UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from __________ to __________

Commission file number: 000-19580

T-3 ENERGY SERVICES, INC.

Registrant’s telephone number, including area code: (713) 996-4110

Securities registered pursuant to Section 12(b) of the Act: None.

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

Title of Each Class
Common Stock, par value $.001 per share
Class B Warrant
Class C Warrant
Class D Warrant

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No  o

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes o  No þ

     The aggregate market value of common stock held by non-affiliates was $9,008,681 at June 30, 2004. As of March 30, 2005, there were 10,581,986 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     The registrant’s proxy statement, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, with respect to the 2005 annual meeting of stockholders, is incorporated by reference into Part III of this report on Form 10-K.

TABLE OF CONTENTS

FORM 10-K

     Unless otherwise indicated, all references to “we,” “us,” “our,” “our company” or “T-3” include T-3 Energy Services, Inc. and all of its subsidiaries.

PART I

Item 1. Business

General

     We manufacture, remanufacture and distribute oilfield products and services to the upstream and downstream oil and gas industry primarily in the Gulf Coast region. In addition, we expanded into the Canadian market through the acquisition of the Oilco Group of Canada (“Oilco”) during the fourth quarter of 2004. Our customers include companies engaged in exploration, production, completion, transportation and processing of oil and gas, and drilling and well servicing contractors. We have historically operated in three segments; however, during the second quarter of 2004, the Company sold substantially all of the remaining assets of its Products segment, other than certain assets used in the Company’s custom coatings business. Accordingly, the Products segment’s results of operations for 2004, 2003 and 2002 have been reported as discontinued operations. Due to the sale of substantially all of the assets of the Products segment and since the Company’s custom coatings business is insignificant to the consolidated results of the Company and also has similar economic characteristics, customers and products to the Pressure Control segment, the Company realigned its operating segments during June 2004. The three historical reporting segments of Pressure Control, Products and Distribution now operate under two reporting segments: Pressure Control and Distribution. All historical segment results reflect the new operating structure.

     We were formerly a Texas corporation named Industrial Holdings, Inc. (“IHI”). On December 17, 2001, T-3 Energy Services, Inc., a private Delaware corporation incorporated in October 1999 (“former T-3”), merged into IHI, with IHI surviving the merger. Immediately following the merger, the combined company was reincorporated in Delaware under the name “T-3 Energy Services, Inc.” and implemented a one-for-ten reverse stock split of its common stock.

     The merger was treated for accounting purposes as a purchase of IHI by former T-3 (a reverse acquisition) in a purchase business transaction. The purchase method of accounting requires that we carry forward former T-3’s net assets at their historical book values and reflect IHI’s net assets at their estimated fair market values, with the fair market value of the purchase consideration in excess of the fair market value of IHI’s identifiable net assets treated as goodwill.

     The Company’s principal executive offices are located at 13111 Northwest Freeway, Suite 500, Houston, Texas 77040, and its telephone number is (713) 996-4110.

Recent Developments

     In mid-year 2003, we hired a new management team that undertook an in-depth evaluation of our businesses and products with the purpose of maximizing stockholder value and positioning T-3 for future growth. In the fourth quarter of 2003, management completed its evaluation and developed a new strategy and operating plan.

     As part of the strategy, we committed to a formal plan to sell certain non-core assets within our Products segment. Accordingly, these assets were reported as discontinued operations and we recorded a loss of $11.3 million, net of tax, at December 31, 2003 based upon a pending sales contract. The sale of these assets was consummated in February 2004 for an aggregate purchase price of approximately $7.4 million, subject to post-closing adjustments. In connection with the disposition, we reevaluated our expectations for the earnings, growth and contribution of the Products segment for 2004 and concluded that the segment would still generate revenues and earnings and contribute positively to T-3’s consolidated results of operations and cash flows but at a much reduced level. This determination was based on the continued softness in the Gulf of Mexico upstream and downstream oil and gas industry as well as lower revenues generated from larger fabricated equipment and component revenues. In addition, we expected lower revenues from the electrical motor and generator repair and storage business. As a

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result, we recorded an impairment charge of $16.2 million on goodwill attributable to our Products segment at December 31, 2003.

