HSE reports 2006 year end financial results - Revenue Rises by 70%, EBITDA Increases by 102%



    CALGARY, April 27 /CNW/ - HSE Integrated Ltd. ("HSE" or the "Company") is
pleased to announce its financial results for the year ended December 31,
2006. Financial and operating highlights are summarized below:


    
    -   Revenue increased by 70% for the year to $100.5 million as compared
        to 2005
    -   Approximately three quarters of the $41.4 million increase in revenue
        from 2005 to 2006 is attributable to acquisitions
    -   Organic revenue growth for 2006 (over the same period in the prior
        year) is estimated to be 15%
    -   EBITDA increased by almost 102% to $15.3 million as compared to 2005
    -   Five acquisitions were completed within the year: Key Safety Services
        Inc (January), Key Monitoring Solutions Corp (January), Sentry Fire
        Equipment Ltd (April), Front-Line Safety Services Ltd (April), and
        Bear's Safety and Rescue Services Ltd (July)
    -   Majority of $8 million capital program completed by year end, with
        the remainder expected to be completed by the first half of 2007
    -   Sector diversification continues as industrial safety services
        revenues as a percentage of the total business mix grows - 23% in
        2006 compared to 17% in the previous year
    

    David Yager, Chairman and CEO, offered the following comments in HSE's
2006 financial results.
    "The significant growth of HSE in 2006 reflects the creation of Canada's
first national industrial safety services company. The internal and
acquisition growth that was undertaken has given us the equipment, manpower
and financial capacity to meet the needs of industry on the important, Health,
Safety and Environment file. Combined with our strong balance sheet, what HSE
achieved in 2006 is financial strength, regional capacity, and industry
sectorial diversity. This platform will permit HSE to continue to grow in 2007
despite the challenges facing the conventional upstream oil and gas industry
at the present time."
    For further information and analysis please see the attached Management's
Discussion and Analysis and Financial Statements.

    CONFERENCE CALL

    HSE will be hosting a conference to discuss their results at 11 AM
(Eastern Daylight Saving Time, 9 AM Mountain Daylight Saving Time) on
Friday April 27, 2007. To participate call 1-800-731-5774 or 416-644-3418.
Details on the webcast and conference call replay are contained in a separate
News Release.

    HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. From its head office in Calgary, Alberta, it serves
its clients from field service locations in Alberta, British Columbia,
Ontario, Nova Scotia, New Brunswick and Michigan. HSE trades on the TSX
Venture Exchange under the symbol "HSL".

    Forward Looking Statements

    This news release may contain forward-looking statements concerning,
among other things, the Company's prospects, expected revenues, expenses,
profits, financial position, strategic direction, and growth initiatives, all
of which are subject to risks, uncertainties and assumptions. These forward-
looking statements are identified by their use of terms and phrases such as
expect, anticipate, estimate, believe, may, will, intend, plan, continue,
project, objective and other similar terms and phrases. These statements are
based on certain assumptions and analyses made by the Company based on its
experience and assessment of current conditions, known trends, expected future
developments and other factors it believes are appropriate under the
circumstances. Such statements are subject to numerous external variables,
both known and unknown, such as changes in commodity prices for natural gas
and oil, changes in drilling activity, weather conditions, industry-specific
and general economic conditions and exchange rate fluctuations. If any of
these risks and uncertainties materializes or if assumptions are incorrect,
actual results may differ materially from those expressed or implied in the
forward-looking statements. The forward looking statements included in this
news release are not guarantees of future performance and should not be unduly
relied upon.

    Non GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, gains or losses on the disposal of property and
equipment, and the non-cash effect of stock-based compensation expense.
Investors should be cautioned that EBITDA should not be construed as an
alternative to net earnings determined by GAAP as an indication of the
Company's performance. This method of calculating EBITDA may differ from that
of other companies and accordingly may not be comparable to measures used by
other companies.

    The TSX Venture Exchange has not reviewed and does not accept
    responsibility for the adequacy or accuracy of this release.

    For more information, please contact: HSE Integrated Ltd., David Yager,
Chairman & CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com;
Tony Hidalgo, Chief Financial Officer, Telephone: (403) 650-6481, E-Mail:
thidalgo@hseintegrated.com


    HSE Integrated Ltd.
    Management Discussion and Analysis ("MD&A")
    For the Years Ended December 31, 2006 and 2005

    The following management discussion and analysis is dated April 26, 2007,
and is a review of the financial results of HSE Integrated Ltd. ("HSE", "We",
"Our", or the "Company") for the fiscal years ended December 31, 2006 and
2005. This should be read in conjunction with the documents filed on SEDAR at
www.sedar.com. Unless otherwise disclosed, the financial information presented
in this discussion has been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") and takes into consideration
information available to management up to April 26, 2007. Unless otherwise
stated, dollar figures presented are expressed in thousands of Canadian
dollars and per-share figures in dollars per weighted-average common share.
The following MD&A contains forward-looking information and statements. We
refer you to the end of the MD&A for the disclaimer on forward looking
statements.

    
    Selected Financial Information

    -------------------------------------------------------------------------
                                Year      Year      Year      Year      Year
                               Ended      Over     Ended      Over     Ended
                             Dec. 31,   Year %   Dec. 31,   Year %   Dec. 31,
                                2006    Change      2005    Change      2004
    -------------------------------------------------------------------------
    Revenue                 $100,539     70.2%   $59,075    179.0%   $21,176
    Operating and materials   75,655     65.0%    45,848    200.0%    15,286
    Operating margin          24,884     88.1%    13,227    124.6%     5,890
    Operating margin %         24.8%      2.4%     22.4%     (5.4%)    27.8%
    Selling, general &
     administrative            9,572     70.0%     5,631     33.5%     4,217
    Net earnings               3,461     88.8%     1,833    714.7%       225
    - per share basic           0.10     42.9%      0.07    250.0%      0.02
    - per share diluted         0.10     42.9%      0.07    250.0%      0.02
    EBITDA(1)                 15,312    101.6%     7,596    323.6%     1,793
    EBITDA %                   15.2%      2.3%     12.9%      4.4%      8.5%
    Total Assets             106,938    108.5%    51,281     25.4%    40,907
    Total Long-Term
     Liabilities             $23,327    490.1%    $3,953     16.6%    $3,389
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See Non-GAAP Measures for (1)
    


    Overview

    The Company's operating results for the year ended December 31, 2006
reflect increases in both revenue and profitability. EBITDA for the year
increased by over $7.7 million, or 101.6%, to $15.3 million from $7.6 million
in 2005. The increase in EBITDA is mainly due to significant increases in
revenue (70.2%) as a result of acquisitions, increased capacity, and
diversification of the Company's business into new services and markets. The
Company also reported greater EBITDA as a percentage of sales for the year
when compared to the same period in the prior year. The higher EBITDA margin
in 2006 was achieved despite a significant reduction in the revenue of higher
margin well control operations compared to the same period in the prior year
(2006 - $1.8 million, 2005 - $5.7 million). Net earnings has increased to
$3.5 million or 3.4% of revenue, mainly due to higher revenue, but offset by
greater levels of amortization and stock based compensation.
    The Company continues to increase its operating capacity, both in its
oilfield safety services business and in the industrial safety services
sector. Spending is underway on the $8 million capital expenditure program
announced in the first quarter of 2006, with almost two thirds invested by
year end, and the balance expected to be invested in the first half of 2007.
During the year, the Company completed the acquisitions of Key Safety Services
Inc. ("Key") and Key Monitoring Solutions Corp. ("KMS") in January; Sentry
Fire Equipment Ltd. ("Sentry") and Front-Line Safety Services Ltd. ("Front-
Line") in April; and Bear's Safety and Rescue Services Ltd ("Bear's") in July.
    The Company has a cash balance of $6.6 million at December 31, 2006.
Working capital (current assets less current liabilities) was $15.6 million at
year-end and bank term debt stood at $15.8 million. HSE used treasury shares
to pay for a portion of the acquisitions made during fiscal 2006, thus
reducing the amount of cash and debt required. As well, the Company completed
private placements in February, 2006 (gross proceeds of $1.4 million), and in
April, 2006 (gross proceeds of $11.7 million) in order to minimize the amount
of debt required for capital expenditures and acquisitions.
    The revenue increase between 2004 and 2005, was largely driven by the
seven acquisitions made in 2004, and the four acquisitions made in 2005. The
higher EBITDA and net earnings between 2004 and 2005 was caused primarily due
to higher revenue, and greater economies of scale in a significantly larger
organization.

    Financial Review

    Revenue

    HSE operates in a single industry segment, which involves providing a
variety of asset, worker and community safety-protection services including:
on-site safety supervision; gas detection; air-quality monitoring; breathing
equipment rentals and services; firefighting and fire protection services and
equipment; worker decontamination (shower) services; on-site medical services;
and safety training. For the years ended December 31, 2006 and 2005, the
Company had no customer representing more than 10% of revenue.
    Revenue for the year increased 70.2% from $59.1 million in 2005 to
$100.5 million in 2006. Approximately three quarters of the $41.4 million
increase in the revenue from 2005 to 2006 is attributable to acquisitions,
with the balance relating to organic growth. Organic revenue growth for 2006
(over the same period in the prior year) is estimated at 15%.
    A total of five acquisitions were completed within the year. The
acquisition of Key broadens the Company's oilfield safety and emergency
response services in Western Canada. KMS provides air-quality monitoring
services for hydrocarbon drilling, for completion and well servicing
activities, and for industrial operations. Sentry offers fire, gas detection
and breathing-air equipment sales and service to industrial and commercial
markets in southern Ontario. Front-Line performs industrial safety services
for the refining, mining, offshore drilling and production and other
industries in Atlantic Canada. Bear's provides industrial safety services to
upstream oil and gas processing facilities and thermal heavy oil recovery and
Oilsands extraction and construction projects in northeast Alberta, and has
provided safety supervision to drilling operations in northern Canada.
    The Company currently provides services to its customers in the following
main business areas: Oilfield Services ("Oilfield"), Industrial Services
("Industrial"), and Environment Monitoring Services ("Environment"). Oilfield
is the provision of the Company's services within the conventional upstream,
or "wellhead", sector of the oil and gas industry. Industrial represents the
services delivered to plants and facilities and the provision of training and
safety management services for multiple industrial sectors. Environment
focuses on air-quality monitoring to protect people, livestock, wildlife and
equipment from an array of airborne contaminants.

