UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission file number: 1-8038

KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)

1301 McKinney Street, Suite 1800, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)

(713) 651-4300
(Registrant's telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesý            Noo

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso            Noý

        As of JulyOctober 31, 2008, the number of outstanding shares of common stock of the registrant was 124,445,608.121,841,252.

KEY ENERGY SERVICES, INC.

INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2008

FORWARD-LOOKING STATEMENTS

        In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These "forward-looking statements" are based on our current expectations, estimates and projections about Key Energy Services, Inc. and its subsidiaries, ("the Company"), our industry and management's beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as "may," "will," "predicts," "projects," "potential" or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties. Actual performance or results may differ materially and adversely.

        We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)

See the accompanying notes which are an integral part of these
unaudited condensed consolidated unaudited financial statements

Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See the accompanying notes which are an integral part of these
unaudited condensed consolidated unaudited financial statements

Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

See the accompanying notes which are an integral part of these
unaudited condensed consolidated unaudited financial statements

Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See the accompanying notes which are an integral part of these
unaudited condensed consolidated unaudited financial statements

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1. GENERAL

        Key Energy Services, Inc., and its wholly ownedwholly-owned and controlled subsidiaries (collectively, the "Company," "we," "us," "its," and "our") provide a complete range of well services to major oil companies and independent oil and natural gas production companies, including rig-based well maintenance, workover, well completion and recompletion services, drilling, oilfield transportation services, pressure pumping services, fishing and rental services and ancillary oilfield services. We believe that we are the leading onshore, rig-based well servicing contractor in the United States. We operate in most major oil and natural gas producing regions of the United States as well as internationally in Argentina and Mexico. We also have a technology development company based in Canada.

        The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed December 31, 2007 balance sheet was prepared from audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Certain information relating to the Company's organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

        Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. These reclassifications relate to the cash flow presentation of certain of our share-based payment arrangements that are accounted for as liabilities. In prior periods, these amounts were included in the caption titled "Stock-Based Compensation," a component of cash flows from operating activities. These amounts are now presented in a caption titled "Share-based compensation liability awards," which is also classified as a cash flow from operations.operating activities. Total cash provided by operating activities remains unchanged from previously reported amounts.

        The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair statementpresentation of the financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the three and sixnine month periods ended JuneSeptember 30, 2008 are not necessarily indicative of the results expected for the full year or any other interim period due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.

2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

        The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our commitments and contingencies. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets and (vi) assess workers' compensation, vehicular liability, self-insured risk accruals and

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES (Continued)

other insurance reserves. Our actual results may differ materially from these estimates. We believe that our estimates are reasonable.

        We apply Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51 (Revised 2003)" ("FIN 46(R)") when determining whether or not to consolidate a Variable Interest Entity ("VIE"). FIN 46(R) requires that an equity investor in a VIE have significant equity at risk (generally a minimum of 10%) and hold a controlling interest, evidenced by voting rights, and absorb a majority of the entity's expected losses, receive a majority of the entity's expected returns, or both. If the equity investor is unable to evidence these characteristics, the entity that retains these ownership characteristics will be required to consolidate the VIE. We have determined that we do not have an interest in a VIE and as such we are not the primary beneficiary of a variable interest in a VIE and we are not the holder of a significant variable interest in a VIE.

        The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115" ("SFAS 159"), on January 1, 2008. SFAS 159 permits companies to choose, at specified election dates, to measure eligible items at fair value (the "Fair Value Option"). Companies choosing such an election report unrealized gains and losses on items for which the Fair Value Option has been elected in earnings at each subsequent reporting period. We did not elect to measure any of our financial assets or liabilities using the Fair Value Option. We will assess at each measurement date whether to use the Fair Value Option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

        There have been no material changes or developments in the Company's evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

3. NEW ACCOUNTING STANDARDS

         SFAS 157.    In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value, and expanding disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

        In February 2008, the FASB issued FASB Staff Position FAS 157-2 ("FSP FAS 157-2"). FSP FAS 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the registrant's financial statements on a recurring basis. The adoption of SFAS 157, as modified by FSP FAS 157-2, did not have a material impact on our financial position, results of operations, or cash flows.

         SFAS 141(R).        In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) will significantly changeestablishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the accounting for business combinations. Underidentifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from current practice resulting from SFAS 141(R) include the expansion of the definitions of a "business" and a "business combination." For all business combinations (whether partial, full or step acquisitions), an acquiring entitythe acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be required to recognize all the assets and

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

3. NEW ACCOUNTING STANDARDS (Continued)

liabilities assumed in a transactionrecognized at the acquisition-dateits fair value with limited exceptions. Specific changes in SFAS 141(R) from previously issued guidance include:

•

Acquisition costs will generally be expensed as incurred;



•

Noncontrolling interests will be valued at fair value at the acquisition date;



•

Certain acquired contingent liabilities will be recorded at fair value aton the acquisition date and, subsequently remeasured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;



•

In-process research and developmentcertain arrangements, changes in fair value will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;



•

Restructuringrecognized in earnings until settlement; and acquisition-related transaction and restructuring costs associated with a business combination will generally be expensed subsequent torather than treated as part of the acquisition date; and



•

Changes in deferred tax asset valuation allowances and income tax uncertainties aftercost of the acquisition date generally will affect income tax expense.

acquisition. SFAS 141(R) also includes newestablishes disclosure requirements related to enable users to evaluate the nature and financial effects of the business combinations. This statementcombination. SFAS 141(R) applies prospectively to all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008,2008. SFAS 141(R) may have an impact on our consolidated financial statements. The

Key Energy Services, Inc. and earlier adoption is prohibited. The impactSubsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

3. NEW ACCOUNTING STANDARDS (Continued)

nature and magnitude of the adoptionspecific impact will depend upon the nature, terms, and size of this standard on the Company's financial position, results of operations, and cash flows will not be known untilacquisitions consummated after the Company completes a business combination subsequent to the adoption date of this standard.effective date.

