Record growth in industrial safety tempered by reduced demand for oilfield services in 2007 fiscal year



    CALGARY, March 31 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") announced its financial results for the fiscal year ended
December 31, 2007. Financial and operating highlights are summarized below:

    
    -   Revenue was $97.3 million for the year, a reduction of 3.2% compared
        to the prior year.
    -   The success of the Company's revenue diversification strategy was
        demonstrated, as significant declines in revenues from conventional
        Oilfield activity were largely offset by growth in Industrial and
        Environment revenues. Revenues from Industrial markets (non-
        conventional upstream oil and gas, plants, facilities, training, and
        safety management services) increased by over 77%, growing to
        $41.6 million in the year from $23.5 million for the same period in
        the prior year. Industrial safety services revenue as a percentage of
        the total business mix in the year almost doubled - 42.7% in 2007
        compared to 23.3% in fiscal 2006. A significant portion of the
        increase in Industrial revenues came from the delivery of a range of
        HSE's services to operations and facilities in the oilsands producing
        and development areas of Northeast Alberta. This geographic area
        experienced growth rates of 290% over the prior year, and by the end
        of 2007 represented over 17% of total revenue (2006 - 4%).
    -   Customer demand continues to increase for the Company's air quality
        monitoring or "Environment" market, which rose 19.1%.
    -   EBITDA declined to $7.0 million for the year (2006 - $15.3 million)
        because the redeployment of personnel to Industrial safety services
        only partially offset a 34.9% decline in generally higher margin
        Oilfield services revenue.
    -   There was a net loss for the year of $27.3 million, as compared to
        net earnings of $3.5 million in the prior year. A majority of the
        loss for the year was due to a write-down of goodwill and intangibles
        of $25.5 million as a result of reduced overall market activity on
        the Oilfield side of the business. A review of property and equipment
        did not conclude an impairment in the value of these assets.
        Equipment redeployment continues as the Company relocates safety
        equipment surplus from the Oilfield sector in Alberta to expanding
        field service operations in British Columbia, Saskatchewan, Ontario,
        New Brunswick, Nova Scotia and Michigan.
    -   In the fourth quarter of 2007, the Company achieved revenues of
        $26.5 million, which were largely similar to the revenue levels in
        the fourth quarter of 2006. Softer activity levels in the Oilfield
        safety service side of the business were largely offset by higher
        revenue levels from Industrial and Environment. There was a 40%
        decline in EBITDA to $2.6 million in the fourth quarter of 2007, when
        compared to the same period in the prior year. The decline in EBITDA
        was primarily caused by a reduction in the utilization of higher
        margin equipment rentals to customers, an increase in the provision
        for doubtful accounts ($0.4 million), and one time costs, the
        majority of which was severance, associated with overhead cost
        reduction initiatives ($0.4 million). There was a net loss of
        $9.2 million in the fourth quarter of 2007, versus net earnings of
        $1.0 million for the same period in 2006. A large majority of the
        loss was related to write-downs of goodwill and intangible assets,
        but was offset by an income tax gain of $1.1 million due to reduced
        future income tax rates.
    -   During the year, the Company acquired Prairie Wide Safety Ltd. of
        Weyburn, Saskatchewan, which expanded the national delivery footprint
        for the Company's full suite of services into the established and
        active hydrocarbon producing region of southeast Saskatchewan. The
        transaction was accretive to earnings in the year.
    -   As part of a continual focus on increased efficiency and higher
        profit margins, the Company implemented a cost reduction initiative
        of over $3 million on an annualized basis, the major impact of which
        will take place in 2008 and beyond. This initiative includes field
        service facility consolidation and a reduction in equipment and
        personnel not essential for service delivery.
    -   During the year, HSE entered an agreement with its current lender for
        credit facilities that provide the Company with increased financial
        flexibility to both pursue strategic opportunities and to fund
        working capital needs. As at December 31, 2007, the Company was in
        compliance with its financial covenants under its credit facilities.
    

    David Yager, Chairman and CEO, offered the following comments for HSE's
2007 financial results.
    "In the 2007 fiscal year we faced significant challenges and seized
numerous opportunities. The biggest challenge was managing the first major
downturn in conventional oil and gas activity since 2002. This major reversal
is well understood by everyone associated with this business and it had a
negative impact on our financial performance. However, because we've been
developing other markets for years, we were able to seize the opportunity
created by excess capacity and redeployed all of our skilled personnel and
many of our specialized assets in other industries. This has permanently
changed our business model going forward and created a new, ongoing and
significantly larger client base. To adapt to this new business, we worked
through our cost and margin issues. Now we're confident that in the future,
HSE is going to be a more valuable company for our three main stakeholders -
clients, employees and capital providers. I encourage investors to look deeper
and see how HSE's broader and diversified client base will create future,
profitable growth regardless of the levels of natural gas drilling activity in
western Canada."
    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 10 AM
(Eastern Standard Time), 8 AM (Mountain Standard Time) on Tuesday April 1st,
2008.

    Dial-In Number: 1-800-731-5319 or 1-416-644-3416
    -------------------------------------------------

    Conference Replay to April 15, 2008:
    ------------------------------------
    1-416-640-1917 or 1-877-289-8525 (Passcode: 21267420 followed by the
    pound sign)

    Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID
    (equalsign)2214520
    ------------------------------------------------------------------------

    HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. From its head office in Calgary, Alberta, its serves
its clients from field service locations in Alberta, British Columbia,
Saskatchewan, Ontario, Nova Scotia, New Brunswick and Michigan. HSE trades on
the TSX 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, foreign exchange gains or losses, 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.


    HSE Integrated Ltd.
    Management Discussion and Analysis ("MD&A")
    For the years ended December 31, 2007 and 2006

    The following management discussion and analysis is dated March 28, 2008,
    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,
    2007 and 2006. 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 March 28, 2008. 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 ended   Year over  Year ended   Year over  Year ended
                     Dec. 31,     year %     Dec. 31,     year %     Dec. 31,
                        2007      change        2006      change        2005
    -------------------------------------------------------------------------
    Revenue          $97,342        -3.2%   $100,539        70.2%    $59,075
    Operating and
     materials        80,829         6.8%     75,655        65.0%     45,848
    Operating margin  16,513       -33.6%     24,884        88.1%     13,227
    Operating
     margin %           17.0%       -7.8%       24.8%        2.4%       22.4%
    Selling, general
     & administrative  9,524        -0.5%      9,572        70.0%      5,631
    Net earnings
     (loss)          (27,302)     -888.9%      3,461        88.8%      1,833
    - per share
     basic             (0.73)     -830.0%       0.10        42.9%       0.07
    - per share
     diluted           (0.73)     -830.0%       0.10        42.9%       0.07
    EBITDA(1)          6,989       -54.4%     15,312       101.6%      7,596
    EBITDA %             7.2%       -8.0%       15.2%        2.3%       12.9%
    Total Assets      73,372       -31.4%    106,938       108.5%     51,281
    Total Long-Term
    Liabilities      $22,196        -4.9%    $23,327       490.1%     $3,953
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See Non-GAAP Measures for (1)
    

    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; fixed and mobile air quality
monitoring; breathing equipment rentals and services; fixed and mobile
firefighting and fire protection services and equipment; worker
decontamination (shower) services; on-site medical services; worker safety
training; and safety management and consulting services.
    For the years ended December 31, 2007 and 2006 the Company had no
customers representing more than 10% of revenue.
    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
services delivered to non-conventional upstream oil and gas development and
production, oil and gas processing and refining plants and facilities, diverse
non-petroleum resource and manufacturing industries, worker safety training,
and safety management and consulting services. Environment focuses on
air-quality monitoring to detect airborne contaminants which may affect the
health of workers, the public, livestock, and wildlife.

