Summary of TETRA TECHNOLOGIES INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion is intended to analyze major elements of our consolidated financial statements and provide insight into important areas of management's focus. This section should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes included elsewhere in this Annual Report. We have accounted for the discontinuance or disposal of certain businesses as discontinued operations and have adjusted prior period financial information to exclude these businesses from continuing operations.

Statements in the following discussion may include forward-looking statements. These forward-looking statements involve risks and uncertainties. See "Item 1A. Risk Factors," for additional discussion of these factors and risks.

Business Overview

The changing global economic environment, particularly as it has affected the oil and gas industry, has created an uncertainty that threatens to interrupt a period of unprecedented growth for our company. During the year ended December 31, 2008, and for the seventh consecutive year, our consolidated revenues increased over the prior year period, reflecting the increasing demand for our products and services during this period, and the execution of our growth strategy, both through internal expansion and acquisitions. Much of the increase in the general demand for energy services during this period was in response to escalating oil and natural gas pricing, caused by the increased energy demands of a growing global economy. While we continue to pursue growth, the impact of decreased oil and natural gas prices and uncertain capital markets caused by the current global financial crisis has now decreased the demand for many of our products and services. This has caused us to temper our growth strategy by implementing more conservative fiscal disciplines, such as lower growth expectations, operating and administrative cost reductions, more careful spending on capital projects, consideration of alternative sources of capital, and a more focused effort on using excess cash flow to reduce our long-term debt whenever possible. During 2008, and particularly subsequent to the third quarter hurricanes which interrupted a large portion of Maritech's production cash flows, our long-term debt balance grew to $406.8 million, resulting in a debt to total capital ratio of 44.1% as of December 31, 2008. Subsequent to yearend, and as of February 27, 2009, this long-term debt balance has increased to $425.4 million and is not expected to significantly decrease until key capital expenditure projects in progress are completed. The most significant capital project is the construction of a new calcium chloride plant in El Dorado, Arkansas, which is expected to be completed and begin operations in the fourth quarter of 2009. Carefully managing our long-term debt levels and our growing asset retirement and decommissioning liabilities, while facing potentially weakening overall operating cash flows, are key strategies during this period of economic uncertainty, the duration of which appears to be indefinite.

Despite reporting overall increased consolidated revenues during 2008 compared to 2007, our profitability was negatively affected by several events and accounting adjustments recorded during the year. Our Maritech segment was severely affected by hurricanes during the third quarter of 2008, which resulted in a significant portion of its producing properties being shut-in during the last several months of the year. Maritech also was directly impacted by the significant decrease in oil and natural gas prices experienced during the last half of 2008, which largely contributed to $42.7 million of oil and gas property impairments recognized in 2008. These decreased oil and natural gas prices are expected to continue during 2009, affecting the profitability of Maritech and indirectly affecting each of our other reporting segments as well. Our Fluids Division showed significant operating growth during 2008, with improved gross profit as a result of lower costs for its CBF products and increased completion service margins. Our Offshore Services segment (formerly known as our Well Abandonment & Decommissioning Services segment) showed minimally improved performance, as lower capacity and poor operating weather conditions during much of the year were offset by the strong performance late in the year of its contract diving operation, which is capitalizing on the post-hurricane market demand for its services. The performances of our Fluids and Offshore Services segments were offset, however, by the impairments of goodwill and other long-term assets, which resulted in each segment reporting decreased pretax earnings compared to the prior year. Our Production Enhancement Division, consisting of our Production Testing segment and Compressco segment, reported continuing growth in earnings compared to the prior year, as each of these businesses continued to expand their operations during most of the year. Corporate overhead decreased during 2008 compared to 2007 as growth in overall administrative expenses were

more than offset by gains recorded to other income associated with certain commodity derivative contracts during the fourth quarter of 2008.