    
    The revenue for these services is shown below:

    -------------------------------------------------------------------------
                                                    Year      Year      Year
                                                   Ended     Ended      Over
                                                 Dec. 31,  Dec. 31,     Year
                                                    2006      2005  % Change
    -------------------------------------------------------------------------
    Oilfield                                     $66,794   $46,508     43.6%
    Industrial                                    23,459    10,036    133.7%
    Environment                                   10,286     2,531    306.4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue                               $100,539   $59,075     70.2%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a % of Revenue:
    Oilfield                                       66.5%     78.7%
    Industrial                                     23.3%     17.0%
    Environment                                    10.2%      4.3%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue                                 100.0%    100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Oilfield revenue increased by almost 44% in 2006, primarily due to the
increased capacity provided by the acquisition of Key in January 2006. When
the amount of well control activities and acquisitions are excluded from both
2006 and 2005, the Oilfield revenue growth in the year was 10.3%, due
primarily to growth in capacity.
    The growth in Industrial and Environment revenue is attributable to two
main reasons; first, the growth of existing capacity and an increased
marketing focus towards the end of 2005, and second, the acquisition of
Sentry, Front-Line, Bear's and KMS. The increase of Industrial and Environment
revenue reflects the Company's strategy of counter cyclical and counter
seasonal diversification from Oilfield. The Oilfield services market is
largely dependent on the level of drilling, completion and well-servicing
activities in the upstream oil and gas sector, and is subject to seasonal and
commodity price driven activity cycles. The Industrial sector, however, is not
subject to the same seasonal influences as Oilfield and, in some cases, tends
to be more active during Oilfield's traditionally slow second quarter.
Further, Industrial activity tends to be impacted by broader general economic
trends impacting the manufacturing sector rather than drilling activity.

    Operating and Materials Expense

    Operating and materials expense consists of costs directly attributable
to the provision of safety and related services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; transportation; fuel; consumables; equipment repairs and maintenance;
and field-office administration including field sales.
    Operating and materials expense for the year ended December 31, 2006
totaled $75.7 million or 75.2% of revenue as compared to $45.8 million or
77.6% of revenue in 2005.
    The reduction in operating and materials expense as a percentage of
revenue is mainly due to the improved utilization of equipment and personnel
that accompanies the continuing integration of assets from acquired companies,
and the benefits of economies of scale in the areas of procurement and
operational support infrastructure. The higher operating margin in 2006 was
achieved despite a significant reduction in the level of higher margin well
control operations in 2006, as compared to the same period in the prior year.

    Selling, General and Administrative Expense

    Sales, general and administrative ("SG&A") expense consists of costs not
directly attributable to the provision of services for customers. These
include costs generally associated with the following: corporate head-office
functions and services; administrative personnel; corporate sales and
marketing costs; liability insurance; professional fees; and investor
relations expenses.
    SG&A for the year ended December 31, 2006 amounted to $9.6 million,
versus $5.6 million in 2005. SG&A as a percentage of revenue remained constant
for both years at 9.5%
    The increase in SG&A costs in comparison to the prior year is a result of
higher business development and corporate costs necessary to support the
Company's increased size.

    Net Earnings

    Net earnings have increased to $3.5 million or 3.4% of revenue, from
$1.8 million or 3.1% or revenue in the prior year. The increase in net
earnings is primarily due to higher levels of revenue, offset by greater
levels in amortization, stock-based compensation, interest and income taxes.
    Amortization for the year has increased by $4.0 million to $7.6 million,
when compared to the prior year. The increase in amortization expense reflects
the impact of the significantly larger asset base of the Company at the end of
the quarter because of the internal capital investment program and from
capital assets acquired through acquisitions. As well, the recognition of
intangible assets on acquisitions has also contributed to the increase in
amortization.
    Stock-based compensation of $977 (2005 - $342) has increased due to
additional grants of stock options to employees of the Company.
    Interest on long term debt and other interest and bank charges increased
from $0.3 million in 2005 to $1.4 million in 2006. The change was caused by
term debt loans used to fund the Key and KMS acquisitions, draws on the
operating line as a result of higher activity levels in the first quarter of
2006, interest on capital leases, and higher interest rates.
    HSE's income tax expense has increased due to higher profitability levels
in 2006. The Company's effective tax rate for 2006 was 30.9%, which was lower
than the prior year's rate of 39.7%, primarily due to higher future income tax
liabilities (and related future income tax expense) in 2005 on acquisitions,
as well as combined Canadian Federal and Provincial income tax rate reductions
in the second quarter of 2006. The lower 2006 effective rate was offset by
higher non-deductible expenses, such as stock-based compensation.

    
    Quarterly Results

                                                        2006
                                     ----------------------------------------
                                          Q4        Q3        Q2        Q1
                                     ----------------------------------------
    Revenue                            $26,198   $26,952   $19,924   $27,465
    Net Income (loss)                      984     1,197    (1,073)    2,353
    EBITDA(1)                            4,341     4,283     1,140     5,548
    -------------------------------------------------------------------------
    Income (loss) per share -
     basic and diluted                   $0.03     $0.03    $(0.03)    $0.07
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                        2005
                                     ----------------------------------------
                                          Q4        Q3        Q2        Q1
                                     ----------------------------------------
    Revenue                            $17,280   $15,080    $9,410   $17,306
    Net Income (loss)                      (59)      786    (1,482)    2,588
    EBITDA(1)                            1,500     2,224      (845)    4,717
    -------------------------------------------------------------------------
    Income (loss) per share -
     basic and diluted                  $(0.01)    $0.03    $(0.06)    $0.11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See Non GAAP Measures for (1)
    

    A majority of the Company's revenues are derived from the provision of
safety services within the conventional upstream, or wellhead, sector of the
oil and gas industry. These revenues are subject to seasonal fluctuations.
Because this sector uses equipment that can only access many field locations
during certain times of the year and because of the effects of weather on
field activity, the industry can experience significant and sometimes
unexpected activity fluctuations. During the winter period, HSE's Oilfield
customers are able to drill in locations (primarily in Northern Alberta and
British Columbia) which can only be accessed economically by heavy equipment
while the ground is frozen. Spring break-up causes a reduction in activity
since drilling and well servicing rigs and support equipment cannot move
between locations due to wet conditions and public road usage bans. Because
transportation is so expensive and problematic through April and May, many
drilling and service companies use this as a maintenance period. Heavy
rainfall during the late spring and summer months can have a similar effect on
upstream conventional oil and gas drilling, completion and workover activity.
    Additionally the Company provides oil industry emergency response
services which can occur at any time. These services, depending on their
nature and extent, can have a material financial impact on the periods in
which they occur.
    The Company is actively developing its industrial safety services
business so that in the future, the quarterly revenue fluctuations will be
less significant. Peak usage of HSE's industrial safety services for plant
shutdowns, turnarounds, and maintenance generally occurs in the second and
third quarters. This is typically counter-cyclical to upstream conventional
oil and gas activity.
    Considerable progress in minimizing quarterly revenue fluctuation was
made in 2006 through the acquisitions of Sentry and Front-Line in April, and
Bear's in July. These acquisitions will further stabilize quarterly revenues
in the future because of the specialized nature of their businesses. Sentry
has a stable revenue stream as it provides year-round plant safety equipment
and services to refineries, petrochemical facilities and other business
operations, not only during periods of periodic maintenance. Front-Line
provides offshore, municipal and refinery safety services that are not subject
to seasonal activity fluctuations.

    Fourth Quarter Results

    In the fourth quarter of 2006, the Company achieved revenues of
$26.2 million, a 51.6% increase on the fourth quarter of 2005. Softer activity
levels on the Oilfield safety service side of the business were offset by
higher revenue levels from Industrial and Environment. The contribution of
Industrial and Environment revenue to the overall business mix was 43.7% (2005
- 20.0%).
    Operating and material expenses were $19.1 million, or 72.9% of revenue
in the fourth quarter of 2006, as compared to $14.4 million, or 83.3% of
revenue for the same period in the prior year. The higher proportion of
Environment revenue, characterized by higher margin equipment rentals,
combined with greater utilization on the Industrial side of the business,
contributed to increased margins.
    SG&A increased from $1.4 million in 2005 (8.1% of revenue) to
$2.7 million in 2006 (10.4%) of revenue. As is the case for the full year, the
increase in SG&A costs in comparison to the prior year is a result of higher
business development and corporate costs necessary to support the Company's
increased size.

    Liquidity and Capital Resources

    The Company's principal sources of capital are cash flows from
operations, borrowings under an established credit facility with its senior
lenders, and equity financing.
    The Company, through the conduct of its operations, has undertaken
certain contractual obligations as noted in the following table:

    
    ($'000)                2007     2008     2009     2010     2011    Total
                        -----------------------------------------------------
    Capital lease
     obligations         $1,710    1,690    1,238      291       94   $5,023
    Property and other
     operating leases     3,165    2,703    2,090    1,556      916   10,430
    Long term debt        4,199    4,898    3,985    3,951        -   17,033
                        -----------------------------------------------------
    Total contractual
     obligations         $9,074    9,291    7,313    5,798    1,010  $32,486
                        -----------------------------------------------------
                        -----------------------------------------------------

    Cash provided by operations

    Cash provided by operations in the year was $8.5 million as compared to
$4.1 million in the prior year, primarily due to higher revenue levels, and
improved methods for the timely collection of outstanding trade receivables.

    Cash provided by financing

    In comparison to the end of 2005, the Company in 2006:

    a)  repaid the outstanding amount owing on the operating line of credit
        from the prior year;
    b)  increased net long-term debt by $14.9 million;
    c)  issued shares for proceeds of $13.2 million (net of costs) through
        private placements and stock option grants,
    d)  paid obligations under capital leases of $1.7 million.
    

