and the wellbore. Production logging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation.

        In addition, cased-hole services may involve wellbore remediation, which could include the positioning and installation of various plugs and packers to maintain production or repair well problems, and casing inspection for internal or external abnormalities in the casing string. Wireline services are provided from surface logging units, which lower tools and information); wellsite construction (preparationsensors into the wellbore. We operated 22 units as of December 31, 2007, and we have seven units ordered that are expected to be delivered in 2008. Cased-hole electric wireline services are conducted during the completion of an oil or natural gas well and often times throughout the life of a wellsite for drilling activities); roustabout services (provision of manpowerproducing well. Services include: production logging, perforating, pipe recovery, pressure control and setting services. We use advanced wireline instruments to assist with activities on a wellsite); foam air services (drilling technique using air or gas to which a foaming agent has been added);evaluate well integrity and air drilling services (drilling technique using compressed air).perform cement evaluations and production logging. Demand and pricing for these services are generally related to demand for our well service operations.cased-hole electric wireline services is correlated to current and anticipated oil and natural gas prices and the resulting effect on the willingness of our customers to make operating and capital expenditures.

Contract Drilling Services

        Although we sold the majority of our contract drilling assets in 2005, we continue toWe provide limited drilling services to oil and natural gas producers, with approximately 13producers. In Argentina, we operate seven drilling rigs onshoreand in the continental United States in the Appalachian Basin and the Powder River Basinwe operate several heavy-duty well service rigs that are capable of Wyoming, and internationally in Argentina. Theproviding drilling services. Our drilling services are primarily provided under standard dayrate,day rate, and, to a lesser extent, footage contracts, although our coal bed methane drilling rigs in the Powder River Basin are typically priced on a footage basis. Thecontracts. Our drilling rigs vary in size and capability. The rigs located in Argentina are equipped with mechanical power systems and have depth ratings of approximately 10,000 feet, although one rig can drill up to approximately 15,000 feet. In 2007, we elected to shut down our coal bed methane drilling operations in the Powder River Basin. We are now seeking to redeploy these assets to other regions. The coal bed methane drilling rigs have depth ratings between 1,200 to 1,800 feet. Like workover services, the demand for contract drilling is directly related to expectations about, and changes in, oil and natural gas prices which, in turn, are driven by the supply of and demand for these commodities.

Ancillary Oilfield Services

        We provide ancillary oilfield services, which include, among others: well site construction (preparation of a well site for drilling activities); roustabout services (provision of manpower to assist with activities on a well site); and air drilling services (drilling technique using compressed air). Demand and pricing for these services are generally related to demand for our well service operations.

Pressure Pumping Services Segment

        Key Energy Pressure Pumping Services providesThrough our pressure pumping services segment (approximately 18% of our revenues for the year ended December 31, 2007), we provide well stimulation and cementing services to oil and natural gas producers. Well stimulation services include fracturing, nitrogen services, and acidizing. These services (which may be completion or workover services) are provided to oil and natural gas

producers and are used to enhance the production of oil and natural gas wells from formations which exhibit restricted flow of oil and natural gas. In the fracturing process, we typically pump fluid and sized sand, or proppants, into a well at high pressure in order to fracture the formation and thereby increase the flow of oil and natural gas. With our cementing services, we pump cement into a well between the casing and the wellbore. Key offers a full complement of acidizing, fracturing and nitrogen and cementing services. At December 31, 2006, Key operated approximately 166,000 horsepower in stimulation and cementing equipment. Key'sOur pressure pumping services in 20062007 were provided in the Permian Basin, the San Juan Basin, the Barnett Shale region of North Texas and the Mid-Continent region. The CompanyWe also providesprovide cementing services in conjunction with our plugging and abandonment operations in California.

        In February 2004, we expanded Demand for our pressure pumping operations throughservices is primarily influenced by current and anticipated oil and natural gas prices and the acquisition of Fleet Cementers, Inc., a wholly owned subsidiary of Precision Drilling Corporation, for approximately $20 million in cash (of which $6 million was paid back to us in 2005 in considerationresulting effect on the willingness of our agreeingcustomers to remove certain noncompete restrictions from the agreement). Fleet Cementers provided pressure pumping services, including cementing, fracturing, acidizing, coiled tubing pumpingmake operating and nitrogen pumping, with primary operations in California and Texas. In connection with the Fleet acquisition, we relocated certain of the Fleet assets to the Barnett Shale region of North Texas. During 2004, 2005 and 2006, we expanded our pressure pumping operation with the purchase of approximately 100,000 horsepower of new pressure pumping equipment. We have additional pumping equipment on order today, and we anticipate that once we receive the equipment, which we expect to receive in the third quarter of 2007, we will operate approximately 212,000 horsepower.capital expenditures.

Fishing and Rental Services Segment

        Key Energy Fishing & Rental Services providesThrough our fishing and rental services segment (approximately 6% of revenues for the year ended December 31, 2007), we provided fishing and rental services to major and independent oil and natural gas production companies in the Gulf Coast, Mid-Continent and Permian Basin regions, of the United States, as well as in California. We also provided limited services offshore in the Gulf of Mexico. Fishing services involve recovering lost or stuck equipment in the wellbore andutilizing a "fishing tool" is a downhole tool designed to recover any such equipment lost in the well. The fishing tool supervisors who manage the fishing process have extensive experience with downhole problems. In addition, Key offerstool." We offer a full line of services and rental equipment designed for use both on landonshore and offshore for drilling and workover services. Our rental tool inventory consists of tubulars, handling tools, pressure-controlpressure-controlled equipment, power swivels, and a fleet of power swivels.

Equipment Overview

Well Service Rigs

        We usefoam air units. Demand for our well service rig fleetfishing and rental services is also closely related to perform four major categories of rig services forcapital spending by oil and natural gas producers.producers, which is generally a function of oil and natural gas prices.

Equipment Overview

Well Service Rigs

        Our rigs typically are billed to customers on a per hour basis but in certain cases may be billed on a dayrate.day rate. We categorize our rigs as active, stacked or inactive. We consider an active rig or piece of equipment to be a unit that is working, on standby, or down for repairs but with work orders assigned to it or that is available for work, which means that the equipment has a crew and is ready to work. A stacked rig or piece of equipment is defined as a unit that is in the remanufacturing process or a unit that does not have a crew assigned to it and could not be put to work without significant investment in repairs and additional equipment. A rig or piece of equipment is considered inactive if we intend to salvage the unit for parts, if we intend to sell the unit or if we intend to scrap the unit. The definitions of active, stacked and inactive are used for the majority of our equipment, including rigs.equipment.

        As of December 31, 2006,2007, our active fleet of well service rigs totaled 900975 rigs. These rigs are located throughout the United States and internationally in Argentina. TheArgentina and Mexico. Our geographic diversification provides us with a balanced mix of oil versus natural gas exposure. We estimate that approximately 60% of our rigs are located in predominantly oil regions while 40% of our rigs are located in predominantly natural gas regions.

        Our fleet is diverse and allows us to work on all types of wells, ranging from very shallow wells to wells as deep as 20,000 feet. The following table classifies our rigs based on size.size and location. Typically, heavy duty rigs will be utilized on deep wells while light duty rigs will be used on shallow wells. In most cases, these rigs can be reassigned to other regions should market conditions warrant the transfer of equipment.

Well Service Rig Fleet as of December 31, 2007

(1)

Swab rigs include rigs used in shallow-depth wells.

(2)

Light Duty rigs include rigs with rated capacity of less than 90 tons.

(3)

Medium Duty rigs include rigs with rated capacity of 90 tons to 125 tons.

(4)

Heavy Duty rigs include rigs with rated capacity of greater than 125 tons. This also includes seven drilling

(5)

Includes eight inland barge rigs acquired in Argentina.the acquisition of Moncla Well Service, Inc. and related entities. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions."

DISCONTINUED OPERATIONS
Oilfield Transportation Equipment

        During 2004, we provided contract drilling services to major oil companiesWe have a broad and independent oildiverse fleet of oilfield transportation service vehicles. We broadly define an oilfield transportation service vehicle as any heavy-duty, revenue-generating vehicle weighing over one ton. Our transportation fleet includes vacuum trucks, winch trucks, hot oilers and natural gas producers onshore in the continental United States in the Permian Basin, the Four Corners region, the Appalachian Basinother vehicles, including kill trucks and the Rocky Mountains. On January 15, 2005, we completed the salevarious hauling and transport trucks.