    
    The revenue for these services is shown below:

    -------------------------------------------------------------------------
                                          Year ended  Year ended   Year over
                                             Dec. 31,    Dec. 31,       year
                                                2007        2006    % change
    -------------------------------------------------------------------------
    Oilfield                                 $43,473     $66,794       -34.9%
    Industrial                                41,618      23,459        77.4%
    Environment                               12,251      10,286        19.1%
    -------------------------------------------------------------------------
    Total Revenue                            $97,342    $100,539        -3.2%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a % of Revenue:
    Oilfield                                    44.7%       66.5%
    Industrial                                  42.7%       23.3%
    Environment                                 12.6%       10.2%
    -------------------------------------------------------------------------
    Total Revenue                              100.0%      100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The success of the Company's revenue diversification strategy continues
to be demonstrated as significant declines in Oilfield revenues were largely
offset by growth in Industrial and Environment revenues.
    Oilfield revenues experienced large declines when compared to the prior
year because of reduced overall activity levels within the conventional
upstream, or "wellhead", sector of the oil and gas industry: oil and natural
gas well drilling, completion and work-over (repair and maintenance) activity.
The primary area of decline relates to natural gas. Industry sources have
indicated that, when compared to the same period in the prior year, new
conventional oil and gas well drilling activity levels in the Western Canadian
Sedimentary Basin ("WCSB") have declined, as have well workover and
stimulation activities on existing wells. Although HSE has been able to
largely maintain its pricing levels with its customers, additional capacity
added by competitors, in conjunction with an overall reduction in demand, has
also contributed to the Company's lower revenue levels for this sector.
    The Company continues its business diversification strategy, and reports
a 77% ($18.2 million) increase in Industrial revenues when compared to the
prior year.
    The rise in Industrial revenues is from the delivery of increased levels
of safety services to oil and gas processing facilities, thermal heavy oil
recovery, and oilsands extraction and construction projects in Alberta; safety
services, fire suppression, gas detection and breathing air equipment rental
services to diverse industrial and commercial markets in British Columbia,
Alberta, and Ontario; safety services for the refining, mining, offshore
drilling and production and other industries in Atlantic Canada; and worker
safety training and safety consulting services in all markets.
    A significant portion of the increase in Industrial revenues came from
the delivery of the full range of HSE's services to operations and facilities
in the oilsands producing and development areas of Northeast Alberta. This
geographic area experienced growth rates of 290% over the prior year, and by
the end of 2007 represented over 17% of total revenue (2006 - 4%).
    A large portion of the increase in Industrial revenues also came from
providing safety services to support major plant and facility maintenance and
repair projects. In the second and third quarter of 2007, the Company secured
and executed a greater number of simultaneous, large scale projects of this
type than in any prior year. The customers for these large scale safety
services were very diverse; clients included oilsands facilities, refineries,
cement plants, high volume sour gas processing facilities, chemical factories,
and fertilizer facilities.
    Services delivered in Central and Atlantic Canada, and the North Eastern
United States is characterized as Industrial revenue. Revenue from these areas
has increased on a year to year basis by 29%, to almost $13 million. This is
due both to the acquisitions completed in April 2006, and through increased
marketing efforts in existing markets.
    Greater marketing efforts have also increased worker training demand,
resulting in increased classroom capacity and course offerings across Canada.
    As a result of the additional air quality monitoring capacity added in
the prior year, Environment revenues increased in the year by 19% as compared
to the same period in 2006. The Company has experienced client and sectoral
diversification in this business group.
    In the third quarter of 2007, the Company acquired Prairie Wide Safety
Ltd. ("PWS") of Weyburn, Saskatchewan. PWS serves the hydrocarbon producing
region of southeast Saskatchewan by providing complete oilfield and industrial
safety services to drilling, completion, well servicing and field processing
operations. The revenue included in the third and fourth quarters associated
with this acquisition was approximately $0.9 million and was accretive to
earnings.

    Operating and Materials Expense and Operating Margin

    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; field service centre property costs; transportation; fuel;
consumables; equipment repairs and maintenance; and field office
administration including field sales.
    Operating and materials expense for the year ended December 31, 2007
totaled $80.8 million or 83.0% of revenue as compared to $75.7 million or
75.2% of revenue in 2006. Operating margin for the year has declined from
$24.9 million (24.8% of revenue) in 2006, to $16.5 million (17.0% of revenue)
in 2007.
    The reduction in operating margins is primarily due to both a lower level
of overall revenue, and a reduction of the level of Oilfield revenues which
contain a greater proportion of higher-margin equipment rental revenue (such
as fire trucks and large mobile decontamination units) which are mainly
utilized in the completion and stimulation of newly drilled natural gas and
crude oil wells, or major workovers or re-completions of existing oil and gas
wells. Lower overall equipment utilization, resulting in lower revenue, was
partially offset by the re-deployment of personnel to the Industrial market, a
key element of the Company's client and regional diversification strategy.
    Included in the year is an addition to the provision for doubtful
accounts of $0.8 million (a majority of which was recorded in the fourth
quarter) as recognition of the potentially challenging environment
particularly for small natural gas producers faced by some of the Company's
Alberta customers.

    Selling, General and Administrative Expense

    Selling, general and administrative ("SG&A") expense consists of costs
not directly attributable to the delivery of services to 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, 2007 amounted to $9.5 million, which
is relatively unchanged from the prior year. Included in the year are costs
($0.2 million) related to the Company's initial listing on the Toronto Stock
Exchange.

    EBITDA and Net Earnings (Loss)

    Despite relatively stable revenue levels as compared to the prior year,
EBITDA (see "Non-GAAP Measures") in the year has declined to $7.0 million,
from $15.3 million in the prior year. This was primarily caused by reduced
rental revenue due to reduced utilization of higher margin safety equipment
associated with the Oilfield services component.
    The Company has experienced reduced activity on the Oilfield side of the
business mainly due to weaker economic fundamentals faced by customers
involved in that industry. As a result, Management conducted a review for
possible impairment of property and equipment, goodwill, and intangible
assets, the outcomes of which are described below.
    A review for impairment of property and equipment was conducted at
December 31, 2007. This analysis consisted of comparing the carrying value of
the property and equipment at year end to the sum of the undiscounted future
cash flows expected to result from its use and eventual disposition. Based
upon this review, Management concluded that an impairment did not exist at
year end, and therefore no write-down of property and equipment was required.
    Impairment tests were performed on intangible assets and goodwill at
December 31, 2007. The results of the tests indicated that the carrying amount
of goodwill and certain intangible assets exceeded their fair value.
Accordingly, a write-down of $25.0 million and $0.5 million was incurred for
goodwill and intangible assets (short term non-compete agreements),
respectively.
    Total amortization for the year was $8.1 million. This was comprised of
$6.8 million in property and equipment amortization, and $1.2 million in
intangible asset amortization. Property and equipment amortization has
increased by $0.4 million when compared to the prior year due to previous
investments in property and equipment and from similar assets acquired through
acquisitions. As well, the recognition of intangible assets on acquisitions
made in the prior year has also contributed to the increase in amortization.
    Stock-based compensation for the year was $1.1 million (2006 -
$1.0 million), and has slightly increased due to additional grants of stock
options to employees of the Company.
    Interest on long term debt and other interest and bank charges decreased
slightly from $1.4 million in 2006 to $1.3 million for 2007. Interest from
increased obligations under capital leases was offset by interest reductions
resulting from lower levels of bank debt.
    For 2007, the loss on disposal of property and equipment was $0.9 million
with proceeds on sale of $1.1 million. Asset divestitures consisted mainly of
retirement of vehicles replaced through the Company's capital expenditure
program.
    HSE had a $2.7 million income tax recovery versus an expense of
$1.5 million for the comparable period in 2006. The reduction can be
attributed to lower earnings, and a $1.1 million future tax rate reduction
resulting from the Federal government's announcement of reductions to future
corporate income tax rates which were substantively enacted in the fourth
quarter.
    The net loss for the year was $27.3 million, which represents a decline
compared to the net earnings of $3.5 million in 2006. The decrease in net
earnings is primarily due to a goodwill and intangible asset impairment charge
of $25.5 million, and to a lesser extent to lower levels of EBITDA, offset by
the recovery of prior year income tax.