     During the second quarter of 2004, we again reevaluated our expectations for the earnings, growth and contribution of the Products segment. As part of this reevaluation, the decision was made to sell substantially all of the remaining assets within our Products segment, except for certain assets related to the Company’s custom coatings business, along with certain assets within our Pressure Control segment. Accordingly, these assets were reported as discontinued operations and we recorded a goodwill impairment charge of $0.3 million, a $0.2 million charge to other intangible assets and a $2.4 million charge to tangible assets during the second quarter. A portion of these remaining Products segment assets were sold during May and June 2004 for $1.0 million and $0.4 million, respectively. The remaining assets of the Products segment and certain assets of the Pressure Control segment were sold during the third quarter of 2004 for $0.6 million and $0.5 million, respectively.

     On September 30, 2004, we entered into loan agreements to refinance our senior and subordinated credit facilities with our existing lenders. The proceeds from these credit facilities will be used to refinance debt, to finance acquisitions and for general corporate and working capital purposes.

     During the fourth quarter of 2004, we completed the purchase of Oilco for approximately $10.4 million. Oilco manufactures accumulators, remanufactures blowout preventors, performs field services on both accumulators and blowout preventors and manufactures rubber goods used in the well control industry.

Business Strategy

     Our business strategy is to maximize stockholder value by building a diversified oilfield services company founded on products and services that enhance our customers’ operations. We have adopted the strategies described below:

	•	integrate our existing operations through appropriate financial controls and personnel, management information systems and facilities consolidations;
	•	focus on excellence in engineering and designing of our own brand of products for our customers;
	•	enter niche markets for products and services that allow us an opportunity to perform more effectively and efficiently than major energy services companies;
	•	acquire products and services that complement each other and our existing products and services in the manufacturing, aftermarket and service arenas;
	•	expand higher margin aftermarket services by promoting rapid response to customer needs;
	•	expand into international markets through agency agreements or acquisitions;
	•	complete strategic add-on Pressure Control acquisitions both domestically and internationally;
	•	continue to maintain our focus on the Gulf of Mexico and high pressure gas markets;
	•	emphasize inter-company coordination through bundled products and services, combined sales efforts and inter-company purchases;
	•	take advantage of our volume purchasing power; and
	•	internally grow the Distribution segment.

     Currently, we have 19 locations throughout the Gulf Coast region and in other select oil and gas regions in Texas, Louisiana and Canada.

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Operations

     Products and Services

     Pressure Control. Through our Pressure Control segment, we manufacture, remanufacture and repair high pressure, severe service products including valves, chokes, actuators, blow out preventors, manifolds and wellhead equipment; manufacture accumulators and rubber goods; and apply custom coatings to customers’ products used primarily in the oil and gas industry. Pressure Control products and services are sold primarily in the Gulf Coast region and Canada to major and independent oil and gas companies engaged in exploration, production, completion and transportation of oil and gas, and to drilling and well servicing contractors. Valves, chokes, actuators and other pressure control products are used to start, stop and monitor the flow of liquids and gases and to protect equipment and personnel from excessive or sudden changes in pressure. Drilling machinery, including drawworks, mud pumps, rotary tables, blowout preventors and pipe handling equipment, are major mechanical and pressure control components of drilling and well servicing rigs. These components are essential to the pumping of fluids, the hoisting, supporting and rotating of the drill string and the controlling of sudden changes in well pressure that may cause the well to ignite. Accumulators are used to operate the blowout preventors on the drilling and well servicing rigs. Custom coating value added services are used by some of our customers, often in conjunction with the other products and services we provide.

     Distribution. Our Distribution segment is engaged in the specialty distribution of pipes, valves, stud bolts, gaskets and other ancillary products primarily to the upstream and downstream oil and gas industry, offshore fabrication companies and shipyards. Our distribution activities are carried out through our network of 6 primary distribution centers along the Louisiana and Texas Gulf Coast. The products stocked at each location vary depending upon local customer needs.