Transportation Fleet as of the majority of our contract drilling assets, which included the drilling rigs and associated equipment in the Permian Basin and Four Corners regions and certain rigs from the Rocky Mountain region. In consideration of the sale, we received approximately $62.0 million in cash. The sale included approximately 25 active rigs and 10 stacked rigs as well as a number of rigs which had been classified as either scrap or salvage. Prior to the sale, our drilling rigs varied in size and capability and in some cases included specialized equipment. The majority of Key's drilling rigs were equipped with mechanical power systems and had drilling depth capabilities ranging from approximately 4,500 to 12,000 feet. We operated one drilling rig with a depth rating of approximately 18,000 feet. As a result of the sale, we treated our land drilling business as a discontinued operation for all periods and recorded an after-tax loss from discontinued operations of $3.4 million, or $0.03 per diluted share, for the year ended December 31, 20052007

Pressure Pumping Equipment

        Our pressure pumping segment operates a diverse fleet of equipment, including: frac pumps, cementing units, acidizing units and an after-tax lossnitrogen units.

Pressure Pumping Fleet as of $5.6 million, or $0.04 per diluted share, during the year ended December 31, 2004.2007

SEASONALITY

        Our operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. Our well service rigs are mobile, and we operate a significant number of oilfield transportation service vehicles. During periods of heavy snow, ice or rain, we may not be able to move our equipment between locations, thereby reducing our ability to generate rig or truck hours. In addition, the majority of our well service rigs work only during daylight hours. In the winter months when days become shorter, this reduces the amount of time that the rigs can work and therefore has a negative impact on total hours worked.

Finally, Lastly, during the fourth quarter, we historically have experienced significant slowdown during the Thanksgiving and Christmas holiday seasons.

PATENTS, TRADE SECRETS, TRADEMARKS AND COPYRIGHTS

        Key isWe are the owner of numerous patents, trademarks and proprietary technology that we believe provide us with a competitive advantage in the various markets in which we operate or intend to operate. Key hasWe have devoted significant resources to developing technological improvements in our well service business and hashave sought patent protection both inside and outside the United States for products and methods that appear to have commercial significance. In the United States, as of December 31, 2006,2007, we had 2630 patents issued and 1516 patents pending. As of December 31, 2006,2007, we had 611 patents issued and 91121 patents pending in foreign countries. All the issued patents have varying remaining durations and begin expiring between 2013 and 2025. The most notable of our technologies include numerous patents surrounding the KeyView® system, a field data acquisition system that captures vital wellsitewell site operating data from service equipment. We believe this information helps us and our customers improve safety, reduce costs and increase productivity.

        We own several trademarks that are important to our business both in the United States and in foreign countries. In general, depending upon the jurisdiction, trademarks are valid as long as they are in use or their registrations are properly maintained and they have not been found to become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While our patents and trademarks, in the aggregate, are of considerable importance to maintaining our competitive position, no single patent or trademark is considered to be of a critical or essential nature.nature to our business.

        We also rely on a combination of trade secret laws, copyright and contractual provisions to establish and protect proprietary rights in our products and services. We typically enter into confidentiality agreements with our employees, strategic partners and suppliers and limit access to the distribution of our proprietary information.

FOREIGN OPERATIONS

        At December 31, 2006,During 2007, we operated internationally in Argentina. During 2006, our operations in Argentina and Mexico. In Argentina, we operated 37 well service rigs and seven drilling rigs and oilfield transportation vehicles, all of which we include in our well servicing segment. We commenced operations in Mexico during the second quarter of 2007. In February 2007, Petróleos Mexicanos, the Mexican national oil company ("PEMEX"), awarded our Mexican subsidiary, Key Energy Services de México S. de R.L. de C.V., a 22-month contract valued at $45.8 million (USD) to provide field production solutions and well workover services. Under the terms of the contract, we initially provided three well service rigs outfitted with our proprietary KeyView® system, and we installed two KeyView® systems on PEMEX-owned well service rigs. The Company previously operatedcontract grants PEMEX the option to call for additional rigs and KeyView® systems in Ontario, Canada asthe future, although these incremental services are not included in the contract. The current project covers PEMEX's North Region assets and initially focuses on oil wells in Burgos, Poza Rica-Altamira and Cerro Azul. We anticipate that we will expand our presence in Mexico during 2008. Recently, PEMEX has requested that we send additional equipment and KeyView® systems to Mexico. We anticipate that we will deploy up to an additional eight well as in Egypt. During 2004,service rigs with our proprietary KeyView® technology and will install three KeyView® units on PEMEX-owned rigs during 2008. Concurrent with the deployment of additional equipment, we closed our Ontario, Canada operation and relocated those assetsintend to our Michigan operation, which was subsequently sold on May 17, 2005. As described below, during 2005,seek an extension of our contract in Egypt terminated.with PEMEX.

        Revenue from our international operations during 2007 totaled $105.8 million, or 6.4% of total revenue. Revenue from international operations for 2006 and 2005 totaled $78.3 million or 5% of total revenue. Forand $68.2 million, respectively.

        On September 5, 2007, we acquired Advanced Measurements, Inc., a discussion of the effects of Argentina foreign currency transactions, see Item 8. "Consolidated Financial Statements and Supplementary Data," Note 10—"Argentina Foreign Currency Translation Loss."

        In Egypt we operated five well service rigs and a number ofprivately-held Canadian technology company focused on oilfield service vehicles underequipment controls, data acquisition and digital information work flow. In addition, in connection with the acquisition, we acquired a two-year contract we signed with Apache Corporation51% ownership interest in Advanced Flow Technologies, Inc., a privately-held Canadian technology company focused on March 28, 2002. While Apache extended the contract for limited periods, Apache did not exercise its right to extend the agreement for two additional one-year periods. In July 2005, the remaining work under the contract was completed,low cost wireless gas well production monitoring. See Item 7. "Management's Discussion and asAnalysis of December 2005, all five rigsFinancial Condition and oilfield service vehicles were shipped back to the United States and redeployed. Under the termsResults of the agreement, Apache paid all demobilization costs associated with these rigs. For information on the risks associated with our international operations, see Item 1A. "Risk Factors—Business and Debt-Related Risk Factors.Operations—Acquisitions."

CUSTOMERS

        Our customers include major oil companies, independent oil and natural gas production companies, and foreign national oil and natural gas production companies. During the years ended

December 31, 2007, 2006 2005, and 2004,2005, no single customer accounted for 10% or more of our consolidated revenues.

COMPETITION AND OTHER EXTERNAL FACTORS

        In the well servicing markets, we believe that, based on available industry data, we are the largest provider of well service rigs based on available industry data. At June 30, 2007, we had 850 active rigs in the United States. At December 31, 2007, we had 975 active rigs. Based on the Weatherford-AESC ("AESC") well service rig count, which is available on Weatherford International's internet website, there were approximately 2,7982,839 well service rigs in the United States at MayDecember 31, 2007 and approximately 2,8492007. A recent well service industry survey published by a U.S. investment bank suggests that there are more well service rigs in the United States in December 2006. Despitethan are reported by the significant consolidation in the domestic well servicing industry,AESC count. We agree that there are numerous small companies that compete in Key'slikely more rigs than reported by the AESC and we believe the active rig count could be as high as 3,600 well servicing markets. In addition, in May 2007 Nabors Industries announced that it operates 438service rigs. The difference between the AESC data and the investment bank survey is likely attributable to (i) not all U.S. well service providers being members of the AESC, (ii) some U.S. oil and natural gas producers owning well service rigs while Basic Energy Services, Inc. statedand not reporting to the AESC, and (iii) poor reporting of equipment by certain members of the AESC.