    The Company has received an amendment to the interest coverage ratio
covenant as specified under its credit facilities. Other than the interest
coverage ratio covenant, for which an amendment was received subsequent to
year end, the Company is in compliance with its debt covenants.

    Cash used in investing

    In 2006, the Company had purchases of property and equipment of almost
$7.0 million, the majority of which consists of field safety equipment, large
diesel tractors for fire and shower units, medical treatment centre units, and
fire and shower unit bodies and equipment. Late in the first quarter of 2006,
the Company announced plans for an $8.0-million capital expenditure program,
with approximately half dedicated to upgrading the existing capital asset
fleet, with the remainder slated for incremental operating capacity. HSE had
invested approximately two thirds of the previously announced capital program
by year end, and expects the remainder of the spending to occur prior to the
first half of 2007.
    The investment in the Key, KMS, Sentry, Front-Line and Bear's
acquisitions for the year was $29 million, of which $17.5 was cash. Of the net
assets purchased through acquisitions in 2006, $15.6 is related mainly to the
purchase of heavy vehicles, property and field safety equipment, which has
contributed to the significant increase in the operating capacity of the
Company.

    Liquidity

    As at December 31, 2006, HSE had $15.8 million of total non-revolving
installment credit facility outstanding, with $10 million of un-drawn
operating facility, and $5 million of un-drawn revolving installment credit
facility. The Company's credit facilities provide a $20-million non-revolving
installment credit facility amortizing equally over five years, a $5-million
revolving installment credit facility amortizing equally over five years, and
an operating line of $10 million (seasonally decreased to $8 million) margined
to accounts receivable.
    In February, 2006 the Company completed a private placement of
550 thousand common shares at $2.50 per share for gross proceeds of
$1.4 million; in April, 2006, HSE completed a private placement of 3.3 million
common shares at $3.55 per share for gross proceeds of $11.7 million.
    At this time HSE believes that operating cash flows, bank credit
facilities and equity financing will be adequate to finance its capital
expenditure and acquisition program.

    Off Balance Sheet Arrangements

    The Company does not have off-balance sheet arrangements other than its
operating leases for equipment entered into in the normal course of business.

    Related-Party Transactions

    During the year, the Company had the following transactions with related
parties. These transactions are measured at exchange amounts, which
approximate an arm's length equivalent.
    From January 1 to June 23, 2006, a company controlled by a former
director of HSE subcontracted the provision of certain goods and services to
HSE. For the first six months of 2006, HSE billed this company $777 (2005 -
$5,163) in respect of the goods and services provided. HSE also paid the
company $86 (2005 - $86) for goods and services. These products and services
were sold at rates agreed to as part of the acquisition of the assets of the
company. Included in accounts receivable is $464 (2005 - $994) owed by this
company to HSE.
    Included in accounts receivable is a promissory note of $49, (2005 - $54)
which is due from an officer and director of the Company. This note is payable
on demand. During 2006, the Company paid rent to a corporation related to this
same Officer and Director of the Company in the amount of $285 (2005 - 247).
    During 2006 the Company also paid rent of $41 (2005 - nil) and $342 (2005
- nil) to two corporations each controlled by different senior management of
the Company.

    
    Acquisitions

    a)  On January 10, 2006, the Company completed the acquisition of Key and
        KMS in a business combination accounted for as a purchase. The
        results of operations are included in the accounts from the date of
        acquisition. Consideration and acquisition costs were comprised of
        2.4 million common shares of the Company valued at $2.80 per share,
        $11,646 cash, and the assumption of debt.

    b)  On April 5, 2006 HSE completed the acquisition of Sentry in a
        business combination accounted for as a purchase. The results of
        operations are included in the accounts from date of acquisition.
        Consideration and acquisition costs were $3,688 cash.

    c)  On April 21, 2006 the Company completed the acquisition of Front-Line
        in a business combination accounted for as a purchase. The results of
        operations are included in the accounts from date of acquisition.
        Consideration for the acquisition and acquisition costs were
        comprised of 667 thousand common shares of the company at $3.69 per
        share, $1,080 of cash, and the assumption of debt.

    d)  On July 1, 2006 the Company completed the acquisition of Bear's in a
        business combination, accounted for as a purchase. The results of
        operations are included in the accounts from date of acquisition.
        Consideration for the acquisition and acquisition costs were $789 of
        cash and the issuance of 100 thousand common shares of the Company at
        a price of $3.39 per share.
    

    Critical Accounting Policies and Estimates

    HSE prepares its consolidated financial statements in accordance with
Canadian Generally Accepted Accounting Principles. In doing so, management is
required to make various estimates and judgments in determining the reported
amounts of assets and liabilities, revenues and expenses, as well as the
disclosure of commitments and contingencies. Management bases its estimates
and judgments on historical experience and on other various assumptions that
are believed to be reasonable under the circumstances. Estimates and
assumptions are reviewed periodically, and actual results may differ from
those estimates under different assumptions or conditions. Management must use
its judgment related to uncertainties in order to make these estimates and
assumptions.
    The accounting policies and estimates believed to require the most
difficult, subjective or complex judgments and which are material to the
Company's financial reporting results are as follows:

    Allowance for Doubtful Accounts Receivable

    The Company assesses its accounts receivable through a continuous process
of reviewing its receivables both on an individual customer basis and on an
overall basis. The review includes assessment of current aging status of
customers, historical collection experience, financial condition of customers,
industry economic trends, and other factors. Based on the review, allowances
for specific customers are determined. The process involves a high degree of
judgment and can frequently involve significant dollar amounts. Accordingly,
the Company's financial position, results of operations, and cash flows can be
affected by adjustments to the allowance due to actual write-offs that differ
from estimates.

    Intangible Assets and Goodwill

    The Company's intangible assets consist of customer relationships, non-
compete agreements, and technology and intellectual property. These intangible
assets are carried at cost less accumulated amortization, which is calculated
on a straight line basis over their estimated useful lives.
    Goodwill represents the excess of purchase price for acquisitions over
the fair market value of the acquired Company's net assets. Goodwill is tested
for impairment at least annually. This impairment test is a two step process.
In the first step, the carrying amount of the Company's assets is compared
with their fair value. When fair value exceeds the carrying amount, goodwill
is not considered to be impaired and the second step of the impairment test is
not required. The second step compares the implied fair value of goodwill with
its carrying amount to measure the impairment loss, if any. Assumptions used
to determine fair market values include estimates as to future operating
performance as well as various earnings multiples. These assumptions and
estimates are subject to risks and uncertainties, and changes in estimates
could occur that may affect the existence or quantum of goodwill impairment.
Based on management's assumptions regarding continued strong demand for its
services, the calculated estimates resulted in no indication of impairment in
the carrying value of goodwill.

    Impairment of Long-Lived Assets

    The Company evaluates potential impairment of long-lived assets and
intangibles when indicators of impairment are present. Estimates of
undiscounted future net cash flows to be derived from the long-lived assets
over their remaining estimated useful lives, as well as any salvage value are
calculated and compared to the carrying value of the long-lived assets to
determine whether the assets are deemed to be impaired. Our industry is highly
cyclical and the estimate of future cash flows requires the use of assumptions
and judgment. Periods of prolonged down cycles in the industry could have a
significant impact on the carrying value of these assets and may result in
impairment charges. Based on management's assumptions regarding continued
strong demand for its services, the calculated estimates resulted in no
indication of impairment in the carrying value of long-lived assets.

    Depreciation and Amortization of Property and Equipment

    Property and equipment is recorded at cost less accumulated amortization.
The useful lives of the depreciable assets are based on historical experience
and judgment of management. This judgment includes an assessment of expected
utilization, job mix assumptions and preventative maintenance programs.
Although management believes that the estimated useful lives and salvage
values are reasonable there can be no certainty that the reduction in
depreciable asset values over time matches amortization expense using
estimated useful lives. If depreciation estimates are not correct, the Company
may record a disproportionate amount of gains or losses on disposition of
these assets. Management believes their estimates of useful lives to be
materially correct.

    Future Income Tax Liabilities

    The Company follows the liability method of accounting for income taxes.
Under this method, future income taxes are recorded for the effect of any
differences between the accounting and income tax basis of an asset or
liability using the substantively enacted tax rates. The Company will
establish valuation allowances to reduce future income tax assets when it is
more likely than not that some or all of a future tax asset will not be
realized. Estimates of future taxable income are considered in assessing the
utilization of available tax losses. Changes in circumstances and assumptions
may require changes to valuation allowances associated with the Company's
future tax assets.

    Accounting Changes

    There were no new accounting standards or pronouncements enacted during
2006 or to the date of this report that had a material affect on the Company's
financial position, results of operations or cash flows for 2006 nor are they
anticipated to have a material affect on the Company's financial position,
results of operations or cash flows for 2007.

    Recent Accounting Pronouncements

    The Company is in the process of evaluating the impact of the following
new standards:

    CICA Sections 1530 & 3251 - Comprehensive Income and Equity

    In January 2005, the Canadian Institute of Chartered Accountants ("CICA")
issued new Handbook Sections 1530, Comprehensive Income, and Section 3251,
Equity. Section 1530 establishes standards for the reporting and presentation
of comprehensive income. The section defines other comprehensive income to
include revenues, expenses, gains and losses that, in accordance with primary
sources of GAAP are recognized in comprehensive income but excluded from net
income. The section does not address issues of recognition or measurement for
comprehensive income and its components. Section 3251 establishes standards
for the presentation of equity and changes in equity during the reporting
period. The requirements in this section are in addition to those of Section
1530 and recommend that an enterprise should present separately the following
components of equity: retained earnings, accumulated and other comprehensive
income, and the total for retained earnings and accumulated other
comprehensive income, contributed surplus, share capital and reserves. The
mandatory effective date to adopt the above Handbook Sections is for interim
and annual financial statements relating to fiscal years beginning on or after
October 1, 2006.

