HSE REPORTS 2006 YEAR END FINANCIAL RESULTS - Revenue Rises by 70%

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					NEWS RELEASE – April 26, 2007

HSE REPORTS 2006 YEAR END FINANCIAL RESULTS – Revenue Rises by
                 70%, EBITDA Increases by 102%
HSE Integrated Ltd. (“HSE” or the “Company”) is pleased to announce its financial results for
the year ended December 31, 2006. Financial and operating highlights are summarized below:

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

David Yager, Chairman and CEO, offered the following comments in HSE’s 2006 financial
results.

“The significant growth of HSE in 2006 reflects the creation of Canada’s first national industrial
safety services company. The internal and acquisition growth that was undertaken has given
us the equipment, manpower and financial capacity to meet the needs of industry on the
important, Health, Safety and Environment file. Combined with our strong balance sheet, what
HSE achieved in 2006 is financial strength, regional capacity, and industry sectorial diversity.
This platform will permit HSE to continue to grow in 2007 despite the challenges facing the
conventional upstream oil and gas industry at the present time.”

For further information and analysis please see the attached Management’s Discussion and
Analysis and Financial Statements.




                                                1
CONFERENCE CALL

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

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

Forward-Looking Statements

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

Non-GAAP Measures

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

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

For more information, please contact:

HSE Integrated Ltd.
David Yager, Chairman & CEO
Telephone: (403) 266-1833
Email: dyager@hseintegrated.com

Tony Hidalgo, Chief Financial Officer
Telephone: (403) 650-6481
Email: thidalgo@hseintegrated.com


                                                           2
HSE Integrated Ltd.
Management Discussion and Analysis (“MD&A”)
For the Years Ended December 31, 2006 and 2005
The following management discussion and analysis is dated April 26, 2007, and is a review of the financial results of HSE Integrated
Ltd. (“HSE”, “We”, “Our”, or the “Company”) for the fiscal years ended December 31, 2006 and 2005. This should be read in
conjunction with the documents filed on SEDAR at www.sedar.com. Unless otherwise disclosed, the financial information presented
in this discussion has been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and takes
into consideration information available to management up to April 26, 2007. Unless otherwise stated, dollar figures presented are
expressed in thousands of Canadian dollars and per-share figures in dollars per weighted-average common share. The following
MD&A contains forward-looking information and statements. We refer you to the end of the MD&A for the disclaimer on forward
looking statements.


Selected Financial Information


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


See Non-GAAP Measures for (1)


Overview

The Company’s operating results for the year ended December 31, 2006 reflect increases in both
revenue and profitability. EBITDA for the year increased by over $7.7 million, or 101.6%, to $15.3 million
from $7.6 million in 2005. The increase in EBITDA is mainly due to significant increases in revenue
(70.2%) as a result of acquisitions, increased capacity, and diversification of the Company’s business into
new services and markets. The Company also reported greater EBITDA as a percentage of sales for the
year when compared to the same period in the prior year. The higher EBITDA margin in 2006 was
achieved despite a significant reduction in the revenue of higher margin well control operations compared
to the same period in the prior year (2006 – $1.8 million, 2005 - $5.7 million). Net earnings has
increased to $3.5 million or 3.4% of revenue, mainly due to higher revenue, but offset by greater levels of
amortization and stock based compensation.




                                                                                                                     Page 1 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


The Company continues to increase its operating capacity, both in its oilfield safety services business and
in the industrial safety services sector. Spending is underway on the $8 million capital expenditure
program announced in the first quarter of 2006, with almost two thirds invested by year end, and the
balance expected to be invested in the first half of 2007. During the year, the Company completed the
acquisitions of Key Safety Services Inc. (“Key”) and Key Monitoring Solutions Corp. (“KMS”) in January;
Sentry Fire Equipment Ltd. (“Sentry”) and Front-Line Safety Services Ltd. (“Front-Line”) in April; and
Bear’s Safety and Rescue Services Ltd (“Bear’s”) in July.

The Company has a cash balance of $6.6 million at December 31, 2006. Working capital (current assets
less current liabilities) was $15.6 million at year-end and bank term debt stood at $15.8 million. HSE used
treasury shares to pay for a portion of the acquisitions made during fiscal 2006, thus reducing the amount
of cash and debt required. As well, the Company completed private placements in February, 2006 (gross
proceeds of $1.4 million), and in April, 2006 (gross proceeds of $11.7 million) in order to minimize the
amount of debt required for capital expenditures and acquisitions.