        The markets in a June 2007 press release that it has 371 wellwhich we operate are highly competitive. Competition is influenced by such factors as price, capacity, availability of work crews, and reputation and experience of the service rigs. We do not believe that any other competitors have greater numbers of active well service rigs than Key. In Argentina, our largest competitors are Pride International, Nabors Industries, and Allis-Chalmers Energy.

provider. We believe that an important competitive factor in establishing and maintaining long-term customer

relationships is having an experienced, skilled and well-trained work force. In recent years, many of Key'sour larger customers have placed increased emphasis on the safety performance and quality of the crews, equipment and services provided by their contractors. Key hasWe have devoted, and will continue to devote, substantial resources toward employee safety and training programs. In addition, we believe that the KeyView® system has provided and will continue to provide important safety enhancements. Further,Although we believe customers consider all of these factors, price is generally the primary factor in determining which service provider is awarded the work. However, we believe that most customers are willing to pay a slight premium for the quality and efficient service we provide.

        Significant well service providers include Nabors Industries, Basic Energy Services and Complete Production Services. Other large competitors include Bronco Drilling and Forbes Energy Services. In addition, though there has been consolidation in the domestic well servicing industry, there are numerous small companies that compete in Key's well servicing markets. We do not believe that any other competitors have greater numbers of active well service rigs than Key. In Argentina, our largest competitors are Pride International, Nabors Industries, and Allis-Chalmers Energy. Schlumberger Ltd. and Nabors Industries are our largest competitors in Mexico.

The pressure pumping market is dominated by three large competitors,major competitors: Schlumberger Ltd., Halliburton Company and BJ Services Company. These three companies have a substantially larger asset base than Key and are believed to operate in all major U.S. oil and natural gas producing basins. Other competitors include Weatherford International, Superior Well Service, Basic Energy Services, Complete Production Services, Frac-Tech and RPC. The pressure pumping industry is very competitive, and the three major competitors generally lead pricing in any particular region. Our pressure pumping services operate in niche markets and historically have competed effectively with these competitors based on performance and strong customer service. Where feasible, we cross-marketcross market our pressure pumping services along with our well service rigs and fishing and rental services, thereby offering our customers the ability to minimize vendors, which, we believe, will improve efficiency. This cross marketing capability is unique to Key, because none of the three major pressure pumping contractors operate well service rigs in the United States.

        The U.S. fishing and rental toolequipment market is fragmented compared to our other product lines. Companies which provide fishing services generally compete based on the reputation of their fishing tool operators and their relationships with customers. Competition for rental tools is sometimes based on price; however, in most cases, when a customer chooses a specific fishing tool operator for a particular job, then the necessary rental toolsequipment will be part of that job as well. Our primary competitors include: Baker Oil Tools, Smith International, Weatherford International, Basic Energy Services, Superior Energy Services, Quail Tools (owned by Parker Drilling) and Knight Oil Tools.

        The need for well servicing, pressure pumping services and fishing and rental services fluctuates, primarily, in relation to the price (or anticipated price) of oil and natural gas, which, in turn, is driven by the supply of and demand for oil and natural gas. Generally, as supply of those commodities decreases and demand increases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higher priced environment.

        The level of Key'sour revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of domestic and international oil and gas exploration and development activity.activity, as well as the equipment capacity in any particular region. For a more detailed discussion, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition.Operations."

EMPLOYEES

        As of December 31, 2006,2007, we employed approximately 9,400 persons.8,380 persons in our domestic operations and approximately 1,440 additional persons in Argentina, Mexico and Canada. Our domestic employees are not represented by a labor union and are not covered by collective bargaining agreements. Many of

our field employees in Argentina are represented by formal unions. While Mexico has a strong petroleum workers union, we are currently only employing non-union workers in Mexico. We have not experienced any material work stoppages associated with labor disputes or grievances and consider our relations with our employees to be satisfactory. We historically haveDuring 2007, we experienced an annual employee turnover rate of over 50%approximately 41%, although ourcompared to a turnover rate during 2006 improved toof approximately 43%.45% in 2006. The high turnover rate is caused, in part, by the nature of the work, which is physically demanding and sometimes performed in harsh outdoor conditions. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. Alternatively, some employees may leave Key if they can earn a higher wage with a competitor. A discussion of the risks associated with our high turnover is presented in Item 1A. "Risk Factors—Business and Debt-RelatedBusiness-Related Risk Factors."

ENVIRONMENTALGOVERNMENTAL REGULATIONS

        Key'sOur operations are subject to various federal, state, and local laws and regulations intendedpertaining to protecthealth, safety and the environment. Key'sWe cannot predict the level of enforcement of existing laws or regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations affecting our business will be adopted, or the effect such changes might have on us, our financial condition or our business. The following is a summary of the more significant existing environmental, health and safety laws and regulations to which our operations are subject and for which compliance may have a material adverse impact on our results of operation or financial position.

Environmental Regulations

        Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials, and some of our operations must obtain permits limitingthat limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits.

        Laws and regulations protecting the environment have become more stringent over the years, and in certain circumstances may impose "strict liability," rendering us liable for environmental damage without regard to negligence or fault on our part. CleanupMoreover, cleanup costs, penalties, and other damages arising as a result of environmental laws and costs associated withnew or changes into existing environmental laws and regulations could be substantial and could have a material adverse effect on Key'sour financial condition, results of operations and cash flows. From time to time, claims have been made and litigation has been brought against Keyus under such laws. However, the costs incurred in connection with such claims and other costs of environmental compliance have not had a material adverse effect on Key'sour past operations or financial statements in the past.statements. Management believes that Key conducts its operations in substantial compliance with current federal, state and local requirements as they relaterelated to health, safety and the environment.

        Our underground injectionHazardous Substances and Waste

        The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as "CERCLA" or the "Superfund" law, and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these "responsible persons" may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources, and for the costs of certain health studies. In the course of our operations, we generate materials that are regulated as hazardous substances and, as a result, may incur

CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants.

        We also generate solid wastes that are subject to the requirements of the Resource Conservation and Recovery Act, as amended, or "RCRA," and comparable state statutes. Certain materials generated in the exploration, development, or production of crude oil and natural gas are excluded from RCRA's hazardous waste regulation, but these wastes, which include wastes currently generated during our operations, could be designated as "hazardous wastes" in the future and become subject to more rigorous and costly disposal requirements. Any such changes in these laws and regulations could have a material adverse effect on our operating expense.

        Although we used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to perform remedial activities to prevent future contamination.

Air Emissions

        The Clean Air Act, as amended, or "CAA," and state laws and regulations restrict the emission of air pollutants and also impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain projects or facilities and may require use of emission controls. Our failure to comply with CAA requirements and those of similar state laws and regulations could subject us to civil and criminal penalties, injunctions, and restrictions on operations.

Global Warming and Climate Control

        Recent scientific studies suggest that emissions of greenhouse gases (including carbon dioxide and methane) may contribute to warming of the Earth's atmosphere. In response to such studies, the U.S. Congress is considering legislation to reduce greenhouse gas emissions. In addition, many states have already taken measures to address greenhouse gases through the development of greenhouse gas emission inventories, and/or regional greenhouse gas cap and trade programs. As a result of the U.S. Supreme Court's decision on April 2, 2007 inMassachusetts et al. v. EPA, the Environmental Protection Agency (the "EPA") may regulate greenhouse gas emissions from mobile sources (e.g. cars and trucks) even if Congress does not adopt new legislation. The Court's holding inMassachusetts that greenhouse gases are covered pollutants under the CAA may also result in future regulation of greenhouse gas emissions from stationary sources. Legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business could increase our costs in order to stay compliant with any new laws.

Water Discharges

        We operate facilities that are subject to requirements of the Clean Water Act, or "CWA," and analogous state laws that impose restrictions and controls on the discharge of pollutants into navigable waters. Pursuant to these laws, permits must be obtained to discharge pollutants into state waters or waters of the United States, including to discharge storm water runoff from certain types of facilities. Spill prevention, control and countermeasure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the Oil Pollution Act of 1990, as amended, or "OPA", which amends the CWA and applies to owners and operators of vessels, including barges, offshore platforms, and certain onshore facilities. Under OPA, regulated parties are strictly

liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible. The CWA can impose substantial civil and criminal penalties for non-compliance.

Employees

Occupational Safety and Health Act

        We are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or "OSHA", and comparable state laws that regulate the protection of employee health and safety. OSHA's hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with OSHA requirements.

Marine Employees

        Certain of our employees who perform services on our barge rigs or work offshore are covered by the provisions of the Jones Act, the Death on the High Seas Act and general maritime law. These laws operate to make the liability limits established under state workers' compensation laws inapplicable to these employees. Instead, these employees or their representatives are permitted to pursue actions against us for damages resulting from job related injuries, with generally no limitations on our potential liability.