     For further information on segment reporting, see Note 13 to our consolidated financial statements.

     Customers and Markets

     The Pressure Control segment sells its products and services to companies engaged in the exploration, production and pipeline transportation of oil and gas; companies in the petrochemical, chemical and petroleum refining industries; and onshore and offshore contract drilling and well servicing companies.

     The Distribution segment’s customers are primarily companies in the upstream and downstream oil and gas industry, offshore fabrication companies and shipyards.

     No single customer within any of our segments accounted for greater than 10% of total revenues within such segment during 2004.

     Marketing

     We market our products primarily through a direct sales force of 62 persons. We believe that our proximity to customers is a key to maintaining and increasing revenues. A majority of our sales are on a purchase order basis at fixed prices on normal 30-day trade terms. Large orders may be filled on a contract basis, depending on the circumstances. International sales are typically made with agent or representative arrangements, and significant sales are secured by letters of credit.

     Suppliers and Raw Materials

     In each of our segments, new and used inventory and related equipment and parts are acquired from suppliers, including individual brokers, other remanufacturing companies and original equipment manufacturers. No single supplier of products is significant to the operations of our segments, and we have not experienced and do not expect a shortage of products that we sell.

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Insurance

     We currently carry a variety of insurance for our operations. We are partially self-insured for certain claims in amounts we believe to be customary and reasonable.

     Although we believe we currently maintain insurance coverage adequate for the risks involved, there is a risk our insurance may not be sufficient to cover any particular loss or that our insurance may not cover all losses. For example, while we maintain product liability insurance, this type of insurance is limited in coverage, and it is possible an adverse claim could arise in excess of our coverage. Finally, insurance rates have in the past been subject to wide fluctuation. Changes in coverage, insurance markets and our industry may result in increases in our cost and higher deductibles and retentions.

Competition

     In each of our segments, many of the markets in which we compete are highly fragmented, and our competitors in these niche markets range from relatively small, privately held businesses to large integrated companies. Competition is based on several competitive factors, including reputation, manufacturing capabilities, availability of plant capacity, price, performance and dependability. Although we do not typically maintain supply or service contracts with our customers, a significant portion of our sales represents repeat business from our customers. We compete with a large number of companies, none of which are dominant in our markets, many of which possess greater financial resources or offer certain products and services we do not offer.

Backlog

     Our backlog is shown in the table below:

     The above backlog information consisted of written orders or commitments believed to be firm contracts for products and services. These contracts are occasionally varied or modified by mutual consent and in some instances may be cancelable by the customer on short notice without substantial penalty. As a result, our backlog as of any particular date may not be indicative of our actual operating results for any future period. Management believes that substantially all of the orders and commitments included in backlog at December 31, 2004 will be completed within the next 12 months.

Environmental Regulations

     We are subject to various laws and regulations relating to the storage, handling, emission and discharge of materials into the environment, including the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Clean Water Act, the Clean Air Act and the Resource Conservation and Recovery Act. Each of these statutes allows the imposition of substantial civil and criminal penalties, as well as permit revocation, for violations of the requirements. In addition, environmental laws could impose liability for costs associated with investigating and remediating contamination at our facilities or at third-party facilities at which we have arranged for the disposal or treatment of hazardous materials and/or wastes.

     Our environmental remediation and compliance costs have not been material during any of the periods presented. We have been identified as a potentially responsible party (PRP) with respect to one site designated for cleanup under CERCLA and similar state laws. Our involvement at this site is believed to have been minimal. Because it is early in the process, no determination of our actual liability can be made at this time. As such, we have

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not currently accrued for any future remediation costs related to this site. Based upon our involvement with this site, we do not expect that our share of remediation costs will have a material impact on our financial position, results of operations or cash flows.

     In July 2001, we discovered preliminary information concerning deep soil contamination at one of our leased facilities. This preliminary information is limited, and the contamination source has not yet been identified. We have informed the landlord of the existence of the contamination and have requested that they remediate the property as required by the lease. We expect that the landlord will comply with its obligations under the lease to investigate the environmental condition and take any action required under applicable laws. We do not believe that we have contributed to or are responsible for remediation of the site.

