. After taking into account any forbearance agreements entered into by any of the creditors of the Company (other than Bovaro Partners LLC or its affiliates or Hunter Cochrane) at or prior to the Closing, the Company will not be insolvent as of the Closing and will not be rendered insolvent by the Purchase Transaction. Taking into account the statements made in the preceding sentence and after giving effect to the consummation of the Purchase Transaction and License Agreement, the Company will be able to pay its liabilities as they become due.

Section 3.19.Brokers and Finders. Buyer has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of the Company or the Member to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by Buyer of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Specifically, but not by way of limitation, Buyer shall not have any such obligation with respect to any of the foregoing as a result of the Purchase Transaction to Bovaro Partners LLC or its affiliates or Hunter Cochrane.

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Section 3.20.Disclosure. No representation or warranty of the Company or the Member set forth hereunder or in the schedules attached hereto or in any certificate delivered pursuant to Section 6.2(a) contains any untrue statement of the material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

ARTICLE IV

CONDUCT OF BUSINESS PENDING THE CLOSING

Section 4.1.Conduct of Business of the Company. Prior to the Effective Time, the Company shall operate its business in, and only in, the usual, regular and ordinary course of business in substantially the same manner as operated on the date of this Agreement. The Member will assure that the Company complies with the requirements of this Section. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, the Company will not:

(a)Sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its assets other than inventory in the ordinary course of business consistent with past practice;

(b)Adopt, amend or terminate any Company Plan;

(c)Except as provided in Section 5.7, amend or terminate any Operating Agreement;

(d)Enter into or modify any employment or severance agreement with any director, officer, or employee, or agree to increase the compensation of any officer, director or employee; and/or

(e)Incur any indebtedness other than indebtedness incurred in the ordinary course of business.

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

ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.1.Cooperation. The Company shall afford to Buyer and its accountants, counsel, financial advisors and other representatives reasonable access during normal business hours throughout the period prior to the Effective Time to all of its properties, books, contracts, personnel, representatives of or contacts with governmental or regulatory authorities, agencies or bodies, commitments, and records (including, but not limited to, tax returns and any and all records or documents which are within the possession of governmental or regulatory authorities, agencies or bodies, and the disclosure of which the Company can facilitate or control) and, such parties as its representatives may reasonably request. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company or with the performance of any of the employees of the Company. No investigation pursuant to this Section shall affect any representation or warranty made by any party. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement,

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

Section 5.3.Expenses and Fees. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, regardless of whether the Closing occurs.

Section 5.4.Notification of Certain Matters. Each of the parties agrees to give prompt notice to each other of, and to use their respective reasonable best efforts to prevent or promptly remedy, (a) the occurrence or failure to occur or the impending or threatened occurrence or failure to occur, of any event which occurrence or failure to occur would be likely to cause any of its representations or warranties in this Agreement to be untrue or inaccurate in any material respect (or in all respects in the case of any representation or warranty containing any materiality qualification) at any time from the date hereof to the Effective Time and (b) any material failure (or any failure in the case of any covenant, condition or agreement containing any materiality qualification) on its part to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

Section 5.5.Employee Matters.

(a)Effective immediately following the Closing, Buyer shall offer employment to all of the employees of the Company, each of which who accepts a position shall hereinafter be referred to as a “Affected Employee” and shall become an employee of Buyer, terminable at will. In order to facilitate the foregoing, the Company shall, effective immediately following the Closing, terminate the employment of all employees of the Company and take all appropriate steps necessary to comply with applicable law in connection with the termination of such employees.

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

(c)With respect to employees who accept employment with Buyer, the Company will remain responsible for medical insurance premiums and other medical related benefits relating to periods prior to the Effective Time and Buyer will be responsible for all other medical insurance premiums and other medical related benefits relating to periods after the Closing to the extent covered under their plans without the application of any waiting period for coverage generally applicable to newly hired employees. The Company shall make available, at such Affected Employee’s expense, medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, to the Affected Employees to the extent required by applicable law. The Company and Buyer shall cooperate and coordinate with each other to provide continuity of health, hospitalization, life, travel and accident insurance coverage for the Affected Employees. The cost of insurance coverage for the Affected Employees from and after the Effective Time shall be borne by Buyer and not the Company, based on the terms of the health insurance policies of the Buyer which are applicable from time to time with respect to employee premium contributions and other matters.

(d)Buyer and the Company shall complete and furnish to each other any other employee data as shall be reasonably required from time to time for each party to perform and fulfill its obligations under this Section 5.5.

(e)The Company agrees that it shall be solely responsible for all liability, costs and expenses (including attorneys’ fees) for all claims relating to their employment, including but not limited to arbitrations, unfair labor practice charges, employment discrimination charges, wrongful termination claims, workers’ compensation claims, any employment-related tort claim or other claims or charges (collectively, “EmploymentClaims”) by any employee or former employee of the Company which accrued prior to the Effective Time relating to arbitrations, unfair labor practice charges, employment discrimination charges, wrongful termination claims, workers’ compensation claims, any employment-related tort claim or other claims or charges of or by employees of the Company. Buyer agrees that it shall be responsible for all Employment Claims by any Affected Employee who accepts employment with Buyer which accrues after the Effective Time. The Disclosure Schedule sets forth a brief description of any known Employment Claims that have been filed or may be filed after the date hereof arising out of conditions, actions or events that occurred before the Effective Time.

Section 5.6The Tradename. The Company will not use the Tradename after the Closing other than to collect receivables attributable to periods prior to Closing. The Company will change its name to a name dissimilar to the Tradename within 10 days of Closing.

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Section 5.7China Contracts. The Company will use its best efforts to assist Buyer in entering into a new Distribution Agreement and the Manufacturing Agreement with Tianjin Eastern Pump Company Ltd. on terms acceptable to the Buyer.

ARTICLE VI

CONDITIONS TO CLOSING

Section 6.1.Conditions to Obligation of the Company to Effect the Purchase Transaction. Unless waived by the Company, the obligation of the Company to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional condition:

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

Section 6.2.Conditions to Obligations of Buyer to Effect the Purchase Transaction. Unless waived by Buyer, the obligations of Buyer to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions:

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

(b)Except as stated in the Disclosure Statement, since December 31, 2005, there shall have been no changes that constitute, and no event or events shall have occurred which have resulted in or constitute, a Material Adverse Effect;

(c)the Morrisons shall have executed and delivered to the Company a patent assignment with respect to the Patents in a form reasonably satisfactory to the Buyer;

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(d)the Company shall have received the opinion letter of Hawks & Associates, L.C. regarding the effect of Wyoming law on this transaction with the opinion letter in a form that is acceptable to the Buyer, in its sole discretion);

(e)the Buyer and the Morrisons shall have entered into employment agreements with Buyer acceptable to Buyer, in its absolute discretion.

ARTICLE VII

INDEMNIFICATION

Section 7.1.Indemnification of Buyer. The Member and the Company shall jointly and severally indemnify Buyer, its affiliates, and their respective officers, directors, employees and agents against, and hold each of them harmless from and against, any and all claims, actions, causes of action, arbitrations, proceedings, losses, damages, liabilities, judgments and expenses (including, without limitation, reasonable attorneys' fees) ("Indemnified Amounts") incurred by the indemnified party as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of the Company or the Member in this Agreement, (b) any violation or breach by the Company or the Member of or default by the Company or the Member under the terms of this Agreement, and/or (c) any event or occurrence relating to the business of the Company occurring prior to the Effective Time. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of its rights under this Section. Upon and conditional upon the consummation of the Closing, the Company hereby releases the Morrisons, from and all claims held by the releasing party against the released party, known or unknown, actual or contingent, including but not limited to any claims relating to the employment by the Company of the Morrisons.

Section 7.2.Indemnification of the Member and the Company. Buyer shall indemnify the Member and the Company against, and hold each of them harmless from and against, any and all Indemnified Amounts incurred by the Member or the Company as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of Buyer in this Agreement, and/or (b) any violation or breach by Buyer of or default by Buyer under the terms of this Agreement. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of his rights under this Section.

Section 7.3.Procedure. The defense of any claim, action, suit, proceeding or investigation subject to indemnification under this Article shall be conducted by the indemnifying party. If the indemnifying party fails to conduct such defense, the indemnified parties may retain counsel satisfactory to them and the indemnifying party shall pay all reasonable fees and expenses of such counsel for the indemnified parties promptly as statements therefor are received. The party not conducting the defense will use reasonable efforts to assist in the vigorous defense of any such matter, provided that such party shall not be liable for any settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any indemnified party wishing to claim indemnification under this Article VII, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the indemnifying party (but the failure so to notify a party shall not relieve such party from any liability which it may have under this Article VII except to the extent such failure materially prejudices such party). If the indemnifying party is responsible for the attorneys’ fees of the indemnified parties, then the indemnified parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more indemnified parties.