         SFAS 160.        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements: anStatements—An amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes newamends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the noncontrolling interest (formerly referred to as "minority interests") in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition ofIt clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements and separate fromstatements. Among other requirements, SFAS 160 requires the parent's equity. The amountconsolidated statement of net income to be reported at amounts that include the amounts attributable to aboth the parent and the noncontrolling interest will be included in consolidated net incomeinterest. SFAS 160 also requires disclosure on the face of the consolidated statement of income statement. SFAS 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions ifof the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss inamounts of consolidated net income when a subsidiary is deconsolidated. Such gains or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests ofattributable to the parent and itsto the noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is not permitted. We are currently evaluating the potential impact of this statement.

        In February 2008, with early adoption prohibited. The Company isthe FASB issued FASB Staff Position FAS 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"), to partially defer FASB Statement No. 157, "Fair Value Measurements" ("SFAS 157"). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the process of determiningfinancial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We are currently evaluating the impact of adopting the adoptionprovisions of this standard will have on the Company's financial position, results of operationsSFAS 157 as it relates to nonfinancial assets and cash flows.liabilities.

         SFAS 161.        In March 2008, the FASB issued SFAS No. 161, "Disclosure"Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133"Activities" ("SFAS 161"). SFAS 161 amends and expands the disclosure requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and requires morequalitative disclosures about an entity'sobjectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and hedging activitiesdisclosures about credit-risk-related contingent features in order to improve the transparency of financial reporting. SFAS 161derivative agreements. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

3. NEW ACCOUNTING STANDARDS (Continued)

This Statement encourages, but does2008. Earlier adoption is not require, comparative disclosures for earlier periods at initial adoption. We will adopt the provisions of SFAS 161 on January 1, 2009.permitted. The Company currently has no financial instruments that qualify as derivatives, and we do not expect that the adoption of this standard will have a material impact on the Company's financial position, results of operations and cash flows.

        In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets." FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We are currently evaluating the potential impact the adoption of FSP 142-3 will have on our consolidated financial statements.

        In October 2008, the FASB issued FASB Staff Position SFAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"). FSP 157-3 clarified the application of SFAS 157. FSP 157-3 demonstrated how the fair value of a financial asset is

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

3. NEW ACCOUNTING STANDARDS (Continued)

determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on our consolidated financial statements.

4. ACQUISITIONS

        From time to time, the Company acquires businesses or assets that are consistent with its long-term growth strategy. Results of operations for acquisitions are included in the unaudited condensed consolidatedCompany's financial statements of operations beginning from the date of acquisition. The purchase price allocations included in the unaudited condensed consolidated balance sheets related to acquisitions made during the third and fourth quartersquarter of 2007 and the sixnine months ended JuneSeptember 30, 2008 are based on preliminary information and are subject to change when final fair value determinations are made for the assets acquired and liabilities assumed. Acquisitions are accounted for using the purchase method of accounting and the purchase price is allocated to the net assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition.

Tri-Energy Services, LLC

        On January 17, 2008, the Company through a wholly-owned subsidiary, purchased the fishing and rental assets of Tri-Energy Services, LLC ("Tri-Energy"), for approximately $1.9 million in cash. These assets were integrated into our Fishing and Rental segment. The equity interests of Tri-Energy were owned by employees of the Company who joined the Company in October 2007 in connection with the acquisition of Moncla Well Service, Inc. and related entities.entities (collectively, "Moncla"). The purchase price was allocated to the tangible and intangible assets purchased and the acquisition of the Tri-Energy assets was accounted for as an asset purchase and did not result in the establishment of goodwill.

Western Drilling, LLC

        On April 3, 2008, the Company through a wholly-owned subsidiary, purchased all of the outstanding equity interests of Western Drilling, LLC ("Western"), a privately-owned company based in California that operated 22 working well service rigs, three stacked well service rigs and equipment used in the workover and rig relocation process. We acquired Western to increase our service footprint in the California market.

        The purchase price was $51.5 million in cash and was paid on April 3, 2008. The purchase price was subject to a working capital adjustment 45 days from the closing date of the acquisition and resulted in additional consideration paid of $0.1 million in May 2008. The Company also incurred direct transaction costs of approximately $0.4 million. The acquisition was funded from borrowings of $50.0 million under the Company's Senior Secured Credit Facility (see Note 8—"Long-Term Debt."Debt") and cash on hand.

        The acquisition of Western was accounted for as a business combination. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The allocation of the purchase price was based upon preliminary valuations and estimates, and is subject to change as the valuations are finalized. The primary areasarea of the purchase price allocation that is not yet finalized relates to pre-merger contingencies. The final valuation is expected to be completed no later than the first quarter of 2009.

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS (Continued)

price allocation that are not yet finalized relate to the fair values of identifiable intangible and tangible assets, and pre-merger contingencies related to environmental exposures. The final valuation of net assets is expected to be completed no later than the first quarter of 2009.