     We believe that we are in compliance in all material respects with applicable environmental laws and are in full compliance with all obligations to investigate or remediate contamination that could reasonably be expected to result in material liability. However, it is possible that unanticipated factual developments could cause us to make environmental expenditures that are significantly different from those we currently expect. In addition, environmental laws continue to be amended and revised and may impose stricter obligations in the future. We cannot predict the effect such future requirements, if enacted, would have on us, although we believe that such regulations would be enacted over time and would affect the industry as a whole.

Employees

     As of December 31, 2004, we had a total of 511 employees, 163 of whom were salaried and 348 of whom were paid on an hourly basis. The entire work force is employed within the United States and Canada. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement.

Available Information

     Access to our filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the United States Securities and Exchange Commission (SEC) may be obtained through the Investor Relations section of our website (http://www.t3energyservices.com). Our website provides a hyperlink to a third party SEC filings website where these reports may be viewed and printed at no cost as soon as reasonably practicable after we have electronically filed such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this report.

Forward-Looking Information

     Certain information in this Annual Report on Form 10-K, including the information we incorporate by reference, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “expects,” “projects,” “believes,” “anticipates,” “intends,” “plans,” “budgets,” “predicts,” “estimates” and similar expressions.

     We have based the forward-looking statements relating to our operations on our current expectations, and estimates and projections about us and about the industry in which we operate in general. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this Form 10-K.

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Risk Factors

     Because we depend on the oil and gas industry, a decline in oil and gas prices or a decrease in industry activity may negatively impact our profits.

     We are, and will continue to be, dependent upon the oil and gas industry and the level of oil and gas exploration and production. The level of exploration and production depends upon the prevailing view of future product prices. Many factors affect the supply and demand for oil and gas and therefore influence product prices, including:

	•	the level of production from known reserves;
	•	weather conditions;
	•	the actions of the Organization of Petroleum Exporting Countries;
	•	political instability in the Middle East and elsewhere;
	•	the level of oil and gas inventories;
	•	the cost of producing oil and gas;
	•	the level of drilling activity;
	•	worldwide economic activity; and
	•	governmental regulation.

     If there is a significant reduction in the demand for drilling services, cash flows of drilling contractors or production companies or drilling or well servicing rig utilization rates, then demand for our products will decline.

The oilfield service industry in which we operate is highly competitive, which may result in a loss of market share or a decrease in revenue or profit margins.

     The oilfield service industry in which we operate is highly competitive. Many of our competitors have greater financial and other resources than we do. Each of our operating units is subject to competition from a number of similarly sized or larger businesses. Factors that affect competition include price, quality and customer service. Strong competition may result in a loss of market share and a decrease in revenue and profit margins. Our success will be affected by our ability to lower our cost structure. Our forward-looking statements assume we will be successful in reducing our cost structure and adapting to the changing environment.

Availability of a skilled workforce could affect our projected results.

     The workforce and labor supply in the oilfield service industry is aging and diminishing such that there is an increasing shortage of available skilled labor. Our forward-looking statements assume we will be able to maintain a skilled workforce.

Our long-term growth depends upon technological innovation and commercialization.

     Our ability to deliver our growth strategy depends in part on the commercialization of new technology. A central aspect of our growth strategy is to innovate our products and services, and to obtain technologically advanced products through internal research and development and/or acquisitions. The key to our success will be our ability to commercialize the technology that we have acquired and demonstrate the enhanced value our technology brings to our customers’ operations. Our forward-looking statements have assumed successful commercialization of, and growth from, these new products and services.

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The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of our goodwill.

     We had goodwill impairments related to continuing and discontinued operations in 2003 and 2004 totaling $26.4 million and $0.3 million, respectively. As of December 31, 2004, we had approximately $73.2 million of goodwill after taking into account the impairment charges. Our estimates of the value of our goodwill could be reduced in the future as a result of various factors, some of which are beyond our control. Any reduction in the value of our businesses may result in further impairment charges and therefore adversely affect our results.