The revenue increase between 2004 and 2005, was largely driven by the seven acquisitions made in
2004, and the four acquisitions made in 2005. The higher EBITDA and net earnings between 2004 and
2005 was caused primarily due to higher revenue, and greater economies of scale in a significantly larger
organization.

Financial Review
Revenue

HSE operates in a single industry segment, which involves providing a variety of asset, worker and
community safety-protection services including: on-site safety supervision; gas detection; air-quality
monitoring; breathing equipment rentals and services; firefighting and fire protection services and
equipment; worker decontamination (shower) services; on-site medical services; and safety training. For
the years ended December 31, 2006 and 2005, the Company had no customer representing more than
10% of revenue.

Revenue for the year increased 70.2% from $59.1 million in 2005 to $100.5 million in 2006.
Approximately three quarters of the $41.4 million increase in the revenue from 2005 to 2006 is
attributable to acquisitions, with the balance relating to organic growth. Organic revenue growth for 2006
(over the same period in the prior year) is estimated at 15%.

A total of five acquisitions were completed within the year. The acquisition of Key broadens the
Company’s oilfield safety and emergency response services in Western Canada. KMS provides air-quality
monitoring services for hydrocarbon drilling, for completion and well servicing activities, and for industrial
operations. Sentry offers fire, gas detection and breathing-air equipment sales and service to industrial
and commercial markets in southern Ontario. Front-Line performs industrial safety services for the
refining, mining, offshore drilling and production and other industries in Atlantic Canada. Bear's provides
industrial safety services to upstream oil and gas processing facilities and thermal heavy oil recovery and
Oilsands extraction and construction projects in northeast Alberta, and has provided safety supervision to
drilling operations in northern Canada.

The Company currently provides services to its customers in the following main business areas: Oilfield
Services (“Oilfield”), Industrial Services (“Industrial”), and Environment Monitoring Services
(“Environment”). Oilfield is the provision of the Company’s services within the conventional upstream, or
“wellhead”, sector of the oil and gas industry. Industrial represents the services delivered to plants and
facilities and the provision of training and safety management services for multiple industrial sectors.
Environment focuses on air-quality monitoring to protect people, livestock, wildlife and equipment from an
array of airborne contaminants.




                                                                                                 Page 2 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006

The revenue for these services is shown below:

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

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


Oilfield revenue increased by almost 44% in 2006, primarily due to the increased capacity provided by the
acquisition of Key in January 2006. When the amount of well control activities and acquisitions are
excluded from both 2006 and 2005, the Oilfield revenue growth in the year was 10.3%, due primarily to
growth in capacity.

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

Operating and Materials Expense

Operating and materials expense consists of costs directly attributable to the provision of safety and
related services to customers. These include: wages and benefits for field employees and contractors;
equipment rentals and leases; transportation; fuel; consumables; equipment repairs and maintenance;
and field-office administration including field sales.

Operating and materials expense for the year ended December 31, 2006 totaled $75.7 million or 75.2% of
revenue as compared to $45.8 million or 77.6% of revenue in 2005.

The reduction in operating and materials expense as a percentage of revenue is mainly due to the
improved utilization of equipment and personnel that accompanies the continuing integration of assets
from acquired companies, and the benefits of economies of scale in the areas of procurement and
operational support infrastructure. The higher operating margin in 2006 was achieved despite a significant
reduction in the level of higher margin well control operations in 2006, as compared to the same period in
the prior year.




                                                                                                  Page 3 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


Selling, General and Administrative Expense

Sales, general and administrative (“SG&A”) expense consists of costs not directly attributable to the
provision of services for customers. These include costs generally associated with the following:
corporate head-office functions and services; administrative personnel; corporate sales and marketing
costs; liability insurance; professional fees; and investor relations expenses.

SG&A for the year ended December 31, 2006 amounted to $9.6 million, versus $5.6 million in 2005.
SG&A as a percentage of revenue remained constant for both years at 9.5%

The increase in SG&A costs in comparison to the prior year is a result of higher business development
and corporate costs necessary to support the Company’s increased size.

Net Earnings

Net earnings have increased to $3.5 million or 3.4% of revenue, from $1.8 million or 3.1% or revenue in
the prior year. The increase in net earnings is primarily due to higher levels of revenue, offset by greater
levels in amortization, stock-based compensation, interest and income taxes.

Amortization for the year has increased by $4.0 million to $7.6 million, when compared to the prior year.
The increase in amortization expense reflects the impact of the significantly larger asset base of the
Company at the end of the quarter because of the internal capital investment program and from capital
assets acquired through acquisitions. As well, the recognition of intangible assets on acquisitions has also
contributed to the increase in amortization.

Stock-based compensation of $977 (2005 - $342) has increased due to additional grants of stock options
to employees of the Company.

Interest on long term debt and other interest and bank charges increased from $0.3 million in 2005 to
$1.4 million in 2006. The change was caused by term debt loans used to fund the Key and KMS
acquisitions, draws on the operating line as a result of higher activity levels in the first quarter of 2006,
interest on capital leases, and higher interest rates.

HSE’s income tax expense has increased due to higher profitability levels in 2006. The Company’s
effective tax rate for 2006 was 30.9%, which was lower than the prior year’s rate of 39.7%, primarily due
to higher future income tax liabilities (and related future income tax expense) in 2005 on acquisitions, as
well as combined Canadian Federal and Provincial income tax rate reductions in the second quarter of
2006. The lower 2006 effective rate was offset by higher non-deductible expenses, such as stock-based
compensation.

Quarterly Results

                                                      2006                                        2005
                                       Q4        Q3           Q2         Q1       Q4         Q3            Q2           Q1
  Revenue                           $26,198    $26,952   $19,924       $27,465   $17,280    $15,080      $9,410        $17,306
  Net Income (loss)                     984      1,197       (1,073)     2,353      (59)       786       (1,482)         2,588
          (1)
  EBITDA                               4,341     4,283        1,140      5,548     1,500      2,224        (845)         4,717
  Income (loss) per share - basic
  and diluted                          $0.03     $0.03       $(0.03)    $ 0.07   $( 0.01)    $ 0.03      $ (0.06)        $0.11
                             (1)
See Non GAAP Measures for




                                                                                                                    Page 4 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


A majority of the Company’s revenues are derived from the provision of safety services within the
conventional upstream, or wellhead, sector of the oil and gas industry. These revenues are subject to
seasonal fluctuations. Because this sector uses equipment that can only access many field locations
during certain times of the year and because of the effects of weather on field activity, the industry can
experience significant and sometimes unexpected activity fluctuations. During the winter period, HSE’s
Oilfield customers are able to drill in locations (primarily in Northern Alberta and British Columbia) which
can only be accessed economically by heavy equipment while the ground is frozen. Spring break-up
causes a reduction in activity since drilling and well servicing rigs and support equipment cannot move
between locations due to wet conditions and public road usage bans. Because transportation is so
expensive and problematic through April and May, many drilling and service companies use this as a
maintenance period. Heavy rainfall during the late spring and summer months can have a similar effect
on upstream conventional oil and gas drilling, completion and workover activity.

Additionally the Company provides oil industry emergency response services which can occur at any
time. These services, depending on their nature and extent, can have a material financial impact on the
periods in which they occur.

The Company is actively developing its industrial safety services business so that in the future, the
quarterly revenue fluctuations will be less significant. Peak usage of HSE’s industrial safety services for
plant shutdowns, turnarounds, and maintenance generally occurs in the second and third quarters. This
is typically counter-cyclical to upstream conventional oil and gas activity.

Considerable progress in minimizing quarterly revenue fluctuation was made in 2006 through the
acquisitions of Sentry and Front-Line in April, and Bear’s in July. These acquisitions will further stabilize
quarterly revenues in the future because of the specialized nature of their businesses. Sentry has a stable
revenue stream as it provides year-round plant safety equipment and services to refineries, petrochemical
facilities and other business operations, not only during periods of periodic maintenance. Front-Line
provides offshore, municipal and refinery safety services that are not subject to seasonal activity
fluctuations.

Fourth Quarter Results

In the fourth quarter of 2006, the Company achieved revenues of $26.2 million, a 51.6% increase on the
fourth quarter of 2005. Softer activity levels on the Oilfield safety service side of the business were offset
by higher revenue levels from Industrial and Environment. The contribution of Industrial and Environment
revenue to the overall business mix was 43.7% (2005 – 20.0%).

Operating and material expenses were $19.1 million, or 72.9% of revenue in the fourth quarter of 2006,
as compared to $14.4 million, or 83.3% of revenue for the same period in the prior year. The higher
proportion of Environment revenue, characterized by higher margin equipment rentals, combined with
greater utilization on the Industrial side of the business, contributed to increased margins.

SG&A increased from $1.4 million in 2005 (8.1% of revenue) to $2.7 million in 2006 (10.4%) of revenue.
As is the case for the full year, the increase in SG&A costs in comparison to the prior year is a result of
higher business development and corporate costs necessary to support the Company’s increased size.




                                                                                                 Page 5 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


Liquidity and Capital Resources

The Company’s principal sources of capital are cash flows from operations, borrowings under an
established credit facility with its senior lenders, and equity financing.

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

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


Cash provided by operations

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

Cash provided by financing

In comparison to the end of 2005, the Company in 2006:
    a) repaid the outstanding amount owing on the operating line of credit from the prior year;
    b) increased net long-term debt by $14.9 million;
    c) issued shares for proceeds of $13.2 million (net of costs) through private placements and stock
       option grants,
    d) paid obligations under capital leases of $1.7 million.

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

Cash used in investing

In 2006, the Company had purchases of property and equipment of almost $7.0 million, the majority of
which consists of field safety equipment, large diesel tractors for fire and shower units, medical treatment
centre units, and fire and shower unit bodies and equipment. Late in the first quarter of 2006, the
Company announced plans for an $8.0-million capital expenditure program, with approximately half
dedicated to upgrading the existing capital asset fleet, with the remainder slated for incremental operating
capacity. HSE had invested approximately two thirds of the previously announced capital program by
year end, and expects the remainder of the spending to occur prior to the first half of 2007.

The investment in the Key, KMS, Sentry, Front-Line and Bear’s acquisitions for the year was $29 million,
of which $17.5 was cash. Of the net assets purchased through acquisitions in 2006, $15.6 is related
mainly to the purchase of heavy vehicles, property and field safety equipment, which has contributed to
the significant increase in the operating capacity of the Company.




                                                                                               Page 6 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006




Liquidity

As at December 31, 2006, HSE had $15.8 million of total non-revolving instalment credit facility outstanding,
with $10 million of un-drawn operating facility, and $5 million of un-drawn revolving installment credit facility.
The Company’s credit facilities provide a $20-million non-revolving instalment credit facility amortizing
equally over five years, a $5-million revolving installment credit facility amortizing equally over five years,
and an operating line of $10 million (seasonally decreased to $8 million) margined to accounts receivable.

In February, 2006 the Company completed a private placement of 550 thousand common shares at $2.50
per share for gross proceeds of $1.4 million; in April, 2006, HSE completed a private placement of 3.3
million common shares at $3.55 per share for gross proceeds of $11.7 million.

At this time HSE believes that operating cash flows, bank credit facilities and equity financing will be
adequate to finance its capital expenditure and acquisition program.

Off Balance Sheet Arrangements

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

Related-Party Transactions

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

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

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

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

Acquisitions

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

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




                                                                                                     Page 7 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006



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

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

Critical Accounting Policies and Estimates

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

The accounting policies and estimates believed to require the most difficult, subjective or complex
judgments and which are material to the Company’s financial reporting results are as follows:

Allowance for Doubtful Accounts Receivable

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

Intangible Assets and Goodwill

The Company’s intangible assets consist of customer relationships, non-compete agreements, and
technology and intellectual property. These intangible assets are carried at cost less accumulated
amortization, which is calculated on a straight line basis over their estimated useful lives.

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




                                                                                                Page 8 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


Impairment of Long-Lived Assets

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


Depreciation and Amortization of Property and Equipment

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

Future Income Tax Liabilities

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


Accounting Changes

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




                                                                                                 Page 9 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


Recent Accounting Pronouncements

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

CICA Sections 1530 & 3251 – Comprehensive Income and Equity

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


CICA Section 3855 – Financial Instruments - Recognition and Measurement

In January 2005, the CICA issued Handbook Section 3855, Financial Instruments - Recognition and
Measurement. The new accounting standard requires that all financial instruments, including derivatives
be included on an entity’s balance sheet and measured, either at their fair value or, in limited
circumstances where fair value may not be considered most relevant, at cost or amortized cost.

