UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number: 1-8038

KEY ENERGY SERVICES, INC.

(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)

1301 McKinney Street, Suite 1800, Houston, Texas 77010

(Address of Principal Executive Offices)principal executive offices) (Zip Code)

713/(713) 651-4300

(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)

None

(Former Name, Former Addressname, former address and Former Fiscal Year,former fiscal year, if Changed Since Last Report)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.

Yes   xNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Yes   oNox

As of October 31, 2007,April 30, 2008, the number of outstanding shares of common stock of the Registrantregistrant was 132,670,100.

125,298,014.

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 condensed consolidated unaudited financial statements

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Key Energy Services, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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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 change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the acquisition-date 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 at 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 development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

· Restructuring costs associated with a business combination will generally be expensed subsequent to the recastingacquisition date; and

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

SFAS 141(R) also includes new disclosure requirements related to business combinations. This statement applies to all business combinations for which the acquisition date is on or after the beginning of prior periodsthe first annual reporting period beginning on or after December 15, 2008, and earlier adoption is prohibited. The impact of the adoption of this standard on the Company’s financial position, results of operations, and cash flows will not be known until the Company completes a business combination subsequent to conformthe adoption date of this standard.

SFAS 160.  In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements: an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new 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 of a noncontrolling interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to a realignmentnoncontrolling interest will be included in consolidated net income on the face of certain positionsthe income statement. SFAS 160 clarifies that were previously reportedchanges in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss in 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 of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The Company is in the process of determining the impact the adoption of this standard will have on the Company’s financial position, results of operations and cash flows.

SFAS 161.  In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 requires more disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  We will adopt the provisions of SFAS 161 on January 1, 2009.  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 componentmaterial impact on the Company’s financial position, results of direct expenses thatoperations, and cash flows.

4.             ACQUISITIONS

The Company has acquired businesses consistent with its long-term growth strategy. Results of operations for acquisitions are now reported as generalincluded in the unaudited condensed consolidated statements of operations from the date of acquisition. The balances included in the unaudited condensed consolidated balance sheets related to acquisitions made during the third and administrative.  These reclassifications had no effect on previously reported net income.  The following tables summarize the effects of these reclassifications on previously reported amounts (in thousands):

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We apply the provisionsfourth quarters of EITF Issue 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet Quantitative Thresholds” (“EITF 04-10”) in our segment reporting in Note 10—“Segment Information.” Our contract drilling operations do not meet the quantitative thresholds as described in Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), and, under the provisions of EITF 04-10, since the operating segments meet the aggregation criteria, we have combined information about this segment with other similar segments that individually do not meet the quantitative thresholds in our Well Servicing reportable segment.

Principles of Consolidation

Within our consolidated financial statements, we include our accounts2007 and the accountsfirst quarter of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts2008 are based on preliminary information and transactions. We accountare subject to change when final asset valuations are obtained and the potential for our interest in entitiesliabilities has been evaluated. Acquisitions are accounted for which we do not have significant control or influence under the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method. See Note 6—“Investment in IROC Energy Services Corp.”

In determining whether we should consolidate an entity within our financial statements, we applypurchase method of accounting and the provisions of FASB Interpretation No. 46 (as amended), “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R requires that an equity investor in a variable interest entity have significant equitypurchase price is allocated to the net assets acquired based upon their estimated fair values at risk and hold a controlling interest, evidenced by voting rights, and absorb a majority of the entity’s expected losses or 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 is required to consolidate the variable interest entities created or obtained after March 15, 2004.

As further discussed in Note 2 — “Acquisitions,” on September 5, 2007, we acquired all the outstanding shares of AMI, a privately-held Canadian company.  On the date of acquisition, AMIacquisition. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition.

On January 17, 2008, the Company 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 a 48% interestby employees of the Company who joined the Company in another privately-held Canadian company, Advanced Flow Technologies, Inc. (“AFTI”).  InOctober 2007 in connection with the acquisition weof Moncla Well Service, Inc. and related entities.  The purchase price was allocated to the assets purchased and the acquisition of Tri-Energy did not result in the establishment of goodwill.

On September 5, 2007, the Company acquired Advanced Measurements, Inc., 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.  The purchase price is subject to a working capital adjustment mechanism which was settled in February 2008 and resulted in additional consideration paid of approximately $0.9 million.  This also resulted in additional goodwill of $0.9 million.

On October 25, 2007, the Company acquired Moncla Well Service, Inc. and related entities which operate well service rigs, barges, and ancillary equipment in the southeastern United States.  During the three months ended March 31, 2008, the Company refined its fair value allocation of the net assets acquired by decreasing working capital by $0.7 million with a corresponding increase to goodwill in the unaudited condensed consolidated balance sheet as of March 31, 2008.