        The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the date of the Western acquisition (in thousands):

        The fair values of property and equipment were determined using a market approach. The fair values of identified intangible assets were determined using an income approach to measure the present worth of anticipated future economic benefits. The Company also performed an economic obsolescence analysis to confirm the values identified through the aforementioned methods. The allocation is still preliminary at this time, and may potentially change by a material amount once the purchase price allocation is finalized.

        Goodwill was recognized as part of the acquisition of Western as the purchase price exceeded the fair value of the acquired assets and assumed liabilities. The Company believes the goodwill associated with the Western acquisition is related to the acquired workforce, potential future expansion of the Western service offerings, and the ability to expand our service offerings. Therefore, it was not allocated to the acquired assets and assumed liabilities.

        The acquired identifiable intangible asset of $9.0 million is related to customer relationships and is subject to amortization under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The customer relationshiprelationships will be amortized as the value of the relationships are realized using rates of 17%, 19%, 15%, 12%, 9%, 7%, 6%, 5%, 4%, 3%, 2%, and 1% for years one2008 through twelve,2019, respectively. The $8.1$8.2 million of goodwill associated with the purchase of Western has been allocated to our Well Servicing segment, and the assets and results of operations subsequent to April 3, 2008 have also been incorporatedintegrated into the Well Servicing segment.

Hydra-Walk, Inc.

        On May 30, 2008, the Company through a wholly-owned subsidiary, purchased all of the outstanding stock of Hydra-Walk, Inc. ("Hydra-Walk") for approximately $10.3 million in cash and a performance earn-out potential of up to $2.0 million over the next two years from the acquisition date if certain financial and operational performance measures are met. Additionally, during the third quarter of 2008 the Company paid approximately $0.2 million in additional consideration related to a holdback amount that was withheld from the seller pending the completion of a seller closing requirement. The purchase price iswas also subject to a post-closing working capital adjustment of less than $0.1 million that has not been finalized.was paid during the third quarter of 2008. The Company retainedincurred direct transaction costs of approximately $1.1 million of Hydra-$0.1 million. The Company

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS (Continued)

Walk'sretained approximately $1.1 million of Hydra-Walk's net working capital as a result of the transaction and did not assume any of the debt of Hydra-Walk.

        Hydra-Walk is a leading provider of pipe handling solutions for the oil and gas industry and operates over 80 automated pipe handling units in Oklahoma, Texas and Wyoming. We acquired Hydra-Walk to expand the level of integrated well servicing services we are able to provide customers. The assets and results of operations for Hydra-Walk were integrated into our Fishing and Rental segment beginning on May 31, 2008.

        The acquisition isof Hydra-Walk was accounted for as a business combination and the purchase price was allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of net assets acquired resulted in the establishment of $5.5 million ofwas recorded as goodwill. The allocation of the purchase price was based upon preliminary valuations and estimates, of the fair value of the tangible assets, and is subject to change as valuations are finalized. The primary areasarea of the purchase price allocation that areis not yet finalized relaterelates to the fair values of tangible assets and valuation of the intangible assets acquired, if any.pre-merger contingencies. The final valuation of net assets is expected to be completed no later than the second quarter of 2009.

        This business combination resulted in the acquisition of $3.7 million of tangible assets, $4.5 million of intangible assets and $1.6 million of goodwill. The fair values of tangible assets were determined using a market approach. The fair values of intangible assets were determined using an income approach to measure the present worth of anticipated future economic benefits. The Company also performed an economic obsolescence analysis to confirm the values identified through the aforementioned methods. The allocation is still preliminary at this time and may potentially change by a material amount once the purchase price allocation is finalized.

        The acquired identifiable intangible assets of $4.5 million relate to customer relationships, a tradename and a non-compete agreement. These intangible assets are subject to amortization under SFAS 142. The customer relationships asset of $4.0 million will be amortized as the value of the relationships are realized using rates of 19%, 24%, 17%, 13%, 9%, 6%, 4%, 3%, 3% and 2% for 2008 through 2017, respectively. The tradename asset of $0.4 million will be amortized straight-line over 10 years and the non-compete agreement asset will be amortized straight-line over 3 years.

        Goodwill of $1.6 million has been recognized as part of the purchase price allocation as the purchase price exceeded the fair value of the acquired assets and assumed liabilities. The Company believes the goodwill associated with the Hydra-Walk acquisition is related to the acquired workforce and expansion of service offerings. Therefore, it was not allocated to the acquired assets and assumed liabilities. The $1.6 million of goodwill has been allocated to our Fishing and Rental segment.

        As of September 30, 2008, the Hydra-Walk operations had met performance earn-out requirements that resulted in additional consideration of $0.3 million which has been recorded as additional goodwill.

Leader Energy Services Ltd.

        On July 22, 2008, the Company acquired all of the United States-based assets of Leader Energy Services Ltd. ("Leader"), a Canadian company, for consideration of $34.6 million in cash, of which $1.0 million will be paid upon satisfaction of certain seller performance requirements. The acquired assets include nine coiled tubing units, seven nitrogen trucks, twelve pumping trucks and other ancillary equipment. Additionally, the Company paid approximately $0.7 million for supplies and inventory used in pressure pumping operations. The Company also incurred direct transaction costs of approximately

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS (Continued)

$0.1 million. The purchase price was allocated to the tangible assets acquired. The acquisition of the Leader assets was accounted for as an asset purchase and did not result in the establishment of goodwill. The Company did not identify any acquired intangible assets. The Leader assets were integrated into our Pressure Pumping segment.