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

ARTICLE VIII

MISCELLANEOUS

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

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

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

(ii)if the Purchase Transaction is not completed by April 5, 2006 (provided that the right to terminate this Agreement under this Section 8.1(a)(ii) shall not be available to the Company if the failure of the Company to fulfill any obligation to Buyer under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

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

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

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

(ii)if the Purchase Transaction is not completed by April 5, 2006 (provided that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to Buyer if the failure of Buyer to fulfill any obligation to the Company under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

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

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

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

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

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If to Buyer:	7030 Empire Central Drive Houston, Texas 77040 Telefax No. (713) 466-8386
With a copy to:	Casey W. Doherty Doherty & Doherty LLP 1717 St. James Place, Suite 520 Houston, Texas 77056 Telefax No. (713) 572-1001
If to the Company or the Member:	Gary A. Weiss 4270 W. Greens Pl. Wilson, WY 83014

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

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

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

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

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

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

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

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

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

THE COMPANY: TOTAL WELL SOLUTIONS, LLC
By:	/s/ Gary A. Weiss
	Name: Gary A. Weiss
	Title:  Managing Member

BUYER: USA PETROVALVE, INC.
By:	/s/ Jerry D. Dumas, Sr.
	Jerry D. Dumas, Sr., Chairman and Chief
	Executive Officer

THE MEMBER: TOTAL ENERGY TECHNOLOGIES, LLC
By:	/s/ Gary A. Weiss
	Name: Gary A. Weiss
	Title: Managing Member

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EX-10.2

EXCLUSIVE LICENSE AGREEMENT

This Exclusive License Agreement (“AGREEMENT”) is made and entered into as of the 3rd day of April, 2006, by and between:

(1)   Total Well Solutions, LLC, a Wyoming limited liability company (the “LICENSOR”);

(2)   USA Petrovalve, Inc., a Texas corporation (the “LICENSEE”); and

(3)   Flotek Industries, Inc. a Delaware corporation and an AFFILIATE of the LICENSEE (“FLOTEK”).

RECITALS

1.0   The LICENSOR owns the right and title to the INVENTION.

2.0   The PARTIES have entered into that certain Asset Purchase Agreement, dated the date hereof, 2006 pursuant to which, among other things, the LICENSEE has acquired certain assets of the LICENSOR in exchange for consideration from the LICENSEE, which consideration includes the obligations of the LICENSEE set forth in this AGREEMENT;

3.0   The LICENSEE desires to obtain an exclusive license in the INVENTION.

4.0   The LICENSOR is willing to grant such a license on terms and conditions recited below.

In consideration of the above-stated premises and the mutual promises and covenants contained in this AGREEMENT, the PARTIES agree as follows:

AGREEMENT

1.0   DEFINITIONS

Each of the following terms shall, whenever found in this AGREEMENT, be used and understood in accordance with the corresponding definitions below:

1.1   “LICENSED PATENT” shall mean and include the United States Letters Patent No. 6,761,215 by James E. Morrison and Guy Morrison III, entitled “Downhole Separator and Method” (listed in SCHEDULE A) and all reissues or reexaminations thereof.

1.2   “RELATED PATENTS” shall mean and include all United States or foreign patent applications and patents that claim priority from the LICENSED PATENT, including at least those listed in SCHEDULE A, and all divisions, continuations, continuations-in-part, extensions, renewals, patents-of-addition, reissues, reexaminations, supplementary protection certificates, or equivalents thereof.

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1.3   “INVENTION” shall mean the downhole separator and method, embodied in at least the LICENSED PATENT and the RELATED PATENTS.

1.4   “CONTROL” and its derivatives mean the ownership or control, either directly or indirectly, of greater than fifty percent (50%) of the voting rights of an entity.

1.5   “AFFILIATE” means an entity that, directly or indirectly, through one of more intermediaries, CONTROLS or is CONTROLLED by, or is under common CONTROL with, another entity.

1.6   “PARTIES” collectively or “PARTY” individually means the LICENSOR, the LICENSEE, and FLOTEK.

1.7   “TERRITORY” means worldwide.

1.8   “LICENSED PRODUCTS” means downhole separators that fall within or are described by any claim or claims of the LICENSED PATENT and/or any of the RELATED PATENTS that have not been held invalid or unenforceable and have not expired or lapsed.

1.9   “QUARTERLY GROSS REVENUE” means revenue as determined under generally accepted accounting principles, consistently applied (“GAAP”). QUARTERLY GROSS REVENUE shall expressly exclude, by way of example and not by way of limitation, (i) sales tax or other taxes collected, and (ii) amounts received as reimbursement of costs, such as freight costs.

1.10   “MARKET REPORT” shall mean a report that sets forth the computation of the ROYALTY.

2.0   GRANT OF LICENSE

2.1   The LICENSOR hereby grants unto the LICENSEE an exclusive, transferable, and sublicensable license throughout the TERRITORY in and to the INVENTION, the LICENSED PATENT, and the RELATED PATENTS, such license including, but not limited to, the exclusive license to:

2.1.1   Manufacture, use, import, offer to sell, sell, repair, and service the LICENSED PRODUCTS;

2.1.2   Enforce the LICENSED PATENT and the RELATED PATENTS as set forth under the provisions of this AGREEMENT; and

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2.1.3   Assign and/or sublicense the LICENSEE’s rights under this AGREEMENT.

2.2   The LICENSOR does not grant or imply to grant any other, further, or different license.

2.3   Except as expressly provided in this AGREEMENT, the LICENSOR does not grant or imply to grant any transfer of right or title in and to the INVENTION, the LICENSED PATENT, or any of the RELATED PATENTS to the LICENSEE.

2.4   The LICENSOR covenants that it, its heirs, legal representatives, assigns, administrators, and executors will, at the expense of the LICENSOR, its successors, and assigns, execute all papers and perform such other acts as may be reasonably necessary to give the LICENSEE, its successors, and assigns the full benefit of this AGREEMENT.

2.5   The LICENSOR retains no right to engage directly or indirectly in the TERRITORY in the manufacture, importation, distribution, promotion, or sale (either on its own account or for or on behalf of any other party) of any invention described and/or claimed in the LICENSED PATENT or RELATED PATENTS, nor engage in activities that would prejudice the performance of its obligations under this AGREEMENT.

3.0   SALES AND PROMOTION

3.1   The LICENSEE intends to use its best efforts regarding the manner in which it conducts its business with respect to the LICENSED PRODUCTS but shall not be held to any standard of conduct with respect to such business.

4.0   MARKET REPORT/AUDIT

4.1   The LICENSEE will on a quarterly basis provide to the LICENSOR a written MARKET REPORT for the preceding quarter. The LICENSOR shall keep such reports, and any information provided to it by the LICENSEE in connection with this AGREEMENT, confidential.

4.2   Upon reasonable notice and during regular business hours, the LICENSOR shall be permitted on an annual basis to have its independent auditors inspect and audit the books and records of the LICENSEE which relates to the determination of the ROYALTY. Such audit shall be at the expense of the LICENSOR, unless it is determined and agreed by the PARTIES that the ROYALTY has been underpaid by 10% or more, in which case the audit shall be at the expense of the LICENSEE.

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5.0   ROYALTY

5.1   During the term of this AGREEMENT and in consideration for the exclusive rights granted in this AGREEMENT, the LICENSEE and its AFFILIATE, FLOTEK, agree to pay to LICENSOR a royalty of 7.5% of the LICENSEE’s QUARTERLY GROSS REVENUE directly attributable to the LICENSED PRODUCTS that are sold by the LICENSEE in the TERRITORY (the “ROYALTY”), provided, however, that the Royalty shall not apply to QUARTERLY GROSS REVENUE attributable to any jurisdiction in which the LICENSED PRODUCTS are subject to competition from products whose cost, without the LICENSEE ROYALTY, is substantially the same to the LICENSED PRODUCTS.

5.2   As long as the LICENSED PATENT has not been found invalid or unenforceable, and has not expired or lapsed, the LICENSEE will pay the LICENSOR, with respect to each calendar year (ending December 31^st), a guaranteed minimum amount of ROYALTY pursuant to Section 5.1 equal to $400,000. The guaranteed minimum amount of ROYALTY shall only be paid should the ROYALTY payments described in Section 5.1 for the preceding calendar year amount to less than $400,000.00, in which case LICENSEE shall pay LICENSOR within 45 days of the end of such period the amount required to cause the ROYALTY paid with respect to that complete 12 month period to equal such minimum amount. The minimum royalty for 2006 shall be pro rated to $300,000.

5.3   The ROYALTY shall be offset by the costs of prosecution and maintenance of the LICENSED PATENT and the RELATED PATENTS as discussed below in Section 10.0 or the costs and expenses of any claim, suit, demand, action, or litigation as discussed below in Section 11.0.