A rise in insurance premiums could adversely impact our results and affect our ability to adequately insure for certain contingent liabilities.

     We maintain insurance to cover potential claims and losses, including claims for personal injury or death resulting from the use of our products. We carry comprehensive insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims. The terrorist attacks that occurred in the U.S. in 2001, as well as other factors, have generally increased the cost of insurance for companies, including ours. Significant increases in the cost of insurance and more restrictive coverage may adversely impact our results of operations. In addition, we may not be able to maintain adequate insurance coverage at rates we believe are reasonable.

Uninsured or underinsured claims or litigation could adversely impact our results.

     In the ordinary course of business, we become the subject of various claims and litigation. We maintain insurance to cover many of our potential losses, and we are subject to various self-retentions and deductibles with respect to our insurance. Although we are subject to various ongoing litigation, we do not believe any of the litigation we are currently subject to will result in any material uninsured or underinsured losses. However, it is possible an unexpected judgment could be rendered against us in cases in which we could be uninsured or underinsured and beyond the amounts we currently have reserved or anticipate incurring.

Our operations are subject to regulation by governmental authorities that may limit our ability to operate our business.

     Our business is affected by governmental regulations relating to our industry segments in general, as well as environmental and safety regulations that have specific application to our business. While we are not aware of any proposed or pending legislation, future legislation may have an adverse effect on our business, financial condition, results of operations or prospects.

     We are subject to various environmental laws, including those governing air emissions, water discharges and the storage, handling, disposal and remediation of petroleum and hazardous substances. We have in the past and will likely in the future incur expenditures to ensure compliance with environmental laws. Due to the possibility of unanticipated factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. Moreover, certain of our facilities have been in operation for many years and, over that time, we and other predecessor operators have generated and disposed of wastes that are or may be considered hazardous. Accordingly, although we have undertaken considerable efforts to comply with applicable laws, it is possible that environmental requirements or facts not currently known to us will require unanticipated efforts and expenditures that cannot be currently quantified.

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Two of our directors may have conflicts of interest because they are also officers or employees of First Reserve Corporation. The resolution of these conflicts of interest may not be in our or our stockholders’ best interests.

     Two of our directors, Joseph R. Edwards and Ben A. Guill, are also officers or employees of First Reserve Corporation, which controls the general partner of First Reserve Fund VIII, L.P., our majority stockholder. This may create conflicts of interest because these directors have responsibilities to First Reserve Fund VIII and its owners. Their duties as officers or employees of First Reserve Corporation may conflict with their duties as directors of our company regarding business dealings between First Reserve Corporation and us and other matters. The resolution of these conflicts may not always be in our or our stockholders’ best interests.

We will renounce any interest in specified business opportunities, and First Reserve Fund VIII and its director designees on our board of directors generally have no obligation to offer us those opportunities.

     First Reserve Fund VIII has investments in other oilfield service companies that compete with us, and First Reserve Corporation and its affiliates, other than T-3, may invest in other such companies in the future. We refer to First Reserve Corporation, its other affiliates and its portfolio companies as the First Reserve group. Our certificate of incorporation provides that, so long as First Reserve Corporation and its affiliates continue to own at least 20% of our common stock, we renounce any interest in specified business opportunities. Our certificate of incorporation also provides that if an opportunity in the oilfield services industry is presented to a person who is a member of the First Reserve group, including any individual who also serves as First Reserve Fund VIII’s director designee of our company:

	•	no member of the First Reserve group or any of those individuals will have any obligation to communicate or offer the opportunity to us; and
	•	such entity or individual may pursue the opportunity as that entity or individual sees fit,

unless:

	•	it was presented to a member of the First Reserve group in that person’s capacity as a director or officer of T-3; or
	•	the opportunity was identified solely through the disclosure of information by or on behalf of T-3.

These provisions of our certificate of incorporation may be amended only by an affirmative vote of holders of at least 80% of our outstanding common stock. As a result of these charter provisions, our future competitive position and growth potential could be adversely affected.

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Item 2. Properties

     We operate 19 facilities, 17 of which are located in the Gulf Coast region and 2 of which are located in Canada, which range in size from 3,000 square feet to approximately 146,000 square feet of manufacturing, distribution and related space, or an aggregate of approximately 383,000 square feet, including corporate headquarters. Of this total, 258,000 square feet of manufacturing and related space is located in leased premises under leases expiring at various dates through 2011. We believe our facilities are suitable for their present and intended purposes and are adequate for our current level of operations.

     We maintain our principal executive offices at 13111 Northwest Freeway, Suite 500, Houston, Texas 77040. This property consists of conventional office space and is, in our opinion, adequate to meet our needs for the foreseeable future.

     The following chart lists our facilities by segment:

Item 3. Legal Proceedings

     We are involved in various claims and litigation arising in the ordinary course of business. In December 2001, a lawsuit was filed against the Company in the 14^th Judicial District Court of Calcasieu Parish, Louisiana as Aspect Energy LLC v. United Wellhead Services, Inc. The lawsuit alleges that certain equipment purchased from and installed by United Wellhead Services, Inc., a wholly owned subsidiary of the Company, was defective in assembly and installation. The plaintiffs have alleged certain damages in excess of $5 million related to repairs and activities associated with the product failure and have also claimed unspecified damages with respect to certain expenses, loss of production and damage to the reservoir. We have tendered the defense of this claim under our comprehensive general liability insurance policy and our umbrella policy. We do not believe that the outcome of such legal actions involving the Company will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

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

     No matters were submitted to a vote of our security holders in the fourth quarter of 2004.

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PART II

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

     Our common stock trades on The Nasdaq National Market under the symbol “TTES.” The following table sets forth the high and low closing sales prices of our common stock:

     On March 21, 2005, there were approximately 139 record holders of our common stock, not including the number of persons or entities who hold stock in nominee or street name through various brokerage firms and banks.

Dividend Policy

     We have never paid dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to support our operations and growth. Any payment of cash dividends in the future will be dependent on the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that the board of directors may deem relevant. Additionally, certain of our debt agreements restrict the payment of dividends.

Item 6. Selected Financial Data

     This item is presented in three tables for the historical reporting requirements of T-3. T-3 began operations in the first half of 2000 by acquiring and merging two predecessor companies with different fiscal year ends. Selected historical data for T-3, Cor-Val, Inc. and Preferred Industries, Inc. are presented separately below.

     The following selected consolidated financial data for each of the five years in the period ended December 31, 2004 has been derived from our audited consolidated financial statements. The following information should be read in conjunction with our consolidated financial statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.

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T-3

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Selected Historical Financial Data of Cor-Val, Inc.

     The following selected unaudited historical financial data for the eleven months ended February 29, 2000 has been derived from the audited consolidated financial statements for the eleven months ended February 29, 2000. Cor-Val has been identified as a predecessor to T-3 for financial reporting purposes.

Cor-Val, Inc.

Selected Historical Financial Data of Preferred Industries, Inc.

     The following selected unaudited historical financial for the four months ended April 30, 2000 has been derived from the audited financial statements of Preferred Industries for the four months ended April 30, 2000. Preferred Industries has been identified as a predecessor to T-3 for financial reporting purposes.

Preferred Industries, Inc.

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

General

     The following discussion of our historical results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

     During the year 2000, we acquired five operating companies in transactions accounted for using the purchase method of accounting. On February 29, 2000, we acquired Cor-Val for approximately $21.4 million in cash, plus liabilities assumed and the issuance of 54,508 shares of our common stock. On April 30, 2000, we acquired Preferred Industries for approximately $18.8 million in cash, plus liabilities assumed and the issuance of 18,169 shares of our common stock. On April 30, 2000, we acquired O&M Equipment, Inc. for approximately $1.4 million in cash, plus liabilities assumed and a maximum earnout of $1.0 million based on the performance of O&M through 2002 ($0.3 million was earned in 2002, $0.6 million was earned in 2001, and $0.1 million was earned in 2000). Additionally, we acquired Control Products of Louisiana, Inc. and Coastal Electric Motors, Inc. in September 2000 and December 2000, respectively, for total consideration of approximately $10.3 million in cash, plus liabilities assumed. The results of operations of these companies have been included in our operating results from the dates of acquisition.