Acquisitions made during 2007

        On September 5, 2007, the Company acquired Advanced Measurements, Inc. ("AMI"), which operates in Canada and is a technology company focused on oilfield service equipment controls, data acquisition and digital information flow. The purchase price was $6.6 million in cash and $2.9 million in assumed debt and was paid in September 2007. During the sixnine months ended JuneSeptember 30, 2008, the Company refined its fair value allocation of the assets acquired and liabilities assumed by increasing its deferred tax asset balance by $0.3 million and decreasing its deferred tax liability balance by $1.0 million. These changes were offset by a corresponding net decrease to goodwill of $1.3 million. During the nine months ended September 30, 2008, but prior to the anniversary of the acquisition, the Company made additional payments to settle its working capital adjustment with the former owners of AMI and incurred additional transaction costs directly related to the business combination. These payments totaled $1.3 million and resulted in additional goodwill of $1.3 million. The purchase price allocation was completed during the third quarter of 2008 and is final.

        On October 25, 2007, the Company acquired Moncla, Well Service, Inc. and related entities ("Moncla") which operated well service rigs, barges and ancillary equipment in the southeastern United States. During the sixnine months ended JuneSeptember 30, 2008, the Company refined its fair value allocation of the assets acquired and liabilities assumed by decreasingincreasing the working capital accounts (excluding deferred tax assets) by $0.6$2.2 million, decreasing the fair value of the well service assets acquired by $3.6 million, increasingdecreasing the deferred tax and other long-term asset balancebalances by $0.3$0.4 million, decreasingincreasing its long-term deferred tax liability balance by $0.4$1.2 million and incurring additional fees related to the closing of the transaction of less than $0.1$0.2 million. The company also paid additional purchase consideration of $0.8 million during the third quarter of 2008. These changes were offset with a corresponding net increase to goodwill for $3.6of $4.0 million in the unaudited condensed consolidated balance sheet as of JuneSeptember 30, 2008. The purchase price allocation is not final and will be completed in the fourth quarter of 2008. The primary area of the purchase price allocation that is not yet final relates to tax exposures.

        On December 7, 2007, the Company acquired the well service assets and related equipment of Kings Oil Tools, Inc. ("Kings"), a California-based well service company. During the sixnine months ended JuneSeptember 30, 2008, the Company revised its fair value allocation of the assets acquired and liabilities assumed by increasing the fair value of the well service assets acquired by $1.6 million, increasing the deferred tax assets by $0.4 million, decreasing the fair value of working capital accounts by $0.1 million and incurring additional fees related to the closing of the transaction of $0.1 million. These changes were offset with a corresponding net decrease to goodwill for $1.7 million in the unaudited condensed consolidated balance sheet as of JuneSeptember 30, 2008. The purchase price allocation is not final and will be completed no later than the fourth quarter of 2008. The primary area of the purchase price allocation that is not yet final relates to tax exposures.

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

5. SUPPLEMENTAL FINANCIAL INFORMATION

        The table below presents the comparative detailed financial information of current accrued liabilities at JuneSeptember 30, 2008 and December 31, 2007:

        The table below presents the comparative detailed financial information of our other non-current accrued liabilities at JuneSeptember 30, 2008 and December 31, 2007:

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

6. GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill for the sixnine months ended JuneSeptember 30, 2008 are as follows:

        The components of our intangible assets are as follows:

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

6. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        Certain of our intangible assets are denominated in currencies other than U.S. Dollars and as such the values of thosethese assets are subject to fluctuations associated with changes in exchange rates. Additionally, certain of these assets are also subject to purchase accounting adjustments. The estimated fair values of intangible assets obtained through acquisitions consummated in the preceding twelve months are based on preliminary information which is subject to change whenuntil final valuations are obtained.

        Amortization expense for our intangible assets was $4.3$4.8 million and $8.1$12.9 million for the three months and sixnine months ended JuneSeptember 30, 2008, respectively, and $0.5$0.7 million and $1.2$1.9 million for the three months and sixnine months ended JuneSeptember 30, 2007, respectively.

7. INVESTMENT IN IROC ENERGY SERVICES CORP.

        As of JuneSeptember 30, 2008 and December 31, 2007, we owned 8,734,469 shares of IROC Energy Services Corp. ("IROC"), an Alberta-based oilfield services company. This represented approximately 19.7% of IROC's outstanding common stock on JuneSeptember 30, 2008 and December 31, 2007. IROC shares trade on the Toronto Venture Stock Exchange and had a closing price of $1.35$1.00 CDN and $0.74 CDN per share on JuneSeptember 30, 2008 and December 31, 2007, respectively. Mr. William Austin, our Chief Financial Officer, and Mr. Newton W. Wilson III, our Chief Operating Officer and former General Counsel, serve on the board of directors of IROC.

        We have significant influence over the operations of IROC through our ownership interest and representation on IROC's board of directors, but we do not control it. We account for our investment in IROC using the equity method. Our investment in IROC totaled $11.8$11.5 million and $11.2 million as of JuneSeptember 30, 2008 and December 31, 2007, respectively. The pro-rata share of IROC's earnings and losses to which we are entitled is recorded in our unaudited condensed consolidated statements of operations as a component of other income and expense, with an offsetting increase or decrease to the carrying value of our investment, as appropriate. Any earnings distributed back to us from IROC in the form of dividends would result in a decrease in the carrying value of our equity investment. The value of our investment may also increase or decrease each period due to changes in the exchange rate between USD and CDN. Changes in the value of our investment due to fluctuations in exchange rates are offset by Accumulated Other Comprehensive Income.