5.4   The ROYALTY due under this AGREEMENT shall be subject to offset for any losses, damages, liabilities, costs, expenses, attorneys’ fees or court costs suffered by the LICENSEE or its affiliates (“DAMAGES”) as a result of any breach by LICENSOR of the terms of the Asset Purchase Agreement by and among the LICENSOR, Total Energy Technologies, LLC, and the LICENSEE (the “APA”), including, but not limited to, any breach of the representations and warranties provided by the LICENSOR in the APA, provided that such breach is identified in a written notice provided by LICENSEE to LICENSOR, and remains uncured within one year of the date hereof (a “BREACH”). Upon the initiation of, and until the conclusion of, any claim, suit, demand, action, or litigation against the LICENSOR by the LICENSEE for an alleged BREACH (a “CLAIM”), all ROYALTY payments, including any minimum amount of ROYALTY, shall be paid into an escrow account (the “ESCROW ACCOUNT”) held by an independent third party pursuant to terms established by the LICENSOR with the independent third party in the reasonable discretion of the LICENSOR. The terms of such ESCROW ACCOUNT shall provide, among other things, that any amount held in the ESCROW ACCOUNT shall be released to the LICENSOR or returned to the LICENSEE upon the final, non-appealable conclusion of the CLAIM (a “DETERMINATION”) to the extent required for the LICENSEE to fully recover the DAMAGES. If the amount paid to the LICENSEE from the ESCROW ACCOUNT upon a DETERMINATION is not sufficient to fully offset and recover the DAMAGES, the LICENSEE shall be permitted to offset and reduce future ROYALTY payments until it has hereby recovered all DAMAGES. Once all DAMAGES have been recovered, the LICENSEE shall continue the ROYALTY payments under the terms above. The terms of this section set forth a non-exclusive remedy.

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6.0   TERMS OF PAYMENT

6.1   The ROYALTY shall be payable as follows: (i) within thirty days after the end of each calendar quarter ending on March 31, June 30 and September 30, LICENSEE shall pay the LICENSOR $100,000, and (ii) on or before February 15^th, LICENSEE shall pay LICENSOR the amount of Royalty which remains unpaid with respect to the calendar year ending on the previous December 31^st.

6.2   All determinations by the LICENSEE with respect to the calculation of the ROYALTY shall be deemed to be correct unless objection is made within thirty days and the LICENSOR is able to establish an error by a preponderance of the evidence.

Unless otherwise specified by the LICENSEE, all payments due by the LICENSEE to the LICENSOR hereunder shall be paid in US dollars by international wire transfer to the account specified in writing from time to time by the LICENSOR.

7.0   CONFIDENTIALITY

7.1   Any information acquired by any of the PARTIES in the course of this AGREEMENT regarding the affairs and business of the PARTIES and their affiliates shall, during the TERM of the AGREEMENT and for (10) years thereafter, be treated as confidential and shall not be disclosed without the prior consent of the PARTIES, except for information that:

7.1.1   at the time of the disclosure or thereafter is generally available to and known by the public (other than as a result of its disclosure by the receiving PARTY), unless the information consists of a compilation of information that, despite the individual components of information being generally available to and known by the public, is not itself generally available to and known by the public;

7.1.2   was available to a receiving PARTY hereto on a non-confidential basis prior to disclosure by the disclosing PARTY; or

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7.1.3   becomes available to a receiving PARTY hereto on a non-confidential basis from a person who is not otherwise bound by a confidentiality agreement with the disclosing PARTY, or is not otherwise prohibited from transmitting the information to the receiving PARTY.

7.2   If a PARTY is required by law to disclose all or any part of such information, such PARTY agrees to:

7.2.1   immediately notify the other PARTIES of the existence, terms, and circumstances surrounding such a request;

7.2.2   consult with the other PARTIES on the advisability of taking legally available steps to resist or narrow such request; and

7.2.3   exercise its commercially reasonable best efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the information required to be disclosed.

7.3   Information to be treated as confidential under this AGREEMENT shall include, but not be limited to, MARKET REPORTS, information regarding the INVENTION, the PARTIES' customer lists, unpublished designs, marketing and business plans, telemarketing and other unique sales techniques, and sources of supply.

7.4   This duty of confidentiality pertains to both PARTIES' directors, officers, employees, agents, and representatives, if any.

8.0   LIABILITY AND DUTIES

8.1   The LICENSOR and the LICENSEE each acknowledges and represents to the other that neither shall incur any liability on behalf of the other, purport to pledge the credit of the other, or accept any order or obligation to be binding upon the other.

8.2   None of the PARTIES or their management or members shall owe a fiduciary duty to each other under this AGREEMENT.

9.0   WARRANTY OF OWNERSHIP

9.1   LICENSOR represents and warrants that it is the owner of the entire right, title, and interest in and to the INVENTION, the LICENSED PATENT, and any RELATED PATENTS.

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10.0   PATENT PROSECUTION AND MAINTENANCE

10.1   The LICENSEE, at the LICENSOR’s expense, shall have the responsibility for and control over the prosecution and maintenance of the LICENSED PATENT and any RELATED PATENTS. The LICENSEE shall take no action with respect to the LICENSED PATENT or any of the RELATED PATENTS where the purpose or effect of that action is to limit or diminish the LICENSEE’s obligation to pay the ROYALTY set forth in Section 5.0 of this AGREEMENT. The LICENSOR, at the expense of the LICENSOR, shall cooperate in any way necessary to enable the LICENSEE to conduct such prosecution and maintenance. The amount of the ROYALTY due under Section 5.1 shall be offset by the costs of such prosecution and maintenance.

11.0   INFRINGEMENT BY LICENSEE/INDEMNIFICATION

11.1   In the event of any claim, suit, demand, action, or litigation against the LICENSEE, on account of any claim of infringement arising out of the manufacture, use, importation, offer for sale, or sale of the LICENSED PRODUCTS (a “LICENSEE INFRINGEMENT CLAIM”), the LICENSOR agrees to furnish to the LICENSEE, on request and at the expense of the LICENSOR, all evidence and information in possession relating to the defense of such litigation. Any such expenses incurred by the LICENSEE, but owed by the LICENSOR, shall be deducted from the amount of the next paid ROYALTY payment.

11.2   The LICENSOR shall indemnify and hold the LICENSEE, its AFFILIATES, and their respective officers and directors harmless from all LICENSEE INFRINGEMENT CLAIMS s, including reasonable legal fees and court costs, that the LICENSEE may incur or suffer. Upon the initiation of, and until the finalization of, any LICENSEE INFRINGMENT CLAIM, all ROYALTY payments, minus all losses, damages, and costs, including reasonable legal fees and court costs, that the LICENSEE may incur or suffer in connection with same, shall be paid into escrow. Should an injunction, damages, or other relief not be awarded to the third party plaintiff, any amount remaining in escrow shall be released to the LICENSOR upon the final, non-appealable conclusion of the claim, suit, demand, action, or litigation against the LICENSEE. Should an injunction, damages, or other relief be awarded to the third party plaintiff, any amount remaining in escrow shall be released to the LICENSEE to the extent required to receive the indemnification to which it is entitled pursuant to this Section and thereafter shall be paid to the LICENSOR.

12.0   INFRINGEMENT BY THIRD PARTY

12.1   In the event that the LICENSED PATENT or any of the RELATED PATENTS shall be considered by the LICENSEE to be infringed by others, the LICENSEE, at its own expense, shall have the right, but not the obligation, to institute any action or proceeding that the LICENSEE may deem necessary or advisable, including, without limitation, the filing of a lawsuit seeking damages and/or an injunction against such infringement, as well as to prosecute, settle, compromise, or otherwise dispose of the same. The LICENSOR waives any right, if any such right exists, to prevent or enjoin the LICENSEE from filing or pursuing an action for infringement by reason of the LICENSOR not being a party to the action. The LICENSOR cannot join any action brought by the LICENSEE per this AGREEMENT unless the LICENSEE requests such joinder or a court orders that the LICENSOR be a party, in which instance the LICENSOR shall join such action by filing the appropriate pleadings or papers with the Court having jurisdiction. In situations where the LICENSOR is or becomes a party to any proceeding or action, the LICENSOR shall be entitled to non-controlling participation through counsel of its selection, in which the LICENSEE shall be responsible for paying the necessary and reasonable attorney fees and expenses of the LICENSOR.