    Fourth Quarter Results

    In the fourth quarter of 2007, the Company achieved revenues of
$26.5 million, which were largely similar to the revenue levels in the fourth
quarter of 2006. Softer activity levels in the Oilfield safety service side of
the business were largely offset by higher revenue levels from Industrial and
Environment. There was a 40% decline in EBITDA to $2.6 million in the fourth
quarter of 2007, when compared to the same period in the prior year. The
decline in EBITDA was primarily caused by a reduction in the utilization of
higher margin equipment rentals to customers, an increase in the provision for
doubtful accounts ($0.4 million), and one time costs, the majority of which
was severance, associated with overhead cost reduction initiatives
($0.4 million). There was a net loss of $9.2 million in the fourth quarter of
2007, versus net earnings of $1.0 million for the same period in 2006. A large
majority of the loss was related to write-downs of goodwill and intangible
assets.

    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
lender, and equity financing.
    The Company, through the conduct of its operations, has undertaken
certain contractual obligations as noted in the following table:

    
    -------------------------------------------------------------------------
    Years ended
     December 31,               2008    2009    2010    2011    2012   Total
    -------------------------------------------------------------------------
    Capital lease obligations $1,488   1,145     303     111       6  $3,053
    Vehicle operating leases   1,717   1,389   1,310     746     144   5,306
    Property & other leases    2,513   2,093   1,641     833     417   7,497
    Long term debt               216   1,153  13,871      20       -  15,260
    -------------------------------------------------------------------------
    Total contractual
     obligations              $5,934   5,780  17,125   1,710     567 $31,116
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Cash Provided by (Used in) Operations

    Cash provided by operations in the year was $1.5 million as compared to
$8.5 million for the same period in the prior year. The primary causes for the
change are lower levels of earnings, and greater aging in accounts receivable.
Management has increased the provision for doubtful accounts to $1.2 million
(approximately 5% of outstanding accounts receivables) as recognition of the
potentially challenging environment faced by some of the Company's smaller
customers primarily in the petroleum industry in Alberta.

    Cash Provided by (Used in) Financing and Investing

    During 2007, the Company made payments of $1.9 million for its capital
leases, and $2 million towards repayment of long-term debt ($0.3 million of
which was debt reduction on the acquisition of PWS). The cash consideration
related to the PWS acquisition was $1.9 million, and proceeds from disposal of
property and equipment were $1.1 million.
    Purchases of property and equipment for the year amounted to
$4.1 million, the majority of which consists of revenue generating safety
services rental equipment, and the fabrication costs related to fire and
shower units.

    Liquidity

    In the quarter ended June 30, 2007, HSE entered into an agreement with
its current lender (a Canadian Chartered Bank) for credit facilities that
provide the Company with increased financial flexibility to pursue strategic
opportunities as they arise. The credit facilities include a $25 million
three-year interest-only revolving facility and a $7.5 million operating
facility. Depending upon certain financial ratios, the facilities bear
interest at the bank's prime rate (or U.S. base rate) plus up to 2.25 percent,
or at bankers' acceptance rates with a stamping fee of 1.50 to 3.75 percent.
An additional standby fee ranging between 0.20 to 0.60 percent per annum is
also required on the unused portion of the credit facilities. The revolving
facility matures on June 25, 2010, with an ability to extend the term at the
lender's option. The operating facility is renewable annually and is margined
to accounts receivable. The operating facility is subject to covenants that
are typical for this type of facility. The credit facilities are
collateralized under a general security agreement.
    At the end of the current quarter, the draw against the revolving
facility was $13.8 million, and there was no draw against the operating
facility.
    At December 31, 2007, the Company was in compliance with its financial
covenants.

    Acquisition

    On July 1, 2007 the Company acquired the outstanding shares of Prairie
Wide Safety Ltd. ("PWS") of Weyburn, Saskatchewan in a business combination
accounted for using the purchase method. PWS serves the hydrocarbon producing
region of southeast Saskatchewan by providing complete oilfield and industrial
safety services to drilling, completion, well servicing and field processing
operations. The final purchase consideration will be determined based upon a
predetermined formula not to exceed $2.2 million plus the assumption of debt,
based upon historical results, with additional consideration contingent upon
performance measures achieved in the first year after the acquisition date.
The results of operations are included in the accounts from the date of
acquisition. Estimated consideration and costs were comprised of 100,000
common shares of the Company valued at $1.64 per share, $1.9 million cash, and
the assumption of debt.
    The purchase price allocation has not been completed, and certain items,
such as fair value of assets and liabilities and estimates for contingent
consideration as of the acquisition date, have not been finalized.

    Outlook

    Reduced conventional oil and gas exploration, development and production
activity levels in the WCSB, relative to the record activity levels
experienced over the past few years, have negatively affected the Oilfield
safety services component of the business, and some industry analysts have
predicted that this will continue into 2008.
    However, the increase in crude oil and natural gas prices in the first
quarter of 2008 are causing more petroleum industry analysts to believe that
the activity downturn that began in the second quarter of 2006 may have
reached bottom leading to a stabilization of activity in this sector, and
possibly a recovery in the second half of 2008 and into 2009.
    In executing the Company's diversification strategy, marketing, equipment
and manpower resources were redeployed into the Industrial component of the
business which continues to diversify the Company's client base and assist in
reducing the cyclicality and seasonality of safety services provided to the
conventional upstream oil and gas sector.
    In the year, the Company was able to demonstrate its ability to
successfully execute multiple, simultaneous, large scale safety service
operations within diversified plant and facility operations for its customers.
This had three positive outcomes for HSE. First, redeploying Oilfield safety
services personnel to Industrial assignments has permitted the Company to
retain largely all of its technical field services personnel. This will
position HSE to fully exploit the recovery in the Oilfield sector when it
emerges. Second, diversifying the assignments of the technical field services
team has given these personnel valuable on-the-job training in delivering
safety services to different industries. Third, this capability was achieved
over the last several years by laying the groundwork of focused marketing
efforts, and the development of personnel and internal processes.
    By exhibiting its capabilities in activities of this magnitude, HSE, with
its integrated and bundled service model, is better positioned to partner with
its customers by offering a greater range of services that can be delivered
throughout the year, and from which higher margins can be attained. Servicing
the Industrial sector will be a permanent and growing component of the HSE
business mix in the future. Continued positive client response to the HSE
business model and services bundle gives management of the Company the
confidence to continue to recruit and train more safety technicians and
professionals and to consider opening new service locations in new markets.
    In the latter half of 2007, Management performed a comprehensive review
of its overhead structure and identified potential cost reductions of over
$3 million (when compared to the cost structure in 2007) that is not intended
to reduce or impair service or delivery capacity. These initiatives included
facilities consolidation intended to increase efficiency and reduce fixed
costs, and a review of equipment, vehicles, and personnel considered not
essential in adding significant value to our customers. A vast majority of the
cost reduction initiatives were undertaken prior to the end of the year, with
the annualized savings expected in 2008. As well, the Company also does not
anticipate the need to significantly increase corporate support costs in the
near term.
    Based primarily on sharply lower natural gas drilling activity in 2007
and the outlook for 2008 that this trend will continue, HSE will increase its
initiatives to move surplus safety equipment to client requirements in other
markets where these assets can enjoy higher utilization levels and thus
increase the Company's revenues without significant capital investment.
Markets in which HSE has relocated equipment in 2007 include Saskatchewan,
Ontario and New Brunswick. For 2008, future markets where equipment may be
redeployed include British Columbia, Saskatchewan, Ontario, New Brunswick,
Nova Scotia, the industrial Midwest of the United States, and one or more of
the conventional oil producing areas of the western United States.
    The recent Crown royalty changes announced by the province of Alberta
have increased uncertainty for the Oilfield sector of the Company's business
in the future. These royalty changes will decrease the amount of oil and gas
development opportunities that are economic for our customers to exploit in
Alberta under different commodity pricing scenarios. While the total impact of
this major policy change on the Company and its clients has yet to be
determined, management is of the view that any events that reduce the cash
flow from hydrocarbon production generated by HSE's clients will ultimately
have a negative impact.
    Building upon the acquisition of PWS in Weyburn, Saskatchewan in the
third quarter of 2007, the Company is confident that this market will generate
higher levels of demand for safety equipment and services than the previous
owner was able to satisfy. To this end, the Company continues to move more
equipment from Alberta to this market and expand its staffing levels.
    The Company believes its continued investment in sector and geographic
diversification, organic growth, skilled safety professionals and internal
process improvements and operational efficiency will ultimately increase
shareholder value.


    
    Quarterly Results
                                                    2007
    -------------------------------------------------------------------------
                                      Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Revenue                    $  26,464   $  23,578   $  19,352   $  27,948
    Net earnings (loss)           (9,173)    (15,920)     (3,113)        904
    EBITDA(1)                      2,601       1,376      (1,790)      4,802
    -------------------------------------------------------------------------
    Income (loss) per share
     - basic and diluted       $   (0.25)  $   (0.42)  $   (0.08)  $    0.02
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See Non-GAAP Measures for(1)


                                                    2006
    -------------------------------------------------------------------------
                                      Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Revenue                    $  26,198   $  26,952   $  19,924   $  27,465
    Net earnings (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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See Non-GAAP Measures for(1)
    

    HSE's business has a somewhat seasonal component. Revenue for the
Oilfield services side of the business tends to be highest in the first and
fourth quarters and lower in the second quarter 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. On the Industrial
revenue side, the second and third quarters tends to be higher due to greater
levels of safety service projects supporting scheduled facility maintenance
and repair activities at client sites. Environment revenue tends to be less
seasonal in nature.

    Related Party Transactions

    During the year, the Company had the following transactions with related
parties all of which are measured at exchange amounts, which approximate an
arm's length equivalent at fair market value:

    
    -   Included in accounts receivable is a promissory note of $49,
        (2006 - $49) which is due from an officer and director of the
        Company. This note is payable on demand. In 2007, the Company paid
        rent and property taxes to a corporation related to this same officer
        and director of the Company in the amount of $284 (2006 - $285). The
        rent is for a regional office.

    -   In 2007, the Company also paid rent and property taxes of
        $64 (2006 - $41), and $371 (2006 - $342) for regional offices to two
        different corporations. In 2007, the Company also paid rent of
        $21 (2006 - $nil) for a regional office to a corporation and received
        $3 (2006 - $nil) on the sale of miscellaneous small tools from the
        same corporation. Each corporation is controlled by different members
        of senior management of the Company.
    

    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 various other 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 is 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.

    Impairment of Long-Lived Assets

    The Company evaluates potential impairment of long-lived assets and
intangible assets 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. Parts of our business
are cyclical in nature 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.

    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 Pronouncements

    On January 1, 2007, the Company adopted the new accounting standards
issued by the Canadian Institute of Chartered Accountants regarding the
recognition, measurement, disclosure and presentation of financial
instruments. Under these standards, financial instruments must be classified
into one of five categories: (i) held-for-trading; (ii) held-to-maturity;
(iii) loans and receivables; (iv) available-for-sale; and (v) other financial
liabilities. The new standards require that all financial instruments within
the scope of the standards, including all derivative instruments, be
recognized on the balance sheet initially at fair value. Subsequent
measurement of all financial assets and liabilities - except those in the
held-for-trading and available-for-sale categories - must be determined at
amortized cost using the effective interest rate method. Held-for-trading
financial instruments are measured at fair value with changes in fair value
recognized in earnings. Available-for-sale financial instruments are measured
at fair value with changes in fair value recognized in comprehensive income
until the investment is derecognized or impaired at which time the amounts
would be recorded in net earnings.
    Under adoption of these new standards, the Company designated accounts
receivable as "loans and receivables", which are measured at amortized cost.
Short-term investments have been designated as "held-for-trading", which are
measured at fair values with changes in such value included in earnings.
Accounts payable and accrued liabilities and long-term debt are classified as
"other financial liabilities" which are measured at amortized cost. We have
classified deferred financing costs of $29 previously included in prepaid
expenses and other assets as unamortized debt issues costs which now reduce
the carrying value of the long-term debt. The debt issue costs will be
accreted to the carrying value of long-term debt using the effective interest
method. Comparative amounts for prior periods have not been restated.
    The Company also adopted as of January 1, 2007 new standards with respect
to comprehensive income. The new standards require a statement of
comprehensive income, if there are items that give rise to comprehensive
income or loss. The Company did not identify any such items giving rise to
comprehensive income or loss in the year ended December 31, 2007, or that
would result in an adjustment to opening balances for accumulated other
comprehensive income or loss.
    The Company was also required to adopt new accounting standards with
respect to hedging activities. As the Company does not currently have a
hedging program that is affected by this accounting standard, the adoption of
these standards has no impact on the financial statements.
    Three new Canadian accounting standards have been issued which will
require additional disclosure in the Company's financial statements commencing
January 1, 2008 regarding the Company's financial instruments as well as its
capital and how it is managed. The third standard relates to inventory and is
effective for interim and annual financial statements beginning on or after
January 1, 2008. The new standard requires that inventory be carried at the
lower of cost and net realizable value, provides more guidance on cost and
requires impairment testing as well as expanded disclosures.

    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.

    Business Cyclicality

    The demand for HSE's Oilfield 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. 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 cyclical demand swings in the Company's activity
levels and operating results. As the Company's client base diversifies to
material levels, so does the exposure to business cycles and contraction risks
in other industrial sectors such as forestry, pulp and paper, automotive,
manufacturing and other segments of the economy that could experience reduced
demand or significant fluctuations of the market value of their finished
goods.

    Availability of Qualified Staff

    The Company's ability to provide reliable service is dependent upon
attracting and retaining skilled employees. 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 competitively priced financing
are unavailable.

    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.
    In March 2008, the Company was served with a legal claim relating to a
company acquired in 2006. Due to the recency of the receipt of this claim the
outcome is undeterminable at this time.

    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, 2007.

    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.
    During 2006, the Company identified revenue completeness, internal
control over financial reporting for acquisitions, segregation of duties and
technical expertise as internal control weaknesses. In the current period,
Management is satisfied that it has implemented adequate compensating controls
to address these weaknesses.
    During the third quarter of 2007, the Company acquired the outstanding
shares of PWS of Weyburn, Saskatchewan in a business combination to be
accounted for using the purchase method. The Weyburn operation has been
integrated into our operations, which included assessing and designing
internal controls over financial reporting and disclosure controls and
procedures.

    Common Shares Outstanding

    At March 19, 2008, there were 37,567,675 common shares of HSE
outstanding, compared with 37,462,342 common shares outstanding as at December
31, 2006.

    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 and bank charges, 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

    -------------------------------------------------------------------------
    For the years ended December 31             2007        2006        2005
    -------------------------------------------------------------------------
    Net earnings (loss)                    $ (27,302)  $   3,461   $   1,833
    Add (deduct):
      Amortization                             8,090       7,618       3,618
      Impairment of goodwill and
       intangible assets                      25,505           -           -
      Stock-based compensation                 1,131         977         342
      Interest and bank charges                1,254       1,398         301
      Foreign exchange loss (gain)                36         (93)         16
      Loss on disposal of property
       and equipment                             939         406         277
      Income tax                              (2,664)      1,545       1,209
    -------------------------------------------------------------------------
    EBITDA                                 $   6,989   $  15,312   $   7,596
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Quarterly EBITDA Calculation

                                                    2007
    -------------------------------------------------------------------------
                                      Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Net earnings (loss)        $  (9,173)  $ (15,920)  $  (3,113)  $     904
    Add (deduct):
      Amortization                 2,243       2,004       1,955       1,888
      Impairment of goodwill
       and intangible assets      10,505      15,000           -           -
      Stock-based compensation       255         186         333         357
      Interest and bank charges      311         309         302         332
      Foreign exchange
       loss (gain)                    12          22           3          (1)
      Loss (gain) on disposal
       of property and
       equipment                     103          99          30         707
      Income taxes                (1,655)       (324)     (1,300)        615
    -------------------------------------------------------------------------
    EBITDA                     $   2,601   $   1,376   $  (1,790)  $   4,802
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                    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
      Impairment of goodwill
       and intangible assets           -           -           -           -
      Stock-based compensation       285         312         231         149
      Interest and bank charges      403         346         359         290
      Foreign exchange
       loss (gain)                   (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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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.

    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.



    Management's Report

    To the shareholders of
    HSE Integrated Ltd.

    The accompanying consolidated financial statements of HSE Integrated Ltd.
and all of the information in this annual report are the responsibility of
Management and have been approved by the HSE Board of Directors.
    Management has prepared the consolidated financial statements in
accordance with Canadian generally accepted accounting principles and where
alternative accounting methods exist, Management has chosen those that it
deems most appropriate.
    Financial statements are not precise since they include amounts based on
estimates and judgments. Such amounts have been determined on a reasonable
basis to ensure the financial statements are presented fairly in all material
respects. Management has prepared the financial information in this annual
report and has ensured it is consistent with the consolidated financial
statements.
    The Company maintains internal accounting and administrative controls
designed to provide reasonable assurance that the financial information is
relevant, reliable, and accurate and that the Company's assets are
appropriately accounted for and adequately safeguarded.
    The HSE Board of Directors is responsible for ensuring Management
fulfills its responsibilities for financial reporting and for reviewing and
approving the financial statements. This is carried out principally through
the Audit Committee. HSE's auditors have full access to the audit committee.


    
    David L. Yager                            Tony Hidalgo C.A.
    ------------------------                  ------------------------
    Chief Executive Officer                   Chief Financial Officer

    March 28, 2008
    


    Auditors' Report to the Shareholders

    We have audited the consolidated balance sheets of HSE Integrated Ltd. as
at December 31, 2007 and 2006 and the consolidated statements of earnings
(loss) and retained earnings (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
    We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
    In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2007 and 2006 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.


    CHARTERED ACCOUNTANTS
    Calgary, Alberta
    March 28, 2008



    
    HSE Integrated Ltd.
    Consolidated Balance Sheets

                                                      Year ended  Year ended
                                                        December    December
    (Stated in thousands)                                31 2007     31 2006
    -------------------------------------------------------------------------

    ASSETS
    Current
      Cash and cash equivalents                        $       -   $   6,551
      Short term investments                                   -         802
      Accounts receivable                                 24,851      22,892
      Inventory                                              216         221
      Prepaid expenses and other assets                    1,758       1,977
      Income taxes recoverable                               720           -
                                                      -----------------------
                                                          27,545      32,443

    Property and equipment (note 6)                       41,314      44,745
    Goodwill (note 4)                                          -      23,641
    Intangible assets (note 4)                             4,513       6,109
                                                      -----------------------

                                                       $  73,372   $ 106,938
                                                      -----------------------
                                                      -----------------------

    LIABILITIES
    Current
      Bank indebtedness                                $     616   $       -
      Accounts payable and accrued liabilities             8,220       9,540
      Income taxes payable                                     -       1,602
      Current portion of obligations
       under capital leases (note 8)                       1,328       1,458
      Current portion of long-term debt (note 7)             216       4,199
                                                      -----------------------
                                                          10,380      16,799

    Obligations under capital leases (note 8)              1,453       3,039
    Long-term debt (note 7)                               14,995      12,834
    Future income taxes (note 9)                           5,748       7,454
                                                      -----------------------
                                                          32,576      40,126
                                                      -----------------------
    SHAREHOLDERS' EQUITY
      Share capital (note 10)                             60,036      61,471
      Contributed surplus (note 11)                        4,144       1,423
      Retained earnings (deficit)                        (23,384)      3,918
                                                      -----------------------
                                                          40,796      66,812
                                                      -----------------------

                                                       $  73,372   $ 106,938
                                                      -----------------------
                                                      -----------------------

    Commitments and contingencies (note 14 and note 17)

       See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd.
    Consolidated Statements of Earnings (Loss) and Retained Earnings
    (Deficit)

                                                      Year ended  Year ended
    (Stated in thousands,                               December    December
     except per share amounts)                           31 2007     31 2006
    -------------------------------------------------------------------------

    REVENUE                                            $  97,342   $ 100,539
                                                      -----------------------

    COSTS
      Operating and materials                             80,829      75,655
      Selling, general and administrative                  9,524       9,572
      Amortization of property and equipment               6,844       6,429
      Amortization of intangible assets                    1,246       1,189
      Stock-based compensation (note 12)                   1,131         977
      Interest on long-term debt                           1,167       1,317
      Other interest and bank charges                         87          81
      Foreign exchange loss (gain)                            36         (93)
      Loss on disposal of property and equipment             939         406
                                                      -----------------------
                                                         101,803      95,533
                                                      -----------------------

    EARNINGS (LOSS) BEFORE THE UNDERNOTED ITEMS           (4,461)      5,006
                                                      -----------------------

      Goodwill impairment (note 4)                       (25,003)          -
      Intangible asset impairment (note 4)                  (502)          -
                                                      -----------------------
                                                         (25,505)          -
                                                      -----------------------

    EARNINGS (LOSS) BEFORE INCOME TAX                    (29,966)      5,006
                                                      -----------------------

    Income taxes (note 9)
      Current (recovery)                                    (731)      1,811
      Future reduction                                    (1,933)       (266)
                                                      -----------------------
                                                          (2,664)      1,545
                                                      -----------------------

    NET EARNINGS (LOSS)                                  (27,302)      3,461

    RETAINED EARNINGS, beginning of year                   3,918         457

    RETAINED EARNINGS (deficit), end of year           $ (23,384)  $   3,918
                                                      -----------------------
                                                      -----------------------

    Earnings (loss) per share (note 10)
      Basic and diluted                                $   (0.73)  $    0.10
                                                      -----------------------
                                                      -----------------------

    See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Consolidated Statements of Cash Flows
                                                      Year ended  Year ended
                                                        December    December
    (Stated in thousands)                                31 2007     31 2006
    -------------------------------------------------------------------------
    Cash provided by (used in)

    Operations
    Net earnings (loss)                                $ (27,302)  $   3,461
      Charges to income not involving cash
        Goodwill impairment (note 4)                      25,003           -
        Intangible asset impairment (note 4)                 502           -
        Amortization                                       8,090       7,618
        Stock-based compensation (note 12)                 1,131         977
        Future income tax reduction                       (1,933)       (266)
        Loss on disposal of property and equipment           939         406
    Change in non-cash working capital (note 15)          (4,914)     (3,713)
                                                       ----------------------