        We recorded approximately $1.0 million of losses and $1.0less than $0.1 million of income related to our investment in IROC for the three and sixnine months ended JuneSeptember 30, 2008, respectively, and $0.3less than $0.1 million of losses and $0.2approximately $0.3 million of income for the three and sixnine months ended JuneSeptember 30, 2007, respectively. During those time periods, no earnings were distributed back to us by IROC in the form of dividends.

        An impairment review of our equity method investment in IROC is performed on a quarterly basis to determine if there has been a decline in fair value that is other than temporary. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, fair value is based on an estimate of discounted cash flows. In determining whether the decline is other than temporary, we consider the cyclicality of the industry in which the investment operates, its historical performance, its performance in relation to its peers and the current economic environment. Future conditions in the industry, operating performance and performance in relation to peers and the future economic environment may vary from our current assessment of recoverability. Such future conditions could therefore result in a determination that a decline in fair value is other than temporary. IROC's

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7. INVESTMENT IN IROC ENERGY SERVICES CORP. (Continued)

stock price is currently depressed and has historically been volatile, and as such the fair value of the Company's investment is less than the amount reflected in the Company's consolidated financial

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7. INVESTMENT IN IROC ENERGY SERVICES CORP. (Continued)

statements. If we later determine that the decline is other than temporary, we will record a write-down in the carrying value of our asset to the then current fair market value.

8. LONG-TERM DEBT

        The components of our long-term debt are as follows:

8.375% Senior Notes due 2014

        On November 29, 2007, the Company issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the "Notes"), under an Indenture, dated as of November 29, 2007, (the "Indenture"), among us, the guarantors party thereto (the "Guarantors") and The Bank of New York Trust Company, N.A., as trustee. The Notes were priced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers' discountsfees and estimated offering expenses, were approximately $416.1 million. We used approximately $394.9 million of the net proceeds to retire then-existing term loans, including accrued and unpaid interest, with the balance used for general corporate purposes.

        The Notes are general unsecured senior obligations of Key.the Company. Accordingly, they rank effectively subordinate to all of our existing and future secured indebtedness. The Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the Notes is payable on June 1 and December 1 of each year, beginning June 1, 2008. The Notes mature on December 1, 2014.

Senior Secured Credit Facility

        The Company maintains a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the Administrative Agents ("Senior Secured Credit Facility"). The Senior Secured Credit Facility matures in 2012 and the original aggregate lending commitment of this facility iswas $400.0 million and allowsallowed for a combination of borrowings and issuances of letters of credit. There were borrowings of $100.0$170 million and outstanding letters of credit of $61.5

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8. LONG-TERM DEBT (Continued)

$61.6 million under the Senior Secured Credit Facility at JuneSeptember 30, 2008. The weighted-average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 4.17125%4.4% at JuneSeptember 30, 2008. The Senior Secured Credit Facility requires the Company to

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8. LONG-TERM DEBT (Continued)

maintain a consolidated interest coverage ratio of at least 3.0 to 1.0, maintain a consolidated leverage ratio of not more than 3.5 to 1.0, and to not exceed capital expenditures of $250.0 million in any fiscal year. The Company was in compliance with these covenants at JuneSeptember 30, 2008.

        On September 15, 2008, Lehman Brothers Holdings Inc. ("Lehman") filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Lehman Commercial Paper, Inc. ("LCPI"), a subsidiary of Lehman, was a member of the syndicate of banks participating in our Senior Secured Credit Facility. LCPI's commitment was approximately 11% of the Company's total facility. As of September 30, 2008, the Company had approximately $150.0 million available under its Senior Secured Credit Facility. This availability reflects the reduction of approximately $18.4 million of unfunded commitments by LCPI.

        All obligations under the Senior Secured Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory and equipment.

9. INCOME TAXES

        The Company's effective tax rate for the three months and sixnine months ended JuneSeptember 30, 2008 was 38.5%37.5% and 38.9%38.4%, respectively, and 38.7%40.0% and 38.5%38.9% for the three months and sixnine months ended JuneSeptember 30, 2007, respectively. The primary difference between the statutory rate of 35% and our effective tax rate relates to state and foreign taxes.

        As of JuneSeptember 30, 2008 and December 31, 2007, we had approximately $7.0$5.9 million and $6.8 million, respectively, of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We are subject to U.S. Federal Income Tax as well as income taxes in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal and state tax matters through the year ended December 31, 2002.

        ApproximatelyNo release of our deferred tax asset valuation allowance was made during the quarter ended September 30, 2008. During the second quarter ended June 30, 2008, approximately $0.5 million of the Net Operating LossCompany's net operating loss deferred tax asset valuation allowance, related to our Mexico operations, has beenwas released as a discrete tax benefit and recordedrecognized in the quarter ended June 30, 2008. The actual income from our Mexico operations for 2008 will affect the ultimate utilization of this deferred tax asset.

        We recognize accrued interest expense and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of approximately $2.6$2.1 million and $2.3 million for the payment of interest and penalties as of JuneSeptember 30, 2008 and December 31, 2007.2007, respectively. We do not expect any substantial changes within the next 12 months related to uncertain tax positions.

        During the first sixnine months of 2008, the Company applied approximately $17.0 million of theits income tax refund receivable due as of December 31, 2007 against the Company's current income taxes payable. No cash refund was received by the Company.