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12.2   The LICENSEE shall notify the LICENSOR of its intention not to institute any such action or proceeding relating to the infringement by a third party, including correspondence or discussions regarding the infringement without the filing of a lawsuit, within ninety days of knowing of any potential infringement by a third party. Upon such notice, the LICENSOR, at its own expense, shall have the right, but not the obligation, to institute any action or proceeding that the LICENSOR may deem necessary or advisable, including, without limitation, the filing of a lawsuit seeking damages and/or an injunction against such infringement, as well as to prosecute, settle, compromise, or otherwise dispose of the same. The LICENSEE waives any right, if any such right exists, to prevent or enjoin the LICENSOR from filing or pursuing an action for infringement by reason of the LICENSEE not being a party to the action. The LICENSEE cannot join any action brought by the LICENSOR per this AGREEMENT unless the LICENSOR requests such joinder or a court orders that the LICENSEE be a party, in which instance the LICENSEE shall join such action by filing the appropriate pleadings or papers with the Court having jurisdiction. In situations where the LICENSEE is or becomes a party to any proceeding or action, the LICENSEE shall be entitled to non-controlling participation through counsel of its selection, in which the LICENSOR shall be responsible for paying the necessary and reasonable attorney fees and expenses of the LICENSEE.

12.3   The PARTY bringing any action or proceeding described in Sections 12.1-12.2 shall retain the moneys collected through such action or proceeding. The non-controlling PARTY is not entitled to any award and/or collection of damages from such action.

12.4   Sections 12.1-12.3 include actions involving the filing of a declaratory judgment action or the filing of any counter-claim for infringement and damages.

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12.5   Should the LICENSOR become a party to an action brought by the LICENSEE pursuant to this AGREEMENT, the LICENSOR waives and agrees not to assert in the action or proceedings, any claim that: (1) the LICENSOR is not subject to the jurisdiction of the court or of any other court to which the proceedings in the court may be appealed; (2) the suit, action, or proceeding is brought in an inconvenient forum; or (3) the venue of the suit, action, or proceeding is improper.

12.6   The LICENSOR and LICENSEE shall each promptly inform the other of any suspected infringement of the LICENSED PATENT or the RELATED PATENTS by a third party.

12.7   Should a lawsuit, reexamination, reissue or other proceeding be commenced in which the validity or enforceability of any of the LICENSED PATENT or any of the RELATED PATENTS is contested or challenged (the “CHALLENGED PATENT”) or in which certain of the claims of the CHALLENGED PATENT are challenged or asserted as being invalid (the “CHALLENGED CLAIMS”), then in the event that a court or other tribunal of competent jurisdiction holds in a final, non-appealable judgment that the CHALLENGED PATENT is unenforceable, and not withstanding anything to the contrary in this AGREEMENT, the LICENSEE shall have no obligation to make any further ROYALTY payments to the LICENSOR for the sales of what were formerly LICENSED PRODUCTS in the country of the CHALLENGED PATENT but shall still retain the rights under this AGREEMENT as to what were the formerly the LICENSED PRODUCTS in that country.

13.0   TERM

13.1   The TERM of this AGREEMENT shall, unless terminated earlier in accordance with Section 14 below, remain in effect as long as at least one of the LICENSED PATENT or any RELATED PATENTS has (1) not been found by the relevant country’s patent office or court of law to be invalid or unenforceable; or (2) has not expired or lapsed.

14.0   TERMINATION

14.1   The LICENSOR or the LICENSEE may terminate this AGREEMENT at any time by giving the other notice to that effect, stating the precise reasons therefore, in any of the following events:

14.1.1   any material breach by the other for which effective remedial action has not been undertaken within sixty days after written notice is given specifying the breach and requiring remedy of the same, the written notice being effective after the remedial period or any subsequent date specified in the notice; or

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14.1.2   if the other shall be unable to pay its debts in the ordinary course of business, shall enter into liquidation (otherwise than for reason of corporate amalgamation or reconstruction), shall become bankrupt or insolvent, or shall be placed in the control of a receiver or trustee, whether compulsorily or voluntarily, the notice being effective on the date when notice is given or any subsequent date specified in the notice.

15.0   CONSEQUENCES OF TERMINATION

15.1   Upon termination of this AGREEMENT:

15.1.1   the LICENSEE shall promptly pay to the LICENSOR all amounts due by way of ROYALTY, or otherwise to the date of termination (which shall be deemed to be the end of the calendar quarter in which it falls);

15.1.2   the LICENSEE shall make no further use or sale of the LICENSED PRODUCTS (subject to Section 15.1.3);

15.1.3   the LICENSOR will, except where termination is based on material breach of this AGREEMENT by the LICENSEE by reason of the LICENSEE’s gross misconduct, permit the LICENSEE to dispose of any stock then in hand within up to six months following the date of termination. The LICENSOR shall be entitled to ROYALTY payments on this stock in hand.

16.0   REPRESENTATIONS AND WARRANTIES

16.1   The LICENSOR hereby represents and warrants to the LICENSEE that neither the LICENSED PATENT nor any of the RELATED PATENTS has been held invalid or unenforceable, that to the knowledge of the LICENSOR, the LICENSED PATENT and the RELATED PATENTS are valid and enforceable, and neither the LICENSED PATENT nor any of the RELATED PATENTS is the subject of, or involved in, any suit, action or reexamination or reissue proceeding.

16.2   The LICENSOR hereby represents and warrants to the LICENSEE that the LICENSOR owns and holds all right, title, claim, and interest in and to the LICENSED PATENT and the RELATED PATENTS, subject to no restrictions or encumbrances of any kind.

16.3   The LICENSOR further represents and warrants that there are no current licenses or commitments or agreements to license any rights in and to LICENSED PATENT or any of the RELATED PATENTS other than the rights granted in this AGREEMENT.

16.4   The LICENSOR and the LICENSEE hereby represent and warrant that they have full and complete power and authority to enter into and carry out their obligations under this AGREEMENT and under any documents, which may be executed in connection herewith.

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16.5   The LICENSOR represents and warrants that they have provided all information concerning notices or allegations made by the LICENSOR concerning the LICENSED PATENT and the RELATED PATENTS, any litigation involving the LICENSED PATENT or any of the RELATED PATENTS, and other license agreements or proposals concerning the LICENSED PATENT or any of the RELATED PATENTS.

16.6   The LICENSOR agrees to indemnify and hold the LICENSEE harmless from any liabilities, costs and expenses (including reasonable attorneys' fees and expenses), obligations, and causes of action arising out of or related to any breach of the representations and warranties made by the LICENSOR herein.

16.7   The LICENSOR represents and warrants that all maintenance or equivalent fees have been paid on the LICENSED PATENT and the RELATED PATENTS and that neither the LICENSED PATENT nor any of the RELATED PATENTS has expired for failure to pay any fees.

16.8   The LICENSOR hereby further represent and warrant that:

16.8.1   The LICENSOR shall not make any license, assignment, commitment or other agreement which is inconsistent with the terms of this AGREEMENT

16.8.2   The LICENSOR owns and holds the exclusive right, title, and interest in and to the LICENSED PATENT and the RELATED PATENTS, and that such rights and the LICENSED PATENT and the RELATED PATENTS are subject to no liens, restrictions, or encumbrances of any kind, and that no other person or entity has any right, title, interest, or claim in or to the LICENSED PATENT or any of the RELATED PATENTS as a result of any action taken by the LICENSOR.

17.0  IMPROVEMENTS

If the LICENSEE, AFFILIATES of the LICENSEE, or any of the officers, agents, or employees of the LICENSEE or its AFFILIATES devise or acquire any improvement in the INVENTION, the LICENSEE or its AFFILIATE shall own all patent rights and any other intellectual property related to such improvement, not subject to any of the terms under this AGREEMENT, as long as said improvements are not covered by the LICENSED PATENT or RELATED PATENTS.

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18.0   EXPENSES

18.1   The expenses incurred by the PARTIES in performance of this AGREEMENT, including all travel and out-of-pocket expenses, shall be solely for their own account.

19.0   TRANSFERABILITY

19.1   The LICENSOR may not assign or transfer all or any portion of its rights under this AGREEMENT or of its title in the LICENSED PATENT or any of the RELATED PATENTS without providing at least thirty days written notice of such to and receiving written approval of such from the LICENSEE.

19.2   The LICENSEE agrees not to unreasonably withhold approval of such assignment or transfer under Section 19.1.

19.3   The LICENSEE may transfer, assign, and/or sublicense all or any portion of its rights under this AGREEMENT, provided that the LICENSEE shall guarantee the performance by its assignee of the obligations of the LICENSEE pursuant to this agreement which accrue subsequent to such assignment and provided further that the LICENSEE must provide at least 30 days advance written notice of the assignment to the LICENSOR.

20.0   SUCCESSORS

20.1   Upon execution, this AGREEMENT shall be binding upon each of the PARTIES and inure to the benefit of the PARTIES and their successors and assigns.

21.0   SEVERABILITY

21.1   Should any part or provision of this AGREEMENT be held unenforceable or in conflict with the law of any jurisdiction, the validity of the remaining parts or provisions shall not be affected by such holding.