    CICA Section 3855 - Financial Instruments - Recognition and Measurement

    In January 2005, the CICA issued Handbook Section 3855, Financial
Instruments - Recognition and Measurement. The new accounting standard
requires that all financial instruments, including derivatives be included on
an entity's balance sheet and measured, either at their fair value or, in
limited circumstances where fair value may not be considered most relevant, at
cost or amortized cost.
    The standard also specifies when gains and losses that result from
changes in fair values are to be recognized in the income statement. The
Company is in the process of evaluating the impact of these new standards and
has not yet determined whether the standards will have a material impact on
its financial statements. The mandatory effective date to adopt the above
Handbook Section is for interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2006.

    CICA Section 3861 - Financial Instruments - Disclosure and Presentation

    In January 2005, the CICA issued Handbook Section 3861, Financial
Instruments - Disclosure and Presentation. This Section establishes standards
for presentation of financial instruments and non-financial derivatives, and
identifies the information that should be disclosed about them. This Handbook
Section is effective for interim or annual periods beginning on or after
October 1, 2006.

    CICA Section 1535 - Capital Disclosures

    In December 2006, the CICA issued Handbook Section 1535 - Capital
Disclosures. The new accounting standard requires disclosure of information
about an entity's objectives, policies, and processes for managing capital, as
well as quantitative data about capital and whether the entity has complied
with any capital requirements. This Handbook Section is effective for interim
or annual periods beginning on or after October 1, 2007.

    CICA Section 3862 - Financial Instruments - Disclosures and Section 3863
    - Financial Instruments Presentation

    In December 2006, the CICA issued Handbook Sections 3862 and 3863 that
provide additional guidance regarding disclosure of the risks associated with
both recognized and unrecognized financial instruments and how those risks are
managed. These Handbook Sections are also effective for interim or annual
periods beginning on or after October 1, 2007.

    Business Risks

    The activities the Company undertakes involve a number of risks and
uncertainties, some of which are summarized below. Additional risks and
uncertainties that the Company may be unaware of, or that were determined to
be immaterial may also become important factors that affect the Company.

    Crude oil and natural gas prices

    The demand for HSE's services is highly dependent upon the level of
expenditures made by oil and gas companies on exploration, development and
production activities. The price received by our customers for crude oil and
natural gas directly impacts their cash flow available to purchase our
services.

    Cyclical or seasonal nature of industry

    Like most companies providing field services in the conventional upstream
Canadian oil and gas industry, the Company's business has a seasonal
component. The Company's safety service business provides services primarily
to the upstream conventional drilling, completions and well servicing sector.
    Because this sector uses equipment that can only access well locations
during certain times of the year and because of the effects of weather on
field activity, the Company can experience unexpected activity fluctuations.
Additionally the Company provides emergency response services which can occur
at any time. The first calendar quarter is the most active in the oil field
services industry, the second quarter the least active and the third and
fourth quarters typically reflect increasing activity. The impacts of the low
activity for Oilfield services low activity are somewhat reduced by activity
in Industrial services when major plant maintenance procedures called "plant
turnarounds" tend to occur.
    Furthermore, fluctuations in crude oil and natural gas prices can produce
periods of high and low demand for the Company's services. These fluctuations
in commodity prices can cause both seasonal and cyclical demand swings in the
Company's activity levels and operating results.

    Merger and acquisition activity

    Acquisitions are a key component of the Company's growth strategy. Our
ability or inability to identify, acquire and integrate acceptable acquisition
candidates on favorable terms will impact our growth and operating results.

    Availability of qualified staff

    The Company's ability to provide reliable service is dependent upon
attracting and retaining skilled workers. The demand for skilled workers is
high and supply limited.

    Availability of financing

    Historically, the Company has funded the growth of its operations and its
acquisitions from bank debt and share issuances in addition to cash generated
from operations. There is no certainty the Company will continue to be able to
obtain sufficient financing at competitive rates. The Company's ability to
grow as planned may be limited if sources of competitive financing are
unavailable.

    Financial Instruments

    The Company has estimated the fair value of its financial assets and
liabilities, which include cash and cash equivalents, receivables, operating
line of credit, payables and accruals, demand loan, and long-term debt. The
Company used valuation methodologies and market information available as at
year-end and has determined that the carrying amounts of such financial
instruments approximate fair value in all cases. The Company is exposed to
interest rate risk to the extent that it has an operating line of credit and
equipment loans that carry both fixed and variable rates of interest. It is
management's opinion that the Company's exposure to interest rate, currency or
credit risk arising from these financial instruments is not significant.

    Litigation and Contingencies

    In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers,
former employees, and third parties. Management believes that adequate
provisions have been recorded in the accounts where required. Although it may
not be possible to accurately estimate the extent of potential costs and
losses, if any, management believes that the ultimate resolution of such
contingencies would not have a material adverse effect on the financial
position of the Company.


    Internal Control over Financial Reporting

    Disclosure Controls and Procedures

    An evaluation was performed under the supervision and with participation
of the Company's management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Multilateral Instrument 52-109. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were designed to provide a reasonable level of
assurance over disclosure of material information, and are effective as at
December 31, 2006.

    Management's Report on Internal Control over Financial Reporting

    The CEO and CFO of HSE Integrated Ltd. are responsible for designing
internal controls over financial reporting or causing them to be designed
under supervision. The Company's internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability of the
Company's financial reporting and its preparation of financial statements for
external purposes in accordance with Canadian generally accepted accounting
principles. Internal controls over financial reporting, no matter how well
designed, have inherent limitations. Therefore, internal controls over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and may not prevent or detect all
misstatements.
    The Company has experienced rapid growth in recent years both organically
and through acquisitions. As a result, the Company has identified weaknesses
in its internal controls over financial reporting. These weaknesses include:

    
    -   The Company employs a process for recording field service activity
        that does not currently include sufficient controls to ensure the
        timely invoicing of customers. This weakness has a tendency to
        understate revenue in each reporting period. The Company mitigates
        this risk by employing manual methods of comparing job dispatch
        records to amounts invoiced to customers. As well, several levels of
        infrastructure at the operating level and senior management of the
        Company continually review revenue figures for reasonability. The
        Company is actively reviewing all economically feasible alternatives
        for improving the internal controls in this area.
    -   The Company has an inability to design or effect change to a design
        of an internal control over financial reporting for a company it
        acquires until after the acquisition is completed. This is an
        inherent weakness that exists due to the Company's strategy of growth
        through acquisitions. Management is aware of this issue and will
        ensure that, to the extent appropriate and possible, a review of
        the design of the internal control over financial reporting for
        companies it intends to acquire occurs during its due diligence
        process or within a reasonable period of time after the acquisition.
    -   Due to a limited number of staff, there is a weakness in the system
        of internal controls in achieving appropriate segregation of duties.
        As well, the Company employs a limited number of finance personnel
        with appropriate technical accounting knowledge, that may not result
        in identifying weaknesses with respect to accounting for complex,
        non-routine accounting and taxation transactions on a timely basis.
        Management and Board review, as well as, the use of external
        consultants are utilized to mitigate the risk of misstatement in
        financial reporting. The addition of accounting staff is anticipated
        as the Company grows, and this is expected to remediate these
        weaknesses.
    

    The Company is committed to continually improving its internal control
environment in line with its strategy for growth. Other than the continual
impact of the corrective actions discussed above, there were no changes in the
fourth quarter in the Company's internal controls over financial reporting
that have materially affected, or are reasonably likely to affect the
Company's internal controls over financial reporting.

    Common Shares Outstanding

    At December 31, 2006, there were 37,462,342 common shares of HSE
outstanding, compared with 29,914,752 common shares outstanding as at
December 31, 2005.

    Outlook

    In 2006, the Company achieved its goal of creating Canada's first and
largest national provider of industrial safety services. The customer response
to the capacity and diversity of HSE's service package has been positive. The
Company now has greater geographical and customer diversity than at any time
in the past.
    Following two years of rapid growth from June 2004, to July 2006, the
Company has increased its focus on improving its internal efficiency and
effectiveness and its opportunities for organic growth. The largest organic
growth opportunities will come from offering more of its services from all of
its field service locations than it does at the present time. This will
include marketing of mobile fire protection, on-site first aid and air-quality
monitoring services outside of western Canada, and increasing the delivery of
plant and industrial safety services to non-petroleum industries across
Canada.
    The Company believes its continued investment in market diversification,
organic growth, skilled safety professionals and internal process improvements
and operational efficiency will ultimately increase shareholder value.
    However, visibility for business from HSE's largest revenue source -
Oilfield safety services - remains poor for the remainder of 2007. Numerous
conventional upstream oil and gas industry analysts have indicated that
activity levels as measured by capital expenditures and the total number of
new oil and gas wells drilled in Canada will be lower in 2007 than 2006, which
would have a negative impact on the Oilfield safety service component of HSE's
business.
    This will, however, increase available equipment and manpower capacity
for other opportunities. Unlike most companies that service the conventional
upstream oil and gas industry, HSE's equipment and manpower can be redeployed
in other industries without significant retraining of personnel or
modification of equipment. Therefore, the Company will continue to explore the
potential to deliver its services across a variety of industries and
geographies.

    Forward-Looking Statements

    This report contains forward-looking information and statements within
the meaning of applicable securities laws. These forward-looking statements
concern, among other things, the Company's prospects, expected revenues,
expenses, profits, financial position, strategic direction, and growth
initiatives, all of which are subject to risks, uncertainties and assumptions.
These forward-looking statements are identified by their use of terms and
phrases such as expect, anticipate, estimate, believe, may, will, intend,
plan, continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward-looking
statements included in this MD&A are not guarantees of future performance and
should not be unduly relied upon. Such information and statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such forward-
looking information and statements.
    The forward-looking information and statements contained in the MD&A
speak only as of the date of this MD&A, and none of the Company or its
subsidiaries assumes any obligation to publicly update or revise them to
reflect new events or circumstances, except as may be required pursuant to
applicable laws.

    Non-GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, foreign exchange gains or losses, gains or
losses on the disposal of property and equipment, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. HSE's method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.