The standard also specifies when gains and losses that result from changes in fair values are to be
recognized in the income statement. The Company is in the process of evaluating the impact of these
new standards and has not yet determined whether the standards will have a material impact on its
financial statements. The mandatory effective date to adopt the above Handbook Section is for interim
and annual financial statements relating to fiscal years beginning on or after October 1, 2006.

CICA Section 3861 – Financial Instruments – Disclosure and Presentation

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


CICA Section 1535 – Capital Disclosures

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




                                                                                            Page 10 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


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

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

Business Risks

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

Crude oil and natural gas prices

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

Cyclical or seasonal nature of industry

Like most companies providing field services in the conventional upstream Canadian oil and gas industry,
the Company’s business has a seasonal component. The Company’s safety service business provides
services primarily to the upstream conventional drilling, completions and well servicing sector.

Because this sector uses equipment that can only access well locations during certain times of the year
and because of the effects of weather on field activity, the Company can experience unexpected activity
fluctuations. Additionally the Company provides emergency response services which can occur at any
time. The first calendar quarter is the most active in the oil field services industry, the second quarter the
least active and the third and fourth quarters typically reflect increasing activity. The impacts of the low
activity for Oilfield services low activity are somewhat reduced by activity in Industrial services when major
plant maintenance procedures called “plant turnarounds” tend to occur.

Furthermore, fluctuations in crude oil and natural gas prices can produce periods of high and low demand
for the Company’s services. These fluctuations in commodity prices can cause both seasonal and cyclical
demand swings in the Company’s activity levels and operating results.

Merger and acquisition activity

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

Availability of qualified staff

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




                                                                                                Page 11 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


Availability of financing

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

Financial Instruments

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

Litigation and Contingencies

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


Internal Control over Financial Reporting

Disclosure Controls and Procedures

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

Management’s Report on Internal Control over Financial Reporting

The CEO and CFO of HSE Integrated Ltd. are responsible for designing internal controls over financial
reporting or causing them to be designed under supervision. The Company’s internal controls over
financial reporting are designed to provide reasonable assurance regarding the reliability of the
Company’s financial reporting and its preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles. Internal controls over financial
reporting, no matter how well designed, have inherent limitations. Therefore, internal controls over
financial reporting can provide only reasonable assurance with respect to financial statement preparation
and may not prevent or detect all misstatements.




                                                                                                 Page 12 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


The Company has experienced rapid growth in recent years both organically and through acquisitions.
As a result, the Company has identified weaknesses in its internal controls over financial reporting.
These weaknesses include:

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

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

Common Shares Outstanding

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

Outlook

In 2006, the Company achieved its goal of creating Canada’s first and largest national provider of
industrial safety services. The customer response to the capacity and diversity of HSE’s service package
has been positive. The Company now has greater geographical and customer diversity than at any time
in the past.

Following two years of rapid growth from June 2004, to July 2006, the Company has increased its focus
on improving its internal efficiency and effectiveness and its opportunities for organic growth. The largest
organic growth opportunities will come from offering more of its services from all of its field service
locations than it does at the present time. This will include marketing of mobile fire protection, on-site first
aid and air-quality monitoring services outside of western Canada, and increasing the delivery of plant
and industrial safety services to non-petroleum industries across Canada.

The Company believes its continued investment in market diversification, organic growth, skilled safety
professionals and internal process improvements and operational efficiency will ultimately increase
shareholder value.


                                                                                                  Page 13 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended December 31, 2006


However, visibility for business from HSE’s largest revenue source – Oilfield safety services – remains
poor for the remainder of 2007. Numerous conventional upstream oil and gas industry analysts have
indicated that activity levels as measured by capital expenditures and the total number of new oil and gas
wells drilled in Canada will be lower in 2007 than 2006, which would have a negative impact on the
Oilfield safety service component of HSE’s business.

This will, however, increase available equipment and manpower capacity for other opportunities. Unlike
most companies that service the conventional upstream oil and gas industry, HSE’s equipment and
manpower can be redeployed in other industries without significant retraining of personnel or modification
of equipment. Therefore, the Company will continue to explore the potential to deliver its services across
a variety of industries and geographies.

Forward-Looking Statements

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

The forward-looking information and statements contained in the MD&A speak only as of the date of this
MD&A, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise
them to reflect new events or circumstances, except as may be required pursuant to applicable laws.




                                                                                             Page 14 of 15
HSE Integrated Ltd.
Management Discussion and Analysis
For the Year Ended 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, taxes, amortization, foreign exchange gains or losses, gains or losses on the disposal of property
and equipment, and the non-cash effect of stock-based compensation expense. Investors should be
cautioned that EBITDA should not be construed as an alternative to net earnings determined by GAAP as
an indication of the Company’s performance. HSE’s method of calculating EBITDA may differ from that of
other companies and accordingly may not be comparable to measures used by other companies.

EBITDA calculation ($ 000’s)


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


Quarterly EBITDA calculation ($ 000’s)

                                                         2006                                         2005

                                          Q4       Q3              Q2        Q1        Q4        Q3            Q2        Q1
Net earnings (loss)                     $984    $1,197      $(1,073)      $2,353     $(58)     $786     $(1,483)      $2,588
Add (deduct):
 Amortization                           2,458    1,862           1,870     1,428     1,007      894           928       789
 Stock based compensation                285      312             231       149        98        70            94        80
 Interest                                403      346             359       290        34        16           114       137
 Foreign exchange (gain) loss            (93)       –               –         –        16         –             –         –
 Loss (gain) on disposal of
 property and equipment                  (26)     (19)            272       179       177       186             8       (94)
 Income taxes                            330      585            (519)     1,149      226       272          (506)     1,217
EBITDA                                 $4,341   $4,283          $1,140    $5,548    $1,500    $2,224     ($ 845)      $4,717



Additional Information

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




                                                                                                                     Page 15 of 15
HSE Integrated Ltd.
Consolidated Balance Sheets
(Audited)

(Stated in thousands) Years ended December 31,                               2006               2005

ASSETS
Current
 Cash and cash equivalents                                      $           6,551         $      382
 Accounts receivable                                                       22,306             16,513
 Inventory                                                                    764                158
 Prepaid expenses and other assets                                          2,822                776
                                                                           32,443             17,829

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

                                                                $         106,938         $   51,281

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

                                                                $         106,938         $   51,281
Commitments and Contingencies (Notes 14 & 17)
Subsequent Event (Notes 7, & 12)

On behalf of the Board

(Signed) “David L. Yager”            Director                   (Signed) “Tony Hidalgo”       Director




                         See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
Consolidated Statements of Earnings and Retained Earnings
(Audited)

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

REVENUE                                                                    $   100,539   $     59,075


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


EARNINGS BEFORE INCOME TAXES                                                     5,006          3,042

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

                                                                                 1,545          1,209

NET EARNINGS                                                                     3,461          1,833

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

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

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




                            See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
Consolidated Statements of Cash Flows
(Audited)

(Stated in thousands) Years ended December 31,                              2006              2005

Cash provided by (used in)

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

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

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

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

Net increase in cash and cash equivalents                                   6,169               63

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




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




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



NOTE 1 – NATURE OF BUSINESS
Nature of business
HSE Integrated Ltd. (the “Company”) is an oilfield and industrial safety services Company incorporated
under the laws of the province of Alberta. The Company provides safety supervision personnel, rental of
breathing apparatus and associated equipment for personnel operating in high hazard environments,
fire/shower units for workers and equipment protection where flammable or corrosive substances are
employed, safety training, on-site medical services and hazardous gas detection and monitoring across
Canada.


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in the preparation of these consolidated
financial statements:


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


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


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


Inventory
Inventory is carried at the lower of cost, determined under the first-in, first-out, method, net realizable value
if for sale, or replacement cost if for use.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment
Property and equipment is stated at cost less accumulated amortization. Major betterments are capitalized.
Repairs and maintenance expenditures which do not extend the useful life of the property and equipment are
expensed.

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


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




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


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



Goodwill
Goodwill represents the excess of the purchase price of a business acquisition over the fair value of the
acquired net assets. Goodwill is not amortized, but is tested for impairment at least annually.
The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is
compared with its fair value. When the fair value of the reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not to be impaired, and the second step is not considered necessary. The
second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount to
measure the amount of the impairment loss, if any.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company recognizes service revenue when the services have been provided to the customer, the product
has been delivered, the sales price has been fixed or determinable and collectibility is reasonably assured.
Generally services are provided over a relatively short time period.


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


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


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

The Company applies the intrinsic value method of accounting to all liability-classified stock-based
compensation arrangements for both employees and non-employees. Compensation cost of liability-
classified awards are measured at intrinsic value each balance sheet date and recognized with a
corresponding increase to a liability. Changes in intrinsic value are recognized in the period they occur.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings per share
Basic earnings per share is calculated using the weighted average number of common shares outstanding
during the year. Under the treasury stock method, diluted earnings per share is calculated based upon the
weighted average number of shares issued and outstanding during the year, adjusted by the total of the
additional common shares that would have been issued assuming exercise of all stock options with exercise
prices at or below the average market price for the year, offset by the reduction in common shares that
would be purchased with the exercise proceeds plus the related unamortized stock based compensation
costs. No adjustment is made for options if the result of this calculation is anti-dilutive.


Financial instruments
   Fair values of financial assets and liabilities

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

  Credit risk

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

  Interest rate risk

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


Measurement uncertainty
The Company evaluates its estimates including those related to bad debts, inventory obsolescence, property
plant and equipment useful lives, goodwill, intangible assets, income taxes, contingencies and litigation, on an
ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that
are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions,
the actual results will differ, possibly materially, from those previously estimated. Many of the conditions
impacting these assumptions and estimates are outside of the Company’s control.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Comparative figures
Certain prior year figures have been reclassified to conform with the current year’s presentation.


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

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

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




NOTE 3 – ACQUISITIONS

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


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

c) On April 21, 2006, the Company completed the acquisition of the shares of Front Line Safety Ltd.
(“Frontline”) in a business combination accounted for as a purchase. Frontline performs fire and industrial
safety services for the petrochemical and mining industries in Atlantic Canada and offshore Canada. The
results of operations are included in the accounts from date of acquisition. Consideration and acquisition costs
were comprised of 666,667 common shares of the company at $3.69 per share, $1,080 of cash and the
assumption of debt.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 3 – ACQUISITIONS (continued)

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



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

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

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

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

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




2005

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

b) On November 30, 2005 the Company purchased 100% of the shares of Blue Star EMS Ltd. and Blue Star
EMS Safety Ltd. (collectively “BlueStar”).The total purchase price for these acquisitions was $1,328 comprised
of $907 in cash and $411 through the issuance of 167,902 shares at a price of $2.45 per share.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)

NOTE 3 – ACQUISITIONS (continued)


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


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

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

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

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

                                        $         1,448     $        1,506   $          301    $      3,255
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 4 – PROPERTY AND EQUIPMENT


                                                                     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



                                                                     2005
                                                                  Accumulated        Net Book
                                                     Cost         Amortization        Value

Land                                            $       356                  –   $         356
Buildings and improvements                            1,093                 72           1,021
Safety equipment                                     20,151              5,979          14,172
Vehicles                                             11,629              4,345           7,284
Vehicles and equipment under capital lease            1,398                649             749
Other property and equipment                          3,042              1,011           2,031

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




NOTE 5 – GOODWILL
                                                                         2006            2005

Balance, January 1                                            $         7,276    $       6,026
Goodwill acquired                                                      16,338            1,007
Goodwill adjustment of prior year acquisition                              27              243
Balance, December 31                                          $        23,641    $       7,276
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 6 - INTANGIBLE ASSETS


                                                                       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

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




NOTE 7 – OPERATING LINE OF CREDIT and LONG TERM DEBT

On January 9, 2006 the Company amended its bank credit facilities to replace the facilities outstanding at
December 31, 2005 with:
    a) a $20,000 non-revolving installment credit facility which amortizes over five years from date of
        draw, bears interest at the bank’s prime rate, and is subject to an annual cash flow sweep of 25%
        of earnings before interest, amortization and taxes less interest paid and repayments of revolving
        and non revolving principal.
    b) a $10,000 (seasonally reduced in June to November to $8,000) operating facility bearing interest
        at the bank’s prime rate, and
    c) a $5,000 revolving installment credit facility which amortizes over five years from date of draw
        and bears interest at the bank’s prime rate.

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

As at December 31, 2006 the Company was in violation of the interest coverage ratio covenant as specified
under the credit facility. An amendment was received to the interest coverage ratio subsequent to year end,
which now results in compliance.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 7 – OPERATING LINE OF CREDIT and LONG TERM DEBT (continued)

                                                                              2006             2005

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


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

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

Accrued consideration on share purchase aquisition (Note 3)                    790                 –


                                                                    $       12,834    $         370

Outstanding principal repayments are due as follows:

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

During 2005, the Company had credit facilities with Canadian chartered banks, payable on demand, to a
combined maximum of $19,900, bearing interest at bank prime plus 1.0%.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 8 – OBLIGATIONS UNDER CAPITAL LEASE
The amounts due under capital lease agreements are repayable in blended monthly payments of $145 (2005
- $22) and bear interest at rates averaging 5.37% (2005 – 8.75 %) per annum. On certain leases, the
Company has options to acquire the leased assets at various times throughout term to 2011.


The minimum lease payments are due as follows:

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

                                                               $       3,039   $         382



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

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

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

Income tax expense                                            $        1,545   $       1,209



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

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

Future income tax liability                                   $        7,454   $       3,201
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)

NOTE 10 – SHARE CAPITAL

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

b)     Issued and outstanding:

                                                                       2006                               2005
Common shares                                            Shares               Amount      Shares                 Amount
                                                     (in thousands)                     (in thousands)


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

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



                                                                      2006                               2005
Warrants                                                  Units               Amount        Units                Amount
                                                     (in thousands)                     (in thousands)


Balance, January 1                                        3,182        $        1,628              –       $          –

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

Balance, December 31                                      3,144        $        1,609        3,182         $      1,628
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 10 – SHARE CAPITAL (continued)

                                                              2006                                   2005
                                                         Units            Amount        Units               Amount
                                                     (in thousands)                 (in thousands)
Agent’s Warrants

Balance, January 1                                           445      $      224               –       $         –

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

Balance, December 31                                            –     $        –            445        $       224




Warrants

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

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

Private placements

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

On April 26, 2006 the Company completed a private placement of equity pursuant to which 3,300,000
common shares were issued at the price of $3.55 per share for gross proceeds of $11,715.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 10 – SHARE CAPITAL (continued)

e)    Per share amounts

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


                                                                              2006             2005

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

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



NOTE 11 – CONTRIBUTED SURPLUS
                                                                              2006             2005

Balance, January 1                                                   $         462    $         120
Stock compensation expense – employee options                                  977              342
Exercise of stock options                                                     (16)                –
Balance, December 31                                                 $       1,423    $         462
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 12 - STOCK-BASED COMPENSATION PLANS

Incentive stock option plan

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

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

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


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

Information about outstanding stock options is as follows:


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

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

Exercisable at end of year                     445,442       $    1.69             160,778     $     1.43
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 12 - STOCK-BASED COMPENSATION PLANS (continued)

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


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

                        1,924,501               2.24            3.77            423,775

Deferred share unit plan

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

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



NOTE 13 - RELATED PARTY TRANSACTIONS

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

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

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

During 2006 the Company also paid rent of $41 (2005 – nil) and $342 (2005 – nil) to two corporations each
controlled by different Executives of the Company.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)

NOTE 14 - COMMITMENTS

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

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




NOTE 15 - SUPPLEMENTARY CASH FLOW INFORMATION


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

 Accounts receivable                                                $       5,319   $   (4,566)
 Inventory                                                                  (113)          (10)
 Prepaid expenses and other assets                                        (1,150)         (495)
 Other assets
 Accounts payable and accrued liabilities                                 (8,498)        1,950
 Income tax payable                                                           729          402

 Net increase (decrease) in non-cash working capital                $     (3,713)   $   (2,719)
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements (Audited)
For the years ended December 31, 2006 and 2005
(stated in thousands of dollars, except share amounts)


NOTE 16 – SEGMENT INFORMATION

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

Revenue by type of service is as follows:

                                                                          2006             2005
              Oilfield                                             $    66,794    $       46,508
              Industrial                                                23,459            10,036
              Environment                                               10,286             2,531
              Total Revenue                                        $   100,539    $       59,075


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




NOTE 17 – CONTINGENCIES

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