On December 7, 2007, the Company acquired the well service assets and related equipment of Kings Oil Tools, Inc., a California-based well service company.  During the three months ended March 31, 2008, the Company revised its fair value allocation of the net assets acquired by increasing the fair value of the well service assets acquired by $1.5 million, decreased the fair value of working capital accounts by $0.1 million, and paid additional fees related to the closing of the transaction of $0.1 million.  These changes were requiredoffset with a corresponding net decrease to exercise an option that increased AMI’s ownershipgoodwill in the unaudited condensed consolidated balance sheet as of AFTI to 51.46%.  As a result, we now consolidate AFTI intoMarch 31, 2008.

5.             SUPPLEMENTAL FINANCIAL INFORMATION

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

The table below presents the comparative detailed financial information of our financial statements, with the remaining 48.54% representing a minority interest.other non-current accrued liabilities at March 31, 2008 and December 31, 2007.

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The table below presents the comparative supplemental cash flow information for the three months ended March 31, 2008 and 2007:

Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations and commitment and agency fees paid.

Revenue Recognition6.GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended March 31, 2008 are as follows:

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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 time we complete a jobAdministrative Agents (“Senior Secured Credit Facility”).  The aggregate lending commitment of this facility is $400.0 million and allows for a customer. Primarily, we price well servicing rig services bycombination of borrowings and issuances of letters of credit. There were borrowings of $50.0 million and outstanding letters of credit $61.1 million under the hour of service performed. DependingSenior Secured Credit Facility at March 31, 2008. The weighted-average interest rate on the type of job, we may charge by the project or by the day.

Oilfield Transportation.  Oilfield transportation revenue consists primarily of fluid and equipment transportation services and frac tanks which are used in conjunction with fluid hauling services. We recognize revenue when services are performed, collectionoutstanding borrowings of the relevant receivable is probable, persuasive evidenceSenior Secured Credit Facility was 4.17125% at March 31, 2008.  The Senior Secured Credit Facility requires the Company to maintain a consolidated interest coverage ratio of an arrangement existsat least 3.0 to 1.0, maintain a consolidated leverage ratio of not more than 3.5 to 1.0, and the price is fixed or determinable. These criteria are typically metto not exceed capital expenditures of $250.0 million in any fiscal year. The Company was in compliance with these covenants at the time we complete a job for a customer. Primarily, we price oilfield trucking services by the hour or by the quantities hauled.March 31, 2008.

Pressure Pumping and Fishing and Rental Services.  Pressure pumping and fishing and rental services include well stimulation and cementing services and recovering lost or stuck equipment in the wellbore. We recognize revenue when services are performed, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the price is fixed or determinable. These criteria are typically met at the time we complete a job for a customer. Generally, we price fishing and rental tool services by the day and pressure pumping services by the job.

Ancillary Oilfield Services.  Ancillary oilfield services include services such as wireline operations, wellsite construction, roustabout services, foam units and air drilling services. We recognize revenue when services are performed, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the price is fixed or determinable. These criteria are typically met at the time we complete a job for a customer. We price ancillary oilfield services by the hour, day or project depending on the type of services performed.

Cash and Cash Equivalents

We consider short-term investments with an original maturity of less than three months to be cash equivalents. None of our cash is restricted and we have not entered into any compensating balance arrangements. However, at September 30, 2007, all of ourAll obligations under the Senior Secured Credit Facility (hereinafter defined) wereare guaranteed by most of our subsidiaries and are secured by most of our assets, including assets held by our subsidiaries, which includes our cashaccounts receivable, inventory and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.equipment.

Investment in Debt and Equity Securities9.             INCOME TAXES

                We accountThe Company’s effective tax rate for investments in debtthe three months ended March 31, 2008 and equity securities under2007 was 39.5 % and 38.4%, respectively.  The primary difference between the provisionsstatutory rate of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt35% and Equity Securities” (“SFAS 115”). Under SFAS 115, investments are classified as either “trading,” “available for sale,” or “heldour effective tax rate relates to maturity,” depending on management’s intent regarding the investment.state and foreign taxes.

                Securities classified as “trading” are carried at fair value on the Company’s Consolidated Balance Sheets, with any unrealized holding gains or losses reported currently in earnings on our Consolidated Statements of Operations. Securities classified as “available for sale” are carried at fair value on the Company’s Consolidated Balance Sheets, with any unrealized holding gains or losses, net of tax, reported as a separate component of shareholders’ equity in Accumulated Other Comprehensive Income.

As of September 30, 2007March 31, 2008 and December 31, 2006,2007, we had approximately $6.9 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 Company had no investments in debt or equity securities that were classified as “trading” or “held to maturity.” In the third quarter of 2006, the Company began investing in Auction-Rate Securities (“ARS”) and Variable-Rate Demand Notes (“VRDN”). These are investments in long-term bonds whose returns are tied to short-term interest rates that are periodically reset, with periods ranging from 7 days to 6 months. As a result of the long-term nature of the underlying security (bonds with contractual lives ranging from 20 to 30 years), the Company accounts for ARS and VRDN investments as “available for sale” securities.  Because the Company can liquidate its position in an ARS or VRDN investment at par on an interest reset date, and because management does not intend to hold these investments beyond one year they are classified as current assets in our Consolidated Balance Sheets.ended December 31, 2002.

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