        The Company is subject to the revised Texas Franchise tax. The revised Texas Franchise tax is an income tax equal to one percent of Texas-sourced revenue reduced by the greater of (a) cost of goods

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9. INCOME TAXES (Continued)

sold (as defined by Texas law), (b) compensation (as defined by Texas law) or (c) thirty percent of the Texas-sourced revenue. The Company accounts for the revised Texas Franchise tax in accordance with SFAS No. 109, "Accounting for Income Taxes," as the tax is derived from a taxable base that consists of income less deductible expenses.

10. COMMITMENTS AND CONTINGENCIES

         Litigation.    Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts and arbitration hearings that result in outcomes in favor of the plaintiffs. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. In accordance with SFAS No. 5, "Accounting for Contingencies," we establish a provision for a contingent liability when it is

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10. COMMITMENTS AND CONTINGENCIES (Continued)

probable that a liability has been incurred and the amount is estimable. As of JuneSeptember 30, 2008, the aggregate amount of our provisions for losses related to litigation that are deemed probable and estimable is approximately $7.8$3.8 million. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded. Additionally, during the third quarter of 2008, we recognized a net benefit of approximately $1.3 million related to the settlement of ongoing legal matters and the continued refinement of liabilities recognized for litigation deemed probable and estimable.

         Gonzales Matter.    In September 2005, a class action lawsuit,Gonzales v. Key Energy Services, Inc., was filed in Ventura County, California Superior Court, 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 between shifts. We haveperiods. On September 17, 2008, we reached an agreement in principle, subject to court approval, to settle all claims related to this matter for $1.2 million. In 2005 we recorded a liability for this matterlawsuit and do not expect that the conclusionsubsequent settlement of this matter will result in an additional loss materially in excess2008 did not have a material impact on our financial position, results of the amounts that have been recorded.operations or cash flows.

         Litigation with Former Officers and Employees.    We were named in a lawsuit by our former general counsel, Jack D. Loftis, Jr., filed 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. On August 17, 2007, the Company filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and breach of fiduciary duties. In its counterclaims, the Company seeks repayment of all severance paid to Mr. Loftis to date (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, and damages relating to the allegations of malpractice and breach of fiduciary duties. The case was transferred to and is now pending in the U.S. District Court for the Eastern District of Pennsylvania.Pennsylvania and is currently set for trial in the fourth quarter of 2009. We have not recorded a liability for this matter and do not believe that the conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.

        On September 3, 2006, our former controller and assistant controller filed a joint complaint against the Company in the 133rd District Court, Harris County, Texas, alleging constructive termination and breach of contract. Additionally, on January 11, 2008, our former Chief Operating Officer, James Byerlotzer, filed a lawsuit in the 55th District Court, Harris County, Texas, alleging breach of contract based on his inability to exercise his stock options during the period that Key waswe were not current in its our

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10. COMMITMENTS AND CONTINGENCIES (Continued)

SEC filings, and based on Key'sour failure to provide him shares of restricted stock. We are currently set for trial in both of these matters in the first quarter of 2009. We have not recorded a liability for these matters and do not believe that the conclusion of these matters will have a material impact on our financial position, results of operations or cash flows.

         ShareholderStockholder Class Action Suits and Derivative Actions.    Since June 2004, we and certain of our officers and directors were named as a defendant in six class action complaints brought on behalf of a putative class of purchasers of our securities for alleged violations of federal securities laws, which were filed in federal district court in Texas. These six actions were consolidated into one action. Four shareholderstockholder derivative actions were also filed, purportedly on our behalf.behalf, generally alleging the same facts as those in the consolidated stockholder class action. On September 7, 2007, we reached agreements in principle to settle all pending securitiesof these stockholder class action and derivative lawsuits in consideration of payments totaling $16.6 million in exchange for full and complete releases for all defendants, of which Keythe Company will be required to pay approximately $1.1 million. We received final approval of the settlement of the shareholderstockholder class action claims by the court on March 6, 2008, and preliminaryfinal court approval on the derivative actions on April 18, 2008. A hearing for final approval on the derivative settlement was heldreceived on August 1,8, 2008. No objections were made by any party during the hearing. The Company anticipates that the final order dismissing the derivative actions will be signed in the third quarter. Following dismissal, all of theAll litigation in the shareholderstockholder class action and derivative matters will be concluded, and if there are no actions taken to reconsider the order that

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10. COMMITMENTS AND CONTINGENCIES (Continued)

has been signed by the court, the court-approved administrator in these matters will begin distribution of payments to eligible class members according to the terms of the settlement. We anticipate this will also be completed in the third quarter of 2008. The liability for the amount of the settlement was recorded in the first quarter of 2007.concluded.

         Expired Option Holders.    In September 2007, Belinda Taylor Texas, filed a lawsuit in the 11^th Judicial District of Harris County, Texas, on behalf of herself and all similarly situated current and former employees who held vested options that expired between April 28, 2004 and the date that the Company became current in its financial statements (the "Expired Option Holders"). The suit, as amended, alleges that the Company breached its contracts with the Expired Option Holders, and breached its fiduciary duties and duties of good faith and fair dealing in the pricing of stock options it granted to those Expired Option Holders. On March 6, 2008, the parties agreed to settle all pending claims with all Expired Option Holders, excluding those terminated for cause and those who have previously filed suits against Key,us, for approximately $1.0 million, which includes all taxes and legal fees, and in March 2008 we recorded a liability in the amount of the settlement for this matter. On June 17, 2008,The court entered a final order approving the settlement on August 25, 2008 and dismissed the case. We expect the distribution of payments pursuant to the terms of the settlement to be completed in the fourth quarter of 2008.