Future demand for our products and services depends primarily on activity in the oil and gas exploration and production industry, which is significantly affected by that industry's level of expenditures for the exploration and production of oil and gas reserves and for the plugging and decommissioning of abandoned oil and gas properties. Industry expenditures, as indicated by rig count statistics and other measures, have decreased significantly recently in response to lower oil and natural gas pricing and the general uncertainty regarding availability of capital resources in the current economic environment. Our overall growth is hampered by the current decreased industry demand for our products and services, although we still believe that there are growth opportunities for our products and services in the U.S. and international markets, supported primarily by:

· increases in technologically-driven deepwater gas well completions in the Gulf of Mexico;

· continued reservoir depletion in the U.S.;

· advancing age of offshore platforms in the Gulf of Mexico; and

· increasing development of oil and gas reserves abroad.

Our Fluids Division generates revenues and cash flows by manufacturing and selling completion fluids and providing filtration, water transfer, and associated products and engineering services to domestic and international exploration and production companies. In addition, the Fluids Division also provides liquid and dry calcium chloride products manufactured at its production facilities or purchased from third party suppliers to a variety of markets outside the energy industry. Fluids Division revenues increased 4.0% during 2008 compared to the prior year due primarily to increased prices and service activity. The overall outlook for the Division's completion services business is dependent on the level of oil and gas drilling activity, particularly in the Gulf of Mexico, which has remained flat or has decreased during the past several years, due largely to the maturity of the producing fields in the heavily developed portions of the Gulf of Mexico. More recently, overall industry drilling activity has also been acutely impacted by the current decreased oil and natural gas prices and increased capital constraints as a result of the general economic conditions. Potentially offsetting some of this decline, the Division is attempting to capitalize on the current industry trend toward drilling deepwater wells that generally require greater volumes of more expensive brine solutions. In addition, we are also pursuing specific international opportunities where demand for our Fluids Division products has been more stable. During 2008, the Fluids Division entered into a long-term contract with Petroleo Brasileiro S.A. (Petrobras) to provide completion fluids for its deepwater drilling program offshore Brazil. To further the growth of the Division's manufactured products operation and provide additional internally produced supply for our completion fluids operations, in 2007 we began construction of a new calcium chloride plant facility located in El Dorado, Arkansas. The plant is expected to increase the Division's capacity for providing calcium chloride to its customers, generating revenues and cash flows beginning in the fourth quarter of 2009.

Our Offshore Division consists of two operating segments: the Offshore Services segment and Maritech segment. Offshore Services generates revenues and cash flows by performing (1) downhole and sub-sea services such as plugging and abandonment, workover, inland water drilling, and wireline services, (2) construction and decommissioning services, including hurricane remediation, and
(3) diving services involving conventional and saturated air diving. The services provided by the Offshore Services segment are marketed primarily in the Gulf Coast region of the U.S., including offshore, inland waters and in certain onshore locations. Gulf of Mexico platform decommissioning and well abandonment activity levels are driven primarily by MMS regulations; the age of producing fields, production platforms and other structures; oil and natural gas commodity prices; sales activity of mature oil and gas producing properties; and overall oil and gas company activity levels. In addition, the segment intends to capitalize on the current demand for well abandonment and decommissioning activity in the Gulf of Mexico, including a portion of the work to be performed over the next several years on offshore properties that were damaged or destroyed by the significant hurricanes that occurred in 2005 and 2008. Given the increasing cost to insure offshore properties, many oil and gas operators are accelerating their plans to abandon and decommission their offshore wells and platforms. Offshore Services revenues decreased by 10.2% during 2008, primarily associated with the heavy lift capacity from vessels which we leased during portions of 2007 and due to decreased 2008 activity levels for well abandonment and decommissioning services, a portion of which was due to unfavorable weather during much of the year. This decrease was despite a significant increase in dive services activity, particularly following the 2008 hurricanes. Despite

this increase in demand for dive services, the Division expects overall activity to further decrease in 2009 due to lower oil and natural gas prices.