22.0   WAIVER

22.1   A waiver of any breach of any provision of this AGREEMENT to be enforceable must be in writing and shall not be construed as a continuing waiver of other breaches of the same or other provisions of this AGREEMENT.

23.0   INTEGRATION

23.1   This AGREEMENT embodies the entire understanding between the PARTIES with respect to the grant of license under the LICENSED PATENT and the RELATED PATENTS, there are no prior representations, warranties, or agreements between the PARTIES relating hereto, and this AGREEMENT is executed and delivered upon the basis of this understanding.

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24.0   GOVERNING LAW, JURISDICTION, AND PLACE OF SUIT

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

24.2   The PARTIES consent to the jurisdiction of the State of Texas, U.S.A. for all purposes in connection with this AGREEMENT.

24.3   Any process, notice, motion, or other application to a Court or to a Justice of the State of Texas, U.S.A. may be served within or without the territorial jurisdiction of the State of Texas, U.S.A., by registered or certified mail, return receipt requested, or by personal service, or in such other manner as is permissible under the Rules of a Court in the State of Texas, U.S.A., provided a reasonable time for appearance, not less than twenty business days, is allowed.

24.4   The PARTIES agree that the proper jurisdiction and venue for resolution of any dispute arising from the terms of or performance under this AGREEMENT (hereinafter “LICENSE DISPUTE”) shall be Harris County Texas. In the event of a LICENSE DISPUTE, the Parties agree to submit the dispute to non-binding mediation and then, if necessary, binding arbitration conducted by the American Arbitration Association.

25.0   MULTIPLE COUNTERPARTS

25.1   This Agreement may be executed in multiple counterparts, each of which shall be deemed an original.

26.0   MODIFICATION

26.1   This AGREEMENT may not be modified otherwise than by written instrument signed by all PARTIES.

27.0   HEADINGS

27.1   The headings of this AGREEMENT shall serve only reference purposes and for convenience and are not binding or intended to limit or expand the breadth of the provisions of this AGREEMENT.

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28.0   NOTICES

28.1   All notices and communications required or permitted to be sent by the PARTIES to each other shall be deemed sufficient if transmitted in writing by registered mail addressed as follows:

If to LICENSOR:	Gary A. Weiss 4270 W. Greens Pl Wilson, WY 83014
If to LICENSEE:	7030 Empire Central Drive Houston, Texas 77040

IN WITNESS WHEREOF, the PARTIES hereto have executed this AGREEMENT as of the date set forth above.

TOTAL WELL SOLUTIONS, LLC
By:	/s/ Gary A. Weiss
	Gary A. Weiss, Managing Member

USA PETROVALVE, INC.
By:	/s/ Jerry D. Dumas Sr.
	Jerry D. Dumas, Sr., Chairman and Chief Executive Officer

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

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SCHEDULE A

List of Patents and Patent Applications Being Licensed

1.   U.S. Patent No. 6,761,215;

2.   Eurasian Patent Application No. 200500439/26;

3.   Australian Patent Application No. 2003278716;

4.   Canadian Patent Application No. 2497929; and

5.   Chinese Patent Application No. 03824239.7

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EX-10.3

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT, dated as of June 6, 2006 (the “Agreement”), is by and among LifTech, LLC, a Wyoming limited liability company (the “Company”), Jason Taylor (“JT”), Toby Semlek (“TS”), and USA Petrovalve, Inc., a Texas corporation (“Buyer”) which is a wholly-owned subsidiary of Flotek Industries, Inc.

WITNESSETH:

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

WHEREAS, JT and TS each have an ownership interest in the Company and thus would derive a substantial benefit from the consummation of the purchase transaction contemplated herein;

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

ARTICLE I

THE PURCHASE

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

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

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

(c)The rights of the Company under the agreements listed on Schedule 1.1(c) (the “Assigned Agreements”);

(d)All of the customer lists, customer files (including credit applications and reports, credit histories and applicable terms and conditions) books, records, ledgers, files, documents, correspondence, plans, studies, and drawings of the Company;

(e)The inventories of finished goods, tooling inventory, work in progress and raw materials of the Company as of the Effective Time (the “Purchased Inventory”), which shall specifically include, but shall not be limited to, the inventory listed on Schedule 1.1(e) (the “Scheduled Inventory”);

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

(g)The cash and other working capital of the Company as of the Effective Time (the “Cash”); and

(h)All of the goodwill of the Company and all of the rights of the Company to use the tradename “LifTech” or any similar name (subject to the permitted use provided for in Section 5.7) (the “Tradename”).

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

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

(a)Pay cash at Closing in the aggregate amount of Seven Hundred Ninety-One Thousand Seven Hundred Four and No/100 Dollars ($791,704) (the “Cash Payment”) less any offset provided for in Section 1.10;

(b)Cause Flotek Industries, Inc. (“Flotek”) to issue to JT and TS, as additional purchase price for the Acquired Assets, an aggregate number of shares (the “Flotek Shares”) of the common stock of Flotek, .0001 par value per share (the “Flotek Common Stock”) determined by dividing Three Million Eight Hundred Fifty-Eight Thousand Five Hundred Twenty-Three and No/100 Dollars ($3,858,523) by the Share Value. The Flotek Shares shall be allocated to JT and TS as indicated on Schedule 1.3(b). For purposes herein, the term “Share Value” shall mean the value of the Flotek Shares based on the average for the ten business days that precede June 6, 2006 of daily closing trading prices of the Flotek Common Stock on the American Stock Exchange;

(c)Assume liability, up to a maximum aggregate assumed amount of $1,231,000, for the accounts payable of the Company (the “Accounts Payable”) set forth on the April 30, 2006 Financial Statements or arising subsequent to April 30, 2006, in the ordinary course of business which are identified in the Closing Statement (as defined in Section 1.7) (collectively, the “Assumed Liabilities”); and

(d)Execute and deliver to the Company a Promissory Note in the amount of Five Hundred Fourteen Thousand Four Hundred Sixty-Nine and No/100 Dollars ($514,469) in the form of Exhibit 1.3(d).

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

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

Section 1.6.Closing. The closing (the “Closing”) of the transactions contemplated by this Agreement (the “Purchase Transaction”) shall take place at the offices of the attorneys for Buyer in Houston, Texas as promptly as practicable (but in any event within five business days) following the date on which the last of the conditions set forth in Article VI is fulfilled or waived, or at such other time and place as Buyer and the Company shall agree. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” The Closing will be effective as of June 1, 2006 (the “Effective Time”).

Section 1.7.Transfer Documents. At the Closing, each of the parties hereto will perform such acts and deliver such documents as are required pursuant to the terms hereof to be delivered at Closing, including but not limited to:

(a)the Company, JT and TS shall:

(i)execute, acknowledge and deliver to Buyer all deeds, bills of sale, endorsements, assignments, and other good and sufficient instruments of conveyance, sale, transfer and assignment as shall be required to vest effectively in Buyer good and indefeasible title in and to the Acquired Assets, free and clear of all liens or encumbrances, including specifically, but not by way of limitation, an assignment, bill of sale and assumption agreement in the form of Exhibit 1.7(a) (the “Assignment”) and the Employment Agreements in the form of Exhibit 5.8 (the “Employment Agreements”);

(ii)deliver or cause to be delivered to Buyer possession of all of the Acquired Assets capable of being physically delivered; and

(iii)deliver to Buyer a closing statement, in a form reasonably satisfactory to Buyer, executed by both JT and TS setting forth the balances of Cash, Accounts Receivable, and Assumed Liabilities as of the Effective Time (the “Closing Statement”).

(b)Buyer shall:

(i)deliver to the Company the Cash Payment, net of any offset provided for in Section 1.10, in the form of bank check or wire transfer;

(ii)execute and deliver to the Company a Promissory Note and Guaranty in the form of Exhibit 1.3(d); and

(ii)execute and deliver the Assignment and the Employment Agreements.

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Section 1.9.Property Taxes. Any general property and/or ad valorem tax assessed against or pertaining to the Acquired Assets for the taxable period that includes the date of the Closing shall be prorated between Buyer and the Company.

Section 1.10.Offsets. The Cash Payment shall be offset and reduced at Closing to reflect any Working Capital Deficit. The term “Working Capital Deficit” means the excess, if any, of the balances of the following amounts as of Closing: (a) the Accounts Payable plus $1,000, over (b) the sum of the Cash and the Accounts Receivable.

Section 1.11.Index. An index identifying the sections in which the definitions of certain terms are set forth in Exhibit A.

ARTICLE II

REPRESENTATIONS AND

WARRANTIES OF BUYER

Buyer represents and warrants to the Company, JT and TS as follows:

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

Section 2.2.Authority; Non-Contravention; Approvals.