        On October 17, 2006, Jane John, the ex-wife of our former chief executive officer, Francis John, filed a complaint in Bucks County, Pennsylvania against her ex-husband and the Company. Ms. John alleges breach of marital agreement, was preliminarily approved bybreach of options agreements, civil conspiracy and fraud. She alleges that Mr. John and the Court. A hearingCompany defrauded her with regard to Mr. John's compensation, as well as in the disclosures of marital property. By virtue of assignments, Ms. John holds 375,000 stock options which expired unexercised during the period before the Company became current in its financial statements, when such options were unable to be exercised. In resolving a separate lawsuit between the Company and Mr. John, Mr. John agreed to indemnify the Company with respect to damages attributable to any and all of Ms. John's claims, other than damages attributable to any alleged breach of Ms. John's stock option agreements, for final approvalwhich the Company agreed to indemnify Mr. John. We have moved for summary judgment on two separate grounds in this action, and recently the court denied one of those motions. Discovery in the case remains ongoing, and there is scheduled to occur incurrently not a trial setting. During the third quarter of 2008.2008, we recorded a liability for this matter and do not

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10. COMMITMENTS AND CONTINGENCIES (Continued)

believe that the conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.

         Automobile Accident Litigation.    On August 22, 2007, one of our employees was involved in an automobile accident that resulted in a third party fatality. A lawsuit arising from this accident is currently pending in Jasper County, Texas. We are vigorously defending against the claims in the lawsuit; however, at this time we cannot predict the outcome of the lawsuit. Mediation has been rescheduled to occurfatality and during the third quarter of 2008. In first quarter of 2008 we recorded an appropriate liability for this mattermatter. The lawsuit arising from this accident was settled during the third quarter of 2008 and do not expect that the final conclusionCompany recognized incremental expense of this matter will result in an additional loss materially in excessless than $0.5 million related to the settlement during the third quarter of the amount accrued.2008.

         Tax Audits.    We are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of December 31, 2007 and JuneSeptember 30, 2008, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of these audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.

        In connection with an ongoing sales tax audit, the Company recorded a liability of approximately $3.2 million during the third quarter of 2008 relating to state sales taxes not collected from the Company's customers from 2003 through September 30, 2008 and therefore not remitted to the appropriate state agency. The provision was recorded in the Company's general and administrative expense line item in the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2008. We do not expect that the ultimate resolution of the matter will result in a loss materially in excess of the amount already accrued.

        In connection with our former Egyptian operations, which terminated in 2005, we are undergoing income tax audits for all periods in which we had operations. As of JuneSeptember 30, 2008, the Company hadhas recorded a liability of approximately $0.4 million relating to open Egyptian income tax audits. In the fourth quarter of 2007, the Company reached a preliminary settlement with the Egyptian tax authorities on the 2003 and 2004 tax years, recording a tax benefit of $0.7 million and reducing the tax liability accrued at December 31, 2007 to approximately $0.4 million. We do not expect that the ultimate resolution of the matter will result in a loss materially in excess of the amount already accrued.

         Self-Insurance Reserves.    We maintain reserves for workers' compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers' compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers' compensation, vehicular liability and general liability claims. As of JuneSeptember 30, 2008 and December 31, 2007, we have recorded

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10. COMMITMENTS AND CONTINGENCIES (Continued)

$70.5 $74.9 million and $69.0 million, respectively, of self-insurance reserves related to workers' compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $10.2 million and $8.1 million of insurance receivables as of JuneSeptember 30, 2008 and December 31, 2007, respectively. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.

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10. COMMITMENTS AND CONTINGENCIES (Continued)

         Environmental Remediation Liabilities.    For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management's assessment of the insurance coverage that may apply to the matters at issue. As of JuneSeptember 30, 2008 and December 31, 2007, we have recorded $2.8$3.0 million and $3.1 million, respectively, for our environmental remediation liabilities. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.

        We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our Salt Water Disposal ("SWD") properties to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).

         Registration Payment Arrangement.    In January 1999, we issued 150,000 warrants (the "Warrants") in connection with a debt offering that were exercisable for an aggregate of approximately 2.2 million shares of the Company's stock at an exercise price of $4.88125 per share. As of JuneSeptember 30, 2008, 75,00077,300 Warrants had been exercised, leaving 75,00072,700 outstanding, which were convertible intoexercisable for approximately 1.1 million shares of our common stock. TheTermination notice was provided to the holders of the outstanding Warrants that the Warrants will expire in Januaryon February 1, 2009.

        Under the terms of the Warrants, we arethe Company is required to maintain an effective registration statement covering the shares potentially issuable upon exercise of the Warrants. If we dothe Company does not have an effective registration statement covering the shares, we arethe Company is required to make liquidated damages payments to the holders of the Warrants. We currently do not have an effectiveDuring the three and nine months ended September 30, 2008, the Company made liquidated damages payments totaling $0.4 million and $0.8 million, respectively. On August 21, 2008, the requisite registration statement covering the shares issuable for the Warrants. The maximum undiscounted consideration that may be required to be paid underby the terms of the Warrants from June 30,became effective. From and after August 22, 2008, no additional liquidated damage payments are required to January 2009 is approximately $0.4 million.be made by the Company.

