Bandera Petroleum Exploration LLC and Impact Technologies LLC, as joint investigators, developed an advanced mud system for microhole coiled tubing drilling. This status report is a conclusion of budget period I and reports the completion of concept development and basic design(s) for the System. The system as conceived and presented herein includes the follow following components: pumps to convey drilling fluids downhole; system to process return well fluids ; method to drill a hole in rock with an abrasive laden fluid. The system is compact, portable, and readily adaptable to a MHT CT rig.