     On May 7, 2001, simultaneous with the signing of the merger agreement with IHI, we acquired A&B Bolt, Inc., a subsidiary of IHI, for $15.3 million in cash including expenses in a transaction accounted for using the purchase method of accounting. The results of operations of A&B Bolt have been included in our operating results from the date of acquisition.

     On December 17, 2001, T-3 Energy Services, Inc., a private Delaware corporation (“former T-3”), merged into IHI, a Texas corporation, with IHI surviving the merger. In connection with the merger, the combined company was reincorporated in Delaware under the name “T-3 Energy Services, Inc.” and implemented a one-for-ten reverse stock split of its common stock.

     The merger was treated for accounting purposes as a purchase of IHI by former T-3 (a reverse acquisition) in a purchase business transaction. The purchase method of accounting requires that we carry forward former T-3’s net assets at their historical book values and reflect IHI’s net assets at their estimated fair market values, with the fair market value of the purchase consideration in excess of the fair market value of IHI’s identifiable net assets treated as goodwill. The historical financial data presented in this Annual Report on Form 10-K includes the historical financial condition and operating results of T-3 prior to its merger with IHI. For the year 2001, the historical financial data also includes the two weeks of operations of the combined company from December 17, 2001 to December 31, 2001.

     As part of the merger with IHI, we acquired a non-energy subsidiary. Because the subsidiary’s operations were outside our strategic focus, at the time of the merger, we identified this operation as one to be sold. The sale was completed in July 2002.

     On December 18, 2001, our shares of common stock began trading on The Nasdaq National Market under the new symbol “TTES.” Immediately after the merger, First Reserve Fund VIII, L.P. (“First Reserve”) owned approximately 77% of our common shares, and collectively all of the former T-3 stockholders (including First Reserve) owned approximately 79% of our common shares, with the remaining 21% of our common shares being held by the stockholders of IHI immediately prior to the merger.

     Before the closing and as part of the merger, (1) IHI divested of substantially all of its non-energy-related subsidiaries, (2) SJMB, L.P. converted $3.6 million of its IHI debt into shares of IHI common stock, (3) First Reserve converted $25.3 million of its former T-3 debt into shares of former T-3 common stock, and (4) First Reserve purchased an additional $46.8 million in shares of former T-3 common stock. In addition, the combined company completed a refinancing of its senior debt simultaneously with the closing of the merger. Under the terms of the merger, all but two of IHI’s then existing directors and all of its officers resigned their positions with the

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combined company, and the management of former T-3 and six of former T-3’s director designees assumed the management and director duties for the combined company.

     In mid-year 2003, we hired a new management team that undertook an in-depth evaluation of our businesses and products with the purpose of maximizing stockholder value and positioning T-3 for future growth.

     During the fourth quarter of 2003, we committed to a formal plan to sell certain non-core assets within our Products segment. The sale of these assets was consummated in February 2004. The assets sold comprised substantially all of the assets of LSS – Lone Star – Houston Inc., Bolt Manufacturing Co., Inc. (d/b/a Walker Bolt Manufacturing Company) and WHIR Acquisition, Inc. (d/b/a Ameritech Manufacturing), (collectively, “the Fastener Businesses”). The Fastener Businesses primarily manufactured and distributed a broad line of standard and metric fasteners, in addition to manufacturing specialty fasteners and parts in small quantities for the commercial and aerospace industries as well as the military.

     Pursuant to the asset sale agreement, the buyer purchased all of the assets of the Fastener Businesses for a purchase price of $7.4 million, subject to a working capital adjustment after closing. We received $7.4 million in cash on February 23, 2004, which was immediately used to pay down our Wells Fargo term loan. In addition, we received two promissory notes in the amount of $0.2 million and $0.1 million, respectively. We did not record these two notes as their ultimate collection is contingent upon the occurrence of certain specified events which management believes are not probable of occurring.