11. SHARE REPURCHASE PROGRAM

        On October 26, 2007, the Company's Board of Directors authorized a share repurchase program, in which the Company may spend up to $300.0 million to repurchase shares of its common stock on the open market. The program expires at the end of the first quarter of 2009. At JuneSeptember 30, 2008, the Company had $175.5$147 million of availability under the share repurchase program to repurchase shares of its common stock on the open market. During the first sixnine months of 2008, the Company repurchased an aggregate of approximately 7.08.8 million shares at a total cost of approximately $92.3$120.8 million, which represents the fair market value of the shares based on the price of the Company's stock on the dates of purchase. Since the inception of the program in November 2007 through JuneSeptember 30, 2008, we havethe Company has repurchased an aggregate of approximately 9.311.2 million shares for a total cost of approximately

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11. SHARE REPURCHASE PROGRAM (Continued)

$124.5 $153.0 million. Under the terms of our Senior Secured Credit Facility, we are limited to stock repurchases of $200.0 million if our consolidated debt to capitalization ratio, as defined in the Senior Secured Credit Facility, is in excess of 50%. As of JuneSeptember 30, 2008, our consolidated debt to capitalization ratio was less than 50%.

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12. EARNINGS PER SHARE

        We present earnings per share information in accordance with the provisions of SFAS No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and "as if converted" methods.

        The diluted earnings per share calculation for the quarters ended JuneSeptember 30, 2008 and 2007 exclude the potential exercise of 2.31.3 million and less than 0.1 million stock options, respectively, because the effects of such exercises on earnings per share in those periods would be anti-dilutive. The diluted earnings per share calculation for the sixnine months ended JuneSeptember 30, 2008 and 2007 exclude the potential exercise of 2.11.8 million and less than 0.1 million stock options, respectively, because the effects of such exercises on earnings per share in those periods would be anti-dilutive. None of our stock appreciation rights ("SARs") were anti-dilutive for the quarters ended September 30, 2008 and 2007. The diluted earnings per share calculation for the three and sixnine months ended JuneSeptember 30, 2008 exclude the potential exercise of 0.60.4 million stock appreciation rights ("SARs")SARs because the effects of such exercises on earnings per share in those periods would be anti-dilutive. None of our SARs were anti-dilutive for the nine months ended September 30, 2007.

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12. EARNINGS PER SHARE (Continued)

share in those periods would be anti-dilutive. No SARs were issued or outstanding during the three and six months ended June 30, 2007. The options and SARs would be anti-dilutive because their exercise prices were higher than the average price of the Company's common stock during the three and six month periods ended June 30, 2008 and 2007.

13. SHARE-BASED COMPENSATION

        The Company recognized employee share-based compensation expense of $5.1$2.9 million and $3.1$2.8 million during the three months ended JuneSeptember 30, 2008 and 2007, respectively, and $8.8$11.8 million and $5.5$8.2 million during the sixnine months ended JuneSeptember 30, 2008 and 2007, respectively. In addition, during the second quarter of 2008

        From time to time, the Company issued 47,190also issues shares of common stock to ourits outside directors. Thesedirectors that vest immediately. The Company issued shares vest immediatelyto its outside directors totaling zero and we37,944 during the three months ended September 30, 2008 and 2007, respectively, and recognized approximately $0.9zero and $0.7 million of expense related to these awards. No commonawards during the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, the Company issued shares were issued to ourits outside directors fortotaling 47,190 and 43,566, respectively, and recognized $0.9 million and $0.8 million of expense related to these awards during the threenine months ended September 30, 2008 and six month periods ended June 30, 2007.2007, respectively.

        The related income tax benefit recognized for employee share-based compensation was $1.8$0.8 million and $0.9$0.5 million for the three months ended JuneSeptember 30, 2008 and 2007, respectively, and $2.8$3.6 million and $1.6$2.1 million during the sixnine months ended JuneSeptember 30, 2008 and 2007, respectively. The related income tax benefit for common stock awards made to our outside directors was zero and approximately $0.3 million for the three and six months ended JuneSeptember 30, 2008.2008 and 2007, respectively, and $0.3 million and $0.3 million during the nine months ended September 30, 2008 and 2007, respectively. The Company did not capitalize any share-based compensation during the three and sixnine month periods ended JuneSeptember 30, 2008 and 2007.

        The unrecognized compensation cost related to the Company's unvested stock options, restricted shares, stock appreciation rights, and phantom shares as of JuneSeptember 30, 2008 was $10.0$8.7 million, $7.1$6.8 million, $1.7$1.3 million, and $8.5$4.5 million, respectively and is expected to be recognized over a weighted-average period of 1.7 years, 1.5 years, 1.11.4 years and 1.91.6 years, respectively.

14. TRANSACTIONS WITH RELATED PARTIES

        In connection with our acquisition of Western, the former owner of Western, Fred Holmes, became an employee of the Company. At the time of and subsequent to the acquisition, Mr. Holmes also owns an exploration and production company, Holmes Western Oil Corporation ("HWOC"), which was a customer of Western. Subsequent to the acquisition, the Company continued to provide services to HWOC. The prices charged for these services are at rates that are an average of the prices charged to Key'sour other customers in the California market. As of JuneSeptember 30, 2008, our receivables with HWOC totaled approximately $0.7$0.6 million, and for the three and sixnine months ended JuneSeptember 30, 2008, revenues from HWOC totaled approximately $2.0 million.$1.1 million and $3.2 million, respectively.

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15. SEGMENT INFORMATION

        The following table setstables set forth our segment information as of and for the three and sixnine month periods ended JuneSeptember 30, 2008 and 2007:

Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

15. SEGMENT INFORMATION (Continued)