    Cash provided by (used in) operations                  1,516       8,483
                                                       ----------------------
                                                       ----------------------

    Financing
      Bank indebtedness                                      616           -
      Repayment of operating line of credit                    -      (1,597)
      Repayment of obligations under capital leases       (1,855)     (1,744)
      Issuance of long-term debt                               -      23,435
      Repayment of long-term debt                         (1,964)     (8,543)
      Issuance of share capital, net of costs                  6      13,235
      Settlement of liabilities at acquisition (note 5)        -      (3,318)
                                                       ----------------------

    Cash provided by (used in) financing                  (3,197)     21,468
                                                       ----------------------
                                                       ----------------------

    Investing
      Purchase of property and equipment                  (4,108)     (6,966)
      Acquisitions (note 5)                               (1,884)    (17,479)
      Proceeds from disposal of property and equipment     1,122         663
                                                       ----------------------
                                                       ----------------------

    Cash used in investing                                (4,870)    (23,782)
                                                       ----------------------
                                                       ----------------------

    Net increase (decrease) (decrease) increase in
     cash and cash equivalents                            (6,551)      6,169

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

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

    Supplementary cash flow information
      Interest paid                                    $   1,254   $   1,323
      Income taxes paid                                $   1,405   $   1,010
                                                       ----------------------
                                                       ----------------------

      See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Notes to the Consolidated Financial Statements

    For the years ended December 31, 2007 and 2006
    (Stated in thousands of dollars)
    -------------------------------------------------------------------------

    NOTE 1 - 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, and 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, technology and intellectual property, are carried at
    cost less accumulated amortization. Amortization is calculated on a
    straight line basis over a period of 1 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,
    which represents fair value. 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 collectability 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 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 is 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 year they occur.

    Per share amounts

    Basic per share amounts are calculated using the weighted average number
    of common shares outstanding during the year. Under the treasury stock
    method, diluted per share amounts are 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.

    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 collectability. 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
    interest rate.

    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 may differ, possibly materially, from
    those previously estimated. Many of the conditions affecting these
    assumptions and estimates are outside of the Company's control.

    Comparative figures

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

    Other Recent Pronouncements

    Three new Canadian accounting standards have been issued. Two of the
    standards will require additional disclosure in the Company's financial
    statements commencing January 1, 2008 about the Company's financial
    instruments as well as its capital and how it is managed. The third
    standard relates to inventory and is effective for interim and annual
    financial statements beginning on or after January 1, 2008. The new
    standard requires that inventory be carried at the lower of cost and net
    realizable value, provides more guidance on cost and requires impairment
    testing as well as expanded disclosures.

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

    NOTE 3 - CHANGE IN ACCOUNTING POLICIES

    On January 1, 2007, the Company adopted the new accounting standards
    issued by the Canadian Institute of Chartered Accountants regarding the
    recognition, measurement, disclosure and presentation of financial
    instruments. Under these standards, financial instruments must be
    classified into one of five categories: (i) held-for-trading; (ii) held-
    to-maturity; (iii) loans and receivables; (iv) available-for-sale; and
    (v) other financial liabilities. The new standards require that all
    financial instruments within the scope of the standards, including all
    derivative instruments, be recognized on the balance sheet initially at
    fair value. Subsequent measurement of all financial assets and
    liabilities - except those in the held-for-trading and available-for-sale
    categories - must be determined at amortized cost using the effective
    interest rate method. Held-for-trading financial instruments are measured
    at fair value with changes in fair value recognized in earnings.
    Available-for-sale financial instruments are measured at fair value with
    changes in fair value recognized in comprehensive income until the
    investment is derecognized or impaired at which time the amounts would be
    recorded in net earnings.

    Under adoption of these new standards, the Company designated accounts
    receivable as "loans and receivables", which are measured at amortized
    cost. Short-term investments have been designated as "held-for-trading",
    which are measured at fair values with changes in such value included in
    earnings. Accounts payable and accrued liabilities, long-term debt and
    capital lease obligations are classified as "other financial liabilities"
    which are measured at amortized cost.

    At the inception of these new standards we have classified deferred
    financing costs of $29 previously included in prepaid expenses and other
    assets, as unamortized debt issues debt issue costs, which now reduces
    the carrying value of the long-term debt. The debt issue costs will be
    accreted to the carrying value of long-term debt using the effective
    interest method. Comparative amounts for prior periods have not been
    restated.

    The Company also adopted as of January 1, 2007 new standards with respect
    to comprehensive income. The new standards require a statement of
    comprehensive income, if there are items that give rise to comprehensive
    income or loss. The Company did not identify any such items giving rise
    to comprehensive income or loss in the year ended December 31, 2007 or
    that would result in an adjustment to opening balances for accumulated
    other comprehensive income or loss.

    The Company was also required to adopt new accounting standards with
    respect to hedging activities. As the Company does not currently have a
    hedging program that is impacted by this accounting standard, the
    adoption of these standards has no effect on the financial statements.

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

    NOTE 4 - GOODWILL AND INTANGIBLE ASSET IMPAIRMENT

    Management has, in accordance with the Company's accounting policy for
    goodwill, determined a goodwill impairment of $25,003. The Company has
    experienced reduced business activity relating primarily to weaker
    economic fundamentals faced by customers operating in the conventional
    upstream oil and gas industry.


    Goodwill                                            December    December
                                                         31 2007     31 2006
                                                       ----------------------

    Balance, January 1                                 $  23,641   $   7,276
    Goodwill acquired                                      1,362      16,338
    Impairment of goodwill                               (25,003)          -
    Goodwill adjustment of prior year acquisition              -          27
                                                       ----------------------
    Balance, December 31                               $       -   $  23,641
                                                       ----------------------
                                                       ----------------------

    The Company also reviewed for impairment its purchased intangible assets
    subject to amortization. As a result, Management has, in accordance with
    the Company's accounting policy for long-lived assets, determined an
    intangible asset impairment of $502, on non-compete agreements.


    Intangible
    assets                             December 31, 2007
                   ----------------------------------------------------------
                                          Accumulated              Net Book
                       Cost     Acquired Amortization  Impairment    Value
                   ----------------------------------------------------------

    Marketing
     license       $     100                     100               $       -
    Customer
     relationships     5,388         140       1,262           -       4,266
    Non-compete
     agreements        1,786          12       1,132         502         164
    Technological
     knowledge           104           -          21           -          83
                   ----------------------------------------------------------
                   $   7,378         152       2,515         502   $   4,513
                   ----------------------------------------------------------
                   ----------------------------------------------------------

                                       December 31, 2006
                   ----------------------------------------------------------
                                          Accumulated              Net Book
                       Cost              Amortization                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
                   ----------------------------------------------------------
                   ----------------------------------------------------------

    NOTE 5 - ACQUISITIONS

    2007

    On July 1, 2007, the Company acquired the shares of Prairie Wide Safety
    Ltd. (PWS) of Weyburn, Saskatchewan in a business combination to be
    accounted for using the purchase method. PWS serves the hydrocarbon-
    producing region of southeast Saskatchewan by providing complete oilfield
    and industrial safety services to drilling, completion, well servicing
    and field processing operations. The purchase consideration was
    determined based upon a predetermined formula, not to exceed $2.2 million
    plus the assumption of debt, based upon historical results, with
    additional consideration contingent upon performance measures achieved in
    the first year from the acquisition date. The results of operations are
    included in the accounts from date of acquisition. Estimated
    consideration and acquisition costs were comprised of 100,000 common
    shares of the Company valued at $1.64 per share, $1,884 cash and the
    assumption of debt.

    The purchase price allocation has not been completed, and certain items
    such as fair value of assets and liabilities and estimates for contingent
    consideration as of the acquisition date have not been finalized.


                                                   Prairie Wide Safety Ltd.
    -------------------------------------------------------------------------
    Net assets acquired and liabilities assumed
    -------------------------------------------------------------------------
      Non-cash working capital                                46
      Property and equipment                               1,365
      Intangible assets                                      152
      Goodwill                                             1,362
      Bank indebtedness                                     (119)
      Long-term debt                                        (392)
      Capital lease obligations                             (139)
      Future income taxes                                   (227)
    -------------------------------------------------------------------------
                                                           2,048
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Consideration paid
    -------------------------------------------------------------------------
      Cash                                                 1,884
      Issuance of Common shares                              164
    -------------------------------------------------------------------------
                                                           2,048
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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.

    As of December 31, 2007, $960 of accrued consideration has been paid in
    cash. The remaining $1,040 forms part of long-term debt on the balance
    sheet.

    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 2006.


                       KSS &                   Front
                         KMS      Sentry        Line       Bears       Total
                   ----------------------------------------------------------
    Net assets
     acquired and
     liabilities
     assumed
      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
                   ----------------------------------------------------------
                   ----------------------------------------------------------

    NOTE 6 - PROPERTY AND EQUIPMENT

                                                    December 31, 2007
                                           ----------------------------------
                                                       Accumulated  Net Book
                                                Cost  Amortization     Value
    -------------------------------------------------------------------------
    Land                                   $     356   $       -   $     356
    Buildings and improvements                 1,619         369       1,250
    Safety equipment                          39,623      16,878      22,745
    Vehicles                                  15,171       5,664       9,507
    Vehicles and equipment under capital
     lease                                     5,639       1,863       3,776
    Furniture and equipment                    1,225         434         791
    Other property and equipment               6,055       3,166       2,889
    -------------------------------------------------------------------------
    Total property and equipment           $  69,688   $  28,374   $  41,314
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                    December 31, 2006
                                           ----------------------------------
                                                       Accumulated  Net Book
                                                Cost  Amortization     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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    A review for impairment of property and equipment was conducted at
    December 31, 2007. This analysis consisted of comparing the carrying
    value of the property and equipment at year end to the sum of the
    undiscounted future cash flows expected to result from its use and
    eventual disposition. Based upon this review, Management concluded that
    an impairment did not exist at year end, and therefore no write-down of
    property and equipment was required.

    NOTE 7 - OPERATING FACILITIES and LONG-TERM DEBT

    During the second quarter, the Company entered an agreement with its
    current lender for credit facilities. The credit facilities include a
    $25 million three year interest-only revolving facility and a
    $7.5 million operating facility.

    The credit facilities bear interest at the bank's prime rate (or U.S.
    base rate) plus up to 2.25%, or at bankers' acceptance rates with
    a variable stamping fee of 1.50% to 3.75%. An additional standby
    fee ranging between 0.20% to 0.60% per annum is also required on
    the unused portion of the credit facilities.

    The revolving facility matures on June 25, 2010, with an ability to
    extend the term at the lender's option. The operating facility is
    renewable annually and is margined to accounts receivable. The operating
    facility is subject to covenants that are typical for this type of
    facility. The credit facilities are collateralized under a general
    security agreement.

    Deferred financing costs associated with the new financing facilities
    have been shown as a reduction in the carrying value of long term debt
    and will be expensed over the term of the debt using the effective
    interest rate method.

    During 2006 and the first quarter 2007, the Company had the following
    bank credit facilities:

    a)  a $20,000 non-revolving installment credit facility which amortized
        over five years from date of draw, bearing interest at the bank's
        prime rate, and was 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)  $10,000 (seasonally reduced in June to November to $8,000) operating
        facility bearing interest at the bank's prime rate. This facility was
        subject to margin requirements based on eligible accounts receivable.
    c)  A $5,000 revolving installment credit facility which amortized over
        five years from date of draw and bears interest at the bank's prime
        rate.

    The credit facilities were secured by general security agreements and
    required maintenance of certain financial ratios and other covenants.

                                                        December    December
                                                         31 2007     31 2006
                                                       ----------------------
    Equipment financing contracts bearing interest at
     rates averaging 3.13% (2006 - 1.44%), payable in
     blended monthly payments of $19 (2006 - $27)
     secured by specific equipment                     $     391   $     438

    Non-revolving credit facility loan as noted above,
     payable in quarterly principal payments of $988
     (2006 - quarterly principal payments of $988)             -      15,805

    Three year interest-only revolving credit facility    13,829           -
                                                        ---------------------
                                                          14,220      16,243
    Accrued consideration on share purchase acquisition    1,040         790
                                                        ---------------------
                                                          15,260      17,033
    Less: current portion                                   (216)     (4,199)
                                                        ---------------------
                                                          15,044      12,834
    Less: unamortized debt issue costs                       (49)          -
                                                        ---------------------

                                                       $  14,995   $  12,834
                                                        ---------------------
                                                        ---------------------

    Outstanding principal repayments are due as follows:

      2007                                             $       -       4,199
      2008                                                   216       4,898
      2009                                                 1,153       3,985
      2010                                                13,871       3,951
      2011                                                    20           -
      2012                                                     -           -
                                                        ---------------------
                                                          15,260      17,033
      Less: current portion                                 (216)     (4,199)
                                                        ---------------------
                                                       $  15,044      12,834
                                                        ---------------------
                                                        ---------------------


    NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASE

    The amounts due under capital lease arrangements are repayable in blended
    monthly payments of $125 (2006 - $145) and bear interest at rates
    averaging 5.50% (2006 - 5.37%) per annum. On certain leases, the Company
    has options to acquire the leased assets at various times throughout term
    to 2012.

                                                        December    December
                                                         31 2007     31 2006
    -------------------------------------------------------------------------
    2007                                               $       -   $   1,710
    2008                                                   1,488       1,690
    2009                                                   1,145       1,238
    2010                                                     303         291
    2011                                                     111          94
    2012                                                       6           -
    -------------------------------------------------------------------------
                                                           3,053       5,023
    Less: interest                                          (272)       (526)
    -------------------------------------------------------------------------
                                                           2,781       4,497
    Less: current portion                                 (1,328)     (1,458)
    -------------------------------------------------------------------------
                                                       $   1,453   $   3,039
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    NOTE 9 - INCOME TAXES

                                                        December    December
                                                         31 2007     31 2006
                                                        ---------------------
    a) Provision for income taxes

    Earnings (loss) before income taxes                $ (29,966)  $   5,006
                                                        ---------------------
                                                        ---------------------
    Expected income tax (recovery) at 32.5%
     (2006 - 32.5%)                                    $  (9,730)  $   1,625
    Non-deductible/non-taxable amounts                     8,562         334
    Income tax rate reductions                            (1,125)       (261)
    Other                                                   (371)       (153)
                                                        ---------------------

    Income tax expense (recovery)                      $  (2,664)  $   1,545
                                                        ---------------------
                                                        ---------------------

                                                            2007        2006
                                                        ---------------------
    b) Future income tax assets and liabilities are
        as follows:

    Property and equipment                             $   5,084   $   6,252
    Intangible assets                                        970       1,763
    Share issue and financing costs                         (306)       (561)
                                                        ---------------------

    Future income tax liability                        $   5,748   $   7,454
                                                        ---------------------
                                                        ---------------------

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

    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:

                                  December 31 2007        December 31 2006
                              -----------------------------------------------
    Common shares                 Shares      Amount      Shares      Amount
                              (in thousands)          (in thousands)
                              -----------------------------------------------