Other Laws and Regulations

Saltwater Disposal Wells

        We operate saltwater disposal wells that are subject to the CWA, Safe Drinking Water Act, and state and local laws and regulations, including those established by the EPA's Underground Injection Control program. The Underground Injection Control programProgram which establishes the minimum program requirements for state and local programs regulating underground injection activities. Those regulations include requirements for permitting, testing and record keeping. The substantial majorityrequirements. Most of our salt watersaltwater disposal wells are located in the State of Texas and regulated by the Texas Railroad Commission, also known as the "RRC." Wewe also operate salt watersaltwater disposal wells in Arkansas, Louisiana and New Mexico and are subject to similar regulatory controls in those states.Mexico. Regulations in these states require us to obtain a permit from the applicable regulatory agencies to operate each of our underground injectionsaltwater disposal wells. TheseThe applicable regulatory agencies have the general authority toagency may suspend or modify one or more of theseour permits if continuedour well operation of one of our underground injection wells is likely to result in pollution of freshwater, substantial violation of permit conditions or applicable rules, or leaks to the environment.

We maintain insurance against some risks associated with underground contamination that may occur as a result ofour well service activities. However, this insurance is limited to activities, at the wellsite andbut there can be no assurance that this insurance will continue to be commercially available or that this insurance will be available at premium levels that justify its purchase by us. The occurrence of a significant event that is not fully insured or indemnified against us could have a materiallymaterial adverse effect on our financial condition and operations.

        CertainElectric Wireline

        We conduct cased-hole electric wireline logging, which may entail the use of our wirelineradioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices to evaluate downhole formation. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of applicable agreement states that work cooperatively in implementing the federal regulations. In addition, our down-hole surveying services involve thecertain states. Additionally, we may use ofhigh explosive charges thatfor perforating casing and formations, and various explosive cutters to assist in wellbore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives. Standards implemented by these regulatory agenciesExplosives and require us to obtain licenses or other approvals for the use of such densitometers as well as explosive charges. We have obtained these licenses and approvals when necessary and believe that we are in substantial compliance with these federal requirements.

ITEM 1A.Risk Factors

        In addition to the other information in this report, the following factors should be considered in evaluating us and our business.

Business and Debt-RelatedBusiness-Related Risk Factors

Our business is dependent on conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies.

        The demand for our services is primarily influenced by current and anticipated oil and natural gas prices. Prices for oil and natural gas historically have been extremely volatile and have reacted to changes in the supply of and demand for oil and natural gas. These include changes resulting from, among other things, the ability of the Organization of Petroleum Exporting Countries to establish and maintain production quotas to support oil prices, domestic and worldwide economic conditions and political instability in oil-producing countries. Weakness in oil and natural gas prices (or the perception by our customers that oil and natural gas prices will decrease) may cause lower rates for, and lower utilization of available well service equipment.equipment and result in lower rates. In addition, when oil and natural gas prices are weak, or when our customers expect oil and natural gas prices to decrease, fewer wells are drilled, resulting in less completion and maintenance work for us. Additional factors that affect demand for our services include:

•

the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies;



•

oil and natural gas production costs;



•

government regulation; and



•

conditions in the worldwide oil and natural gas industry.

        In addition, we anticipate that prices for oil and natural gas will continue to be volatile and affect the demand for and pricing of our services. Decreases in oil and natural gas prices can result in a reduction in the trading prices and value of our securities, even if the decreases in oil and natural gas prices do not affect our business directly. Moreover, a material decline in oil or natural gas prices or activities over a sustained period of time could materially adversely affect the demand for our services and, therefore, our results of operations and financial condition.

Periods of diminished or weakened demand for our services have occurred in the past. Although we experienced a material decrease in the demand for our services beginning in August 2001 and continuing through September 2002, since September 2002 we have experienced continued strong demand for our services. We believe the previous decrease in demand was due to an overall weakening

of demand for onshore well services, which was attributable to general uncertainty about future oil and natural gas prices and the U.S. economy, including the impact of the September 11, 2001 terrorist attacks. If any of these conditions return, demand for our services could again decrease, having a material adverse effect on our financial condition and results of operations. In light of these and other factors relating to the oil and natural gas industry, our historical operating results may not be indicative of future performance.

We may be unable to implementmaintain pricing increases on our core services.

        A component of our business strategy includes charging higherDuring the past three years, we have increased the prices on our core services to offset rising costs and to generate higher returns for our shareholders. Recently, we have made some price concessions to our customers in order to generate higher returns. During periods ofmaintain market share. We believe that market conditions should remain strong industry activity when demanddue to high commodity prices, and therefore anticipate that pricing for our services has increased, we have been able to increase our prices. These increases have been initiated to offset our rising cost structure and to enhance our margins. We believe that we have been able to increase our prices due to strong industry conditions, our capabilities and our leading market position. In the eventshould be relatively stable during 2008; however, should market conditions deteriorate or additional new industry capacity increase, it may become more difficult for us to increase prices, and if demand for our services declines, some customers may seek pricing concessions. Additionally, in some cases, we have not been able to successfully increase prices without adversely affecting demand for our services. Specifically, some customers have elected to use our competition rather than to pay our higher price.maintain prices.

        The inability to secure further price increasesmaintain our pricing could:

•

limit our ability to offset rising costs; and



•

impact our ability to generate highergreater free cash flow which would be used to expand our business.

Increases in industry capacity may adversely affect our business.

        Over the past three years, new capacity, including new well service rigs, new pressure pumping equipment and new fishing and rental equipment, has entered the market. In some cases, the new capacity is attributable to start-up oilfield service companies and in other cases, the new capacity has been employed by existing service providers to increase their service capacity. We have been adversely affected by the new capacity as our utilization for 2007 is down from prior years. Lower utilization of our fleet has led to reduced pricing for our services. Should oilfield service companies continue to add new capacity and demand for services not increase, it is possible that we could experience continued pressure on the pricing of our services.services and experience lower utilization. This could have a material negative impact on our operating results.

An economic downturn may adversely affect our business.

        AThere is a concern that the United States may enter into a recession in 2008, and if so, a downturn in the U.S. economy may cause reduced demand for petroleum-based products and natural gas. In addition, during a downturn many oil and natural gas production companies often reduce or delay expenditures to reduce costs, which in turn may cause a reduction in the demand for our services during these periods. We view the Baker Hughes U.S. land drilling rig count as a good barometer of oilfield service activity, which is driven by capital spending from oil and natural gas production companies. During 2002, the last economic slowdown in which activity levels fell, the Baker Hughes U.S. land drilling rig count declined to an average of 717. Since that time, activity levels, as measured by the Baker Hughes U.S. land drilling rig count, have improved. According to available industry data, in 2006, the average U.S. land drilling rig count was approximately 1,559 working rigs, as compared to an average of approximately 1,290 working rigs in 2005. The number of land drilling rigs may be seen as indicative of the demand for services such as those we provide. If the economic environment should deteriorate, our business, financial condition and results of operations may be adversely impacted.

Our business involves certain operating risks, which are primarily self-insured, and our insurance may not be adequate to cover all losses or liabilities we might incur in our operations.

        Our operations are subject to many hazards and risks, including the following:

•

blow-outs, the uncontrolled flow of natural gas, oil or other well fluids into the atmosphere or an underground formation;



•

reservoir damage;



•

fires and explosions;



•

accidents resulting in serious bodily injury and the loss of life or property;



•

pollution and other damage to the environment; and



•

liabilities from accidents or damage by our fleet of trucks, rigs and other equipment.

        If these hazards occur, they could result in suspension of operations, damage to or destruction of our equipment and the property of others, or injury or death to our or a third party's personnel.

        We self-insure a significant portion of these liabilities. For losses in excess of our self-insurance limits, we maintain insurance from unaffiliated commercial carriers. However, our insurance may not be adequate to cover all losses or liabilities that we might incur in our operations. Furthermore, our insurance may not adequately protect us against liability from all of the hazards of our business. We also are subject to the risk that we may not be able to maintain or obtain insurance of the type and amount we desire at a reasonable cost. If we were to incur a significant liability for which we were uninsured or for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows.

We are subject to the economic, political and social instability risks of doing business in certain foreign countries.