(a)Buyer and Flotek each have full corporate power and authority to execute and deliver this Agreement to consummate the transactions contemplated hereby. Other than the approval by the Board of Directors of Buyer and Flotek, no corporate proceedings on the part of Buyer or Flotek are necessary to authorize the execution and delivery of this Agreement or the consummation by Buyer and Flotek of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and Flotek, and, assuming the due authorization, execution and delivery hereof by the Company, JT and TS, constitutes a valid and legally binding agreement of Buyer and Flotek enforceable against each of them in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles.

(b)The execution and delivery of this Agreement by Buyer and Flotek and the consummation by Buyer and Flotek of the transactions contemplated hereby do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Buyer or Flotek under any of the terms, conditions or provisions of (i) the charter or bylaw of Buyer and Flotek, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Buyer or Flotek or any of their properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Buyer or Flotek is now a party or by which Buyer or Flotek or any of its properties or assets may be bound or affected.

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Section 2.3.Reports. Flotek has previously made available or delivered to the Company, JT, and TS copies of the Form 10-KSB filed by it with the Securities and Exchange Commission for the period ended December 31, 2005 (the “SEC”) and its quarterly report filed with the SEC on Form 10-QSB for the period ending March 31, 2005 (“Flotek SEC Reports”). As of their respective dates, the Flotek SEC Reports did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither Buyer nor Flotek has made any other representation to the Company, JT, or TS regarding the Flotek Shares. The Flotek Shares will be restricted stock which will not be tradable on the open market under the applicable securities laws.

Section 2.4.Brokers and Finders. Buyer has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Buyer to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by Buyer of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF THE COMPANY AND JT AND TS

The Company, JT and TS jointly and severally represent and warrant to Buyer that:

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

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Section 3.2.Ownership. JT owns seventy percent (70%) of the issued and outstanding membership interest in the Company and TS owns thirty percent (30%) of the issued and outstanding membership interest in the Company. The only members of the Company are JT and TS.

Section 3.3.Other Entities. The Company does not own stock or other ownership interests in any other entity.

Section 3.4.Authority; Non-Contravention; Approvals.

(a)The Company has full limited liability company power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been approved by the managers of the Company and the members of the Company to the extent required to consummate this transaction in accordance with applicable law, including but not limited to the laws of the State of Wyoming. No further actions on the part of the Company are necessary to authorize the execution and delivery of this Agreement or the consummation by the Company of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company, JT and TS, and, assuming the due authorization, execution and delivery hereof by Buyer, constitutes a valid and legally binding agreement of the Company and JT and TS, enforceable against the Company, JT and TS in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (b) general equitable principles.

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

Section 3.5.Financial Statements. The Company has furnished Buyer with a balance sheet of the Company as of December 31, 2004, December 31, 2005 and April 30, 2006, and the related statement of income for the calendar years then ended (including the notes thereto) (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied, and are accurate and complete and fairly present the financial condition and result of operations of the Company.

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Section 3.6.Absence of Undisclosed Liabilities. Except as disclosed in the Disclosure Schedule, the Company has not incurred any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities or obligations (a) which are provided for in the Financial Statements or reflected in the notes thereto, (b) which were incurred after April 30, 2006, and were incurred in the ordinary course of business and consistent with past practices, or (c) liabilities or obligations under this Agreement.

Section 3.7.Absence of Certain Changes or Events. Since April 30, 2006, the business of the Company has been conducted in the ordinary course of business consistent with past practices, and there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Material Adverse Effect. Specifically, but not by way of limitation, since April 30, 2006, the Company has not engaged in or been subject to any of the actions described in Section 4.1. "Material Adverse Effect" means any event, occurrence, fact, condition, change, development, circumstance, or effect with respect to the business, assets (including intangible assets), liabilities, condition (financial or other), operations, properties (including intangible properties), results, or prospects of the Company with respect to which there is a substantial likelihood that the event, occurrence, fact etc. would have been viewed by a reasonable investor as having a significantly negative effect on the value of the consideration such reasonable investor would have been willing to pay for the purchase of the Company.

Section 3.8.Accounts Receivable. The Accounts Receivable are valid, genuine and subsisting, arise out of bona fide sales and delivery of goods, performance of services or other business transactions in the ordinary course of business and are current and collectible. Each of the Accounts Receivable will be collected in full, without any set-off and without resort to litigation, within 120 days after the Closing.

Section 3.9.Tangible Assets. The Tangible Personal Property and the Leased Assets constitute all of the tangible personal property necessary for the conduct by the Company of its business as now conducted. The Company has good and indefeasible title to the Tangible Personal Property, free and clear of all mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever. The Tangible Personal Property and Leased Assets are in good, serviceable condition and fit for the particular purposes for which they are used in the business of the Company, subject only to normal maintenance requirements and wear and tear reasonably expected in the ordinary course of business.

Section 3.10.Employee Benefits. The Disclosure Schedule contains a complete list of “employee welfare plans” (as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 (“ERISA”)) currently maintained by the Company or any person or trade or business under common control with the Company, or in which active or former employees of the Company (collectively, the “Affected Employees”) currently participate (which plans are hereinafter referred to as “Welfare Plans”). The Disclosure Schedule also contains a complete list of “employee pension benefit plans” as that term is defined in Section 3(2) of ERISA maintained by the Company or any person or trade or business under common control with the Company, or in which any such entity currently contributes or is required to contribute or in which Affected Employees currently participate (which plans are hereinafter referred to as “Pension Plans”). Neither the Company nor any of the Affected Employees participate or ever participated in any “multiemployer plan” (as that term is defined in Section 3(37) of ERISA). The Welfare Plans and Pension Plans, and any other plans of the type described in the first two sentences of this Section previously applicable at any time to the Company, are collectively referred to as the “Company Plans”. Each Company Plan is or was in compliance with the provisions of all applicable laws, rules and regulations, including, without limitation, ERISA and the Code. None of the Pension Plans has incurred any “accumulated funding deficiency” (as defined in Section 412(a) of the Code). The Company has not incurred any liability to the Pension Benefit Guaranty Corporation under Section 4062, 4063 or 4064 of ERISA, or any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan. The Disclosure Schedule describes all bonuses and other compensation which will be payable to any of the employees of the Company as a result of the consummation of the Purchase Transaction, and any obligation to pay severance payments.

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Section 3.11.Litigation. There are no claims, suits, actions, or proceedings pending or, to the Knowledge of the Company, threatened against or relating to the Company, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. The Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. For purposes of this Agreement, “Knowledge” means actual or constructive knowledge of officers of the Company after reasonable inquiry.

Section 3.12.No Violation of Law. The Company is not in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable Environmental Law) of any governmental or regulatory body or authority. Except as disclosed in the Disclosure Schedule, as of the date of this Agreement, to the Knowledge of the Company, no investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. The governmental permits or licenses of the Company (the “Permits”) are sufficient for the Company to conduct its business in the manner currently conducted, and the Company is not in violation of the terms thereof. The Company is not in violation of the terms of any of its Permits and is not required to possess any other permit, license, franchise, variance, exemption, order or other governmental authorization, consent or approval.

Section 3.13.Labor Matters. The Disclosure Schedule sets forth a list of each of the employees of the Company, and a description of the salaries and other compensation payable to such individuals. Except as set forth in the Disclosure Schedule, (a) there are no material controversies pending or, to the Knowledge of the Company, threatened between the Company on the one hand and any of its employees on the other, (b) the Company is not a party to a collective bargaining agreement of other labor union contract applicable to persons employed by the Company, nor does the Company have any Knowledge of any activities or proceedings of any labor union to organize any such employees, (c) the Company is not a party to any written agreement, memorandum, or understanding with respect to the employment of any individual, and (d) neither the Company, JT or TS are aware of any intention of any employee to terminate his or her employment with the Company, either as a result of the Purchase Transaction or otherwise.

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Section 3.14.Customer Relationships. The Disclosure Schedule lists all of the material customers of the Company. Except as set forth in the Disclosure Schedule, there has not been (a) any adverse change in the business relationship of the Company with any customer; or (b) any change in any term (including credit terms) of the agreements with any such customer. The Company has not received any customer complaints concerning its products and services.

Section 3.15.Real Property.

(a)The Company does not own and has never owned any interest of any kind (whether ownership, lease or otherwise) in any real property, except the real estate leased by it at 5608 South Winland, Gillette, Wyoming (the “Company Facilities”).

(b)The Company Facilities are in good condition (reasonable wear and tear excepted), and are adequate for the operation of the Company's business as presently conducted.

(c)The Company’s use of the Company Facilities in the normal conduct of its business does not violate any applicable building, zoning or other law, ordinance or regulation affecting such real property, and no covenants, easements, rights of way or other such conditions of record impair the Company’s use of the Company Facilities in the normal conduct of its business.