    
    EBITDA calculation ($ 000's)

    -------------------------------------------------------------------------
    For the Years Ended December 31                 2006      2005      2004
    -------------------------------------------------------------------------
    Net earnings                                  $3,461    $1,833      $225
    Add (deduct):
      Amortization                                 7,618     3,618     1,154
      Stock based compensation                       977       342       120
      Interest                                     1,398       301       180
      Foreign exchange (gain) loss                   (93)       16         -
      Loss on disposal of property and equipment     406       277        12
      Income taxes                                 1,545     1,209       102
    -------------------------------------------------------------------------
    EBITDA                                       $15,312    $7,596    $1,793
    -------------------------------------------------------------------------


    Quarterly EBITDA calculation ($ 000's)

                                                        2006
                                     ----------------------------------------
                                          Q4        Q3        Q2        Q1
                                     ----------------------------------------
    Net earnings (loss)                   $984    $1,197   $(1,073)   $2,353
    Add (deduct):
      Amortization                       2,458     1,862     1,870     1,428
      Stock based compensation             285       312       231       149
      Interest                             403       346       359       290
      Foreign exchange (gain) loss         (93)        -         -         -
      Loss (gain) on disposal of
       property and equipment              (26)      (19)      272       179
      Income taxes                         330       585      (519)    1,149
    -------------------------------------------------------------------------
    EBITDA                              $4,341    $4,283    $1,140    $5,548
    -------------------------------------------------------------------------


                                                        2005
                                     ----------------------------------------
                                          Q4        Q3        Q2        Q1
                                     ----------------------------------------
    Net earnings (loss)                   $(58)     $786   $(1,483)   $2,588
    Add (deduct):
      Amortization                       1,007       894       928       789
      Stock based compensation              98        70        94        80
      Interest                              34        16       114       137
      Foreign exchange (gain) loss          16         -         -         -
      Loss (gain) on disposal of
       property and equipment              177       186         8       (94)
      Income taxes                         226       272      (506)    1,217
    -------------------------------------------------------------------------
    EBITDA                              $1,500    $2,224     ($845)   $4,717
    -------------------------------------------------------------------------

    Additional Information

    Additional information relating to HSE is available under our profile on
the SEDAR website at www.sedar.com and at www.hseintegrated.com.




    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Consolidated Balance Sheets
    (Audited)

    (Stated in thousands) Years ended December 31,          2006        2005
    -------------------------------------------------------------------------
    ASSETS
    Current
      Cash and cash equivalents                        $   6,551   $     382
      Accounts receivable                                 22,306      16,513
      Inventory                                              764         158
      Prepaid expenses and other assets                    2,822         776
                                                       ----------------------
                                                          32,443      17,829

    Property and equipment (Note 4)                       44,745      25,613
    Goodwill (Note 5)                                     23,641       7,276
    Intangible assets (Note 6)                             6,109         563
                                                       ----------------------

                                                       $ 106,938   $  51,281
                                                       ----------------------
                                                       ----------------------
    LIABILITIES
    Current
      Operating line of credit (Note 7)                $       -   $   1,597
      Accounts payable and accrued liabilities             9,540       5,371
      Income taxes payable                                 1,602         548
      Current portion of obligations under
       capital leases (Note 8)                             1,458         247
      Current portion of long-term debt (Note 7)           4,199         235
                                                       ----------------------
                                                          16,799       7,998
    Obligations under capital leases (Note 8)              3,039         382
    Long-term debt (Note 7)                               12,834         370
    Future income taxes (Note 9)                           7,454       3,201
                                                       ----------------------
                                                          40,126      11,951
                                                       ----------------------
    SHAREHOLDERS' EQUITY
      Share capital (Note 10)                             61,471      38,411
      Contributed surplus (Note 11)                        1,423         462
      Retained earnings                                    3,918         457
                                                       ----------------------
                                                          66,812      39,330
                                                       ----------------------

                                                       $ 106,938   $  51,281
                                                       ----------------------
                                                       ----------------------
    Commitments and Contingencies (Notes 14 & 17)
    Subsequent Event (Notes 7, & 12)
    -------------------------------------------------------------------------
    On behalf of the Board


    (Signed) "David L. Yager" Director       (Signed) "Tony Hidalgo" Director
    ----------------------------------       --------------------------------

      See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Consolidated Statements of Earnings and Retained Earnings
    (Audited)

    (Stated in thousands, except per share amounts)
    Years ended December 31,                                2006        2005
    -------------------------------------------------------------------------

    REVENUE                                            $ 100,539   $  59,075
                                                       ----------------------

    COSTS
      Operating and materials                             75,655      45,848
      Selling, general and administrative                  9,572       5,631
      Amortization                                         7,618       3,618
      Interest on long-term debt                           1,317         150
      Stock based compensation (Note 11)                     977         342
      Other interest and bank charges                         81         151
      Foreign exchange (gain) loss                           (93)         16
      Loss on disposal of property and equipment             406         277
                                                       ----------------------
                                                          95,533      56,033
                                                       ----------------------


    EARNINGS (LOSS) BEFORE INCOME TAXES                    5,006       3,042
                                                       ----------------------

    Income taxes (Note 9)
      Current                                              1,811         438
      Future                                                (266)        771
                                                       ----------------------

                                                           1,545       1,209
                                                       ----------------------

    NET EARNINGS                                           3,461       1,833

    RETAINED EARNINGS (deficit), beginning of year           457      (1,376)
                                                       ----------------------

    RETAINED EARNINGS, end of year                     $   3,918   $     457
                                                       ----------------------
                                                       ----------------------

    Earnings per share (Note 10)
      Basic and diluted                                $    0.10   $    0.07
                                                       ----------------------
                                                       ----------------------

      See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Consolidated Statements of Cash Flows
    (Audited)

    (Stated in thousands) Years ended December 31,          2006        2005
    -------------------------------------------------------------------------
    Cash provided by (used in)

    Operations
    Net earnings                                       $   3,461   $   1,833
      Charges to income not involving cash
        Amortization                                       7,618       3,618
        Stock-based compensation (Note 11)                   977         342
        Future income tax expense                           (266)        771
        Loss on disposal of property
         and equipment                                       406         277
      Change in non-cash working capital (Note 15)        (3,713)     (2,719)
                                                       ----------------------

    Cash provided by operations                            8,483       4,122
                                                       ----------------------
    Financing
      Advances Repayment of operating line of
       credit, net                                        (1,597)     (3,106)
      Repayment of demand loans                                -      (4,850)
      Repayment of obligations under capital leases       (1,744)          -
      Issuance of long-term debt                          23,435           -
      Repayment of long-term debt                         (8,543)       (646)
      Issuance of share capital, net of costs             13,235      10,436
      Settlement of liabilities at acquisition (Note 3)   (3,318)          -
                                                       ----------------------

    Cash provided by financing                            21,468       1,834
                                                       ----------------------
    Investing
      Purchase of property and equipment (Note 4)         (6,966)     (4,373)
      Acquisitions (Note 3)                              (17,479)     (1,979)
      Proceeds from disposal of property and equipment       663         459
                                                       ----------------------

    Cash used in investing                               (23,782)     (5,893)
                                                       ----------------------

    Net increase in cash and cash equivalents              6,169          63

    Cash and cash equivalents, beginning of year             382         319
                                                       ----------------------
    Cash and cash equivalents, end of year             $   6,551   $     382
                                                       ----------------------
                                                       ----------------------

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

    Supplemental cash flow information
      Income tax paid                                  $   1,010   $      10
      Interest paid                                    $   1,323   $     291

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

      See accompanying notes to the consolidated financial statements.
    


    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Notes to the Consolidated Financial Statements (Audited)
    For the years ended December 31, 2006 and 2005
    (stated in thousands of dollars, except share amounts)
    -------------------------------------------------------------------------

    NOTE 1 - NATURE OF BUSINESS

    Nature of business

    HSE Integrated Ltd. (the "Company") is an oilfield and industrial safety
    services Company incorporated under the laws of the province of Alberta.
    The Company provides safety supervision personnel, rental of breathing
    apparatus and associated equipment for personnel operating in high hazard
    environments, fire/shower units for workers and equipment protection
    where flammable or corrosive substances are employed, safety training,
    on-site medical services and hazardous gas detection and monitoring
    across Canada.

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

    NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

    The following is a summary of significant accounting policies used in the
    preparation of these consolidated financial statements:

    Basis of presentation

    These consolidated financial statements are prepared in accordance with
    Canadian generally accepted accounting principles (GAAP). Management is
    required to make estimates and assumptions that affect reported amounts
    of assets and liabilities and disclosure of contingent assets and
    liabilities as at the date of the financial statements and the reported
    amounts of revenue and expenses during the reported period. Actual
    results could differ from these estimates.

    Consolidation

    These consolidated financial statements include the accounts of the
    Company and its subsidiaries (from the date of acquisition), all of which
    are wholly owned. All intercompany balances and transactions have been
    eliminated on consolidation.

    Cash and cash equivalents

    Cash and cash equivalents include bank balances and highly liquid short
    term money market instruments with original maturities of three months or
    less.

    Inventory

    Inventory is carried at the lower of cost, determined under the first-in,
    first-out, method, net realizable value if for sale, or replacement cost
    if for use.

    Property and equipment

    Property and equipment is stated at cost less accumulated amortization.
    Major betterments are capitalized. Repairs and maintenance expenditures
    which do not extend the useful life of the property and equipment are
    expensed.

    Amortization is calculated using the straight-line method over the
    estimated useful life of the assets as follows:

    
    Buildings and improvements                                 5 - 40 years
    Safety equipment                                           5 - 20 years
    Vehicles                                                   7 - 20 years
    Vehicles and equipment under capital lease                 7 - 10 years
    Other property and equipment                               2 - 10 years
    

    Intangible assets

    Intangible assets, consisting of acquired customer relationships, non-
    compete agreements, and technology and intellectual property, are carried
    at cost less accumulated amortization, which is calculated on a straight
    line basis over a period of 3 to 10 years depending upon the assets
    estimated useful life.