        We currently have operations in Argentina and Mexico and may expand our operations into other foreign countries. We also have a technology development group in Canada. As a result, we are exposed to risks of international operations, including:

•

increased governmental ownership and regulation of the economy in the markets where we operate;



•

inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest rates and wage and price controls;



•

increased trade barriers, such as higher tariffs and taxes on imports of commodity products;



•

exposure to foreign currency exchange rates;



•

exchange controls or other currency restrictions;



•

war, civil unrest or significant political instability;



•

expropriation, confiscatory taxation andor nationalization of our assets located in the markets where we operate;



•

governmental policies limiting investments by and returns to foreign investors;



•

labor unrest and strikes; and



•

restrictive governmental regulation and bureaucratic delays.

        The occurrence of one or more of these risks may:

•

negatively impact our results of operations;



•

restrict the movement of funds and equipment;equipment to and from affected countries; and



•

inhibit our ability to collect receivables; and



•

lead to U.S. government or international sanctions.receivables.

We historically have experienced a high employee turnover rate. Any difficulty we experience replacing or adding workers could adversely affect our business.

        We historically have experienced an annual employee turnover rate of almost 50%, although our turnover rate during 20062007 improved to approximately 43%41%. The high turnover rate is attributable to the nature of the work, which is physically demanding and performed outdoors. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. We cannot assure that at times of high demand we will be able to retain, recruit and train an adequate number of workers. Potential inability or lack of desire by workers to commute to our facilities and job sites and competition for workers from competitors or other industries are factors that could affect our ability to attract and retain workers. We believe that our wage rates are competitive with the wage rates of our competitors and other potential employers. A significant increase in the wages other employers pay could result in a reduction in our workforce, increases in our wage rates, or both. Either of these events could diminish our profitability and growth potential.

We may not be successful in implementing technology development and technology enhancements.

        A component of our business strategy is to incorporate our technology into our well service rigs, primarily through the KeyView® system. The inability to successfully develop and integrate the technology could:

•

limit our ability to improve our market position;



•

increase our operating costs; and



•

limit our ability to recoup the investments made in technology initiatives.

We are subject tomay incur significant costs and liabilities as a result of environmental, health and safety laws and regulations that expose us to potential liability.govern our operations.

        Our operations are regulated under a number ofsubject to U.S. federal, state and local, and foreign laws and regulations that govern, among other things,impose limitations on the discharge of pollutants into the environment and establish standards for the handling, storage and disposal of waste materials, some of which are classified asincluding toxic and hazardous substances, and the discharge of hazardous materials into the environment. In addition to potential liability if we should fail towastes. To comply environmental regulations may expose us to liability for noncompliance of other parties, without regard to whether we were negligent. Sanctions for noncompliance with applicable environmentalthese laws and regulations, may include administrative, civilwe must obtain and criminal penalties, revocationmaintain numerous permits, approvals and certificates from various governmental authorities. While the cost of permits and corrective action orders. Furthermore, we may be liable for costs for environmental clean-up at currently or previously owned or operated properties or off-site locations where we sent, disposed of, or arranged for disposal of hazardous materials.

        Our expenditures for environmentalsuch compliance havehas not been significant in the past, but may increase in the future. Compliance with existing laws or regulations, adoption of new laws, or regulations or enforcement policies could become more vigorous enforcement of environmental lawsstringent and significantly increase our compliance costs or regulationslimit our future business opportunities, which could have a material adverse effect on our operations by increasing our expenses and limiting our future business opportunities.operations.

        In addition, we conduct electric wireline logging, which entails the use of various downhole sondes that acquire geologic data from the surrounding well bore. The data is set up downhole using armored, insulated cable which has from one to seven electrical conductors inside. We use radioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices to evaluate downhole formations, such as Americium, Beryllium 241, Cesium 137, Iodine 131, and other isotopes. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of applicable agreement states that work cooperatively in implementing the federal regulations. Additionally, we use high explosive charges for perforating casing and formations, and various explosive cutters to assist in well bore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives. Standards implemented by these regulatory

agencies require us to obtain licenses or other approvals for the use of densitometers as well as explosive charges. While we believe we are in substantial compliance with these requirements, failure to obtain necessary licenses or otherwise        Failure to comply with environmental, health and safety laws and regulations could result in the lawassessment of administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and to a lesser extent, orders to limit or cease certain operations. Certain environmental laws impose strict and/or joint and several liability, which could adversely affectcause us to become liable for the conduct of others or for consequences of our business.own actions that were in compliance with all applicable laws at the time of those actions. Please see Item 1. "Business—Governmental Regulations" for more information.

We rely on a limited number of suppliers for certain materials used in providing our pressure pumping services.

        We rely heavily on three suppliers for sized sand, a principal raw material that is critical for our pressure pumping operations. While the materials are generally available, if we were to have a problem sourcing raw materials or transporting these materials from either of these vendors, our ability to provide pressure pumping services could be limited.

We may not be successful in identifying, making and integrating our acquisitions.

        A component of our growth strategy is to make geographic-focused acquisitions that will strengthen our presence in selected regional markets. The success of this strategy will depend on our ability to identify suitable acquisition candidates and to negotiate acceptable financial and other terms. There is no assurance that we will be able to do so. The success of an acquisition depends on our ability to perform adequate diligence before the acquisition and on our ability to integrate the acquisition after it is completed. While we commit significant resources to ensure that we conduct comprehensive due diligence, there can be no assurance that all potential risks and liabilities will be identified in connection with an acquisition. Similarly, while we expect to commit substantial resources, including management time and effort, to integrating acquired businesses into ours, there is no assurance that we will be successful integrating these businesses. In particular, it is important that we are able to retain both key personnel of the acquired business and its customer base. A loss of either key personnel or customers could negatively impact the future operating results of the acquired business.

Debt-Related Risk Factors

We may not be able to generate sufficient cash flow to meet our debt service obligations.

        We had $421.8 million of total indebtedness and capital lease obligations outstanding at December 31, 2006. As of June 30, 2007, we had $424.1 million of total indebtedness and capital lease obligations outstanding.

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to conditions in the oil and gas industry, general economic and financial conditions, competition in the markets where we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, thatall of which are beyond our control.

        We cannot assure you that our business will generate sufficient cash flow from operations to service our outstanding indebtedness, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may not ablehave to refinanceundertake alternative financing plans, such as:

•

refinancing or restructuring our indebtedness. We may not be able to continue to implement the parts of our business strategy relating to strengthening our balance sheet by debt;



•

selling assets;



•

reducing debt, makingor delaying acquisitions andor capital investments, such as remanufacturing our rigs and related equipment.equipment; or



•

seeking to raise additional capital.

        However, we cannot assure you that we would be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, or that implementing any such alternative financing plans would allow us to meet our debt obligations. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financings, could materially and adversely affect our business, financial condition, results of operations and prospects.

Our debt instruments impose restrictions on us that may affectlevel and the covenants in the agreements governing our ability to successfully operate our business.

        Our senior secured credit facility limits our ability to take various actions, such as:

•

incurring additional indebtedness;



•

paying dividends;



•

repurchasing junior indebtedness;



•

making investments;



•

entering into transactions with affiliates;



•

merging or consolidating with other entities; and



•

selling all or substantially all of our assets.

        These restrictions alsodebt could limit our ability to obtain additional financing, make needed capital expenditures, withstand a downturn in our business or the economy in general, or otherwise conduct our business.

Additional indebtedness could materially adversely affectnegatively impact our financial condition, results of operations and business prospects and prevent us from fulfilling our obligations under our outstanding indebtedness.debt agreements.

        UnderOur level of indebtedness, and the covenants contained in the agreements governing our senior secured credit facility, we are limited indebt, could have important consequences for our ability to incur additional debt until we have filed our required periodic reports with the SEC. If and when such restrictions are lifted and we can incur additional debt, increased leverage could, for example:operations, including:

•

makemaking it more difficult for us to satisfy our obligations under our indebtedness; ifindebtedness and increasing the risk that we fail to comply with the requirements ofmay default on our indebtedness, that failure could result in an event of default of such indebtedness;debt obligations;



•

requirerequiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;



•

limitlimiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other general corporate purposes;activities;



•

limitlimiting management's discretion in operating our business;



•

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;



•

diminishdetracting from our ability to withstand successfully withstand a downturn in our business or the economy generally; and



•

placeplacing us at a competitive disadvantage against less leveraged competitors.competitors; and

•

making us vulnerable to increases in interest rates, because certain debt will vary with prevailing interest rates.