     At December 31, 2003, the assets held for sale constituted a business and thus were classified as discontinued operations. Goodwill was allocated based on the relative fair values of the portion of the reporting unit being disposed of and the portion of the reporting unit remaining. For the year ended December 31, 2003, we recorded a loss of $11.3 million, net of tax, based upon a pending sales contract. Included in this loss was a goodwill impairment charge of $10.2 million and a long-lived asset impairment of $2.3 million.

     In the fourth quarter of 2003, our management completed its evaluation of each of our business segment’s product lines and service revenues for expected future performance and developed a new strategy and operating plan. Management based its expectations for T-3’s future performance on then current market conditions and on each of the business segment’s potential to maximize the value of the overall business by either expansion or growth of product lines and services, internally and through acquisitions, and in both the domestic and international markets.

     We reevaluated our expectations for the earnings, growth and contribution of the Products segment for 2004 and concluded that the segment would continue to contribute positively to T-3’s consolidated results of operations and cash flows but at a much reduced level. This determination took into account the continued softness in the Gulf of Mexico upstream and downstream oil and gas industry as well as lower revenues generated from larger fabricated equipment and component sales. In addition, we expected lower revenues from the electrical motor and generator repair and storage business. As a result, we recorded an impairment charge of $16.2 million, of which $1.0 million is attributable to the Company’s custom coatings business, during the fourth quarter of 2003 on goodwill attributable to our Products segment.

     During the second quarter of 2004, we again reevaluated our expectations for the earnings, growth and contribution of the Products segment. As part of this reevaluation, we decided to sell substantially all of the remaining assets within our Products segment, except for certain assets related to the Company’s custom coatings business, along with certain assets within our Pressure Control segment. A portion of the remaining Products segment assets were sold during May and June 2004 for $1.0 million and $0.4 million, respectively. The assets sold comprised substantially all of the assets of one of the two operating divisions of Moores Pump & Services, Inc., known as “Moores Machine Shop” and TPS Total Power Systems, Inc. (“TPS”). Moores Machine Shop primarily is engaged in the manufacture and production of downhole and completion products and equipment. TPS distributes new electric motors; provides complete rewinding, repair and rebuilding for used AC/DC electric motors and generators; and repairs and manufactures used flood pumps and waste disposal pumps for governmental entities in Louisiana and Texas. The remaining assets of Moores Pump & Services, Inc. (“Moores Pump”) and Control Products of Louisiana, Inc. (“CPL”) were sold during the third quarter of 2004 for $0.6 million and $0.5 million,

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respectively. Moores Pump is a pump distribution and remanufacturing business. CPL primarily repairs and manufactures control valves and related equipment. Accordingly, the results of operations of Moores Machine Shop, TPS, Moores Pump and CPL have been reported as discontinued operations.

     At June 30, 2004, Pressure Control goodwill was allocated based on the relative fair values of the portion of the reporting unit being disposed and the portion of the reporting unit remaining. This resulted in a goodwill impairment charge of $0.3 million during the second quarter of 2004, related to the assets being sold within our Pressure Control segment. In addition to the goodwill impairment charge, we recorded a $0.2 million charge to other intangible assets and a $2.4 million charge to tangible assets related to the Products and Pressure Control dispositions during the second quarter of 2004.

     During the second quarter of 2004, we also sold certain assets of the spray weld division of O&M Equipment, L.P. for cash of $0.3 million. These assets did not constitute a business; however, they did qualify as assets held for sale. Accordingly, they are presented as such on the December 31, 2003 consolidated balance sheet. The disposition of these assets resulted in a loss on sale of $50,000, which included a $150,000 write-down of other intangible assets. The results of operations are classified in income from continuing operations for the periods presented.

     On September 30, 2004, we entered into loan agreements to refinance our senior and subordinated credit facilities with our existing lenders. The proceeds from these credit facilities will be used to refinance debt, to finance acquisitions and for general corporate and working capital purposes.

     During October of 2004, we completed the purchase of Oilco for approximately $10.4 million. Oilco manufactures accumulators, remanufactures