    Balance, January 1            37,462   $  59,862      29,915   $  36,559
    Changes (net of share
     issue costs):
      Private placement                -           -       3,850      12,515
      Issued on acquisition
       of shares                       -           -       3,167       9,519
      Issued on acquisition
       of PWS (note 5)               100         164           -           -
      Issued on conversion
       of agent's warrants             -           -         445       1,070
      Issued on conversion
       of warrants                     -           -          38         110
      Issued on exercise
       of options                      6          10          47          89
                              -----------------------------------------------

    Balance, December 31          37,568   $  60,036      37,462   $  59,862
                              -----------------------------------------------
                              -----------------------------------------------

    c)  Warrants:

                                  December 31 2007        December 31 2006
                              -----------------------------------------------
    Warrants                    Warrants      Amount    Warrants      Amount
                             (in thousands)          (in thousands)
                              -----------------------------------------------

    Balance, January 1             3,144   $   1,609       3,182   $   1,628
      Converted to common
       shares                          -           -         (38)        (19)
      Expired                     (3,144)     (1,609)          -           -
                              -----------------------------------------------

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


                                  December 31 2007        December 31 2006
                              -----------------------------------------------
    Agent's Warrants            Warrants      Amount    Warrants      Amount
                             (in thousands)          (in thousands)
                              -----------------------------------------------

    Balance, January 1                 -   $       -         445   $     224
      Converted to common
       shares                          -           -        (445)       (224)
                              -----------------------------------------------

    Balance, December 31               -   $       -           -   $       -
                              -----------------------------------------------
                              -----------------------------------------------

    d)  Per share amounts:

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

                                                        December    December
                                                         31 2007     31 2006
                                                       ----------------------
    Basic weighted average number of common shares
     outstanding during the year                          37,516      35,807
                                                       ----------------------
                                                       ----------------------

    Diluted weighted average number of common shares
     outstanding during the year                          37,516      36,053
                                                       ----------------------
                                                       ----------------------

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

    NOTE 11 - CONTRIBUTED SURPLUS

                                                        December    December
                                                         31 2007     31 2006
                                                       ----------------------

    Balance, January 1                                 $   1,423   $     462
    Stock compensation expense - employee options          1,116         977
    Exercise of stock options                                 (4)        (16)
    Warrants - expired                                     1,609           -
                                                        ---------------------
    Balance, December 31                               $   4,144   $   1,423
                                                        ---------------------
                                                        ---------------------

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

    NOTE 12 - STOCK-BASED COMPENSATION PLANS

    Incentive stock option plan

    The weighted average fair value of options granted for the years ended
    December 31, 2007 and 2006 are $2.14 and $2.24 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:

                                                December 31      December 31
                                                   2007             2006
                                              -------------------------------
    Vesting period (years)                                3                3
    Risk-free interest rate                    3.94 - 4.11%     3.89 - 4.08%
    Expected life (years)                                 5                5
    Price volatility                                135.24%   55.46 - 96.00%
                                              -------------------------------
                                              -------------------------------

    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
    an exercise price no less than market on the grant date. The term of
    options granted does not exceed five years.

    Information about outstanding stock options is as follows:

                                    December 31             December 31
                                       2007                    2006
                              ----------------------- -----------------------
                                            Weighted                Weighted
                                             Average                 Average
                                            Exercise                Exercise
                                 Options       Price     Options       Price
                              -----------------------------------------------
    Outstanding, beginning
     of period                 1,924,501   $    2.24   1,022,333   $    1.74
    Granted                      667,500        1.71   1,053,000        2.83
    Exercised                     (5,333)       1.06     (47,332)       1.36
    Forfeited                   (206,670)       2.12    (103,500)       2.69
                              -----------------------------------------------
    Outstanding,
     end of period             2,379,998   $    2.15   1,924,501   $    2.24
                              -----------------------------------------------
                              -----------------------------------------------
    Exercisable at end
     of period                   996,143   $    2.06     445,442   $    1.69
                              -----------------------------------------------
                              -----------------------------------------------

    The following table summarizes information about stock options
    outstanding at December 31, 2007:

                                               Weighted
                           Exercise             average
        Options              prices           remaining               Number
    outstanding                   $                life          exercisable
    -------------------------------------------------------------------------
         28,000           0.50-1.05                1.15               28,000
        276,999           1.06-1.60                2.09              214,322
      1,238,333           1.61-2.15                3.46              397,167
        330,000           2.16-2.70                3.04              186,663
        506,666           2.71-4.50                3.26              169,991
    -------------------------------------------------------------------------
      2,379,998                2.15                3.17              996,143
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Deferred share unit plan

    Effective November 13, 2006, the Company adopted 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. The units were revalued at December
    31, 2007 and the expense for 2007 was $15 (2006 - $nil).

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

    NOTE 13 - RELATED PARTY TRANSACTIONS

    During the year, the Company had the following transactions with related
    parties, all of which are  measured at exchange amounts, which
    approximate an arm's length equivalent at fair market value:

    -   Included in accounts receivable is a promissory note of $49 (2006 -
        $49) which is due from an officer and Director of the Company. This
        note is payable on demand. In 2007, the Company paid rent and
        property taxes to a corporation related to this same Officer and
        Director of the Company in the amount of $284 (2006 - $285). The
        rent is for a regional office.

    -   In 2007, the Company also paid rent and property taxes of $64 (2006 -
        $41), and $371 (2006 - $342) for regional offices to two different
        corporations. In 2007, the Company also paid rent of $21 (2006 -
        $nil) for a regional office to a corporation and received $3 (2006 -
        $nil) on the sale of miscellaneous small tools from the same
        corporation. Different members of senior management of the Company
        control each corporation.

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

    NOTE 14 - COMMITMENTS

    The Company leases certain shop and office space and vehicles and
    equipment under operating leases for periods ending between 2008 and
    2012. Future minimum lease payments under these leases in each of the
    next five years are as follows:

                                              Rental   Operating
                                          facilities      leases       Total
                                         ------------------------------------
    2008                                   $   2,514   $   1,717   $   4,231
    2009                                       2,093       1,389       3,482
    2010                                       1,641       1,300       2,941
    2011                                         833         692       1,525
    2012                                         417          18         435
                                         ------------------------------------

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

    NOTE 15 - SUPPLEMENTARY CASH FLOW INFORMATION

    Increase (decrease) in non-cash                     December    December
     working capital from operations                     31 2007    31  2006
                                                        ---------------------

    Short term investments                             $     802   $       -
    Accounts receivable                                   (1,730)      3,431
    Inventory                                                 40         358
    Prepaid expenses and other assets                        229         267
    Accounts payable and accrued liabilities              (1,918)     (8,498)
    Income tax payable                                    (2,337)        729
                                                        ---------------------

    Net decrease in non-cash working capital           $  (4,914)  $  (3,713)
                                                        ---------------------
                                                        ---------------------

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

    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
    periods ended December 31, 2007 and 2006, the Company had no customer
    representing more than 10% of revenue.

    Revenue by customer group is as follows:

                                                        December    December
                                                         31 2007     31 2006
                                                        ---------------------
    Oilfield                                           $  43,473   $  66,794
    Industrial                                            41,618      23,459
    Environment                                           12,251      10,286
                                                        ---------------------
    Total Revenue                                      $  97,342   $ 100,539
                                                        ---------------------
                                                        ---------------------

    As a % of Revenue:

    Oilfield                                               44.7%       66.5%
    Industrial                                             42.7%       23.3%
    Environment                                            12.6%       10.2%
                                                        ---------------------
    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 applicable. Although
    it may not be possible to estimate accurately 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.

    In March 2008, the Company was served with a legal claim relating to a
    company acquired in 2006. Due to the recency of the receipt of this claim
    the outcome is undeterminable at this time.

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

    %SEDAR: 00011733E




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

Organization Profile

HSE Integrated Ltd.

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