        If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could increase.

We may be unablerequired to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants contained in our senior secured credit facility, which could resultand other restrictions in the impairmentagreements governing our debt, it could lead to an event of default and the consequent acceleration of our working capital and alter ourobligation to repay outstanding debt. Our ability to operatecomply with these covenants and other restrictions may be affected by events beyond our business.control, including prevailing economic and financial conditions.

        We are a party to a $547.25 million senior secured credit facility. To maintainIn addition, under the right to borrow under this credit facility and avoid a default,terms of our indebtedness, we are required to maintainmust comply with certain financial covenant ratios and satisfy certain financial condition tests, several of which become more restrictive over time and maycould require us to take action to reduce our debt or take some other action in order to comply with them. Our ability to satisfy required financial ratios and tests can be affected by events beyond our control, including prevailing economic, financial and industry conditions, and we cannot assure you that we will continue to meet those ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in a default under our credit agreement.indebtedness. If we default, our lendercredit facility lenders will no longer be obligated to extend credit to us and they, as well as the trustee for our outstanding notes, could elect to declare all amounts outstanding under the indenture or senior secured credit agreement,facility, as applicable, together with accrued interest, to be immediately due and payable. The results of such action would have a significant negative impact on our results of operations, financial condition and cash flows.

Our business may be adversely affected if we cannot successfully execute acquisitions that we make or effectively integrate acquired operations.variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

        Our strategy includes acquiring complementary businessesBorrowings under our senior secured credit facility bear interest at variable rates, exposing us to interest rate risk. If interest rates increase, our domestic operations. In addition,debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease.

Delayed Financial Reporting-Related Risk Factors

We are not eligible to use short-form or shelf registration.

        The securities laws require that we supply current annual and quarterly financial statements in order for us to be able to register securities for a public offering or an acquisition. Although we are able to register securities for public offerings and acquisitions, we are not eligible to use "short-form" registration that allows us to incorporate by reference our SEC reports into our registration statements, or to use shelf registration until we have filed all of our periodic reports in a timely manner for a period of twelve months. Therefore, we will also evaluate possible international acquisitions. Anybe ineligible for short-form or shelf registration until October 2008. Inability to use short-form or shelf registration could increase the costs of selling securities publicly and could significantly delay such strategysales.

Taxing authorities may determine that we owe additional taxes from previous years.

        As a result of the restatement of our financial statements for periods prior to 2004 and delay in our financial reporting for subsequent periods, we will involve a numberlikely have to amend previously filed tax returns and reports. Where legal, regulatory or administrative rules require or allow us to amend our previous tax filings, we intend to comply with our obligations under applicable law. To the extent that tax authorities do not accept our conclusions about the tax effects of risksthe restatement, liabilities for taxes could differ from those which have been recorded in our consolidated financial statements. If it is determined that we have additional tax liabilities, there could be an adverse effect on our financial condition, results of operations and challenges, including:cash flows.

•




We have identified material weaknesses in our abilityinternal control over financial reporting. These material weaknesses, if not corrected, could affect the reliability of our financial statements and have other adverse consequences.

        Section 404 of the Sarbanes-Oxley Act of 2002 and the related SEC rules require management of public companies to identify suitable acquisition candidates, to negotiate acceptable terms, documentation and other conditions,assess the effectiveness of their internal control over financial reporting annually and to obtaininclude in Annual Reports on Form 10-K a management report on that assessment, together with an attestation report by an independent registered public accounting firm. Under Section 404 and the SEC rules, a company cannot find that its internal control over financial reporting is effective if there exist any necessary regulatory clearances;



•

our ability to integrate acquired operations;



•

potential loss"material weaknesses" in its financial controls. A "material weakness" is a control deficiency, or combination of key employees and customerscontrol deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the acquired companies;annual or interim financial statements will not be prevented or detected.

        We have identified material weaknesses in internal control over financial reporting as of December 31, 2007. We have taken and



•

an increase will take actions to remediate the material weaknesses and improve the effectiveness of our internal control over financial reporting; however, we cannot assure you that we will be able to correct these material weaknesses by the end of 2008. Any failure in the effectiveness of internal control over financial reporting, if it results in misstatements in our expenses and working capital requirements.

        Any of these factorsfinancial statements, could adversely affect our ability to achieve anticipated levels of earnings and cash flow from acquisitions or realize other anticipated benefits. Furthermore, competition from other potential buyers could reduce our acquisition opportunitieshave a material effect on financial reporting or cause us to pay a higher price than we otherwise might pay.fail to meet reporting obligations, and could negatively impact investor perceptions.

The trading price of our common stock could be subject to significant fluctuations.Takeover Protection-Related Risks

        The trading price of our common stock has been volatile due to, among other factors, the uncertainty associated with the restatement of our prior period financial statements, our ability to become current with respect to our SEC filings, and our ability to relist our common stock on the NYSE. Continued uncertainty or negative developments may cause significant declines in the price of our common stock. Also, factors such as announcements of fluctuations in our or our competitors' operating results and market conditions for oil and gas-related stocks in general could have a significant impact on the future trading prices of our common stock. In particular, the trading price of the common stock of many oilfield service companies has experienced extreme price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose stocks were affected. In addition, the trading prices and value of our common stock could be subject to significant fluctuations in response to variations in our prospects and operating results, which may in turn be affected by weakness in commodity prices, changes in interest rates and other factors. There can be no assurance that these factors will not have an adverse effect on the trading prices of our common stock.

Our bylaws contain provisions that may prevent or delay a change in control.

        Our Amended and Restated Bylaws contain certain provisions designed to enhance the ability of the Board of Directors to respond to unsolicited attempts to acquire control of the Company. These provisions:

•

establish a classified Board of Directors, generally providing for three-year staggered terms of office for all members of our Board;



•

set limitations on the removal of directors;



•

provide our Board of Directors the ability to set the number of directors and to fill vacancies on the Board occurring between shareholder meetings; and



•

set limitations on who may call a special meeting of shareholders.

        These provisions may have the effect of entrenching management and may deprive investors of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

Delayed Financial Reporting-Related Risk Factors

The delay in reporting our financial statements and related events has had, and will continue to have, a material adverse effect on us.

        Because of the delay in completing our financial statements for the year ended December 31, 2003, and our restatement of prior period financial statements, we have been unable to file our required periodic reports with the SEC for some time. This report is being filed more than four months after it was due. We have not yet filed our quarterly reports for 2005, 2006 and the first two quarters of 2007, and we may be unable to timely file our quarterly report for the third quarter of 2007. As a result of these events, we have become subject to significant risks and occurrences relating to the following matters, which are described in more detail below:

•

Possible adverse consequences of failure to file past SEC reports;



•

Limitations on access to public capital markets;

ITEM 1B.Unresolved Staff Comments

        None.

ITEM 2.Properties

        Key leases executive office space in Houston, Texas (principal executive office) and Midland, Texas. In addition, we conduct our operations using a combination of owned and leased properties to support our operations in each of our geographic markets. Our leased properties are subject to various lease terms and expirations. As of December 31, 2006,2007, we owned 135142 properties, twelve10 of which were inactive. We also operated 8475 leased

office and yard locations. We owned or leased 57 salt water disposal wells, ten of which were inactive at December 31, 2006.2007. The majority of our salt water disposal wells are located in Texas.

        We believe all properties that we currently occupy are suitable for their intended use. We believe that we have sufficient facilities to conduct our operations during 2007.2008. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.