(d)The Company has not experienced any material interruption in the delivery of adequate quantities of any utilities or other public services to the Company Facilities required by the Company in the normal operation of its business.

Section 3.16.Environmental Matters. Except as set forth in the Disclosure Schedule:

(a)no notice, demand, request for information, citation, summons or order has been received, no complaint has been served, no penalty has been assessed, and no investigation, action, claim, suit, proceeding or review is pending or, to the Knowledge of the Company, is threatened by any governmental entity or other person relating to or arising out of any environmental law;

(b)the Company is and has been in compliance with all environmental laws and environmental permits; and

(c)there are no liabilities of or relating to the Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any environmental law and there are no facts, conditions, situations or set of circumstances which could reasonable be expected to result in or be the basis for any such liability.

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Section 3.17.Material Contracts. Schedule 1.1(c) lists all agreements, leases, commitments, contracts, undertakings or understandings, to which the Company is a party, including but not limited to service agreements, manufacturing agreements, purchase or sale agreements, master service agreements, supply agreements, distribution or distributor agreements, real estate leases, purchase orders, license agreements, customer orders and equipment rental agreements. Each Operating Agreement is a valid, binding and enforceable agreement of the Company and, to the Knowledge of the Company, the other parties thereto. There has not occurred any breach or default under any Operating Agreement on the part of the Company or, to the Knowledge of the Company, any other parties thereto. No event has occurred which with the giving of notice or the lapse of time, or both, would constitute a default under any Operating Agreement on the part of the Company, or, to the Knowledge of the Company, any of the other parties thereto. There is no dispute between the parties to any Operating Agreement as to the interpretation thereof or as to whether any party is in breach or default thereunder, and no party to any Operating Agreement has indicated its intention to, or suggested it may evaluate whether to, terminate any Operating Agreement.

Section 3.18.Inventory. The Purchased Inventory consists of items that are usable and saleable in the ordinary course of business by the Company. All items of Purchased Inventory are owned by the Company free and clear of any lien or encumbrance, and are in good condition. No items of Purchased Inventory are held by the Company on consignment from others. As of the Effective Time the Scheduled Inventory is located on the premises of the Company as the Effective Time as determined by a physical count conducted by the Company.

Section 3.19.Solvency. The Company will not be insolvent as of the Closing and will not be rendered insolvent by the Purchase Transaction. After giving effect to the consummation of the Purchase Transaction, the Company will be able to pay its liabilities as they become due.

Section 3.20.Brokers and Finders. Except as indicated in the Disclosure Schedule, the Company has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of the Company or the Member to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by the Company or the Member of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.

Section 3.21.Purchase for Own Account. The Flotek Shares are being or will be acquired by each of JT and TS for his own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the rights of JT and TS at all times (subject to Section 9.4) to sell or otherwise dispose of all or any part of such securities under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act of 1933 (the “Securities Act”). JT and TS are each experienced in evaluating companies such as Flotek and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of their investment and has the ability to suffer the total loss of their investment. JT and TS each have had the opportunity to ask questions of and receive answers from executive officers of Flotek concerning the terms and conditions of the offering of the Flotek Shares and to obtain additional information to the satisfaction of JT and TS. JT and TS are each an “accredited investor” as that term is defined by Rule 501 of Regulation D promulgated under the Securities Act. The Flotek Shares will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of Flotek on such exemption is predicated in part on the representations set forth herein. JT and TS will not sell or assign any Flotek Shares except pursuant to a valid registration statement filed pursuant to the Securities Act or pursuant to a valid exemption from the registration requirements thereof.

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Section 3.22.Disclosure. No representation or warranty of the Company, JT or TS set forth hereunder or in the schedules attached hereto or in any certificate delivered pursuant to Section 6.2(a) contains any untrue statement of the material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

ARTICLE IV

CONDUCT OF BUSINESS PENDING THE CLOSING

Section 4.1.Conduct of Business of the Company. Prior to the Effective Time, the Company shall operate its business in, and only in, the usual, regular and ordinary course of business in substantially the same manner as operated on the date of this Agreement. JT and TS will assure that the Company complies with the requirements of this Section. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, the Company will not:

(a)Sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its assets other than inventory in the ordinary course of business consistent with past practice;

(b)Adopt, amend or terminate any Company Plan;

(c)Except as provided in Section 5.8, amend or terminate any Operating Agreement;

(d)Enter into or modify any employment or severance agreement with any director, officer, or employee, or agree to increase the compensation of any officer, director or employee; and/or

(e)Incur any indebtedness other than indebtedness incurred in the ordinary course of business.

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

ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.1.Cooperation. The Company shall afford to Buyer and its accountants, counsel, financial advisors and other representatives reasonable access during normal business hours throughout the period prior to the Effective Time to all of its properties, books, contracts, personnel, representatives of or contacts with governmental or regulatory authorities, agencies or bodies, commitments, and records (including, but not limited to, tax returns and any and all records or documents which are within the possession of governmental or regulatory authorities, agencies or bodies, and the disclosure of which the Company can facilitate or control) and, such parties as its representatives may reasonably request. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company or with the performance of any of the employees of the Company. No investigation pursuant to this Section shall affect any representation or warranty made by any party. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement,

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

Section 5.3.Expenses and Fees. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, regardless of whether the Closing occurs.

Section 5.4.Public Statements. The parties shall consult with each other prior to issuing any press release or any written public statement with respect to this Agreement or the transactions contemplated hereby and shall not issue any such press release or written public statement prior to such consultation.

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Section 5.5.Notification of Certain Matters. Each of the parties agrees to give prompt notice to each other of, and to use their respective reasonable best efforts to prevent or promptly remedy, (a) the occurrence or failure to occur or the impending or threatened occurrence or failure to occur, of any event which occurrence or failure to occur would be likely to cause any of its representations or warranties in this Agreement to be untrue or inaccurate in any material respect (or in all respects in the case of any representation or warranty containing any materiality qualification) at any time from the date hereof to the Effective Time and (b) any material failure (or any failure in the case of any covenant, condition or agreement containing any materiality qualification) on its part to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

Section 5.6.Employee Matters.

(a)Effective immediately following the Closing, Buyer shall offer employment to all of the employees of the Company, each of which who accepts a position shall hereinafter be referred to as a “Affected Employee” and shall become an employee of Buyer, terminable at will. In order to facilitate the foregoing, the Company shall, effective immediately following the Closing, terminate the employment of all employees of the Company and take all appropriate steps necessary to comply with applicable law in connection with the termination of such employees.

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

(c)With respect to employees, who accept employment with Buyer, the Company will remain responsible for medical expenses covered under their plans actually incurred prior to the Effective Time and Buyer will be responsible for all other medical expenses incurred on or after the Closing to the extent covered under their plans without the application of any waiting period for coverage generally applicable to newly hired employees. The Company shall make available, at such Affected Employee’s expense, medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, to the Affected Employees to the extent required by applicable law. The Company and Buyer shall cooperate and coordinate with each other to provide continuity of health, hospitalization, life, travel and accident insurance coverage for the Affected Employees. The cost of insurance coverage for the Affected Employees from and after the Effective Time shall be borne by Buyer and not the Company, based on the terms of the health insurance policies of the Buyer which are applicable from time to time with respect to employee premium contributions and other matters.

(d)Buyer and the Company shall complete and furnish to each other any other employee data as shall be reasonably required from time to time for each party to perform and fulfill its obligations under this Section 5.6.

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(e)The Company agrees that it shall be solely responsible for all liability, costs and expenses (including attorneys’ fees) for all claims relating to their employment, including but not limited to arbitrations, unfair labor practice charges, employment discrimination charges, wrongful termination claims, workers’ compensation claims, any employment-related tort claim or other claims or charges (collectively, “EmploymentClaims”) by any employee or former employee of the Company which accrued prior to the Effective Time relating to arbitrations, unfair labor practice charges, employment discrimination charges, wrongful termination claims, workers’ compensation claims, any employment-related tort claim or other claims or charges of or by employees of the Company. Buyer agrees that it shall be responsible for all Employment Claims by any Affected Employee who accepts employment with Buyer which accrues after the Effective Time. The Disclosure Schedule sets forth a description of any known Employment Claims that have been filed or may be filed after the date hereof arising out of conditions, actions or events that occurred before the Effective Time.

Section 5.7.The Tradename. The Company will change its name to a name dissimilar to the Tradename within 10 days of Closing.

Section 5.8.Individual Agreements. At the Closing, JT and TS will each enter into with the Buyer employment agreements in the forms included on Exhibit 5.8.