    Impairment of long-lived assets

    Long-lived assets, such as property and equipment and purchased
    intangible assets subject to amortization, are reviewed for impairment
    whenever events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Recoverability of assets is
    measured by a comparison of the carrying amount of an asset to estimated
    undiscounted future cash flows expected to be generated by the asset. If
    the carrying amount of an asset exceeds its estimated future cash flows,
    an impairment charge is recognized for the amount by which the carrying
    amount of the asset exceeds the fair value of the asset.

    Goodwill

    Goodwill represents the excess of the purchase price of a business
    acquisition over the fair value of the acquired net assets. Goodwill is
    not amortized, but is tested for impairment at least annually. The
    impairment test is carried out in two steps. In the first step, the
    carrying amount of the reporting unit is compared with its fair value.
    When the fair value of the reporting unit exceeds its carrying amount,
    goodwill of the reporting unit is considered not to be impaired, and the
    second step is not considered necessary. The second step compares the
    implied fair value of the reporting unit's goodwill with its carrying
    amount to measure the amount of the impairment loss, if any.

    Revenue recognition

    The Company recognizes service revenue when the services have been
    provided to the customer, the product has been delivered, the sales price
    has been fixed or determinable and collectibility is reasonably assured.
    Generally services are provided over a relatively short time period.

    Income taxes

    The Company follows the liability method of accounting for income taxes.
    Under this method, the Company records future income taxes for the effect
    of any differences between the accounting and income tax basis of an
    asset or liability, using the substantially enacted tax rates and laws
    that will be in effect when the differences are expected to reverse. The
    effect on future tax assets and liabilities of a change in the tax rate
    is recognized in income in the period in which the change occurs. The
    Company records a valuation allowance in each reporting period when
    management believes that it is more likely than not that any future tax
    asset created will not be realized. The computation of the provision for
    income taxes involves the interpretation of tax legislation and
    regulations that are continually changing. There are tax matters that
    have not yet been confirmed by taxation authorities; however, management
    believes that the provision for income taxes is reasonable.

    Foreign currency translation

    All of the Company's operations are considered as integrated and are
    translated into Canadian dollars using the temporal method. Accordingly,
    all monetary items denominated in foreign currencies are translated to
    Canadian dollars at exchange rates in effect at the balance sheet date
    and non-monetary items are translated at rates of exchange in effect when
    the assets were acquired or obligations incurred. Revenue and expenses
    are translated at rates in effect at the time of the transaction. Foreign
    exchange gains and losses are included in earnings.

    Stock-based compensation plans

    The Company applies the fair value method of accounting to all equity-
    classified stock-based compensation arrangements for both employees and
    non-employees. Compensation cost of equity-classified awards to employees
    are measured at fair value at the grant date and recognized over the
    vesting period with a corresponding increase to contributed surplus.
    Compensation cost of equity-classified awards to non-employees are
    initially measured at fair value, and periodically remeasured to fair
    value until the non-employees performance is complete, and recognized
    over the vesting period with a corresponding increase to contributed
    surplus. Upon the exercise of the award, consideration received together
    with amounts previously recognized in contributed surplus is recorded as
    an increase to share capital.

    The Company applies the intrinsic value method of accounting to all
    liability-classified stock-based compensation arrangements for both
    employees and non-employees. Compensation cost of liability-classified
    awards are measured at intrinsic value each balance sheet date and
    recognized with a corresponding increase to a liability. Changes in
    intrinsic value are recognized in the period they occur.

    Earnings per share

    Basic earnings per share is calculated using the weighted average number
    of common shares outstanding during the year. Under the treasury stock
    method, diluted earnings per share is calculated based upon the weighted
    average number of shares issued and outstanding during the year, adjusted
    by the total of the additional common shares that would have been issued
    assuming exercise of all stock options with exercise prices at or below
    the average market price for the year, offset by the reduction in common
    shares that would be purchased with the exercise proceeds plus the
    related unamortized stock based compensation costs. No adjustment is made
    for options if the result of this calculation is anti-dilutive.


    
    Financial instruments

      Fair values of financial assets and liabilities

    The Company has estimated the fair value of its financial assets and
    liabilities, which include cash and short term deposits, accounts
    receivable, operating lines of credit, accounts payable and accrued
    liabilities, capital leases and long-term debt. The fair value of all
    financial assets and liabilities approximates their carrying amounts due
    to their current maturities or market rates of interest.

      Credit risk

    Trade accounts receivable are recorded at the invoiced amount and do not
    bear interest. The allowance for doubtful accounts is the Company's best
    estimate of the amount of probable credit losses in the Company's
    existing accounts receivable. The Company determines the allowance based
    on historical write-off experience, account aging and the oil and gas
    industry economic cycle. The Company reviews its allowance for doubtful
    accounts monthly. Past due balances over 90 days and over a specified
    amount are reviewed individually for collectibility. All other balances
    are reviewed on a pooled basis. Account balances are charged off against
    the allowance after all appropriate means of collection have been
    exhausted and the potential for recovery is considered remote. Based on
    its customer base, the Company does not believe that it has any
    significant concentrations of credit risk other than its concentration in
    the oil and gas industry. The Company does not have any off balance-sheet
    credit exposure related to its customers.

      Interest rate risk

    The Company is exposed to interest rate risk to the extent that it has an
    operating line of credit and long term debt that carry a variable rate of
    interest.


    Measurement uncertainty

    The Company evaluates its estimates including those related to bad debts,
    inventory obsolescence, property plant and equipment useful lives,
    goodwill, intangible assets, income taxes, contingencies and litigation,
    on an ongoing basis. The Company bases its estimates on historical
    experience and on various other assumptions that are believed at the time
    to be reasonable under the circumstances. Under different assumptions or
    conditions, the actual results will differ, possibly materially, from
    those previously estimated. Many of the conditions impacting these
    assumptions and estimates are outside of the Company's control.

    Comparative figures

    Certain prior year figures have been reclassified to conform with the
    current year's presentation.

    Accounting Standards pending adoption

    The Canadian Institute of Chartered Accountants has issued two new
    accounting standards: Section 1530, Comprehensive Income and Section
    3855, Financial Instruments -Recognition and Measurement. The Company
    will apply these standards, summarized below, effective January 1, 2007.

    Section 1530 - Comprehensive Income - Comprehensive income consists of
    net income plus "other comprehensive income". Other comprehensive income
    will include the unrealized exchange gains and losses arising from self
    sustaining foreign operations. Accumulated other comprehensive income
    will be presented separately in shareholders equity.

    Section 3855 - Financial Instruments - Recognition and Measurement - This
    section describes the standards for recognizing and measuring financial
    instruments on the balance sheet and the standards for reporting gains
    and losses in the financial statements. Financial assets classified as
    loans and receivables and financial liabilities classified as other
    liabilities have to be measured initially at fair value.

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

    NOTE 3 - ACQUISITIONS

    2006

    a) On January 10, 2006, the Company completed the acquisition of the
    shares of two related entities, Key Safety Services Inc. ("KSS") and Key
    Monitoring Solutions Corp. ("KMS"), in a business combination accounted
    for as a purchase. KSS performs oilfield safety services in Western
    Canada. KMS provides air quality monitoring services for hydrocarbon
    drilling and industrial projects. The results of operations are included
    in the accounts from date of acquisition. Consideration and acquisition
    costs were comprised of 2,400,000 common shares of the Company valued at
    $2.80 per share, $11,646 cash, accrued consideration and the assumption
    of debt.

    b) On April 5, 2006, the Company completed the acquisition of the shares
    of Sentry Fire Equipment Ltd. ("Sentry") in a business combination
    accounted for as a purchase. Sentry performs fire suppression services
    for the industrial and commercial markets in southern Ontario. The
    results of operations are included in the accounts from date of
    acquisition. Consideration and acquisition costs were $3,688 cash.

    c) On April 21, 2006, the Company completed the acquisition of the shares
    of Front Line Safety Ltd. ("Frontline") in a business combination
    accounted for as a purchase. Frontline performs fire and industrial
    safety services for the petrochemical and mining industries in Atlantic
    Canada and offshore Canada. The results of operations are included in the
    accounts from date of acquisition. Consideration and acquisition costs
    were comprised of 666,667 common shares of the company at $3.69 per
    share, $1,080 of cash and the assumption of debt.

    d) On July 1, 2006, the Company completed the acquisition of the shares
    of Bear's Safety and Rescue Services Ltd. ("Bears") in a business
    combination accounted for as a purchase. Bears provides industrial safety
    services to upstream oil and gas processing facilities, refineries, and
    petrochemical plants in northeast Alberta and has provided safety
    supervision to drilling operations in northern Canada and
    internationally. The results of operations are included in the accounts
    from date of acquisition. Consideration and acquisition costs were
    comprised of 100,000 common shares of the Company at $3.39 per share and
    $789 of cash.


    The following table summarizes the estimated fair value of the assets
    acquired during the year.
                              KSS &               Front
                               KMS     Sentry      Line     Bears     Total
                            -------------------------------------------------
    Net assets acquired
    ------------------------
      Non-cash working
       capital              $    284  $    377  $    108  $    (52) $    717
      Property and
       equipment              12,984       765     1,572       267    15,588
      Goodwill                11,973     1,931     1,745       689    16,338
      Intangible assets        4,482       811     1,132       311     6,736
      Long term debt            (263)      (17)     (318)     (148)     (746)
      Settlement of
       liabilities on
       acquisition            (3,068)        -      (250)        -    (3,318)
      Capital lease
       obligations            (1,528)        -         -       (14)   (1,542)
      Future income taxes     (3,578)     (375)     (725)     (124)   (4,802)
                            -------------------------------------------------

                            $ 21,286  $  3,492  $  3,264  $    929  $ 28,971
                            -------------------------------------------------
                            -------------------------------------------------

    Consideration paid
    ------------------------
      Cash                  $ 11,646  $  3,688  $  1,080  $    789  $ 17,203
      Bank indebtedness
       (cash) acquired           920      (196)     (276)     (199)      249
      Accrued consideration    2,000         -         -         -     2,000
      Common shares            6,720         -     2,460       339     9,519
                            -------------------------------------------------

                            $ 21,286  $  3,492  $  3,264  $    929  $ 28,971
                            -------------------------------------------------
                            -------------------------------------------------

    2005

    a) On July 11, 2005, the Company purchased 100% of the shares of CRS
    Technologies (1990) Inc. and Confined Space Response Services Inc.
    (collectively "CRS"). The total purchase price for these acquisitions was
    $1,365 comprised of $500 in cash and $865 through the issuance of 588,236
    common shares (294,118 held in escrow) at a price of $1.47 per share.
    Should CRS meet certain business continuity conditions the 294,118
    escrowed shares will be released from escrow at the rate of one third on
    July 11, 2006, 2007 and 2008.

    b) On November 30, 2005 the Company purchased 100% of the shares of Blue
    Star EMS Ltd. and Blue Star EMS Safety Ltd. (collectively "BlueStar").The
    total purchase price for these acquisitions was $1,328 comprised of $907
    in cash and $411 through the issuance of 167,902 shares at a price of
    $2.45 per share.

    c) On December 7, 2005, the Company purchased 100% of the shares of
    595073 BC Ltd. ("Sutherland').The total purchase price for these
    acquisitions was $350 in cash.