Through Maritech and its subsidiaries, the Division acquires, manages, explores, and exploits oil and gas properties in the offshore, inland water and onshore region of the Gulf of Mexico and generates revenues and cash flows from the sale of the associated oil and natural gas production volumes. Maritech acquires properties for their exploration and development potential, although many of Maritech's producing properties were also purchased to support the Division's Offshore Services businesses. During 2008, Maritech's operations were hampered by several factors that will continue to impact its operations going forward, including production interruptions from hurricanes, decreasing oil and natural gas pricing, increased insurance and other operating costs, reduced funding for capital expenditures, and significant future well intervention and decommissioning efforts. Following the 2008 hurricanes, Maritech now has six toppled offshore platforms that will require extensive efforts to decommission. Maritech continues to assess the remaining well intervention and debris removal efforts associated with these six offshore platforms and continues to believe that substantially all such hurricane related costs incurred and to be incurred in excess of deductibles are covered costs pursuant to its insurance policies. Maritech's revenues during 2008 decreased by 2.6% compared to 2007, despite significantly increased realized oil and natural gas prices during much of the year, due primarily to the decreased overall production following the third quarter 2008 hurricanes. Although much of the storm-interrupted production has been restored or will be restored by the end of the first quarter of 2009, one of the destroyed offshore platforms served a key producing field, the East Cameron 328 field. The complete restoration of East Cameron 328 production will require the redrilling of new wells, and this effort is not expected to be complete until 2010. Maritech's twenty-one primary term leases, along with exploitation opportunities on producing leases, should continue to provide Maritech with additional attractive exploitation projects, subject to capital expenditure constraints as a result of the current economic environment.

Our Production Enhancement Division consists of two operating segments: the Production Testing segment and Compressco segment. The Production Testing segment generates revenues and cash flows by performing flowback pressure, volume testing, and other services for oil and gas producers. The primary testing markets served are in Texas, New Mexico, Colorado, Oklahoma, Arkansas, Louisiana, Pennsylvania, the U.S. Gulf of Mexico, Mexico, and certain other international markets. The Division's production testing operations are generally driven by the demand for natural gas and oil and the resulting industry drilling and completion activities in the markets which the Production Testing segment serves. The Production Testing segment revenues increased 36.4% in 2008 as compared to 2007, primarily due to increased domestic demand. Given the current and expected decreased oil and natural gas price environment, we expect demand for our production testing services will decrease in 2009 compared to 2008. In addition, many of our production testing customers are smaller independent operators, who may be more severely impacted by the current economic uncertainty than larger operators.

Compressco generates revenues and cash flows by performing wellhead compression-based production enhancement services which it markets throughout 14 states that encompass most of the onshore producing regions of the United States, as well as in Canada, Mexico, and other international locations. Demand for wellhead compression services is generally driven by the need to boost production in certain mature gas wells with declining production. The Compressco segment's revenues increased 16.6% in 2008 as compared to 2007 due to increased domestic and international demand for production enhancement services. Though demand for Compressco's services is also affected by oil and natural gas prices, we anticipate Compressco's 2009 revenues and cash flows to be impacted less than our other businesses, as we continue to seek new domestic and international markets for Compressco operations.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the collectibility of accounts receivable, and the current cost of future abandonment and decommissioning obligations. "Note B - Summary of Significant Accounting Policies" to the Consolidated Financial Statements contains the accounting policies governing each of these matters. Our estimates are based on historical experience and on future expectations, which we believe are reasonable. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not

readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environment are encountered. Actual results are likely to differ from our current estimates, and those differences may be material. The following critical accounting policies reflect the most significant judgments and estimates used in the preparation of our financial statements.