Section 5.9.Prohibited Activities. Each of JT and TS agree, severally and not jointly with any other person, that he will not, during the period beginning on the date hereof and ending on the second anniversary of the Closing Date, directly or indirectly, for any reason, for his own account or on behalf of or together with any other person:

(a)engage as an officer, director or in any other managerial capacity or as an owner, co-owner or other investor of or in, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, dealer or distributor of any kind, in the business of electric submersible pumps sales and service within the United States (the “Territory”);

(b)call on or otherwise solicit any natural person who is at that time employed by the Company in any managerial capacity with the purpose or intent of attracting that person from the employ of the Company; or

(c)call on, solicit or perform services for, either directly or indirectly, any person that at that time is, or at any time within two years prior to that time was, a customer of any of the Company within any Territory, for the purpose of soliciting or selling any product or service in competition with the Companies within that Territory.

ARTICLE VI

CONDITIONS TO CLOSING

Section 6.1.Conditions to Obligation of the Company to Effect the Purchase Transaction. Unless waived by the Company, the obligation of the Company to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional condition:

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

Section 6.2.Conditions to Obligations of Buyer to Effect the Purchase Transaction. Unless waived by Buyer, the obligations of Buyer to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions:

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

(b)Except as stated in the Disclosure Statement, since April 30, 2006, there shall have been no changes that constitute, and no event or events shall have occurred which have resulted in or constitute, a Material Adverse Effect; and

(c)the landlord of the Company’s facility located at 5608 S. Winland Drive, Gillette, Wyoming (the “Facility”) shall have entered into a written lease agreement acceptable to Buyer whereby Buyer leases the Facility for a period of one (1) year on the same terms and conditions as the Company presently leases the Facility.

ARTICLE VII

INDEMNIFICATION

Section 7.1.Indemnification of Buyer. JT, TS and the Company shall jointly and severally indemnify Buyer, its affiliates, and their respective officers, directors, employees and agents against, and hold each of them harmless from and against, any and all claims, actions, causes of action, arbitrations, proceedings, losses, damages, liabilities, judgments and expenses (including, without limitation, reasonable attorneys' fees) ("Indemnified Amounts") incurred by the indemnified party as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of the Company, JT or TS in this Agreement, (b) any violation or breach by the Company, JT or TS of or default by the Company, JT or TS under the terms of this Agreement, and/or (c) any event or occurrence relating to the business of the Company occurring prior to the Effective Time. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of its rights under this Section.

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Section 7.2.Indemnification of JT, TS and the Company. Buyer shall indemnify JT, TS and the Company against, and hold each of them harmless from and against, any and all Indemnified Amounts incurred by JT, TS or the Company as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of Buyer in this Agreement, (b) any violation or breach by Buyer of or default by Buyer under the terms of this Agreement, and/or (c) any event or occurrence relating to the business of the Company occurring after the Effective Time other than Indemnified Amounts arising from activity conducted by JT or TS on behalf of Buyer. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of his rights under this Section.

Section 7.3.Procedure. The defense of any claim, action, suit, proceeding or investigation subject to indemnification under this Article shall be conducted by the indemnifying party. If the indemnifying party fails to conduct such defense, the indemnified parties may retain counsel satisfactory to them and the indemnifying party shall pay all reasonable fees and expenses of such counsel for the indemnified parties promptly as statements therefor are received. The party not conducting the defense will use reasonable efforts to assist in the vigorous defense of any such matter, provided that such party shall not be liable for any settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any indemnified party wishing to claim indemnification under this Article VII, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the indemnifying party (but the failure so to notify a party shall not relieve such party from any liability which it may have under this Article VII except to the extent such failure materially prejudices such party). If the indemnifying party is responsible for the attorneys’ fees of the indemnified parties, then the indemnified parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more indemnified parties.

Section 7.4.Express Negligence Rule. The indemnification obligations under this Article VII shall apply regardless of whether any suit or action results solely or in part from the passive or concurrent negligence of the indemnified party; provided, however, that the indemnity obligations of the parties under Section 7.1(c) shall not apply to the extent any suit or action results from the due diligence investigation by Buyer of the Company. The rights of the parties to indemnification under this Article VII shall not be limited due to any investigations heretofore or hereafter made by such parties or their representatives, regardless of negligence in the conduct of any such investigations.

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ARTICLE VIII

MISCELLANEOUS

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

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

(i)if the representations and warranties of Buyer shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of the subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 15 days after written notice of such failure is given to Buyer by the Company;

(ii)if the Purchase Transaction is not completed by June 30, 2006 (provided that the right to terminate this Agreement under this Section 8.1(a)(ii) shall not be available to the Company if the failure of the Company, JT or TS to fulfill any obligation to Buyer under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

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

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

(i)if the representations and warranties of the Company shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of such subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 15 days after written notice of such failure is given to the Company by Buyer;

(ii)if the Purchase Transaction is not completed by June 30, 2006 (provided that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to Buyer if the failure of Buyer to fulfill any obligation to the Company under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

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

Section 8.2.Effect of Termination. In the event of termination of this Agreement by either Buyer or the Company pursuant to the provisions of Section 8.1, this Agreement shall forthwith become void and there shall be no further obligations on the part of the Company, Buyer, or its respective officers or directors, JT or TS to perform any covenant or provision of this Agreement which otherwise would be required to be performed after the date of termination (except as set forth in this Section 8.2 and in Sections 5.3 and 8.9, all of which shall survive the termination). Nothing in this Section 8.2 shall relieve any party from liability for any breach of this Agreement.

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

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

If to Buyer:	7030 Empire Central Drive Houston, Texas 77040 Telefax No. (713) 466-8386
With a copy to:	Casey W. Doherty Doherty & Doherty LLP 1717 St. James Place, Suite 520 Houston, Texas 77056 Telefax No. (713) 572-1001
If to the Company or JT and TS:	5608 South Winland Drive Gillette, Wyoming 52717 Telefax No. (307) 685-3255
With a copy to:	Joseph E. Hallock Stevens, Edwards, Hallock, and Carpenter, P.C. P.O. Box 1148 Gillette, WY 82717

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

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

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

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

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

Section 8.10.Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. The parties agree to accept facsimile transmissions of signed counterparts of this Agreement, to be followed by delivery of signed original counterparts.

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

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

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

THE COMPANY: LIFTECH, LLC, a Wyoming limited liability company
By:	/s/ Jason Taylor
	Name:Jason Taylor
	Title:Managing Member

BUYER: USA PETROVALVE, INC., a Texas corporation
By:	/s/ Jerry D. Dumas, Sr.
	Jerry D. Dumas, Sr., President

THE MEMBERS:
By:	/s/ Jason Taylor
	Jason Taylor

By:	/s/ Toby Semlek
	Toby Semlek

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EXHIBIT A

INDEX OF DEFINITIONS

Accounts Payable	Section 1.3(c)
Accounts Receivable	Section 1.1(f)
Acquired Assets	Section 1.1
Affected Employee	Section 5.6
Affected Employees	Section 3.10
Assumed Liabilities	Section 1.3(c)
Cash	Section 1.1(g)
Cash Payment	Section 1.3
Closing	Section 1.6
Closing Date	Section 1.6
Closing Statement	Section 1.7
Company Plans	Section 3.10
Disclosure Schedule	Section 3.4(b)
Effective Time	Section 1.6
Financial Statements	Section 3.5
Flotek	Section 1.3(b)
Flotek Common Stock	Section 1.3(b)
Flotek Shares	Section 1.3(b)
Indemnified Amounts	Section 7.1
Knowledge	Section 3.11
Leased Assets	Section 1.1(b)
Material Adverse Effect	Section 3.7
Purchase Transaction	Section 1.6
Purchased Inventory	Section 1.1(e)
Scheduled Inventory	Section 1.1(f)
Tangible Personal Property	Section 1.1(a)
Tradename	Section 1.1(h)

EX-31.1

Exhibit 31.1 

CERTIFICATION

I, Jerry D. Dumas, Sr., Chief Executive Officer of Flotek Industries, Inc., certify that:

 1.   I have reviewed this quarterly report on Form 10-QSB for the period ended June 30, 2006 of Flotek Industries, Inc.

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to e designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ Jerry D. Dumas, Sr.
Date: August 11, 2006	Jerry D. Dumas, Sr.
	Chief Executive Officer

EX-31.2

Exhibit 31.2 

CERTIFICATION

I, Lisa Meier, Chief Financial Officer of Flotek Industries, Inc. certify that:

 1.   I have reviewed this quarterly report on Form 10-QSB for the period ended June 30, 2006 of Flotek Industries, Inc.

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to e designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006	/s/ Lisa Meier
	Lisa Meier
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of the Chief Executive Officer and of the 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 ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/s/ Jerry D. Dumas, Sr.
	Jerry D. Dumas, Sr.
Date: August 11, 2006	Chief Executive Officer

	/s/ Lisa Meier
	Lisa Meier
Date: August 11, 2006	Chief Financial Officer