    The following table summarizes the estimated fair value of the assets
    acquired during 2005.

                                     CRS    BlueStar  Sutherland       Total
                            -------------------------------------------------
    Net assets acquired
    ------------------------
      Non-cash working
       capital                 $     114   $     553   $     139   $     806
      Property and equipment         817         738         383       1,938
      Goodwill                       529         460          18       1,007
      Intangible assets              359         174          10         543
      Long term debt                 (91)       (242)       (178)       (511)
      Future income taxes           (280)       (177)        (71)       (528)
                            -------------------------------------------------

                               $   1,448   $   1,506   $     301   $   3,255
                            -------------------------------------------------
                            -------------------------------------------------

    Consideration paid
    ------------------------
      Cash                     $     590   $   1,055   $     359   $   2,004
      Bank indebtedness (cash)
       acquired                       (7)         40         (58)        (25)
      Common shares                  865         411           -       1,276
                            -------------------------------------------------

                               $   1,448   $   1,506   $     301   $   3,255
                            -------------------------------------------------
                            -------------------------------------------------

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

    NOTE 4 - PROPERTY AND EQUIPMENT
                                                           2006
                                           ----------------------------------
                                                     Accumulated         Net
                                                          Amorti-       Book
                                                Cost      zation       Value
                                           ----------------------------------
    Land                                   $     356           -   $     356
    Buildings and improvements                 1,410         184       1,226
    Safety equipment                          38,049      13,813      24,236
    Vehicles                                  15,681       5,734       9,947
    Vehicles and equipment under capital
     lease                                     6,554       1,440       5,114
    Other property and equipment               6,589       2,723       3,866
                                           ----------------------------------

    Total property and equipment           $  68,639      23,894   $  44,745
                                           ----------------------------------
                                           ----------------------------------


                                                           2005
                                           ----------------------------------
                                                     Accumulated         Net
                                                          Amorti-       Book
                                                Cost      zation       Value
                                           ----------------------------------
    Land                                   $     356           -   $     356
    Buildings and improvements                 1,093          72       1,021
    Safety equipment                          20,151       5,979      14,172
    Vehicles                                  11,629       4,345       7,284
    Vehicles and equipment under capital
     lease                                     1,398         649         749
    Other property and equipment               3,042       1,011       2,031
                                           ----------------------------------

    Total property and equipment           $  37,669      12,056   $  25,613
                                           ----------------------------------
                                           ----------------------------------


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

    NOTE 5 - GOODWILL
                                                            2006        2005
                                                       ----------------------
    Balance, January 1                                 $   7,276   $   6,026
    Goodwill acquired                                     16,338       1,007
    Goodwill adjustment of prior year acquisition             27         243
                                                       ----------------------
    Balance, December 31                               $  23,641   $   7,276
                                                       ----------------------
                                                       ----------------------

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

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


    NOTE 6 - INTANGIBLE ASSETS

                                                           2006
                                           ----------------------------------
                                                     Accumulated         Net
                                                          Amorti-       Book
                                                Cost      zation       Value
                                           ----------------------------------
    Marketing license                      $     100         100   $       -
    Customer relationships                     5,388         629       4,759
    Non-compete agreements                     1,786         530       1,256
    Technological knowledge                      104          10          94

                                           ----------------------------------
                                           $   7,378       1,269   $   6,109
                                           ----------------------------------
                                           ----------------------------------


                                                           2005
                                           ----------------------------------
                                                     Accumulated         Net
                                                          Amorti-       Book
                                                Cost      zation       Value
                                           ----------------------------------
    Marketing license                      $     100          30   $      70
    Customer relationships                       419          47         372
    Non-compete agreements                       124           3         121
                                           ----------------------------------
                                           $     643          80   $     563
                                           ----------------------------------
                                           ----------------------------------


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

    NOTE 7 - OPERATING LINE OF CREDIT and LONG TERM DEBT

    On January 9, 2006 the Company amended its bank credit facilities to
    replace the facilities outstanding at December 31, 2005 with:

    a) a $20,000 non-revolving installment credit facility which amortizes
       over five years from date of draw, bears interest at the bank's prime
       rate, and is subject to an annual cash flow sweep of 25% of earnings
       before interest, amortization and taxes less interest paid and
       repayments of revolving and non revolving principal.
    b) a $10,000 (seasonally reduced in June to November to $8,000) operating
       facility bearing interest at the bank's prime rate, and
    c) a $5,000 revolving installment credit facility which amortizes over
       five years from date of draw and bears interest at the bank's prime
       rate.

    The operating facility is subject to margin requirements based on
    eligible accounts receivable. The credit facilities are secured by
    general security agreements and require maintenance of certain financial
    ratios and other covenants.

    As at December 31, 2006 the Company was in violation of the interest
    coverage ratio covenant as specified under the credit facility. An
    amendment was received to the interest coverage ratio subsequent to year
    end, which now results in compliance.


                                                            2006        2005
                                                      -----------------------
    Equipment financing contracts bearing interest at
    rates averaging 1.44% (2005 - 2.19%), payable in
    blended monthly payments of $27 (2005 - $17)
    secured by specific equipment.                     $     438   $     405


    Non-revolving credit facility loan as noted above,
    payable in quarterly principal payments of $988
    (2005 - blended monthly payments of $5)               15,805         200
                                                      -----------------------

                                                          16,243         605
    Less current portion                                  (4,199)       (235)
                                                      -----------------------

    Accrued consideration on share purchase
    acquisition (Note 3)                                     790           -

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

                                                       $  12,834   $     370
                                                      -----------------------
                                                      -----------------------

    Outstanding principal repayments are due as follows:

    2007                                               $   4,199
    2008                                                   4,898
    2009                                                   3,985
    2010                                                   3,951
                                                      -----------
                                                       $  17,033
                                                      -----------
                                                      -----------

    During 2005, the Company had credit facilities with Canadian chartered
    banks, payable on demand, to a combined maximum of $19,900, bearing
    interest at bank prime plus 1.0%.

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

    NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASE

    The amounts due under capital lease agreements are repayable in blended
    monthly payments of $145 (2005 - $22) and bear interest at rates
    averaging 5.37% (2005 - 8.75 %) per annum. On certain leases, the Company
    has options to acquire the leased assets at various times throughout term
    to 2011.

    The minimum lease payments are due as follows:

                                                            2006        2005
                                                      -----------------------
    2006                                               $       -   $     291
    2007                                                   1,710         251
    2008                                                   1,690         144
    2009                                                   1,238          41
    2010                                                     291           -
    2011                                                      94           -
                                                      -----------------------
                                                           5,023         727
    Less: interest                                          (526)        (98)
                                                      -----------------------
                                                           4,497         629
    Less : current portion                                (1,458)       (247)
                                                      -----------------------

                                                       $   3,039   $     382
                                                      -----------------------
                                                      -----------------------

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

    NOTE 9 - INCOME TAXES
                                                            2006        2005
                                                      -----------------------
    a)  Provision for income taxes

    Earnings before income taxes                       $   5,006   $   3,042
                                                      -----------------------
                                                      -----------------------

    Expected income tax at 32.5% (2005 - 33.6%)        $   1,625   $   1,022
    Non-deductible/non-taxable amounts                       334         193
    Income tax rate reductions                              (261)         (6)
    Other                                                   (153)          -
                                                      -----------------------

    Income tax expense                                 $   1,545   $   1,209
                                                      -----------------------
                                                      -----------------------


                                                            2006        2005
                                                      -----------------------
    b)  Future income tax assets and liabilities are
        as follows:

    Property and equipment                             $   6,252   $   3,706
    Intangible assets                                      1,763           -
    Share issue and financing costs                         (561)       (465)
    Non-capital losses carried forward                         -         (40)
                                                      -----------------------

    Future income tax liability                        $   7,454   $   3,201
                                                      -----------------------
                                                      -----------------------

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

    NOTE 10 - SHARE CAPITAL

    a)  Authorized:
          Unlimited number of common shares without par value.
          Unlimited number of preferred shares, issuable in series.

    b)  Issued and outstanding:

                                         2006                    2005
                              -----------------------------------------------
    Common shares             Shares (in      Amount  Shares (in      Amount
                               thousands)              thousands)
                              -----------------------------------------------
    Balance, January 1            29,915   $  36,559      22,509   $  25,237
    Changes (net of share
     issue costs):
      Private placement            3,850      12,515       6,363       9,628
      Issued on acquisition
       of shares                   3,167       9,519         756       1,276
      Issued on conversion of
       agent's warrants              445       1,070           -           -
      Issued on conversion of
       warrants                       38         110           -           -
      Issued on exercise of
       options                        47          89          32          37
      Issued on conversion of
       debentures                      -           -         275         412
      Cancellation of shares
       issued on SDS Group
       Inc. acquisition                -           -         (20)        (31)
                              -----------------------------------------------

    Balance, December 31          37,462   $  59,862      29,915   $  36,559
                              -----------------------------------------------
                              -----------------------------------------------


                                         2006                    2005
                              -----------------------------------------------
    Warrants                   Units (in               Units (in
                               thousands)     Amount   thousands)     Amount
                              -----------------------------------------------
    Balance, January 1             3,182   $   1,628           -   $       -

      Issued in conjunction with
       private placement               -           -       3,182       1,628
      Converted to common shares     (38)        (19)          -           -
                              -----------------------------------------------

    Balance, December 31           3,144   $   1,609       3,182   $   1,628
                              -----------------------------------------------
                              -----------------------------------------------


                                         2006                    2005
                              -----------------------------------------------
                               Units (in               Units (in
                               thousands)     Amount   thousands)     Amount
                              -----------------------------------------------
    Agent's Warrants

    Balance, January 1               445   $     224           -   $       -

     Issued in conjunction with
      private placement                -           -         445         224
     Converted to common shares     (445)       (224)          -           -
                              -----------------------------------------------

    Balance, December 31               -   $       -         445   $     224
                              -----------------------------------------------
                              -----------------------------------------------

    Warrants

    On June 23, 2005, the Company by way of private placement, issued
    6,363,200 units. Each unit consisted of one common share and one-half of
    one share purchase warrant. Each whole warrant entitles the holder to
    acquire a common share at a price of $2.40, at any time on or before June
    23, 2007.