Impairment of Long-Lived Assets - The determination of impairment of long-lived assets is conducted periodically whenever indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgments as to the future operating cash flows to be generated from these assets throughout their estimated useful lives. If an impairment of a long-lived asset is warranted, we estimate the fair value of the asset, based on a present value of these cash flows or the value that could be realized from disposing of the asset in a transaction between market participants. The oil and gas industry is cyclical, and our estimates of the amount of future cash flows, the period over which these estimated future cash flows will be generated, as well as the fair value of an impaired asset, are imprecise. Our failure to accurately estimate these future operating cash flows or fair values could result in certain long-lived assets being overstated, which could result in impairment charges in periods subsequent to the time in which the impairment indicators were first present. Alternatively, if our estimates of future operating cash flows or fair values are understated, impairments might be recognized unnecessarily or in excess of the appropriate amounts. Our estimates of operating cash flows and fair values for assets impaired have generally been accurate. Although we have historically had minimal impairments of long-lived assets other than for oil and gas properties (see separate discussion below), during 2008 we recorded long-lived asset impairments of $8.7 million. Given the current volatile economic environment, the likelihood of material impairments of long-lived assets in future periods is higher due to the possibility of further decreased demand for our products and services.

Impairment of Goodwill - The impairment of goodwill is also assessed whenever impairment indicators are present but no less than once annually. The assessment for goodwill impairment is performed for each reporting unit, and consists of a comparison of the carrying amount of each reporting unit to our estimation of the fair value of that reporting unit. If the carrying amount of the reporting unit exceeds its estimated fair value, an impairment loss is calculated by comparing the carrying amount of the reporting unit's goodwill to our estimated implied fair value of that goodwill. Our estimates of reporting unit fair value are imprecise and are subject to our estimates of the future cash flows of each business and our judgment as to how these estimated cash flows translate into each business' estimated fair value. These estimates and judgments are affected by numerous factors, including the general economic environment at the time of our assessment, which affects our overall market capitalization. If we over-estimate the fair value of our reporting units, the balance of our goodwill asset may be overstated. Alternatively, if our estimated reporting unit fair values are understated, impairments might be recognized unnecessarily or in excess of the appropriate amounts. During the fourth quarter of 2008, due to changes in the global economic environment which affected our stock price and market capitalization, we recorded an impairment of goodwill of $47.1 million. We feel our estimates of the fair value for each reporting unit are reasonable. However, given the current volatile economic environment, the likelihood of additional material impairments of goodwill in future periods is higher.

Oil and Gas Properties - Maritech accounts for its interests in oil and gas properties using the successful efforts method, whereby costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized, and costs related to unsuccessful exploratory wells are expensed as incurred. All capitalized costs are accumulated and recorded separately for each field and are depleted on a unit-of-production basis, based on the estimated remaining proved oil and gas reserves of each field. Oil and gas properties are assessed for impairment in value on an individual field basis, whenever indicators become evident, with any impairment charged to expense. Accordingly, Maritech's results of operations may be more volatile compared to those oil and gas exploration and production companies who account for their operations using the full-cost method. Due to the impact of changing oil and gas prices, results of drilling and development efforts, and increased estimated decommissioning liabilities (see discussion below), Maritech has recorded oil and gas property impairments and dry hole costs, and during the fourth quarter of 2007 and the third and fourth quarters of 2008 these impairment charges were significant. Maritech purchases oil and gas properties and assumes the associated well abandonment and decommissioning liabilities. Any significant differences in the actual amounts of oil and gas production cash flows produced or decommissioning costs incurred, compared to the estimated amounts recorded, will affect our anticipated profitability. Given the current volatility of oil and natural gas prices, we are more likely to record additional significant impairments in future periods.

The process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering, and economic data for each reservoir. As a result, these estimates are inherently imprecise. Actual future production, cash flows, development expenditures, operating and abandonment expenses, and quantities of recoverable oil and gas reserves may vary substantially from those initially estimated by Maritech. Any significant variance in these assumptions could result in significant upward or downward revisions of previous estimates, as reflected in our annual disclosure of the estimated quantity and value of our proved reserves. In previous years, we have reflected revisions to our previous estimates of reserve quantities and values, and in some years, these revisions have been significant. It is possible we will have additional revisions to our estimated quantities of proved reserves in future periods.