ITEM 3.Legal Proceedings

Class Action Lawsuits and Derivative Activities

        Since June 2004, we have beenwere named as a defendant in six class action complaints for alleged violations of federal securities laws, which have been filed in federal district court in Texas. They are as follows:

Cause No. MO-04-CV-082;Peter Kaltman, on behalf of himself and all others similarly situated v. Key Energy Services, Inc., Francis D. John, Royce W. Mitchell, Richard J. Alario and James J. Byerlotzer, filed in the United States District Court for the Western District of Texas

Cause No. MO-04-CV-083;Malcolm Lord, Individually and on Behalf of all Others Similarly situated v. Key Energy Services, Inc., Francis D. John, Richard J. Alario, James J. Byerlotzer and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas

Cause No. MO-04-CV-090;Celeste Navon, on behalf of herself and all others similarly situated v. Key Energy Services, Inc., Francis John, Royce Mitchell, James Byerlotzer and Richard Alario, filed in the United States District Court for the Western District of Texas

Cause No. MO-04-CV-104;David W. Ortbals, on Behalf of Himself and All Others Similarly situated v. Key Energy Services, Inc., Richard J. Alario, James J. Byerlotzer, Francis D. John, and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas

Cause No. MO-04-CV-0254;Paul E. Steward, on Behalf of Himself and All Others Similarly situated v. Key Energy Services, Inc., Francis D. John and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas

Cause No. MO-04-CV-0227;Garco Investment LLP Individually and on Behalf of all Others Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, James J. Byerlotzer, Francis D. John and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas

        These six actions have beenwere consolidated into one action. On November 1, 2005, the plaintiffs filed a consolidated amended class action complaint. The complaint iswas brought on behalf of a putative class of purchasers of our securities between April 29, 2003 and June 4, 2004. The complaint namesnamed Key, Francis D. John, Royce W. Mitchell, Richard J. Alario and James J. Byerlotzer as defendants. The complaint generally allegesalleged that we made false and misleading statements and omitted material information from our public statements and SEC reports during the class period in violation of the Securities Exchange Act of 1934, including alleged: (i) overstatement of revenues, net income, and earnings per share, (ii) failure to take write-downs of assets, consisting of primarily idle equipment, (iii) failure to amortize the Company's goodwill, (iv) failure to disclose that the Company lacked adequate internal controls and therefore was unable to ascertain the true financial condition of the Company, (v) material inflation of the Company's financial results at all relevant times, (vi) misrepresentation of the value of acquired businesses, and (vii) failure to disclose misappropriation of funds by employees. We filed a motion to dismiss the case. The individual defendants also filed motions to dismiss the case. On August 11, 2006, the court denied our motion to dismiss, but granted dismissals as to Messrs. Alario and Byerlotzer. We filed our answer to the consolidated amended complaint on September 11, 2006. Trial is set for March 3, 2008.

        The Plaintiffs have filed a motion for class certification. The class certification hearing is scheduled to be held on September 6, 2007. The parties are engaged in written discovery and document production.

Derivative Actions

        FourIn addition, four shareholder derivative suits have beenwere filed by certain of our shareholders. They are as follows:

Cause No. 2004-CV-44728; Moonlight Investments, LTD. on Behalf of Nominal Defendant Key Energy Services, Inc., v. Francis D. John, Richard J. Alario, James J. Byerlotzer, Royce W. Mitchell, Kevin P. Collins, W. Phillip Marcum, and Ralph S. Michael, III, and Key Energy Services, Inc., filed in the 385th Judicial District Court, Midland County, Texas

Cause No. EP-04-CA-0457;Sandra Weissman, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation, filed in the United States District Court Western District of Texas

Cause No. EP-04-CA-0456;Daniel Bloom, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation, filed in the United States District Court Western District of Texas

Cause No. 2007-31254;Sandra Weissman, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation filed in the 270^th Judicial District, Harris County, Texas.Texas

        The first derivative suit was filed on August 9, 2004 in state court in Midland, Texas. Two other derivative suits were filed in federal court in El Paso, Texas on December 10, 2004 and subsequently transferred to federal court in Midland, Texas and consolidated by agreement of the parties. Following dismissal of those two actions for failure to make a demand, a fourth derivative suit was filed in Texas state court in Harris County, Texas on May 22, 2007. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, and Richard J. Alario have beenwere named as defendants in one or more of those actions. ThoseThe actions arewere filed by individual shareholders purporting to act on our behalf, asserting various claims against the named officer and director defendants. The derivative actions generally allege the same facts as those in the shareholder class action suits. Those suits also allege breach of fiduciary duty, abuse of control, waste of corporate assets, and unjust enrichment by these defendants.

        The first derivative suit was filed on August 9, 2004On September 7, 2007, we reached agreements in state court in Midland, Texas. The plaintiff subsequently amended that suitprinciple to assert claims against our former independent public accountants, KPMG LLP. We filed a motion to dismisssettle all claims in thatpending securities class action which was granted by the court on March 29, 2005 for failure to make demand on the directors before filing suit. The plaintiff appealed that ruling. On May 18, 2006, the intermediate Court of Appeals issued an opinion affirming the trial court's ruling that the plaintiff had not pleaded sufficient facts to excuse its failure to make demand, but reversing on procedural grounds. We filed a motion for rehearing, which was denied June 15, 2006, and we appealed to the Texas Supreme Court. On June 8, 2007 the Texas Supreme Court denied Key's Petition For Review (appeal). The case has been sent back to the trial court for further proceedings.

        Two other derivative suits were filed in federal court in El Paso, Texas on December 10, 2004. Those actions were transferred to federal court in Midland, Texas and consolidated by agreement of the parties. We filed a motion to dismiss or to stay that consolidated action. The individual defendants also filed a motion to dismiss. On July 10, 2006, the court entered an order dismissing those two derivative actions for failure to make a demand. After the dismissal, Plaintiff, Sandra Weissman made a putative demand on Key. On May 22, 2007, Ms. Weissman refiled her suit. She filed suit in Texas state court in Harris County, Texas. We have not yet been formally served with the lawsuit.

        In each of the matters described above, plaintiffs are seeking an unspecified amount of monetary damages. At this time, we cannot ascertain the ultimate aggregate amount of monetary liability or financial impact of the class actions and derivative lawsuits. While we have directors'lawsuits in consideration of payments totaling $16.6 million in exchange for full and officers' insurance in the aggregate amountcomplete releases for all defendants, of $50 million, we cannot determine whether these actions, suits, claims, and proceedingswhich Key will individually or collectively, have a material adverse effect on our business, results of operations, financial condition and cash flows. We and named directors and officers intendbe required to vigorously defend these actions, suits, claims and proceedings.

Government Investigations

        On March 29, 2004, we were notified by the Fort Worth office of the SEC that it had commenced an inquiry regarding the Company. The SEC issued a formal order of investigation on July 15, 2004. On May 30, 2007, we were informed by the staff of the Enforcement Division of the SEC that it had completed its investigation as to Key and that it did not intend to recommend enforcement action. In addition, on January 5, 2005, we were served with a subpoena issued by a grand jury in Midland, Texas, that asked for the production of documents in connection with an investigation being conducted by the U.S. Attorney's Office for the Western District of Texas. In October 2006, we were notified by the U.S. Attorney's Office that it would not pursue any criminal charges against the Company.

Litigation with Former Officers and Employees

        We have been named in a lawsuit by our former general counsel, Jack D. Loftis, Jr., in the U.S. District Court, District of New Jersey on April 21, 2006, in which he alleges a "whistle-blower" claim under the Sarbanes-Oxley Act, breach of contract, breach of good faith and fair dealing, breach of fiduciary duty, and wrongful termination. Mr. Loftis previously filed his "whistle-blower" claim with the Department of Labor ("DOL"), which found that there was no reasonable cause to believe that we violated the Sarbanes-Oxley Act when we terminated Mr. Loftis and dismissed the complaint. On July 28, and October 2, 2006, Key moved to dismiss the lawsuit for lack of jurisdiction over Key Energy or for lack of venue. On June 28, 2007, the court denied our motions but on its own motion transferred the case to the U.S. District Court for the Eastern District of Pennsylvania.

        Additionally, on August 21, 2006, our former chief financial officer, Royce W. Mitchell, filed a suit against the Company in 385^th District Court, Midland County, Texas alleging breach of contract with regard to alleged bonuses, benefits and expense reimbursements, conditional stock grants and stock options, to which he believes himself entitled; as well as relief under theories of quantum meruit, promissory estoppel, and specific performance. Although there is no scheduling order in the case, discovery is underway. Further, our former controller and assistant controller filed a joint complaint against the Company on September 3, 2006 in 133^rd District Court, Harris County, Texas alleging constructive termination and breach of contract. Following Key's removal of the case to the federal court, Plaintiff dismissed his constructive termination allegation and the parties agreed to a remand of the case back to the state court. Discovery is now ongoing.