    Agent's warrants entitled the holder to acquire a common share at a price
    of $1.90 before June 23, 2006.

    Private placements

    On February 7, 2006 the Company completed a private placement of equity
    with the Company's employees pursuant to which 550,000 common shares were
    issued at the price of $2.50 per share for gross proceeds of $1,375.

    On April 26, 2006 the Company completed a private placement of equity
    pursuant to which 3,300,000 common shares were issued at the price of
    $3.55 per share for gross proceeds of $11,715.

    e) Per share amounts

    Basic earnings per common share is computed by dividing earnings by the
    weighted average number of common shares outstanding during the year.
    Diluted earnings per common share is computed by dividing earnings by the
    diluted weighted average number of common shares outstanding during the
    year.


                                                            2006        2005
                                                      -----------------------
    Basic weighted average number of common shares
     outstanding during the year                          35,807      26,317
                                                      -----------------------
                                                      -----------------------

    Diluted weighted average number of common shares
     outstanding during the year                          36,053      26,955
                                                      -----------------------
                                                      -----------------------

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

    NOTE 11 - CONTRIBUTED SURPLUS

                                                            2006        2005
                                                      -----------------------

    Balance, January 1                                 $     462   $     120
    Stock compensation expense - employee options            977         342
    Exercise of stock options                                (16)          -
                                                      -----------------------
    Balance, December 31                               $   1,423   $     462
                                                      -----------------------
                                                      -----------------------

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

    NOTE 12 - STOCK-BASED COMPENSATION PLANS

    Incentive stock option plan

    Compensation costs for stock based compensation totalled $977 (2005 -
    $342). Options granted prior to January 1, 2003 are accounted for using
    the intrinsic value method.

    The weighted average fair market value of options granted for the periods
    ended December 31, 2006 and December 31, 2005 are $2.24 and $1.85 per
    option, respectively. The fair value of each option granted was
    estimated on the date of grant using the Modified Black-Scholes option-
    pricing model with the following assumptions:


                                                      2006             2005
                                          -----------------------------------
    Vesting period (years)                               3                3
    Risk-free interest rate                   3.89 - 4.08%     3.89 - 4.00%
    Expected life (years)                                5                5
    Price volatility                        55.46 - 96.00%          120.37%
                                          -----------------------------------
                                          -----------------------------------

    Pursuant to an incentive stock option plan, a maximum of 10% of the
    issued and outstanding common shares of the Company are reserved from
    time to time, for issuance to eligible participants. Option prices and
    vesting terms are determined by the directors at the time of granting at
    a price no less than fair value at grant date. The term of options
    granted does not exceed five years.

    Information about outstanding stock options is as follows:

                                        2006                    2005
                              ----------------------- -----------------------
                                            Weighted                Weighted
                                             Average                 Average
                                            Exercise                Exercise
                                 Options       Price     Options       Price
                              -----------------------------------------------
    Outstanding,
     beginning of year         1,022,333   $    1.74     467,000   $    1.49
    Granted                    1,053,000        2.83     693,000        1.85
    Exercised                    (47,332)       1.36     (32,000)       1.15
    Forfeited                   (103,500)       2.69    (105,667)       1.58
                              -----------------------------------------------

    Outstanding, end of year   1,924,501   $    2.24   1,022,333   $    1.74
                              -----------------------------------------------
                              -----------------------------------------------

    Exercisable at end of year   445,442   $    1.69     160,778   $    1.43
                              -----------------------------------------------
                              -----------------------------------------------


    The following table summarizes information about stock options
    outstanding at December 31 2006:

                                                            Number
                                              Weighted     exerci-
                                               average    sable at
                       Options    Exercise   remaining    December
                   outstanding      prices        life    31, 2006
                  -------------------------------------------------
                                      $
                        30,000   0.50-1.05        2.05      23,333
                       639,001   1.25-1.69        2.86     310,444
                       560,500   1.83-2.20        4.34      73,332
                       170,000   2.50-2.76        4.22      16,666
                       525,000   3.16-3.45        4.22           -
                  -------------------------------------------------

                     1,924,501        2.24        3.77     423,775
                  -------------------------------------------------
                  -------------------------------------------------

    Deferred share unit plan

    The Company adopted effective November 13, 2006 a deferred share unit
    (DSU) plan for non-executive directors. Under the terms of the plan, DSUs
    awarded will vest immediately and will be settled with cash in the amount
    equal to the closing price of the Company's common shares on the
    redemption date specified by the Director upon tendering their
    resignation from the Board. The redemption date must be after the date on
    which the notice of redemption is filed with the Company and before
    December 15 of the first calendar year commencing after the Director's
    termination date.

    On January 16, 2007, 15,000 deferred share units were granted to non-
    executive directors.

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

    NOTE 13 - RELATED PARTY TRANSACTIONS

    During the year, the Company had the following transactions with related
    parties. These transactions are measured at exchange amounts, which
    approximate an arm's length equivalent.

    From January 1 to June 23, 2006, a company controlled by a former
    director of HSE subcontracted the provision of certain goods and services
    to HSE. For the first six months of 2006, HSE billed this company $777
    (2005 - $5,163) in respect of the goods and services provided. HSE also
    paid the company $86 (2005 - $86) for goods and services. These products
    and services are sold at rates agreed to as part of the acquisition of
    the assets of the company. Included in accounts receivable is $464 (2005
    - $994) owed by this company to HSE.

    Included in accounts receivable is a promissory note of $49, (2005 - $54)
    which is due from an Officer and Director of the Company. The note is
    payable on demand. During 2006 the Company paid rent to a corporation
    related to this same Officer and Director of the Company in the amount of
    $285 (2005 - $247).

    During 2006 the Company also paid rent of $41 (2005 - nil) and $342 (2005
    - nil) to two corporations each controlled by different Executives of the
    Company.

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

    NOTE 14 - COMMITMENTS

    The Company leases certain shop and office space and vehicles and
    equipment under operating leases for periods ending between 2006 and
    2011. Future minimum lease payments under these leases in each of the
    next five years are as follows:


                                              Rental   Operating
                                          facilities      leases       Total
                                          -----------------------------------
    2007                                   $   2,128       1,037   $   3,165
    2008                                       1,975         728       2,703
    2009                                       1,629         461       2,090
    2010                                       1,132         424       1,556
    2011                                   $     577         339   $     916
                                          -----------------------------------

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

    NOTE 15 - SUPPLEMENTARY CASH FLOW INFORMATION

    Increase (decrease) in non-cash working capital
     from operations                                        2006        2005
                                                      -----------------------

    Accounts receivable                                $   5,319   $  (4,566)
    Inventory                                               (113)        (10)
    Prepaid expenses and other assets                     (1,150)       (495)
    Other assets
    Accounts payable and accrued liabilities              (8,498)      1,950
    Income tax payable                                       729         402
                                                      -----------------------
    Net increase (decrease) in non-cash working
     capital                                           $  (3,713)  $  (2,719)
                                                      -----------------------
                                                      -----------------------

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

    NOTE 16 - SEGMENT INFORMATION

    Management has determined that the Company operates in a single industry
    segment, which involves the provision of industrial health, safety and
    environmental monitoring services. Substantially all of the Company's
    operations, assets, revenues, and employees are in Canada. For the years
    ended December 31, 2006 and 2005, the Company had no customer
    representing more than 10% of revenue.

    Revenue by type of service is as follows:
                                                            2006        2005
                                                      -----------------------
    Oilfield                                           $  66,794   $  46,508
    Industrial                                            23,459      10,036
    Environment                                           10,286       2,531
                                                      -----------------------
    Total Revenue                                      $ 100,539   $  59,075
                                                      -----------------------
                                                      -----------------------

    As a % of Revenue:
    Oilfield                                               66.5%       78.7%
    Industrial                                             23.3%       17.0%
    Environment                                            10.2%        4.3%
                                                      -----------------------
    Total Revenue                                         100.0%      100.0%
                                                      -----------------------
                                                      -----------------------

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

    NOTE 17 - CONTINGENCIES

    In the ordinary course of business activities, the Company may be
    contingently liable for litigation and claims with customers, suppliers,
    former employees, and third parties. Management believes that adequate
    provisions have been recorded in the accounts where required. Although it
    may not be possible to accurately estimate the extent of potential costs
    and losses, if any, management believes that the ultimate resolution of
    such contingencies would not have a material effect on the financial
    position of the Company.
    





For further information:

For further information: HSE Integrated Ltd., David Yager, Chairman &
CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com; Tony
Hidalgo, Chief Financial Officer, Telephone: (403) 650-6481, E-Mail:
thidalgo@hseintegrated.com

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HSE Integrated Ltd.

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