Decommissioning Liabilities - We estimate the third party market values (including an estimated profit) to plug and abandon the wells, decommission the pipelines and platforms and clear the sites, and use these estimates to record Maritech's well abandonment and decommissioning liabilities. These well abandonment and decommissioning liabilities (referred to as decommissioning liabilities) are recorded net of amounts allocable to joint interest owners, anticipated insurance recoveries, and any contractual amounts to be paid by the previous owners of the property. In estimating the decommissioning liabilities, we perform detailed estimating procedures, analysis, and engineering studies. Whenever practical, Maritech utilizes the services of its affiliated companies to perform well abandonment and decommissioning work. When these services are performed by an affiliated company, all recorded intercompany revenues are eliminated in the consolidated financial statements. Any profit we earn in performing such abandonment and decommissioning operations on Maritech's properties is recorded as the work is performed. The recorded decommissioning liability associated with a specific property is fully extinguished when the property is completely abandoned. Once a Maritech well abandonment and decommissioning project is performed, any remaining decommissioning liability in excess of the actual cost of the work performed is recorded as additional profit on the project and included in earnings in the period in which the project is completed. Conversely, actual costs in excess of the decommissioning liability are charged against earnings in the period in which the work is performed.

We review the adequacy of our decommissioning liability whenever indicators suggest that either the amount or timing of the estimated cash flows underlying the liability have changed materially. The estimated timing of these cash flows is determined by the productive life of the associated oil and gas property, which is based on the property's oil and gas reserve estimates. The amount of cash flows necessary to abandon and decommission the property is subject to changes due to seasonal demand, increased demand following hurricanes, and other general changes in the energy industry environment. Accordingly, the estimation of our decommissioning liability is imprecise. The estimation of the decommissioning liability associated with the six Maritech offshore platforms that were destroyed during the 2005 and 2008 hurricanes is particularly difficult due to the non-routine nature of the efforts required. The actual cost of performing Maritech's well abandonment and decommissioning work has often exceeded our initial estimate of Maritech's decommissioning liability and has resulted in charges to earnings in the period the work is performed or when the additional liability is recorded. To the extent our decommissioning liability is understated, additional charges to earnings may be required in future periods.

Revenue Recognition - We generate revenue on certain well abandonment and decommissioning projects under contracts which are typically of short duration and that provide for either lump-sum turnkey charges or specific time, material, and equipment charges, which are billed in accordance with the terms of such contracts. With regard to turnkey contracts, revenue is recognized using the percentage-of-completion method based on the ratio of costs incurred to total estimated costs at completion. The estimation of total costs to be incurred may be imprecise due to unexpected well conditions, delays, weather, and other uncertainties. Inaccurate cost estimates may result in the revenue associated with a specific contract being recognized in an inappropriate period. Total project revenue and cost estimates for turnkey contracts are reviewed periodically as work progresses, and adjustments are reflected in the period in which such estimates are revised. Provisions for estimated losses on such contracts are made in the period such losses are determined. Despite the uncertainties associated with estimating the total contract cost, our recognition of revenue associated with these contracts has historically been reasonable.

Bad Debt Reserves - Reserves for bad debts are calculated on a specific identification basis, whereby we estimate whether or not specific accounts receivable will be collected. Such estimates of

future collectability may be incorrect, which could result in the recognition of unanticipated bad debt expenses in future periods. A significant portion of our revenues come from oil and gas exploration and production companies, and historically our estimates of uncollectible receivables have proven reasonably accurate. However, if due to adverse circumstances, such as in the current economic environment, certain customers are unable to repay some or all of the amounts owed us, an additional bad debt allowance may be required, and such amount may be material.

Income Taxes - We provide for income taxes by taking into account the differences between the financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis amounts. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. This calculation requires us to make certain estimates about our future operations and many of these estimates . . .