        We intend to vigorously defend against these claims; however, we cannot predict the outcome of the lawsuits. See Item 8. "Consolidated Financial Statements and Supplementary Data," Note 19—"Subsequent Events," for a discussionpay $1,125,000. Final approval of the settlement of litigation with our former chief executive officer.the shareholder and class action claims by the court is anticipated to occur in the first quarter of 2008.

Other Matters

        A class action lawsuit,Gonzalez v. Key Energy Services, Inc., was filed in Ventura County, California, Superior Court in September 2005 alleging that Key did not pay its hourly employees for travel time between the yard and the wellhead and that certain employees were denied meal and rest periods during shifts. Discovery in the case is underway, but a class has not been certified. Key moved for a legal determination regarding its use of on-duty meal periods, and the Court issued a ruling on March 16, 2007 contrary to Key's interpretation of the relevant law. Key has recently filed a Petition for Writ with the Court of Appeals of the State of California. We intend to vigorously defend against this action; however, we cannot predict the outcome of the lawsuit.

        In addition we are involved into various suits and claims that have arisen in the ordinary course of business.business, we continue to be involved in litigation with our former executive officers as well as a class action lawsuit in California. We do not believe that the disposition of any of these items, including litigation with former management, will result in a material adverse effect on theour consolidated financial position, results of operations or cash flows of Key.flows. See Item 8. "Consolidated Financial Statements and Supplementary Data," Note 12—"Commitments and Contingencies."

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

        None.At our 2007 Annual Meeting of Shareholders held on December 6, 2007, holders of 106,759,477 shares were present in person or by proxy, constituting 80.47% of the outstanding shares of common stock as of the record date for the annual meeting. The matters voted upon at the annual meeting were:

        Election of four Class I Directors.    The shareholders elected four Class I Directors to serve for a three year term, expiring in 2010:

Four Class II Directors, David J. Breazzano, William D. Fertig, Robert K. Reeves and J. Robinson West, continued in office with terms expiring in 2008. Three Class III Directors, Richard J. Alario, Ralph S. Michael, III and Arlene M. Yocum, continued in office with terms expiring in 2009.

        Adoption of 2007 Equity and Cash Incentive Plan.    The shareholders adopted the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan:

        Ratification of Independent Registered Public Accounting Firm.    The shareholders ratified the selection of Grant Thornton LLP as the Company's independent registered public accounting firm for the current fiscal year:

PART II

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

        Market and Share Prices.    On October 3, 2007, Key's common stock was tradedresumed trading on the New York Stock Exchange, under the symbol "KEG,"KEG." until April 7, 2005, when the NYSE suspended the trading of our common stock based on our failure to timely file our SEC reports. The common stock was delisted on May 5, 2005. SinceFrom April 8, 2005 until October 2, 2007, our stock has beenwas quoted on the Pink Sheets Electronic Quotation Service (the "Pink Sheets") under the symbol "KEGS." As of June 30, 2007,February 20, 2008, there were 564556 registered holders of 131,593,695128,149,793 issued and outstanding shares of common stock, net of 533,466 shares of common stock held in treasury.stock. The following table sets forth the reported high and low sales price of Key's common stock as quoted on the Pink Sheets for the periods indicated.

        The following Corporate Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

        The following performance graph compares the performance of our common stock to the Oil Service Sector and to a peer group established by management. This peer group is comprised of five other companies with a similar mix of operations and includes Nabors Industries Ltd., Weatherford International Ltd., Basic Energy Services, Inc., Complete Production Services, Inc., and RPC, Inc. The graph below matches the cumulative sixty-six monthfive-year total return ofto holders of our common stock with the cumulative total returns of the Oil Service Sector and our peer group. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 at June 30, 2001December 31, 2002 and tracks the return on the investment through December 31, 2006.2007.

Stock Performance Graph

COMPARISON OF 66 MONTH5 YEAR CUMULATIVE TOTAL RETURN*
Among Key Energy Services, Inc., The Russell 2000 Index,
The PHLX Oil Service Sector Index And A Peer Group

---

*

$100 invested on 6/30/01December 31, 2002 in stock or index—includingindex-including reinvestment of dividends. Fiscal year ending December 31.

Copyright © 2007, Standard and Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

        Dividend Policy.    There were no dividends paid on Key's common stock duringfor the yearsyear ended December 31, 2006, December 31, 2005 or December 31, 2004.2007. Key must meet certain financial

covenants before it may pay dividends under the terms of its current credit facility. Key does not currently intend to pay dividends.

        Sale of Unregistered Securities.    On October 2, 2006, we awarded 25,000 shares of restricted stock to Mr. Don Weinheimer, our senior vice president-business development, technology and strategic planning, in connection with his hiring. On October 30, 2006, we awarded 15,000 shares of restricted stock to Mr. Marshall Dodson, our chief accounting officer, in connection with the completion of our restatement process. On December 22, 2006, we awarded an aggregate amount of 285,000 shares of restricted stock to our top four current executive officers for retention purposes. All such shares of restricted stock were granted under the Key Energy Group, Inc. 1997 Incentive Plan. Each of these issuances of shares of restricted stock were made in reliance upon the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof for transactions by an issuer not involving any public offering.

        Stock Repurchases.    TheDuring the fourth quarter of 2007, the Company made the following repurchasesrepurchased an aggregate 2,378,283 million shares of its common stock during 2006.stock. The repurchases were made pursuant to the Company's $300 million share repurchase program and to satisfy tax withholding obligations that arose upon vesting of restricted stock that washad been granted to certain senior executives during 2005. See Item 11. "Executive Compensation."executives. Set forth below is a summary of the share repurchases.

ISSUER PURCHASES OF EQUITY SECURITIES

(1)

The numberRelated to share repurchases made to satisfy tax withholding obligations of shares repurchased was determined based on the minimum supplemental withholding rate and an additional withholding ratecertain executive officers upon vesting of 10% for Kim B. Clarke.restricted stock.

(2)

The average price paid per share on the vesting date was determined using the closing price of the common stock of the Company as quoted on the Pink Sheets on June 23, 2006.October 1, 2007 and the closing price of the common stock of the Company as quoted on the NYSE on October 29, 2007.

(3)

In October 2007, the Company announced a $300 million share repurchase program. The program expires March 31, 2009.

(4)

Includes 33,355 shares repurchased to satisfy tax withholding obligations of certain executive officers upon vesting of restricted stock.

(5)

The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the average of the closing price and opening price on December 21, 2007 and December 24, 2007, respectively, as quoted on the NYSE.

Equity Compensation Plan Information

        See Item 12. "Security OwnershipThe following table sets forth information as of Certain Beneficial Owners and Management and Related Stockholder Matters" for a description of securitiesDecember 31, 2007 with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuanceissuance.

(1)

Represents options and other stock-based awards granted under equity compensation plans.

the Key Energy Group, Inc. 1997 Incentive Plan (the "1997 Incentive Plan") and the options and other stock-based awards available under the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan (the "2007 Incentive Plan"). The 1997 Incentive Plan expired in November 2007.

(2)

Represents non-statutory stock options granted outside the 1997 Incentive Plan and the 2007 Incentive Plan. The options have a ten-year term and other terms and conditions as those options granted under the 1997 Incentive Plan. These options were granted during 2000 and 2001.

ITEM 6.Selected Financial Data

        The following historical selected financial data for the years ended December 31, 2007, 2006, 2005 and 2004 has been derived from the audited financial statements of the Company. TheAlthough the Company emerged from an extended restatement and financial reporting process in September 2007, it is unable to provide complete audited financial information for periods prior to 2004. Therefore, the Company is not providing selected financial data for the yearsyear ended December 31, 2002 and 2003, because it is unable to provide financial statements for those periodsthat period (except for the December 31, 2003 balance sheet) in accordance with GAAP. See "Note Regarding Ourgenerally accepted accounting principles ("GAAP"). Investors should refer to the 2003 Financial Reporting Process."and Informational Report on Form 8-K/A, filed with the SEC on October 26, 2006 for a full description of the restatement process.

        The historical selected financial data should be read in conjunction with the historical Consolidated Financial Statements and related notes thereto included in Item 8. "Consolidated Financial Statements and Supplementary Data."

Consolidated Results of Operations Data:

Cash Flow Data: