AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 2002
                                                      REGISTRATION NO. 333-83924
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                         POST-EFFECTIVE AMENDMENT NO. 1
                                       TO
                                    FORM S-4

            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                            ------------------------

                           KEY ENERGY SERVICES, INC.

               Co-registrants are listed on the following pages.
             (Exact name of registrant as specified in its charter)


                                                       
           MARYLAND                        1381                    04-2648081
 (State or other jurisdiction        (Primary Standard          (I.R.S. Employer
     of incorporation or         Industrial Classification    Identification No.)
        organization)                  Code Number)


                                 6 DESTA DRIVE
                              MIDLAND, TEXAS 79705
                                 (915) 620-0300

         (Address, including zip code, and telephone number, including
            area code, of registrant's principal executive offices)

                                FRANCIS D. JOHN
                              400 SOUTH RIVER ROAD
                          NEW HOPE, PENNSYLVANIA 18938
                                 (215) 862-7900

 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                            ------------------------

                                   COPIES TO:


                                       
       Jack D. Loftis, Jr.                         Samuel N. Allen
    Key Energy Services, Inc.                  Porter & Hedges, L.L.P.
       400 South River Road                   700 Louisiana, 35th Floor
   New Hope, Pennsylvania 18938                  Houston, Texas 77002
          (215) 862-7900                            (713) 226-0600


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                           KEY ENERGY SERVICES, INC.
                                   PROSPECTUS
                    UP TO 17,425,818 SHARES OF COMMON STOCK

                            ------------------------

                                Q SERVICES, INC.
                                PROXY STATEMENT
                      FOR SPECIAL MEETING OF SHAREHOLDERS
                          TO BE HELD ON JUNE 28, 2002

                            ------------------------

    This proxy statement/prospectus is being furnished to the holders of common
stock, no par value, series A preferred stock, no par value, and series B
preferred stock, no par value, of Q Services, Inc., a Texas corporation, in
connection with the solicitation of proxies by the board of directors of Q
Services for use at its special meeting of shareholders to be held on June 28,
2002, at the time and place set forth in the Notice of Special Meeting of
Shareholders, for the purpose of voting upon and approving:

    - the Plan and Agreement of Merger dated as of May 13, 2002, as amended,
      among Key Energy Services, Inc., a Maryland corporation, Key Merger Sub,
      Inc, a Texas corporation and a wholly-owned subsidiary of Key Energy
      Services, Inc., and Q Services, Inc., a Texas corporation, pursuant to
      which Key Merger Sub will be merged into Q Services with Q Services being
      the surviving corporation, and the transactions contemplated therein; and

    - to consider and transact such other business as may properly be brought
      before the special meeting or any adjournment thereof.

    If the merger is consummated, former holders of Q Services common stock will
become Key shareholders and Q Services will become a wholly-owned subsidiary of
Key.

    This proxy statement/prospectus also is being used in connection with the
distribution of shares of the common stock, par value $.10 per share, of Key in
connection with the proposed merger and, after the effective date of the merger,
in connection with resales of Key's common stock by the selling shareholders
named in this proxy statement/prospectus.

    Key's common stock is currently traded on the New York Stock Exchange under
the symbol "KEG." The last reported sale price of Key's common stock on the New
York Stock Exchange on June   , 2002 was $            . Neither the common stock
nor the series A or series B preferred stock of Q Services is traded on any
securities exchange.

 PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 15 IN THIS PROXY
                             STATEMENT/PROSPECTUS.

     NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
                                   SECURITIES
               OR DETERMINED THAT THIS PROXY STATEMENT/PROSPECTUS
    IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS ILLEGAL.

         This proxy statement/prospectus is dated June   , 2002 and was
       first mailed to Q Services shareholders on or about June   , 2002

                             ADDITIONAL INFORMATION

    Key has filed a registration statement on Form S-4 with the SEC with respect
to the securities it may offer, including the common stock to be issued to the
holders of Q Services common stock in the merger. This proxy
statement/prospectus is part of that registration statement, and constitutes
both a prospectus of Key and a proxy statement of Q Services for its special
meeting. However it does not contain important business and financial
information about Key. This information is available to you without charge. See
"Where You Can Find More Information" on page 85 of this proxy statement/
prospectus for additional information about Key, and information on file with
the SEC. You may also request these documents from Key.

    TO OBTAIN TIMELY DELIVERY, Q SERVICES SHAREHOLDERS MUST REQUEST THIS
INFORMATION BY JUNE 20, 2002. You may obtain these documents without charge by
writing or calling Key at the following address and telephone number:

                           KEY ENERGY SERVICES, INC.
                              400 South River Road
                          New Hope, Pennsylvania 18938
                             Attn: General Counsel
                                 (215) 862-7900

                               TABLE OF CONTENTS


                                                           
QUESTIONS AND ANSWERS ABOUT THE MERGER......................      1

SUMMARY.....................................................      5
  The Companies.............................................      5
  The Merger................................................      5
  Key's Reasons for the Merger..............................      6
  Q Services' Reasons for the Merger........................      6
  Risk Factors..............................................      6
  What You Will Receive in the Merger.......................      6
  The Q Services Special Meeting............................      7
  Record Date; Shareholders Entitled to Vote................      7
  Vote Required.............................................      7
  Voting Agreements.........................................      7
  Fairness Opinion..........................................      7
  Recommendation of the Board of Directors of Q Services....      7
  Material Federal Income Tax Consequences..................      7
  Accounting Treatment......................................      8
  Interests of Certain Persons in the Merger................      8
  Regulatory Approvals......................................      8
  Effects of the Merger on the Rights of Q Services
    Shareholders............................................      8
  Registration of Key Shares................................      9
  Listing of Key Common Stock...............................      9
  Dissenters' Rights........................................      9
  Conditions Precedent to the Merger........................      9
  No Solicitation of Competing Transactions.................     10
  Effective Date............................................     10
  Termination of the Merger Agreement.......................     10
  Forward-Looking Statements in this Proxy
    Statement/Prospectus....................................     11
  Comparative Market Price Data.............................     11

SUMMARY FINANCIAL INFORMATION...............................     12
  Selected Historical Consolidated Financial Data of Key....     12
  Selected Historical Consolidated Financial Data of Q
    Services................................................     13
  Selected Historical Consolidated Pro Forma Financial
    Information.............................................     14

RISK FACTORS................................................     15
  Risks Relating to the Merger..............................     15
  Risks Related to Key......................................     17

THE COMPANIES...............................................     22
  Key.......................................................     22
  Q Services................................................     22

THE SPECIAL MEETING.........................................     24
  Date, Time and Place......................................     24
  Matters to Be Considered at the Special Meeting...........     24
  Board of Directors Recommendation.........................     24
  Record Date...............................................     24
  Quorum....................................................     24
  Vote Required.............................................     24
  Voting Agreements.........................................     25


                                       i


                                                           
  Proxies...................................................     25
  Revocability of Proxies...................................     25
  Solicitation of Proxies...................................     25

THE MERGER..................................................     26
  General Description of the Merger.........................     26
  Background of the Merger..................................     26
  Key's Reasons for the Merger..............................     28
  Q Services' Reasons for the Merger........................     28
  Opinion of Q Services' Financial Advisor..................     29
  Financial Analyses........................................     31
  Implied Exchange Ratio Summary............................     32
  Pro Forma Merger Consequences Analysis....................     35
  About Lehman Brothers.....................................     35
  Resale of Key Common Stock; Registration Under the
    Securities Act..........................................     35
  Interests of Certain Persons in the Merger; Conflicts of
    Interest................................................     36
  Certain United States Federal Income Tax Consequences.....     37
  Accounting Treatment......................................     39
  Government and Regulatory Approvals.......................     39
  Dissenters' Rights........................................     39
  Certain Other Effects of the Merger.......................     41
  Recommendation of the Board of Directors of Q Services....     41
  Vote Required.............................................     41

THE MERGER AGREEMENT........................................     42
  The Merger................................................     42
  General Structure of the Merger...........................     42
  Calculation of Purchase Price.............................     43
  Merger Consideration......................................     43
  Treatment of Q Services Preferred Stock...................     44
  Treatment of Q Services Stock Options.....................     44
  Treatment of Warrants.....................................     44
  Purchase Price Holdback...................................     45
  Purchase Price Adjustment Payment.........................     45
  Fractional Shares.........................................     46
  Exchange of Certificates..................................     46
  Representations and Warranties of Q Services..............     47
  Representations and Warranties of Key.....................     47
  Agreements of Key and Q Services..........................     48
  Additional Agreements of Q Services.......................     48
  Additional Agreements of Key..............................     49
  Conditions Precedent to the Obligations of Q Services.....     49
  Conditions Precedent to the Obligations of Key............     49
  Termination...............................................     50
  Termination by Key........................................     51
  Termination by Q Services.................................     51
  Effect of Termination.....................................     51
  Voting Agreements.........................................     51
  Noncompetition Agreements.................................     52
  Employment Agreements.....................................     52
  Second Amendment to Amended and Restated Shareholders
    Agreement...............................................     53


                                       ii


                                                           
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION..........     54

Q SERVICES' SELECTED FINANCIAL DATA.........................     60

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS OF Q SERVICES...................     62
  Results of Operations.....................................     62
  Quarter Ended March 31, 2002 versus Quarter Ended March
    31, 2001................................................     62
  Year Ended December 31, 2001 versus Year Ended December
    31, 2000................................................     63
  Liquidity and Capital Resources...........................     65
  Quantitative and Qualitative Disclosures about Market
    Risk....................................................     66

DESCRIPTION OF KEY CAPITAL STOCK............................     67
  Common Stock..............................................     67
  Preferred Stock...........................................     67

COMPARISON OF RIGHTS OF SHAREHOLDERS OF KEY AND Q
  SERVICES..................................................     69

SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE
  OFFICERS AND PRINCIPAL SHAREHOLDERS OF Q SERVICES.........     80

SELLING SHAREHOLDERS........................................     82

PLAN OF DISTRIBUTION........................................     83

EXPERTS.....................................................     84

LEGAL MATTERS...............................................     84

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...........     85

WHERE YOU CAN FIND MORE INFORMATION.........................     85

INDEX TO Q SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED
  FINANCIAL STATEMENTS......................................    F-1


EXHIBITS


                                                                                          
Exhibit A                         -- Plan and Agreement of Merger dated as of May 13, 2002 among
                                     Key Energy Services, Inc., a Maryland corporation, Key
                                     Merger Sub, Inc., a Texas corporation and Q Services, Inc.,
                                     a Texas corporation, as amended by the First Amendment to
                                     Plan and Agreement of Merger dated as of May 30, 2002 among
                                     Key Energy Services, Inc., a Maryland corporation, Key
                                     Merger Sub, Inc., a Texas corporation, and Q Services, Inc.,
                                     a Texas corporation

Exhibit B                         -- Opinion of Lehman Brothers, Inc. dated as of May 10, 2002

Exhibit C                         -- Articles 5.12 and 5.13 of the Texas Business Corporation Act

Exhibit D                         -- Annual Report on Form 10-K, as amended, of Key Energy
                                     Services, Inc. for the fiscal year ended June 30, 2001

Exhibit E                         -- Quarterly Report on Form 10-Q of Key Energy Services, Inc.
                                     for the quarter ended March 31, 2002


                                      iii

                     QUESTIONS AND ANSWERS ABOUT THE MERGER


                     
Q:                      WHAT IS THE PROPOSED TRANSACTION?

A:                      A wholly-owned subsidiary of Key Energy Services, Inc. will
                        merge into Q Services. As a result, former Q Services common
                        shareholders will become Key common shareholders, and Q
                        Services will become a wholly-owned subsidiary of Key.

Q:                      WHY ARE THE COMPANIES PROPOSING THE MERGER?

A:                      The boards of directors of Key and Q Services believe the
                        following benefits will be realized in the merger:

                            - combining the two companies will enhance two of the
                            business lines that Key currently operates;

                            - a wider geographic area will be covered by the
                            combined company than is covered by either company
                              individually;

                            - substantial synergies and economies of scale can be
                            realized through the combination of the two companies;

                            - Key's ability to respond to its overall customer base
                            during peak activity periods will be enhanced;

                            - the expanded service capability of Key will allow Key
                            to better meet its customer needs and to provide a
                              "total solution" service capability; and

                            - Key will have the opportunity to enter into markets
                              where it does not currently operate.

Q.                      WHAT IS THE PURCHASE PRICE THAT KEY IS PAYING FOR Q
                        SERVICES?

A:                      The purchase price for Q Services is the agreed upon
                        enterprise value of $265.0 million LESS certain reductions.
                        These reductions include the following:

                            - Q Services' total balance sheet liabilities, excluding
                            deferred income tax liability, reduced by Q Services'
                              current assets, each calculated as of the date the
                              merger closes. For purposes of the calculation,
                              liabilities will also include:

                                - severance benefits to certain Q Services
                                  employees; and

                                - Q Services' transaction costs, which consist
                               primarily of fees of a financial advisor and legal
                                  and accounting fees;

                            - amounts necessary to redeem Q Services' issued and
                            outstanding series A preferred stock and series B
                              preferred stock.


                                       1


                     
Q:                      WHAT WILL I RECEIVE IN THE MERGER?

A:                      Holders of Q Services common stock will receive Key common
                        stock in the merger. The number of shares of Key common
                        stock issuable in exchange for each share of Q Services
                        common stock will be based on, among other things:

                            - the purchase price that Key is paying for all
                            outstanding Q Services common stock as described above;
                              and

                            - the value of Key common stock based on the average of
                            the closing prices of Key common stock on the New York
                              Stock Exchange over the 10-day trading period
                              immediately preceding the day before the effective
                              date of the merger, but in no event below $11.00 or
                              above $13.00 per share.

Q:                      HOW MANY KEY SHARES WILL I RECEIVE FOR EACH SHARE OF Q
                        SERVICES COMMON STOCK THAT I HOLD?

A:                      Since the calculation of the number of shares of Key common
                        stock issuable in exchange for each share of Q Services
                        common stock is subject to the variables described above and
                        a post-closing adjustment, as of the date of this proxy
                        statement/prospectus, it is not possible to calculate the
                        exact number of shares of Key common stock that you will
                        receive in the merger. However, assuming the purchase price
                        reductions equal those described above and the Q Services
                        balance sheet used to calculate the final merger
                        consideration is identical to the Q Services March 31, 2002
                        balance sheet included elsewhere in this proxy
                        statement/prospectus, approximately 1.0723 shares and
                        approximately 0.9073 shares of Key common stock would be
                        issuable in exchange for each share of Q Services common
                        stock assuming a Key share price of $11.00 or lower and
                        $13.00 or higher, respectively. As of June   , 2002, the
                        closing price of Key common stock was $     and the 10-day
                        average share price was $     .

Q:                      WHAT IS THE PURCHASE PRICE HOLDBACK AND HOW DOES IT WORK?

A:                      Because of the post-closing adjustment described below, the
                        number of shares of Key common stock issuable in the merger
                        cannot be determined with precision on the effective date of
                        the merger. Therefore, 5% of the merger consideration
                        payable to Q Services common shareholders and to holders of
                        options and warrants to purchase Q Services common stock on
                        the effective date of the merger will be held back by Key.
                        The purchase price holdback will be used to satisfy
                        adjustments to the purchase price based on differences
                        between the estimated and final balance sheets of Q Services
                        as described above.

                            - If the final purchase price is less than the purchase
                            price estimated at closing by more than the amount of
                              the holdback, then the Q Services common shareholders,
                              option holders and warrant holders will not receive
                              the amount of the merger consideration that was held
                              back, and they will be required to pay back to Key
                              their pro rata share of the purchase price adjustment
                              that is in excess of the 5% holdback.

                            - If the final purchase price is less than the purchase
                            price estimated at closing, but in an amount less than
                              the amount of the 5% holdback, then Key will retain an
                              amount equal to the difference in the final and
                              estimated purchase price, and the Q Services common
                              shareholders, option holders and warrant holders will
                              receive the balance of the holdback.

                            - If the final purchase price is greater than the
                            purchase price estimated at closing, then Key will
                              distribute the entire holdback amount to the Q
                              Services common shareholders, option holders and
                              warrant holders and will also pay to such persons any
                              additional merger consideration necessary for the
                              final purchase price to have been paid in full.


                                       2


                     
Q:                      IS THE PURCHASE PRICE SUBJECT TO A POST-CLOSING ADJUSTMENT?

A:                      Yes, the purchase price will be adjusted post-closing. The
                        purchase price paid at closing will be calculated using an
                        estimated Q Services balance sheet as of that date. After
                        the closing, a final balance sheet will be prepared and then
                        compared to the estimated balance sheet to calculate the
                        final purchase price.

Q:                      WHO MUST APPROVE THE MERGER?

A:                      In addition to governmental and other regulatory approvals,
                        the merger agreement and the merger must be approved by Q
                        Services' common and preferred shareholders voting together
                        as a single class. Approval by Key's shareholders is not
                        required.

Q:                      WHAT SHAREHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER?

A:                      Approval of the merger requires the affirmative vote of
                        two-thirds of the issued and outstanding Q Services common
                        stock, series A preferred stock and series B preferred
                        stock, voting as a single class.

Q:                      HOW MANY VOTES MAY I CAST?

A:                      Each holder of Q Services common stock is entitled to one
                        vote per share. Each holder of Q Services series A preferred
                        stock and series B preferred stock is entitled to the number
                        of votes determined by dividing the number of shares of Q
                        Services series A preferred stock or series B preferred
                        stock held by the holder by ten. Any fractional votes are
                        adjusted up or down as follows: a holder of ten shares of Q
                        Services series A preferred stock or series B preferred
                        stock is entitled to one vote, a holder of 15 shares of Q
                        Services series A preferred stock or series B preferred
                        stock is entitled to one vote, and a holder of 16 shares of
                        Q Services series A preferred stock or series B preferred
                        stock is entitled to two votes.

Q:                      DOES THE Q SERVICES BOARD OF DIRECTORS RECOMMEND VOTING IN
                        FAVOR OF THE MERGER?

A:                      Yes. After careful consideration, the Q Services board of
                        directors unanimously recommends that its common and
                        preferred shareholders vote in favor of the merger agreement
                        and merger. In recommending approval of the merger, the
                        board of directors has considered the opinion of Lehman
                        Brothers, Inc. dated as of May 10, 2002, to the shareholders
                        of Q Services to the effect that as of the date of the
                        written opinion, and based upon and subject to certain
                        matters stated in the opinion, the merger consideration is
                        fair from a financial point of view to Q Services' common
                        shareholders.

Q:                      WHAT IF THE MERGER IS NOT COMPLETED?

A:                      If the merger is not completed, then holders of Q Services
                        common stock, series A preferred stock and series B
                        preferred stock will remain shareholders of Q Services.

Q:                      WHAT DO I NEED TO DO NOW?

A:                      We urge you to read this proxy statement/prospectus,
                        including the exhibits, carefully, and to consider how the
                        merger will affect you as a shareholder of Q Services. You
                        also should review the documents referenced under "Where You
                        Can Find More Information" on page 85.

Q:                      HOW DO I VOTE?

A:                      You may vote by mailing a signed proxy card in the enclosed
                        return envelope as soon as possible so that your shares of Q
                        Services common or preferred stock may be represented at the
                        special meeting. You may also attend the special meeting and
                        vote in person.


                                       3


                     
Q:                      CAN I CHANGE MY VOTE?

A:                      Yes. You may change your vote by delivering a later-dated,
                        signed proxy card to Q Services' secretary before the
                        special meeting, by delivering a written notice of
                        revocation or by attending the special meeting and voting in
                        person.

Q:                      AM I ENTITLED TO DISSENTERS' RIGHTS?

A:                      Yes. If you are a holder of Q Services common stock and wish
                        to dissent from the merger, you must deliver to Q Services,
                        before the taking of the vote on the merger of the special
                        meeting, a written objection to the merger setting out that
                        your right to dissent will be exercised if the merger is
                        effective. There are additional procedural requirements you
                        must follow to exercise your dissenters' rights. These
                        procedures are described in this proxy statement/prospectus
                        under the caption "The Merger--Dissenters' Rights" on page
                        39.

Q:                      WHEN AND WHERE IS THE SPECIAL MEETING?

A:                      The special meeting will be held on June 28, 2002,
                        9:00 a.m., Houston, Texas time, at The Briar Club, 2603
                        Timmons Lane, Houston, Texas 77027.

Q:                      AM I BEING ASKED TO VOTE ON ANY OTHER PROPOSALS AT THE
                        MEETING?

A:                      No. Q Services is not aware of any additional items to be
                        voted upon at the meeting.

Q:                      WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?

A:                      Key and Q Services are working to complete the merger as
                        quickly as possible. If the conditions to the merger are
                        satisfied or waived, Key and Q Services hope to complete the
                        merger promptly following the special shareholders meeting.

Q:                      SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A:                      No. If the merger is completed, Key will promptly send you
                        written instructions for sending in your stock certificates
                        in exchange for the merger consideration to be issued at
                        closing.

Q:                      WHOM CAN I CALL WITH QUESTIONS?

A:                      If you have any questions about the merger or any related
                        transactions, please call David Schorlemer, the chief
                        financial officer of Q Services, at (713) 353-0191.


                                       4

                                    SUMMARY

    This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully, and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we have referred. In particular, you
should read the documents attached to this proxy statement/prospectus, including
the merger agreement, which is attached as Exhibit A. Also see "Where You Can
Find More Information" on page 85. We have included page references
parenthetically to direct you to more complete descriptions of the topics
presented in this summary.

INTRODUCTION

    Key will use this proxy statement/prospectus for the distribution of Key
common stock to Q Services' common shareholders in the merger. Q Services is
delivering this proxy statement/prospectus to its common and preferred
shareholders in connection with the solicitation of votes for approval of the
merger.

THE COMPANIES (see page 22)

    KEY ENERGY SERVICES, INC.  Based on available industry data, Key is the
largest onshore, rig-based well servicing contractor in the world. Key provides
a complete range of well services to major oil companies and independent oil and
natural gas production companies. Key conducts well servicing operations in
various regions of the continental United States and internationally in
Argentina and Canada. Key also is a leading onshore drilling contractor and
conducts land drilling operations in a number of major domestic producing
basins, as well as in Argentina and in Ontario, Canada. In addition to its other
businesses, Key also produces and develops oil and natural gas reserves in the
Permian Basin region and Texas Panhandle.

    Key's Annual Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2001 and its Quarterly Report for the quarter ended March 31, 2002,
accompany this proxy statement/prospectus as exhibits.

    Key's headquarters are located at 6 Desta Drive, Midland, Texas 79705, and
its telephone number at that address is (915) 620-0300.

    Q SERVICES, INC.  Q Services is an oilfield service company specializing in
the delivery of products and services related to the production of natural gas
and oil. Its customers include over 1,500 major and independent operating
companies. Q Services' primary service lines include:

    - fishing and rental tool services;

    - field production services, including oilfield fluid transportation and
      logistics, frac tank rental, completion and production chemicals, lease
      crew services and site construction; and

    - pressure pumping services, including fracturing, acidizing, cementing and
      nitrogen services.

    Q Services' headquarters are located at 3100 Timmons Lane, Suite 300,
Houston, Texas 77027, and its telephone number at that address is
(713) 869-6020.

THE MERGER (see page 26)

    A wholly-owned subsidiary of Key formed for the purpose of effecting the
merger will merge into Q Services. As a result, Q Services common shareholders
will become Key common shareholders, and Q Services will become a wholly-owned
subsidiary of Key.

                                       5

KEY'S REASONS FOR THE MERGER (see page 28)

    Key's board of directors and management believe the merger will benefit Key
and its shareholders because the acquisition:

    - will expand its current oilfield trucking and fishing and rental tool
      service lines into new geographic markets;

    - will add pressure pumping as a new service line;

    - will allow Key to expand its existing customer base;

    - will increase Key's exposure to the natural gas markets;

    - is expected to be immediately accretive to earnings per share and cash
      flow per share; and

    - will reduce Key's debt-to-capitalization ratio.

Q SERVICES' REASONS FOR THE MERGER (see page 28)

    Q Services' board of directors and management believe the merger will
benefit Q Services and its shareholders for the following reasons:

    - the combined company provides a strategic platform for future growth;

    - the combined company will have adequate capital sources to facilitate
      internal and external growth, which will result in an increased ability to
      focus on operational growth VS. capital structure;

    - the management team of the combined company will benefit from added depth
      and industry experience;

    - Q Services' shareholders will have the opportunity to participate in the
      potential for equity growth in a well-established larger public company
      after the merger;

    - the acquisition allows the Q Services shareholders greater liquidity
      through access to public markets following the merger; and

    - the merger will potentially reduce the risk of Q Services shareholders'
      investment after the merger as a result of the combined company having
      greater capital resources and being more geographically diversified.

RISK FACTORS (see page 15)

    See "Risk Factors" for a discussion of certain risks that should be
considered by Q Services common and preferred shareholders in evaluating whether
to approve the merger agreement and the merger.

WHAT YOU WILL RECEIVE IN THE MERGER (see page 43)

    As a result of the merger, each share of Q Services common stock that you
own will be converted into the right to receive a number of shares of Key common
stock determined in accordance with the merger agreement. Each share of Q
Services preferred stock will be redeemed pursuant to its terms and under
procedures set forth in the merger agreement and described in this proxy
statement/ prospectus.

                                       6

THE Q SERVICES SPECIAL MEETING (see page 24)

    The special meeting of the Q Services shareholders will be held on June 28,
2002, at 9:00 a.m., Houston, Texas time, at The Briar Club, 2603 Timmons Lane,
Houston, Texas 77027. At the special meeting, Q Services' shareholders will be
asked to vote "FOR" approval of the merger agreement and the merger.

RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE (see page 24)

    The record date for holders of Q Services common stock, series A preferred
stock and series B preferred stock entitled to notice of and to vote at the
special meeting is June 1, 2002. On the record date, there were 15,630,762
shares of Q Services common stock, 72,000 shares of Q Services series A
preferred stock and 2,600 shares of Q Services series B preferred stock issued
and outstanding and entitled to vote at the special meeting.

VOTE REQUIRED (see page 24)

    The vote required to approve the merger agreement and the merger is the
affirmative vote of at least two-thirds of the issued and outstanding Q Services
common stock, series A preferred stock and series B preferred stock, voting
together as a single class.

VOTING AGREEMENTS (see pages 25 and 51)

    Holders of Q Services common stock owning an aggregate of approximately 73%
of the combined voting power of all Q Services issued and outstanding common
stock, series A preferred stock and series B preferred stock have agreed to vote
all their shares "FOR" the merger agreement and merger. Consequently, approval
of the merger agreement by Q Services' common and preferred shareholders is
assured. However, because there are other conditions to closing that have not
yet been fulfilled, closing of the merger is not assured.

FAIRNESS OPINION (see page 29)

    Lehman Brothers has delivered a written opinion, dated as of May 10, 2002,
to the board of directors of Q Services to the effect that as of the date of the
opinion, and based upon and subject to certain matters stated in the opinion,
the merger consideration is fair from a financial point of view to the
shareholders of Q Services. The full text of the Lehman Brothers opinion, which
sets forth the assumptions and matters considered and the limitations under the
review undertaken, is attached to this proxy statement/prospectus as Exhibit B
and should be read carefully and in its entirety. Key did not obtain a fairness
opinion in connection with the merger and Lehman Brothers' opinion was issued
for the benefit of the Q Services shareholders only and does not in any manner
address the fairness, from a financial point of view, of the consideration paid
by Key in connection with the merger.

RECOMMENDATION OF THE BOARD OF DIRECTORS OF Q SERVICES (see pages 24 and 41)

    After careful consideration, the Q Services board of directors unanimously
recommends that its common and preferred shareholders vote "FOR" the merger
agreement and the merger.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES (see page 37)

    The merger has been structured as a reorganization for federal income tax
purposes. Assuming the merger is treated as a reorganization, the Q Services
common shareholders generally will not recognize gain or loss for federal income
tax purposes on the exchange of their Q Services common stock for Key common
stock in the merger, except for any gain on receipt of cash in respect of a
purchase price adjustment payment.

                                       7

ACCOUNTING TREATMENT (see page 39)

    Key will account for the merger as a purchase of a business, which means
that the assets and liabilities of Q Services will be recorded at their fair
value, with the remaining purchase price over the fair value of net identifiable
assets and liabilities to be reflected as goodwill. The results of operations
and cash flows of Q Services will be included in Key's results prospectively
after the effective date of the merger.

INTERESTS OF CERTAIN PERSONS IN THE MERGER (see page 36)

    In considering the recommendation of the Q Services board of directors
regarding the merger, you should be aware of the interests that certain officers
and directors of Q Services have in the merger that are different from your and
their interests as shareholders.

    In connection with the merger, Craig M. Johnson, the president of Q
Services, and David S. Schorlemer, the chief financial officer of Q Services,
will enter into three year employment agreements with Key. Pursuant to these
agreements, these individuals will be entitled to various benefits, including an
annual base salary and discretionary cash bonus, participation in Key's stock
option plan, reimbursement of certain expenses, guaranteed vacation, and other
fringe benefits such as medical, life and disability insurance, retirement plans
and a vehicle allowance. Several officers and directors of Q Services, including
Messrs. Johnson and Schorlemer, will receive substantial severance payments upon
the consummation of the merger, and some of those persons will remain employed
by Q Services or Key after the merger. In addition, Messrs. Johnson and
Schorlemer will be entitled to severance benefits if their employment with Key
should be terminated under certain circumstances.

    David M. Johnson, chairman and chief executive officer of Q Services, will
enter into a consulting and non-competition agreement with Key pursuant to which
he will be entitled to receive, among other things, $150,000 per year for a
period of two years. Mr. Johnson will also receive substantial severance
payments from Q Services upon consummation of the merger.

    Officers and directors of Q Services who own Q Services common stock will
participate in the merger on the same terms and conditions as Q Services' other
common shareholders. Many members of Q Services' management and directors,
however, have a substantial number of options to purchase Q Services common
stock. Under the terms of the option agreements, the vesting of those options
will accelerate as a result of the merger. All outstanding Q Services' options
will either be converted into cash or exercised for shares of Q Services common
stock, which will then be converted into Key common stock in the merger.
Therefore, holders of options to purchase Q Services' common stock will receive
immediate financial benefits as a result of the merger that they would not
immediately receive if the merger were not occurring.

REGULATORY APPROVALS (see page 39)

    Key and Q Services are not aware of any governmental or regulatory
requirements for consummation of the merger other than compliance with state
corporate securities and federal antitrust laws, including compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.

EFFECTS OF THE MERGER ON THE RIGHTS OF Q SERVICES SHAREHOLDERS (see page 69)

    After the merger, holders of Q Services common stock will become holders of
Key common stock. On consummation of the merger, the certificate of
incorporation and bylaws of Key, in addition to the applicable provisions of
Maryland law, will govern the rights of all former holders of Q Services common
stock.

                                       8

REGISTRATION OF KEY SHARES (see page 35)

    The merger agreement requires Key to use its reasonable efforts to maintain
the effectiveness under the Securities Act of the registration statement of
which this proxy statement/prospectus is a part, and to make this proxy
statement/prospectus available for use by Q Services' shareholders who are
affiliates of Q Services for resale of the Key shares they receive in the
merger. Key may from time to time require that selling Q Services' shareholders
identified in this proxy statement/prospectus refrain from effecting any public
sales or distributions of the Key common stock they receive in the merger due to
the existence of material and nonpublic information the disclosure of which
would be required in this proxy statement/prospectus. However, this proxy
statement/prospectus must be available for use by selling Q Services'
shareholders identified in this proxy statement/prospectus for the resale of
their Key shares received in the merger for a period of at least 22 consecutive
trading days immediately after the effective date of the merger.

LISTING OF KEY COMMON STOCK (see page 49)

    The shares of Key common stock to be issued to the Q Services shareholders
in the merger will be listed for trading on the New York Stock Exchange.

DISSENTERS' RIGHTS (see page 39)

    If you object to the merger, Texas law permits you to seek relief as a
dissenting shareholder. If you are a Q Services shareholder and wish to dissent,
you must deliver to Q Services, before the taking of the vote on the merger at
the special meeting, a written objection to the merger that sets out that your
right to dissent will be exercised if the merger is effective, and you also must
supply certain other information. A proxy or vote against the merger is not
sufficient to make this demand. You also must not vote in favor of the merger
agreement.

    The provisions of Texas law relating to the exercise of appraisal rights are
complicated, and failure to strictly adhere to those provisions may terminate or
result in a waiver of your appraisal rights. Therefore, if you decide to
exercise your appraisal rights to obtain an appraisal of the fair value of your
Q Services shares, you may wish to consult with a qualified attorney.

    Copies of Articles 5.12 and 5.13 of the Texas Business Corporation Act,
which govern this process, are attached as Exhibit C to this proxy
statement/prospectus.

CONDITIONS PRECEDENT TO THE MERGER (see page 49)

    Key and Q Services are not obligated to complete the merger unless certain
conditions are satisfied or waived by them. These include the following:

    - All waiting periods required under the Hart-Scott-Rodino Antitrust
      Improvements Act of 1976 shall have expired or early termination with
      respect thereto shall have been obtained;

    - Certain actions shall have been taken with respect to Q Services' issued
      and outstanding options and warrants;

    - All of Q Services series A preferred and series B preferred stock shall
      have been redeemed;

    - Key shall have paid certain obligations of Q Services under Q Services'
      credit agreement;

    - The SEC shall have declared the post-effective amendment to the
      registration statement, of which this proxy statement/prospectus forms a
      part, effective under the Securities Act and such effectiveness shall not
      have been revoked on or before the effective date of the merger;

    - Q Services shall have terminated all shareholder, voting or similar
      agreements before the effective date of the merger;

                                       9

    - Certain Q Services employees shall have executed and delivered employment
      agreements with Key;

    - Certain individuals shall have entered into noncompetition agreements with
      Key;

    - Certain related party transactions to which Q Services is subject shall be
      amended to provide that Q Services may terminate those agreements on
      30 days' notice without penalty; and

    - The satisfaction of certain other conditions customary in transactions
      similar to the merger.

    The party entitled to the benefit of any of these conditions may waive any
of these conditions. Neither Key nor Q Services can make assurances that the
conditions will be satisfied or waived or that the merger will occur.

NO SOLICITATION OF COMPETING TRANSACTIONS (see page 48)

    The merger agreement restricts Q Services' ability to solicit, initiate,
encourage or enter into any alternative acquisition transactions with third
parties. Q Services must promptly notify Key if it receives offers, proposals or
expressions of interest for any such alternative transactions.

EFFECTIVE DATE (see page 42)

    The merger will become effective on the filing of the articles of merger
with the Secretary of State of Texas. The articles of merger will be filed as
soon as practicable after all conditions to the obligations of Key and Q
Services to consummate the merger have been satisfied or waived.

TERMINATION OF THE MERGER AGREEMENT (see page 50)

    Key and Q Services can agree at any time to terminate the merger agreement
without completing the merger, and the merger agreement may be terminated by
either company if any of the following occurs:

    - the merger is not completed by July 17, 2002, subject to extension until
      October 15, 2002 to obtain certain governmental approvals; or

    - a court or other governmental authority seeks to prevent or prohibit the
      merger.

    Key may terminate the merger agreement if:

    - there has been a material adverse effect in the financial condition or
      business of Q Services since March 31, 2002;

    - Q Services' representations and warranties contained in the merger
      agreement concerning environmental matters and operation of saltwater
      disposal wells are not true as of the effective date of the merger, and
      all of those untrue representations and warranties in the aggregate would
      be reasonably likely to result in costs, damages, diminution in value,
      expenses, losses or liabilities with respect to the business, operations,
      assets or liabilities of Q Services of more than $5 million;

    - Q Services has failed to perform any of its covenants or agreements
      contained in the merger agreement and the failure has not been waived by
      Key; or

    - the holders of shares of Q Services' common stock representing in excess
      of 0.5% of the issued and outstanding shares of Q Services' common stock
      elected to exercise their dissenters' rights described above.

                                       10

    Q Services may terminate the merger agreement if:

    - Key has failed to perform any of its covenants or agreements contained in
      the merger agreement and the failure has not been waived by Q Services; or

    - there has been a material adverse effect in the financial condition or
      business of Key and its subsidiaries since March 31, 2002.

FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS (see page 85)

    This proxy statement/prospectus and the documents incorporated by reference
into this proxy statement/prospectus contain forward-looking statements within
the "safe harbor" provisions of the Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements. In evaluating the
merger, you should carefully consider the discussion of risks and uncertainties
in the section entitled "Risk Factors" beginning on page 15.

COMPARATIVE MARKET PRICE DATA

    KEY.  Key's common stock is traded on the New York Stock Exchange under the
symbol "KEG."

    On May 13, 2002, the last trading day before the public announcement of the
proposed merger, the last sale price of Key's common stock, as reported by the
New York Stock Exchange was $12.14 per share. On June   , 2002, the last trading
date before the date of this proxy statement/prospectus, the last sale price of
Key's common stock, as reported by the New York Stock Exchange was $      .

    The market price of Key's common stock fluctuates and you are advised to
obtain current market quotations for Key's common stock.

    Q SERVICES.  Because there is no established trading market for the shares
of Q Services common stock, information with respect to market prices for Q
Services common stock has been omitted.

                                       11

                         SUMMARY FINANCIAL INFORMATION

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF KEY

    Key is providing the following financial information to help you in your
analysis of the financial aspects of the merger. The annual selected historical
consolidated financial data presented below have been derived from Key's audited
consolidated financial statements. The data presented for each of the nine-month
periods ended March 31, 2002 and 2001 has been derived from Key's unaudited
consolidated interim financial statements. As this information is only a
summary, it should be read in conjunction with Key's historical consolidated
financial statements (and related notes) contained in its annual and quarterly
reports and other information that Key has filed with the SEC, which are
attached as Exhibits D and E to this proxy statement/prospectus.



                                                           YEAR ENDED             NINE MONTHS ENDED
                                                            JUNE 30,                  MARCH 31,
                                                     -----------------------   -----------------------
                                                        2001         2000         2002         2001
                                                     ----------   ----------   ----------   ----------
                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                
STATEMENT OF OPERATIONS DATA

Revenues...........................................  $  873,262   $  637,732   $  632,815   $  622,960

Earnings from operations...........................     298,324      175,346      208,833      201,435

Net earnings (loss) before extraordinary item(1)...      62,281      (20,570)      46,999       36,191

Net earnings (loss)................................      62,710      (18,559)      44,009       37,289

Net earnings (loss) per share before extraordinary
  item
  Basic............................................        0.63        (0.25)        0.45         0.37
  Diluted..........................................        0.61        (0.25)        0.44         0.36

BALANCE SHEET DATA (AT END OF PERIOD)
Working capital....................................      90,597      160,741      110,083       96,690

Property and equipment, net........................     793,716      760,561      801,196      776,207

Total assets.......................................   1,228,284    1,246,265    1,231,907    1,191,126

Long-term debt and lease obligations, net of
  current portion..................................     485,961      651,945      437,349      527,254

Stockholders' equity...............................     476,878      382,887      546,215      429,652


------------------------

(1) Key recorded extraordinary items, net of the related tax effects, on early
    extinguishment of certain debt obligations.

                                       12

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF Q SERVICES

    The annual selected historical consolidated financial data of Q Services
presented below has been derived from Q Services' audited consolidated financial
statements for such periods. The data presented for each of the three-month
periods ended March 31, 2002 and 2001 has been derived from Q Services'
unaudited consolidated interim financial statements. The audited consolidated
financial statements of Q Services for the years ended December 31, 2001 and
2000, and the unaudited consolidated interim financial statements of Q Services
for the three-month periods ended March 31, 2002 and 2001, have been included
elsewhere within this proxy statement/prospectus. Such financial statements and
the related footnotes should be referenced when reviewing the selected
consolidated financial data for such periods. Additionally, the selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Q Services' Financial Condition and Results of
Operations" for such periods, included elsewhere within this proxy
statement/prospectus.



                                                            YEAR ENDED        THREE MONTHS ENDED
                                                           DECEMBER 31,            MARCH 31,
                                                        -------------------   -------------------
                                                          2001       2000       2002       2001
                                                        --------   --------   --------   --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                             
STATEMENT OF OPERATIONS DATA
Revenues..............................................  $179,115   $78,929    $ 38,612   $31,800

Earnings from operations..............................    30,416    10,810       2,063     6,500

Net earnings before extraordinary item(1).............    14,365     4,971         295     2,998

Net earnings(2).......................................    11,757     4,971         295     2,998

Net earnings per share
  Basic...............................................      1.00      1.19        0.02      0.39
  Diluted.............................................      0.95      1.03        0.02      0.36

BALANCE SHEET DATA (AT END OF PERIOD)
Working capital.......................................     7,199     5,001       8,009

Property and equipment, net...........................    95,966    42,103      96,181

Total assets..........................................   201,121    78,845     201,803

Long-term debt and lease obligations, net of current
  portion.............................................    66,855    32,571      68,492

Shareholders' equity..................................    84,698    27,360      85,298


------------------------

(1) Q Services recorded an extraordinary loss of $2,365, net of the related tax
    benefit of $1,277, in 2001 related to the early extinguishment of certain of
    its debt obligations.

(2) Net earnings represents the amount applicable to Q Services common
    shareholders after accrued preferred stock dividends. Q Services had accrued
    but unpaid preferred stock dividends of $243 during the year ended
    December 31, 2001 and $133 during the three months ended March 31, 2002.

                                       13

SELECTED HISTORICAL CONSOLIDATED PRO FORMA FINANCIAL INFORMATION

    The following table sets forth unaudited pro forma combined summary
financial data, which are presented to give effect to the merger under the
purchase method of accounting. The statements of operations data for the
nine-month period ended March 31, 2002 and for the year ended June 30, 2001,
have been prepared assuming that the merger was consummated on July 1, 2000. The
balance sheet data assume that the merger was consummated on March 31, 2002.

    The unaudited pro forma combined summary financial data do not purport to
represent what the financial position or results of operations of Key actually
would have been had the merger occurred on the dates indicated or to project
Key's financial results or results of operations for any future date or period.
Furthermore, the unaudited pro forma combined summary financial data do not
reflect any cost savings or other synergies that may result from the merger or
any other changes that may occur as the result of post-combination activities
and other matters. In addition, the unaudited pro forma combined summary
statements of operations data exclude estimates of non-recurring charges
directly attributable to the merger that will be charged to operations in the
quarters after which the merger is actually consummated.

    The unaudited pro forma combined summary financial data should be read in
conjunction with the historical consolidated financial statements of Key and Q
Services, including the notes thereto, and the unaudited pro forma financial
statements, including the notes thereto, contained elsewhere within this proxy
statement/prospectus.



                                                              NINE MONTHS ENDED    YEAR ENDED
                                                                  MARCH 31,         JUNE 30,
                                                                     2002             2001
                                                              ------------------   -----------
                                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                                          AMOUNTS)
                                                                             
STATEMENT OF OPERATIONS DATA

Revenues....................................................       $  775,451       $992,990
Earnings from operations(1).................................          266,745        355,975
Income from continuing operations...........................           55,342         80,417
Income from continuing operations per share
  Basic.....................................................       $     0.46       $   0.76
  Diluted...................................................             0.45           0.73

BALANCE SHEET DATA
Working capital.............................................       $   86,968
Property and equipment, net.................................          942,363
Total assets................................................        1,521,066
Long-term debt and lease obligations, net of current
  portion...................................................          487,777
Shareholders' equity........................................          737,899


------------------------

(1) Earnings from operations is total revenues less well servicing, contract
    drilling and other expenses.

                                       14

                                  RISK FACTORS

    YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING IMPORTANT FACTORS, IN ADDITION
TO THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, TO DETERMINE WHETHER TO VOTE FOR THE MERGER.

RISKS RELATING TO THE MERGER

THE MERGER CONSIDERATION ISSUED ON THE EFFECTIVE DATE OF THE MERGER IS SUBJECT
TO ADJUSTMENT. HOLDERS OF Q SERVICES COMMON STOCK MAY NEVER RECEIVE MERGER
CONSIDERATION HELD BACK AS OF THE EFFECTIVE DATE OF THE MERGER AND MAY BE
REQUIRED TO REFUND KEY A PORTION OF THE MERGER CONSIDERATION PREVIOUSLY GIVEN
THEM TO SATISFY ANY POST-CLOSING ADJUSTMENTS.

    The purchase price to be paid by Key in the merger will be based in part
upon an estimated balance sheet of Q Services as of the effective date of the
merger. The purchase price will be adjusted based on a final balance sheet to be
agreed to between Key and a representative of Q Services' shareholders following
the effective date of the merger. Since the final balance sheet and the
estimated balance sheet as of the effective date of the merger may differ, the
ultimate purchase price Key will be required to pay for Q Services may differ
from the price Key pays at the closing of the merger. Therefore, 5% of the
merger consideration payable to Q Services' shareholders and to holders of
options and warrants to purchase Q Services common stock on the effective date
of the merger will be held back by Key. The purchase price holdback will be used
to satisfy adjustments to the purchase price based on differences between the
estimated and final balance sheets of Q Services as described above.

    Holders of Q Services common stock may never receive any of the merger
consideration held back as of the effective date of the merger and may be
required to refund to Key a portion of the merger consideration previously given
to them following the effective date of the merger.

HOLDERS OF Q SERVICES COMMON STOCK MAY NOT KNOW THE NUMBER OF SHARES OF KEY
COMMON STOCK THEY WILL RECEIVE UNTIL AFTER THE SPECIAL MEETING.

    The actual number of shares of Key common stock to be issued for each share
of Q Services common stock will be determined based on the average closing
prices of the Key common stock on the New York Stock Exchange for the ten
trading days immediately preceding the day before the effective date of the
merger, but will not be less than $11.00 nor more than $13.00 per share. The
number of shares of Key common stock to be issued in the merger also will be
based on an estimated balance sheet for Q Services as of the effective date of
the merger, and will be subject to adjustment based on a final balance sheet as
of the effective date to be delivered after consummation of the merger. Since it
is not possible, as of the date of this proxy statement/prospectus, to determine
the date the merger will become effective or the actual Key share price or the
estimated or final balance sheet of Q Services as of such date, Q Services
shareholders may be required to vote on approval of the merger without knowing
the exact number of shares of Key common stock they will receive in the merger.
Assuming the final Q Services balance sheet as of the effective date of the
merger is identical to the balance sheet of Q Services as of March 31, 2002,
contained elsewhere within this proxy statement/prospectus, each share of Q
Services common stock will be converted into approximately 1.0723 or
approximately 0.9073 shares of Key common stock, assuming the Key share price is
$11.00 or lower or $13.00 or higher, respectively. There can be no assurance
that the estimated or final balance sheet of Q Services as of the effective date
of the merger will not be substantially different from the March 31, 2002
balance sheet contained elsewhere within this proxy statement/prospectus.

                                       15

HOLDERS OF Q SERVICES COMMON STOCK MAY RECEIVE SHARES OF KEY COMMON STOCK THAT
HAVE A CURRENT MARKET PRICE THAT IS LOWER THAN THE PRICE ATTRIBUTED TO THOSE
SHARES FOR PURPOSES OF THE MERGER AT THE EFFECTIVE DATE OF THE MERGER.

    The actual number of shares of Key common stock to be issued for each share
of Q Services common stock will be determined based upon the market value of the
Key common stock as described above, but will not be less than $11.00 nor more
than $13.00 per share. On the effective date of the merger, the holders of Q
Services common stock could receive shares of Key common stock that have a
current market price that is lower than the price attributed to those shares for
purposes of the merger. For example, if the closing price of the Key common
stock is less than $11.00 per share on the effective date of the merger, Q
Services common shareholders would receive Key shares that have a current market
price of less than $11.00 per share. As a result, the Q Services common
shareholders would be unable to sell their shares of Key stock at the price at
which it was valued for purposes of the merger until the market price of the Key
common stock is at or above $11.00 per share.

THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT MAY NOT BE CONSUMMATED
EVEN IF SHAREHOLDER APPROVAL FOR THE MERGER IS OBTAINED.

    The merger agreement contains conditions that, if not satisfied or waived,
would result in the merger not occurring, even though the Q Services
shareholders may have approved it. You cannot be assured that all of the closing
conditions to the merger will be satisfied, that any unsatisfied conditions will
be waived or that the merger will occur.

Q SERVICES MAY LOSE AN OPPORTUNITY TO ENTER INTO A MERGER OR BUSINESS
COMBINATION WITH ANOTHER PARTY ON MORE FAVORABLE TERMS BECAUSE OF PROVISIONS IN
THE MERGER AGREEMENT.

    While the merger agreement is in effect, Q Services is prohibited from
entering into or soliciting, initiating or encouraging any inquiries or
proposals that may lead to a proposal, or offer to enter into certain
transactions such as a merger, sale of assets or other business combination,
with any person other than Key. In addition, certain of Q Services common
shareholders have entered into voting agreements with Key pursuant to which they
have agreed to vote all of their shares of Q Services common stock in favor of
the merger. The shares subject to the voting agreements are a sufficient number
to assure that Q Services will receive the requisite vote for approval of the
merger. As a result, Q Services may lose an opportunity to enter into a more
favorable transaction.

THE PRICE OF KEY COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM THOSE
AFFECTING THE VALUE OF Q SERVICES.

    Upon completion of the merger, holders of Q Services common stock will
become Key common shareholders. Key's business differs from that of Q Services,
and Key's results of operations, as well as the price of Key common stock, may
be affected by factors different from those affecting Q Services' operations.

SOME OF Q SERVICES' DIRECTORS AND OFFICERS HAVE INTERESTS THAT DIFFER IN SEVERAL
RESPECTS FROM Q SERVICES SHAREHOLDERS.

    In considering the recommendation of the Q Services board of directors to
approve the merger agreement and the merger, you should consider that some of Q
Services' directors and officers have interests that differ from, or are in
addition to, their interests as Q Services shareholders generally. These
interests include benefits provided to them by Key under employment agreements
and the continuation of certain indemnification arrangements. In addition, one
of Q Services' officers and directors will enter into a consulting and
non-competition agreement with Key that provides him benefits that will not be
available to other Q Services shareholders. Certain officers and directors of Q
Services also will receive substantial compensation in the form of severance
payments and accelerated

                                       16

vesting and subsequent payout of their stock options that would not be available
to them unless the merger is consummated.

KEY WILL FACE SIGNIFICANT CHALLENGES IN INTEGRATING THE OPERATIONS OF KEY AND Q
SERVICES AND, AS A RESULT, MAY NOT REALIZE THE BENEFITS OF CONSOLIDATION, SUCH
AS ENHANCEMENT OF KEY'S BUSINESS LINES, EXPANDED GEOGRAPHIC COVERAGE AND
REALIZATION OF SYNERGIES AND ECONOMICS OF SCALE.

    Integrating the operations and personnel of Key and Q Services will be a
complex process, and Key cannot be certain that the integration will be
completed in a timely manner or that the anticipated benefits of the merger will
be achieved. The successful integration of Key and Q Services will require,
among other things, the integration of the Companies' finance, human resources,
operations and marketing groups and the coordination of the Companies'
information systems. The diversion of the attention of Key's management and any
difficulties encountered in the process of combining the companies could cause
the disruption of, or a loss of momentum in, the activities of Key's business.

RISKS RELATED TO KEY

KEY'S BUSINESS IS DEPENDENT ON CONDITIONS IN THE OIL AND NATURAL GAS INDUSTRY,
ESPECIALLY THE CAPITAL EXPENDITURES OF OIL AND NATURAL GAS COMPANIES.

    The demand for Key's services is primarily influenced by current and
anticipated oil and natural gas prices. Prices for oil and natural gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas (including changes resulting from
the ability of the Organization of Petroleum Exporting Countries to establish
and maintain production quotas for oil prices), domestic and worldwide economic
conditions and political instability in oil producing countries. Weakness in oil
and natural gas prices may cause lower rates and lower utilization of available
well service equipment. In addition, when oil and natural gas prices are weak,
fewer wells are drilled, resulting in less drilling and less maintenance work
for Key. Additional factors that affect demand for Key's services include:

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

    - oil and natural gas production costs;

    - government regulation; and

    - conditions in the worldwide oil and natural gas industry.

    In addition, Key anticipates prices for oil and natural gas will continue to
be volatile and affect the demand for and pricing of its services. Reductions in
oil and natural gas prices can result in a reduction in the trading prices and
value of Key common stock, even if the reduction in oil and natural gas prices
does not affect its business generally. However, a material decline in oil or
natural gas prices or activities over a sustained period of time could
materially adversely affect the demand for Key's services and, therefore, its
results of operations and financial condition.

    Periods of diminished or weakened demand for Key's services have occurred in
the past. Since the end of the first quarter of fiscal 2002 and continuing
through the third quarter, Key has experienced a decrease in the demand for its
services. Key believes this trend is due to an overall weakening of demand for
onshore well services, which is attributable to lower prices for oil and natural
gas and general economic uncertainty. If these conditions continue or worsen,
they could have a material adverse effect on Key's financial condition and
results of operations. In light of these and other factors relating to the oil
and natural gas industry, Key's historical operating results may not be
indicative of future performance.

                                       17

AN ECONOMIC DOWNTURN MAY ADVERSELY AFFECT KEY'S BUSINESS.

    An economic downturn may cause reduced demand for petroleum-based products
and natural gas. In addition, many oil and natural gas production companies
often reduce or delay expenditures to reduce costs, which in turn may cause a
reduction in the demand for Key's services during these periods. According to
industry data, in July 2001, there were approximately 1,293 active drilling rigs
in North America. In March 2002, the number of active drilling rigs had been
reduced to 768. The number of active drilling rigs may be indicative of demands
for services such as those Key provides. If the economic environment worsens,
Key's business may be further adversely impacted.

KEY'S BUSINESS INVOLVES CERTAIN OPERATING RISKS, WHICH ARE PARTIALLY
SELF-INSURED, AND KEY'S INSURANCE MAY NOT BE ADEQUATE TO COVER ALL LOSSES OR
LIABILITIES IT MIGHT INCUR IN ITS OPERATIONS.

    Key's operations are subject to many hazards and risks, including the
following:

    - blow-outs;

    - reservoir damage;

    - loss of well control;

    - cratering;

    - fires;

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

    - pollution and other damage to the environment; and

    - liabilities from accident or damage by our fleet of trucks.

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

    Key self-insures a significant portion of these liabilities. For losses in
excess of Key's self-insurance limits, Key maintains insurance from unrelated
commercial carriers. However, its insurance may not be adequate to cover all
losses or liabilities that it might incur in its operations. There can be no
assurance that Key's insurance will adequately protect it against liability from
all of the hazards of its business. Moreover, Key also is subject to the risk
that it may not be able to maintain or obtain insurance of the type and amount
it desires at a reasonable cost. If Key were to incur a significant liability
for which it were not fully insured, it could have a material adverse effect on
Key's financial position and results of operations.

KEY IS SUBJECT TO THE ECONOMIC, POLITICAL AND SOCIAL INSTABILITY RISKS OF DOING
BUSINESS IN CERTAIN FOREIGN COUNTRIES.

    Key has investments and may make additional investments in Argentina and
other foreign countries, including Canada and Egypt. As a result, Key is exposed
to currency exchange rate fluctuations. Key also is exposed to other risks of
international operations, including:

    - increased governmental ownership and regulation of the economy in the
      markets where it operates;

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

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

    - exchange controls or other currency restrictions;

                                       18

    - civil unrest or significant political instability;

    - expropriation, confiscatory taxation and nationalization of its assets
      located in the markets where it operates; and

    - governmental policies limiting returns to foreign investors.

    In fiscal 2001, Key's foreign operations accounted for less than 7% of its
revenues. A substantial portion of these revenues were derived from its
operations in Argentina. For fiscal 2001, revenues from operations in Argentina
were $48.5 million, which accounted for 5.6% of Key's total revenues for this
period. For fiscal 2001, net income from operations in Argentina was
$4.5 million. For the nine months ended March 31, 2002, revenues from operations
in Argentina were $28.0 million, which accounted for 4.4% of Key's total revenue
for this period.

    Recently, Argentina has been negatively affected by volatile economic and
political conditions. In December 2001, the Argentine government announced that
it would restrict bank account withdrawals and would not service its public
sector debt. Furthermore, in early January 2002, the Argentine government
abandoned its decade-old fixed peso-dollar exchange rate and created a dual
exchange rate system. As a result of this abandonment of the fixed peso-dollar
exchange rate system, Key translated the assets of its Argentine subsidiary,
which resulted in accumulated foreign currency translation losses of
approximately $43.5 million and $24.2 million at March 31, 2002 and
December 31, 2001, respectively. Additionally, the Argentine government has
indicated that as part of its monetary policy changes, it will redenominate
certain consumer loans from U.S. dollar denominated to Argentine peso
denominated. As a result, Key recorded a foreign currency transaction loss of
$1.8 million in the three months ended December 31, 2001 related to accounts
receivable subject to certain U.S. dollar denominated contracts held by Key's
Argentine subsidiary, which are subject to redenomination.

    Key believes that all of these events will negatively affect oil production
in Argentina, and accordingly will have a negative effect on demand for Key's
services in Argentina. The economic conditions in Argentina continue to be
unstable and further devaluation of the Argentine peso may occur. Key continues
to evaluate the structure of its operations in Argentina, but is currently
unable to predict the effect that further instability in Argentina will have on
its financial position.

KEY HISTORICALLY HAS EXPERIENCED A HIGH EMPLOYEE TURNOVER RATE. ANY DIFFICULTY
KEY EXPERIENCES REPLACING OR ADDING WORKERS COULD ADVERSELY AFFECT ITS BUSINESS.

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

KEY IS SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS THAT
EXPOSE IT TO POTENTIAL LIABILITY.

    Key's operations are regulated under a number of foreign, federal, state and
local laws that govern, among other things, the handling, storage and disposal
of waste materials, some of which are classified as hazardous substances, and
the discharge of hazardous materials into the environment. Key's operations are
subject to stringent regulations relating to protection of the environment and
waste handling. In addition to liability for its own noncompliance, these
regulations may expose Key to

                                       19

liability for noncompliance of other parties, without regard to whether it was
negligent. Sanctions for noncompliance with applicable environmental laws and
regulations may include administrative, civil and criminal penalties, revocation
of permits and corrective action orders. Furthermore, Key may be liable for
costs for environmental clean-up at currently or previously owned or operated
properties or off-site locations where it sent, disposed of, or arranged for
disposal of hazardous materials. Compliance with existing laws or regulations,
the adoption of new laws or regulations or the more vigorous enforcement of
environmental laws or regulations could have a material adverse effect on Key's
operations by increasing its expenses and limiting its future business
opportunities.

KEY HAS A SIGNIFICANT AMOUNT OF INDEBTEDNESS AND COULD INCUR ADDITIONAL
INDEBTEDNESS, WHICH COULD MATERIALLY ADVERSELY AFFECT ITS FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS PROSPECTS AND PREVENT IT FROM FULFILLING ITS
OBLIGATIONS UNDER ITS OUTSTANDING INDEBTEDNESS.

    Key had approximately $445.7 million of long-term indebtedness outstanding
at March 31, 2002. Key is permitted under the indentures governing its public
debt securities to incur additional debt, subject to certain limitations. If Key
incurs additional debt, its increased leverage could, for example:

    - make it more difficult for Key to satisfy its obligations under its public
      debt securities or other indebtedness and, if Key fails to comply with the
      requirements of the other indebtedness, that failure could result in an
      event of default on its public debt securities or other indebtedness;

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

    - limit Key's ability to obtain additional financing in the future for
      working capital, capital expenditures and other general corporate
      activities;

    - limit Key's flexibility in planning for, or reacting to, changes in its
      business and the industry in which it operates;

    - detract from Key's ability to successfully withstand an industry or
      general economic downturn; and

    - place Key at a competitive disadvantage against less leveraged
      competitors.

KEY MAY NOT BE ABLE TO GENERATE SIGNIFICANT CASH FLOW TO MEET ITS DEBT SERVICE
OBLIGATIONS.

    Key's ability to make payments on and to refinance its indebtedness, and to
fund planned capital expenditures, will depend on its ability to generate cash
in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond Key's control.

    Key cannot assure you that its business will generate sufficient cash flow
from operations to service its outstanding indebtedness, that future borrowings
will be available to it under its credit facility in an amount sufficient to
enable it to pay its indebtedness or to fund other liquidity needs. Key may need
to refinance all or a portion of its existing indebtedness on or before
maturity. Key cannot assure you that it will be able to refinance any of its
indebtedness, including its credit facility, on commercially reasonable terms or
at all.

KEY'S DEBT INSTRUMENTS IMPOSE RESTRICTIONS ON IT THAT MAY AFFECT ITS ABILITY TO
SUCCESSFULLY OPERATE ITS BUSINESS.

    Key's credit facility and the terms of the indentures for its public debt
securities limit Key's ability to take various actions, such as:

    - incurring additional indebtedness;

    - paying dividends;

                                       20

    - repurchasing junior indebtedness;

    - making investments;

    - entering into transactions with affiliates;

    - merging or consolidating with other entities; and

    - selling all or substantially all of our assets.

    In addition, Key's credit facility requires it to maintain certain financial
covenant ratios and satisfy certain financial condition tests, several of which
become more restrictive over time and may require it to take action to reduce
its debt or take some other action in order to comply with them. These
restrictions also could limit Key's ability to obtain future financings, make
needed capital expenditures, withstand a downturn in its business or the economy
in general, or otherwise conduct necessary corporate activities. Key also may be
prevented from taking advantage of business opportunities that arise because of
the limitations imposed on it by the restrictive covenants under its credit
facility and indentures for its public debt securities.

KEY HAS PURSUED AND CONTINUES TO PURSUE STRATEGIC ACQUISITIONS. KEY'S BUSINESS
MAY BE ADVERSELY AFFECTED IF IT CANNOT EFFECTIVELY INTEGRATE ACQUIRED
OPERATIONS.

    A component of Key's strategy includes acquiring complementary businesses.
Acquisitions involve a number of risks and challenges including:

    - Key's ability to integrate acquired operations;

    - potential loss of key employees and customers of the acquired companies;
      and

    - an increase in Key's expenses and working capital requirements.

    Any of these factors could adversely affect Key's ability to achieve
anticipated levels of earnings and cash flow from acquisitions or realize other
anticipated benefits. Furthermore, competition from other potential buyers could
reduce Key's acquisition opportunities or cause Key to pay a higher price than
it otherwise might pay.

THE TRADING PRICE OF KEY'S COMMON STOCK COULD BE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.

    The trading price of Key's common stock has been volatile. Factors such as
announcements of fluctuations in Key's or its competitors' operating results and
market conditions for oil and gas related stocks in general could have a
significant impact on the future trading prices of Key's common stock. In
particular, the trading price of the common stock of many oil and gas companies
has experienced extreme price and volume fluctuations, which have at times been
unrelated to the operating performance of the companies whose stocks were
affected. In addition, the trading price of Key's common stock could be subject
to significant fluctuations in response to variations in Key's prospects and
operating results, which may in turn be affected by weakness in oil prices,
changes in interest rates and other factors. There can be no assurance that
these factors will not have an adverse effect on the trading price of Key's
common stock.

                                       21

                                 THE COMPANIES

KEY

    Based on available industry data, Key is the largest onshore, rig-based well
servicing contractor in the world. Key provides a complete range of well
services to major oil companies and independent oil and natural gas production
companies, including:

    - rig-based well maintenance, workover, completion, and recompletion
      services (including horizontal recompletions);

    - oilfield trucking services; and

    - ancillary oilfield services.

    Key conducts well servicing operations onshore internationally in Argentina
and in Ontario, Canada and in the following regions of the continental United
States:

    - Gulf Coast (including South Texas, Central Gulf Coast of Texas and South
      Louisiana);

    - Permian Basin of West Texas and Eastern New Mexico;

    - Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins and the
      ArkLaTex region);

    - Four Corners (including the San Juan, Piceance, Uinta and Paradox Basins);

    - Eastern (including the Appalachian, Michigan and Illinois Basins);

    - Rocky Mountains (including the Denver-Julesberg, Powder River, Wind River,
      Green River and Williston Basins); and

    - California (the San Joaquin Basin).

    Key also is a leading onshore drilling contractor and conducts land drilling
operations in a number of major domestic producing basins, as well as in
Argentina and in Ontario, Canada. In addition to its other businesses, Key
produces and develops oil and natural gas reserves in the Permian Basin region
and Texas Panhandle.

    Key has built its leadership position in part through the acquisition of
small, regional well service companies. Key has also implemented a strategy,
which has also contributed to its position within the industry, to:

    - improve its balance sheet and reduce its level of debt;

    - build strong customer relationships by offering a broad range of equipment
      and services that will meet most of its customer's needs at the wellsite;

    - maximize utilization of its rig fleet by actively refurbishing its rigs
      and related equipment; and

    - train and professionally develop its employees, with an emphasis on
      safety.

Q SERVICES

    Q Services specializes in the delivery of products and services that enhance
and maintain the production quality of existing oil and gas wells. Q Services'
business lines include:

    - fishing and rental tool services used in the workover maintenance process
      and in drilling operations;

                                       22

    - field production services, which consist of oilfield fluid transportation
      and disposal services, frac tank rental, completion and production
      chemicals, lease crews and on-site construction services; and

    - pressure pumping services, which consist of fracturing, acidizing,
      cementing and nitrogen services used in well stimulation and maintenance
      processes.

    Q Services currently provides services in the following regions with over
1,000 personnel in 60 operating locations:

    - Northwest Texas and Oklahoma;

    - The Gulf Coast Region of Texas and Louisiana, including the inland waters
      and offshore in the Gulf of Mexico;

    - South Texas;

    - ArkLaTex Region;

    - Permian Basin of West Texas and Eastern New Mexico; and

    - Four Corners.

    Q Services has pursued a selective acquisition strategy to enhance its
existing operations and to increase the breadth of its service offerings to its
customers.

    Q Services conducts its business by following certain operating principles
including:

    - a decentralized management structure;

    - continued investment in equipment and technology to improve operational
      efficiency and safety; and

    - customized products and services to meet the individual needs of its
      customers.

                                       23

                              THE SPECIAL MEETING

    This proxy statement/prospectus is being furnished in connection with the
solicitation of proxies by the Q Services board of directors for use at the
special meeting of Q Services shareholders to vote for approval of the merger.
This proxy statement/prospectus is also being furnished as a prospectus in
connection with the issuance by Key of shares of Key common stock in the merger.
This proxy statement/prospectus and the enclosed form of proxy are first being
mailed to shareholders of Q Services on or about June   , 2002.

DATE, TIME AND PLACE

    The special meeting will be held on June 28, 2002, at The Briar Club, 2603
Timmons Lane, Houston, Texas 77027, commencing at 9:00 a.m., Houston, Texas
time.

MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING

    At the special meeting, holders of shares of Q Services common stock,
series A preferred stock and series B preferred stock will be asked to consider
and vote on:

    - a proposal to approve and adopt the merger agreement and the merger; and

    - any other matters that may properly come before the meeting.

BOARD OF DIRECTORS RECOMMENDATION

    After careful consideration, the Q Services board of directors has
unanimously declared that the merger agreement and the merger are advisable and
fair to and in the best interests of Q Services' shareholders. THE Q SERVICES
BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF SHARES OF Q SERVICES COMMON STOCK, SERIES A PREFERRED
STOCK AND SERIES B PREFERRED STOCK VOTE TO APPROVE THE MERGER AGREEMENT AND THE
MERGER.

RECORD DATE

    The Q Services board of directors has fixed the record date for the
determination of the shareholders entitled to notice of and to vote at the
special meeting as of the close of business on June 1, 2002. Accordingly, only
shareholders of record of Q Services common stock, series A preferred stock and
series B preferred stock at the close of business on June 1, 2002 are entitled
to notice of and to vote at the special meeting. As of the record date, there
were 15,630,762 shares of Q Services common stock, 72,000 shares of Q Services
series A preferred stock and 2,600 shares of Q Services series B preferred stock
outstanding.

QUORUM

    The presence at the special meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Q Services common stock, series A and
series B preferred stock will constitute a quorum for the transaction of
business at the special meeting. Abstentions and non-votes will be considered
present at the special meeting for the purpose of determining the presence of a
quorum. If a quorum is not present, the shareholders represented in person or by
proxy at the special meeting may adjourn the meeting until such time and to such
place as may be determined by a vote of the holders of a majority of the shares
represented in person or by proxy at the meeting.

VOTE REQUIRED

    The vote required to approve the merger agreement and the merger is the
affirmative vote of at least two-thirds of the issued and outstanding Q Services
common stock, series A preferred stock and series B preferred stock, voting
together as a single class.

    Each holder of Q Services common stock is entitled to one vote per share of
Q Services common stock held by such holder. Each holder of Q Services series A
preferred stock or series B preferred stock is entitled to the number of votes
determined by dividing the number of shares of Q Services

                                       24

series A preferred stock or Series B preferred stock held by such holder by ten.
Any fractional votes are adjusted up or down as follows: a holder of ten shares
of Q Services series A preferred stock or series B preferred stock is entitled
to one vote, a holder of 15 shares of Q Services series A preferred stock or
series B preferred stock is entitled to one vote and a holder of 16 shares of
series A preferred stock or series B preferred stock is entitled to two votes.

VOTING AGREEMENTS

    Certain common shareholders of Q Services have entered into voting
agreements with Key. Under the voting agreements, each of these shareholders has
agreed to vote all of the shares of Q Services common stock held by it in favor
of approving the merger agreement and has also granted an irrevocable proxy to
Key representatives to vote its shares of Q Services common stock at the special
meeting. As of the record date, 10 shareholders of Q Services who executed
voting agreements held in the aggregate 11,480,327 shares of Q Services common
stock, which is approximately 73% of the combined voting power of all issued and
outstanding Q Services common and preferred stock. Therefore, approval of the
merger agreement by the Q Services shareholders is assured. However, because
there are other conditions to closing that have not yet been fulfilled, closing
of the merger is not assured.

PROXIES

    This proxy statement/prospectus is accompanied by a form of proxy to be used
at the Q Services special meeting. Each Q Services common and preferred
shareholder is requested to complete, sign and date the accompanying proxy and
promptly return it in the enclosed envelope or otherwise mail it to Q Services.

    Shares of Q Services common stock and preferred stock represented by a
properly executed proxy will, unless revoked, be voted in accordance with the
instructions indicated or, if no instructions are indicated, will be voted "FOR"
approval of the merger agreement and the merger, and in the best judgment of the
individuals named in the proxy on any other matters which may properly come
before the special meeting.

    You may abstain from voting by properly marking the "ABSTAIN" box on the
proposal from which you wish to abstain. Your abstention will be counted as
present for the purpose of determining the existence of a quorum. Abstentions
will have the same effect as a vote against the approval of the merger
agreement.

REVOCABILITY OF PROXIES

    You may revoke any proxy you have given at any time before its use by:

    - delivering to Q Services a written notice of revocation;

    - delivering to Q Services a proxy signed on a later date; or

    - voting in person at the special meeting.

    Attendance at the special meeting is not in itself sufficient to revoke a
proxy.

SOLICITATION OF PROXIES

    Proxies are being solicited by and on behalf of the Q Services board of
directors. Q Services will bear the cost of the solicitation of proxies from its
shareholders. In addition to soliciting proxies by mail, officers, directors and
employees of Q Services, without receiving additional compensation, may solicit
proxies by telephone, in person or by other means.

                                       25

                                   THE MERGER

    This section of the proxy statement/prospectus, as well as the next section
titled "The Merger Agreement" beginning on page 42, describes certain aspects of
the proposed merger. These sections highlight significant information about the
merger agreement and the merger, but may not include all the information that
you would like to know. The merger agreement, as amended, is attached as
Exhibit A to this proxy statement/prospectus. We urge you to read the merger
agreement in its entirety.

GENERAL DESCRIPTION OF THE MERGER

    On May 13, 2002, Key, Key Merger Sub, Inc. and Q Services entered into a
Plan and Agreement of Merger pursuant to which Key Merger Sub would be merged
into Q Services with Q Services being the surviving corporation. Upon
consummation of the merger, all common shareholders of Q Services will become
holders of Key common stock and Q Services will be a wholly-owned subsidiary of
Key. The merger will be effective when Key Merger Sub and Q Services file
articles of merger with the Secretary of State of Texas.

    In connection with the merger, Q Services will redeem all of its issued and
outstanding series A and series B preferred stock before consummation of the
merger under procedures described elsewhere in this proxy statement/prospectus.
In addition, all outstanding options and warrants to purchase Q Services common
stock will have been amended to provide for cashless exercise and exercised, or
classified as "cash out options" or "cash out warrants," with the cash value
being paid to the holders in the form of notes under procedures set forth in the
merger agreement and described elsewhere in this proxy statement/prospectus.

BACKGROUND OF THE MERGER

    On or about August 11, 2001, David M. Johnson, the chief executive officer
of Q Services, received a telephone call from Thomas K. Grundman, then the chief
financial officer of Key, in which Mr. Grundman requested a meeting with
Mr. Johnson to discuss the two companies and their current strategic directions.

    On August 15, 2001, Mr. Johnson and David S. Schorlemer, the chief financial
officer of Q Services, met with Mr. Grundman in Houston, Texas, and discussed Q
Services' current strategy, its recent acquisition activity and business plan.
Mr. Grundman indicated that, if Q Services was interested, Key would be
interested in discussing a possible business combination and would be willing to
assemble an acquisition team to review financial and other data in preparation
of an offer. Mr. Johnson indicated that Q Services' current plan was to pursue
its acquisition strategy and that Q Services would not be interested in pursuing
a combination at that time.

    On September 5, 2001, Mr. Johnson, Mr. Schorlemer and Q Services' president,
Craig M. Johnson, attended an industry conference in New York, New York, at
which time a representative of Lehman Brothers introduced Mr. Craig Johnson and
Mr. Schorlemer to Key's chairman and chief executive officer, Francis D. John.
At that meeting, the parties discussed current market conditions and
opportunities, including the prospect of a business combination between the
companies.

    During the fall of 2001, Lehman Brothers, at the request of Key, contacted Q
Services and its majority shareholder with respect to Key's desire to pursue
discussions with Q Services. Q Services responded to Lehman Brothers that Q
Services was not interested in entering into acquisition negotiations at that
time.

    On or about February 25, 2002, Mr. Schorlemer contacted Key's current chief
financial officer, Royce W. Mitchell, in Midland, Texas, to discuss with him
matters involving the renewal of Q Services' insurance and Key's experience in
those matters. During the call, the parties discussed the prospect of merging
the companies.

                                       26

    On or about February 26, 2002, Mr. Craig Johnson contacted Lehman Brothers
to request that Lehman Brothers organize a meeting between Q Services' and Key's
management groups to discuss the prospect of a business combination. It was
determined that the meeting would be held in Orlando, Florida, where both
parties would be attending investor conferences.

    On March 6, 2002, at the investor conference in Orlando, Florida,
representatives of Q Services, Key and Lehman Brothers met and discussed the
potential benefits a merger could provide to their respective shareholders. The
parties agreed to conduct another meeting between Q Services' and Key's chief
financial officers to exchange information and further discuss the prospects of
a merger further.

    On March 12, 2002, the parties executed a confidentiality agreement in
preparation for the exchange of data between the companies. On March 13, 2002,
Mr. Mitchell and Mr. Schorlemer met in Dallas, Texas to exchange data. During
the meeting, the parties discussed the aspects of the potential merger and
reviewed selected financial and operational data to better familiarize each
other with the respective companies and their operating philosophies.
Additionally, a preliminary time frame was established for Key to submit an
offer and to request additional data to continue Key's internal analysis.

    On March 27, 2002, a meeting took place in Houston, Texas to introduce each
company's management team to each other and to further discuss the respective
companies' businesses and operating philosophies. In particular, Key was
interested in understanding Q Services' fishing and rental tool business and
pressure pumping operations. Another time frame was discussed regarding
additional data requests and timing for an offer.

    During the last week of March 2002 and continuing into the first week of
April 2002, Q Services and Key conducted purchase price negotiations with the
parties agreeing to a merger consideration to be based on a $265 million
enterprise valuation. On April 3, 2002, Mr. John and Key's general counsel,
Mr. Jack D. Loftis, presented Mr. Schorlemer with a written non-binding term
sheet at Q Services' headquarters in Houston, Texas.

    On April 8, 2002, Q Services met with its majority shareholder to discuss
other strategic alternatives and the contemplated merger with Key. The other
alternatives discussed included other potential business combinations that Q
Services could consider and pursue.

    On April 10, 2002, Q Services held a board meeting at which representatives
of Lehman Brothers presented an overview of the contemplated transaction for the
purpose of discussing the $265 million enterprise valuation and requesting an
approval by the board of directors for management to proceed with negotiations.
Before the presentation by Lehman Brothers, the board of directors approved the
execution of a letter agreement with Lehman Brothers for advisory services
related to the contemplated merger transaction. Q Services' board of directors
unanimously approved the action to proceed and requested that management update
the board of directors on the status of the negotiations as they progressed.

    On April 11, 2002, Key held a board meeting to discuss, among other matters,
Key's acquisition of Q Services. Mr. John made a brief presentation of the
acquisition to the other members of the board at which time representatives of
Lehman Brothers were invited to participate in the discussion. Lehman Brothers
presented an overview of Q Services and an analysis of the business combination
to the board. Lehman Brothers was then excused from the meeting at which time
the board continued their discussion. The meeting concluded with the board
recommending that Key proceed toward a definitive agreement.

    On April 17, 2002, Q Services met with the Key due diligence team in
Houston, Texas, to discuss due diligence and transition planning, as well as to
discuss the conceptual organization of the merged entities. Various
representatives of Q Services and Key participated in separate meetings over the
course of several days regarding various aspects of the operations, benefit
plans and financial statements of the companies.

                                       27

    On or about April 17, 2002, Key requested their counsel, Porter &
Hedges, L.L.P., begin drafting a definitive merger agreement between Key and Q
Services. At that time, Q Services requested that their counsel, Vinson &
Elkins L.L.P., provide assistance in this matter.

    Between April 17, 2002 and May 13, 2002, Key and Q Services and their
respective legal and management teams completed their pre-signing due diligence
efforts and conducted negotiations with respect to the merger agreement,
employment agreements and other ancillary agreements.

    On May 9, 2002, Key held a telephonic board meeting in which Mr. John
reviewed the status of negotiations on the definitive agreement with the other
members of the board who unanimously approved the terms of the merger as
outlined by Mr. John. Mr. Loftis delivered to the board members an executive
summary of the transaction and a written consent approving the merger, which was
executed by each board member.

    On May 10, 2002, Q Services' board of directors held a special meeting in
Houston, Texas to consider the merger transaction with Key. During the meeting,
Q Services' senior management team presented the proposed transaction and the
terms of the merger agreement to its board of directors. Representatives of
Lehman Brothers presented a summary of its financial analysis related to the
proposed merger and addressed the fairness, from a financial point of view, of
the consideration to be received by the shareholders of Q Services. A
representative of Vinson & Elkins L.L.P. reviewed with the board its fiduciary
duties under applicable law in connection with the proposed transaction. The
board then discussed and reviewed the benefits and the potential risks and
drawbacks of the proposed transaction and asked questions about the proposed
merger. After a significant period of discussion and questions, the board
authorized management to finalize the negotiations with Key, including the
execution of all necessary legal documents and other matters.

    On May 13, 2002, a definitive merger agreement was executed between Key and
Q Services.

KEY'S REASONS FOR THE MERGER

    Key's board of directors and management believe the merger will benefit Key
and its shareholders because the acquisition:

    - will expand its current oilfield trucking and fishing and rental tool
      service lines into new geographic markets;

    - will add pressure pumping as a new service line;

    - will allow Key to expand its existing customer base;

    - will increase Key's exposure to the natural gas markets;

    - is expected to be immediately accretive to earnings per share and cash
      flow per share; and

    - will reduce Key's debt-to-capitalization ratio.

Q SERVICES' REASONS FOR THE MERGER

    Q Services' board of directors and management believe the merger will
benefit Q Services and its shareholders for the following reasons:

    - the combined company provides a strategic platform for future growth;

    - the combined company will have adequate capital sources to facilitate
      internal and external growth which will result in an increased ability to
      focus on operational growth VS. capital structure;

    - the management team of the combined company will benefit from added depth
      and industry experience;

    - Q Services' shareholders will have the opportunity to participate in the
      potential for equity growth in a well-established larger public company
      after the merger;

                                       28

    - the acquisition allows the Q Services shareholders greater liquidity
      through access to public markets following the merger; and

    - the merger will potentially reduce the risk of Q Services shareholders'
      investment after the merger as a result of the combined company having
      greater capital resources and being more geographically diversified.

OPINION OF Q SERVICES' FINANCIAL ADVISOR

    The following section sets forth a description of Lehman Brothers' fairness
opinion provided to the board of directors of Q Services in connection with the
merger. Key did not obtain a fairness opinion in connection with the merger and
Lehman Brothers' opinion was issued for the benefit of the Q Services common
shareholders only and does not in any manner address the fairness, from a
financial point of view, of the consideration paid by Key in connection with the
merger.

    Lehman Brothers acted as Q Services' financial advisor in connection with
the merger. Q Services instructed Lehman Brothers, in its role as financial
advisor, to evaluate the fairness, from a financial point of view, of the
consideration offered to Q Services shareholders in the merger. On May 10, 2002,
Lehman Brothers delivered its oral and written opinion to the Q Services board
of directors that, as of such date and based upon and subject to certain
conditions stated therein, from a financial point of view, the consideration
offered to Q Services shareholders in the merger was fair to such shareholders.

    Q Services and Key entered into a transaction pursuant to which

    - Q Services will merge with a Key subsidiary and become a wholly-owned
      subsidiary of Key; and

    - upon effectiveness of the merger, each outstanding share of Q Services
      common stock will be converted into the right to receive that number of
      shares of Key common stock determined by

       - a fraction, the numerator of which shall be $265.0 million less total
         liabilities, as reflected on Q Services' estimated balance sheet, the
         amount required to redeem the preferred stock at closing, transaction
         fees and expenses, and certain severance costs plus total current
         assets, as reflected on Q Services' estimated balance sheet, and
         deferred tax liability, and the denominator of which is Key's average
         share price for the 10 trading days immediately preceding the day
         before the closing date; DIVIDED BY

       - the total number of shares of Q Services common stock issued and
         outstanding as of the closing date.

    Based on Q Services' estimated balance sheet as of March 31, 2002, the
implied equity value for the merger is $193.9 million or $11.83 per Q Services
share. The implied equity value and equity value per share may change based on Q
Services' balance sheet as of the closing date and other terms and conditions as
set forth in the merger agreement. The consideration offered to Q Services by
Key is also subject to a collar on the value of the stock it delivers to Q
Services shareholders of $11.00 to $13.00 per Key share. This fixes the number
of Key shares for each share of Q Services common stock based on Key's average
share price for the 10 trading days immediately preceding the day before the
closing date if that price is below $11.00 or above $13.00.

    THE FULL TEXT OF THE LEHMAN BROTHERS WRITTEN OPINION, DATED AS OF MAY 10,
2002, WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY LEHMAN
BROTHERS IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS EXHIBIT B, AND IS
INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO READ THIS OPINION CAREFULLY
IN ITS ENTIRETY. THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF LEHMAN
BROTHERS' OPINION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH OPINION.

    No limitations were imposed by Q Services on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. The form and amount of the consideration to be received by Q
Services shareholders in the merger was determined through

                                       29

arm's-length negotiations between the parties. Lehman Brothers' advisory
services and opinion were provided for the use and benefit of the Q Services
board of directors in connection with its consideration of the merger. Lehman
Brothers' opinion is not intended to be and does not constitute a recommendation
to any Q Services shareholder as to how such shareholder should vote with
respect to the merger. Lehman Brothers was not requested to opine as to, and its
opinion does not address, Q Services' underlying business decision to proceed
with the merger. In addition, Lehman Brothers' opinion does not address the
prices at which shares of Key common stock will actually trade after the merger.

    In connection with rendering its opinion, Lehman Brothers reviewed and
analyzed, among other things, the following:

    - the merger agreement and the specific terms of the merger;

    - publicly available information concerning Key that Lehman Brothers
      believed to be relevant to its analysis, including the Annual Report on
      Form 10-K for the fiscal year ended June 30, 2001 and Quarterly Reports on
      Form 10-Q for the quarters ended September 30, 2001, December 31, 2001 and
      March 31, 2002;

    - financial and operating information with respect to the business,
      operations and prospects of Q Services and Key furnished to Lehman
      Brothers by Q Services;

    - a trading history of the common stock of Key from April 10, 2001 to
      May 10, 2002 and a comparison of that trading history with those of other
      companies that Lehman Brothers deemed relevant;

    - a comparison of the historical financial results and present financial
      condition of each of Q Services and Key with each other and with those of
      other companies that Lehman Brothers deemed relevant;

    - a comparison of the financial terms of the merger with the financial terms
      of certain other recent public and private oil services transactions that
      Lehman Brothers deemed relevant;

    - published estimates of third party research analysts with respect to the
      future financial performance of Key;

    - the pro forma consequences of the merger on the future financial
      performance of Key, including the potential synergies and cost savings
      expected by managements of Q Services and Key to result from the merger;
      and

    - Q Services' current ability to fund future capital requirements to support
      the growth of Q Services as set forth in Q Services' business plan.

    In addition, Lehman Brothers had discussions with the management of Q
Services concerning its business, operations, assets, financial condition and
prospects and undertook such other studies, analyses and investigations as it
deemed appropriate.

    In rendering its opinion, Lehman Brothers assumed and relied upon, without
independent verification, the accuracy and completeness of the financial and
other information reviewed by it for the purpose of its opinion and further
relied upon the assurances of management of Q Services and Key that they are not
aware of any facts or circumstances that would make such information inaccurate
or misleading. Lehman Brothers assumed that the financial forecasts have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of each of Q Services and Key as to the future
financial performance of Q Services and Key and that each of Q Services and Key
will perform substantially in accordance with such projections. In addition,
Lehman Brothers assumed that the merger would be consummated in accordance with
the terms set forth in the merger agreement; and upon advice of Q Services,
Lehman Brothers assumed that the amounts and timing of the expected synergies
are reasonable and that the expected synergies will be realized substantially in
accordance with such estimates. In arriving at its opinion, Lehman Brothers did
not

                                       30

conduct a physical inspection of the properties and facilities of each of Q
Services and Key and did not make or obtain any evaluations or appraisals of the
assets or liabilities of Q Services or Key, nor was Lehman Brothers furnished
with any such appraisals. In addition, the Q Services board of directors did not
authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit any
indications of interest from any third party with respect to the purchase of all
or a part of Q Services' business. Upon advice of Q Services and its legal and
accounting advisors, Lehman Brothers assumed that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and therefore as a tax-free transaction to the shareholders
of Q Services. Lehman Brothers' opinion was necessarily based upon market,
economic and other conditions in effect on, and evaluated as of, May 10, 2002.

    In arriving at its opinion, Lehman Brothers made its determination as to the
fairness, from a financial point of view, of the consideration offered to Q
Services' shareholders on the basis of the financial and comparative analyses
described below. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances. As a result, fairness opinions are not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Lehman Brothers
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, Lehman Brothers believes that its
analyses must be considered as a whole and that considering any portion of such
analyses and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In performing its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Q Services
or Key. None of Q Services, Key, Lehman Brothers or any other person assumes
responsibility if future results are materially different from those discussed.
Any estimates contained in the analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses may actually be sold.

FINANCIAL ANALYSES

    The following is a summary of the material financial analyses performed by
Lehman Brothers in connection with providing its oral and written opinion to the
Q Services board of directors. Certain of the summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses used by Lehman Brothers, the table must be read together
with the text of each summary. The table alone does not constitute a complete
description of the financial and comparative analyses. In particular, in
applying the various valuation methodologies to the particular businesses,
operations and prospects of Q Services and Key and the particular circumstances
of the merger, Lehman Brothers made qualitative judgments as to the significance
and relevance of each analysis. In addition, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Q Services
and Key. Accordingly, analyses set forth in the table and described below must
be considered as a whole. Considering any portion of such analyses, including
the implied exchange ratios set forth in the table below, and of the factors
considered without considering all analyses, factors and the assumptions
underlying these analyses, could create a misleading or incomplete view of the
process underlying, and conclusions represented by, Lehman Brothers' opinion.

                                       31

IMPLIED EXCHANGE RATIO SUMMARY



                                                                          IMPLIED EXCHANGE
  VALUATION METHODOLOGY     SUMMARY DESCRIPTION OF VALUATION METHODOLOGY       RATIO
--------------------------  --------------------------------------------  ----------------
                                                                    
Discounted Cash Flow        Net present valuation of management            0.784--1.392
Analysis                    projections of after-tax cash flows using
                            selected discount rates and terminal value
                            multiples

Comparable Company Trading  Market valuation benchmark based on the        0.777--1.331
Analysis                    common stock trading multiples of selected
                            comparable companies

Comparable Acquisitions     Market valuation benchmark based on            0.590--1.273
Analysis                    consideration paid in selected comparable
                            transactions

Implied Exchange Ratio in                                                     0.994
the Merger(a)

Implied Exchange Ratios                                                    0.910--1.076
Based on Collar
Range(a)(b)


------------------------

(a) As calculated under the terms of the merger agreement and based on Q
    Services' estimated balance sheet as of March 31, 2002.

(b) The exchange ratio as of the date of Lehman Brothers' analysis which would
    prevail, respectively, if Key's average share price for the 10 trading days
    immediately preceding the day before the closing date is higher than $13.00
    or lower than $11.00.

    DISCOUNTED CASH FLOW ANALYSIS.  Lehman Brothers estimated the present value
of the future after-tax cash flows expected to be generated from Q Services'
operations based on information and projections by Q Services for the years 2002
through 2006, multiples to estimate the terminal value, and discount rates of
13.0% and 15.0% for the low and high ends of the discounted cash flow analysis
range, respectively, assuming a tax rate of 38.0%. The discounted cash flow
analysis performed on Q Services assumes that Q Services operations continue as
a going concern in perpetuity.

    Lehman Brothers also estimated the present value of the future after-tax
cash flows expected to be generated from Key's operations based on information
and projections by Key for the years 2002 through 2006, multiples to estimate
the terminal value, and discount rates of 11.0% and 13.0% for the low and high
ends of the discounted cash flow analysis range, respectively, assuming a tax
rate of 38.0%. The discounted cash flow analysis performed on Key assumes that
Key's operations continue as a going concern in perpetuity.

    A comparison of the discounted cash flow analyses of Q Services and Key
implies an exchange ratio range of 0.784 to 1.392. The implied exchange ratio in
the merger as of the date of Lehman Brothers' analysis of 0.994 falls within
this range, as does the implied exchange ratios based on the collar range.

    COMPARABLE COMPANY TRADING ANALYSIS.  With respect to Q Services, Lehman
Brothers reviewed the public stock market trading multiples for selected
oilfield services companies, including, but not limited to, the following:

    - Key Energy Services, Inc.;

    - Oil States International, Inc.;

                                       32

    - RPC, Inc.;

    - Superior Energy Services, Inc.; and

    - W-H Energy Services, Inc.

    For each of the selected oilfield services companies, using publicly
available information, Lehman Brothers calculated and analyzed the common equity
market value multiples of certain projected financial criteria based upon
published analyst estimates, such as net income and discretionary cash flow.
Lehman Brothers also calculated and analyzed the adjusted capitalization
multiples of certain projected financial criteria based upon published analyst
estimates, such as EBITDA (earnings before interest, taxes, depreciation and
amortization). The adjusted capitalization of each company was obtained by
adding long-term debt to the sum of the market value of its common equity, the
value of its preferred stock based upon its market value if publicly traded and
its liquidation value if privately held, and the book value of any minority
interest minus the cash balance. Lehman Brothers then applied reference
multiples to the relevant Q Services financial statistics to arrive at an
indicative comparable company valuation range.

    Because of the inherent differences between the businesses, operations and
prospects of Q Services and the companies included in the comparable companies
group, Lehman Brothers believed that it was inappropriate to, and therefore did
not, rely solely on the quantitative results of the analysis. Accordingly,
Lehman Brothers also made qualitative judgments concerning the differences
between the financial and operating characteristics of Q Services and the
companies in the comparable companies group that would affect the equity values
of Q Services and such comparable companies.

    With respect to Key, Lehman Brothers reviewed the public stock market
trading multiples for selected land drilling companies, including, but not
limited to, the following:

    - Grey Wolf, Inc.;

    - Helmerich & Payne, Inc.;

    - Nabors Industries, Inc.;

    - Patterson-UTI Energy, Inc.;

    - Precision Drilling, Inc.; and

    - Unit, Inc.

    For each of the selected land drilling companies, using publicly available
information, Lehman Brothers calculated and analyzed the common equity market
value multiples of certain projected financial criteria based upon published
analyst estimates, such as net income and discretionary cash flow. Lehman
Brothers also calculated and analyzed the adjusted capitalization multiples of
certain projected financial criteria based upon published analyst estimates,
such as EBITDA. The adjusted capitalization of each company was obtained by
adding long-term debt to the sum of the market value of its common equity, the
value of its preferred stock based upon its market value if publicly traded and
its liquidation value if privately held, and the book value of any minority
interest minus the cash balance. Lehman Brothers then applied reference
multiples to the relevant Key financial statistics to arrive at an indicative
comparable company valuation range.

    Because of the inherent differences between the businesses, operations and
prospects of Key and the companies included in the comparable companies group,
Lehman Brothers believed that it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the analysis. Accordingly, Lehman
Brothers also made qualitative judgments concerning the differences between the
financial and operating characteristics of Key and the companies in the
comparable companies group that would affect the equity values of Key and such
comparable companies.

                                       33

    A comparison of the comparable company trading analyses of Q Services and
Key implies an exchange ratio range of 0.777 to 1.331. The implied exchange
ratio in the merger as of the date of Lehman Brothers' analysis of 0.994 falls
within this range, as does the implied exchange ratios based on the collar
range.

    COMPARABLE ACQUISITIONS ANALYSIS.  With respect to Q Services, Lehman
Brothers reviewed certain publicly available information on selected domestic
U.S. and international transactions which were announced from June of 1995 to
February of 2002 including, but not limited to, the following:

    - Weatherford International, Inc. / Enterra Corporation;

    - BJ Services Company / Nowsco Well Service, Ltd.;

    - EVI, Inc. / Weatherford Enterra, Inc.;

    - Key Energy Group, Inc. / Dawson Production Services, Inc.;

    - Nabors Industries, Inc. / Pool Energy Services Company;

    - Precision Drilling Corporation / Plains Energy Services, Ltd.;

    - Tuboscope, Inc. / Varco International, Inc.;

    - Patterson Energy, Inc. / UTI Energy, Inc.; and

    - BJ Services Company / OSCA, Inc.

    For each transaction, Lehman Brothers calculated enterprise value multiples
based on the EBITDA during the last twelve months period prior to announcement
of the transaction, the one year forward estimated EBITDA at announcement of the
transaction and the two year forward estimated EBITDA at announcement of the
transaction.

    Lehman Brothers then applied reference multiples to Q Services'
above-mentioned statistics to arrive at an indicative comparable acquisitions
valuation range.

    Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of Q
Services and the companies involved in the transactions analyzed, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the analysis. Accordingly, Lehman Brothers
also made qualitative judgments concerning the differences between the
characteristics of these transactions and the merger that would affect the
enterprise values of Q Services and such other companies.

    With respect to Key, Lehman Brothers reviewed certain publicly available
information on selected domestic U.S. and international transactions which were
announced from June of 1995 to February of 2002 including, but not limited to,
the following:

    - Weatherford International, Inc. / Enterra Corporation;

    - BJ Services Company / Nowsco Well Service, Ltd.;

    - EVI, Inc. / Weatherford Enterra, Inc.;

    - Key Energy Group, Inc. / Dawson Production Services, Inc.;

    - Nabors Industries, Inc. / Pool Energy Services Company;

    - Precision Drilling Corporation / Plains Energy Services, Ltd.;

    - Tuboscope, Inc. / Varco International, Inc.;

    - Patterson Energy, Inc. / UTI Energy, Inc.; and

                                       34

    - BJ Services Company / OSCA, Inc.

    For each transaction, Lehman Brothers calculated enterprise value multiples
based on the EBITDA during the last twelve months period prior to announcement
of the transaction, the one year forward estimated EBITDA at announcement of the
transaction and the two year forward estimated EBITDA at announcement of the
transaction.

    Lehman Brothers then applied reference multiples to Key's above-mentioned
statistics to arrive at an indicative comparable acquisitions valuation range.

    Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of Key
and the companies involved in the transactions analyzed, Lehman Brothers
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis. Accordingly, Lehman Brothers also made
qualitative judgments concerning the differences between the characteristics of
these transactions and the merger that would affect the enterprise values of Key
and such other companies.

    A comparison of the comparable acquisitions analyses of Q Services and Key
implies an exchange ratio range of 0.590 to 1.273. The implied exchange ratio in
the merger as of the date of Lehman Brothers' analysis of 0.994 falls within
this range, as does the implied exchange ratio based on the collar range.

PRO FORMA MERGER CONSEQUENCES ANALYSIS

    Lehman Brothers analyzed the pro forma impact of the merger on Key's
projected earnings per share and discretionary cash flow per share. Projected
net income and discretionary cash flow for calendar years 2002 and 2003 were
based on management projections. Lehman Brothers compared the earnings and
discretionary cash flow of Key on a standalone basis to the earnings and
discretionary cash flow attributable to pro forma Key. The analysis indicated
that the merger will be accretive to Key's net income and discretionary cash
flow per share in 2002 and 2003.

ABOUT LEHMAN BROTHERS

    Lehman Brothers is an internationally recognized investment banking and
advisory firm. Lehman Brothers, as part of its investment banking and financial
advisory business, is continuously engaged in, among other things, the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes. The Q Services board of directors selected Lehman Brothers
because of its expertise, reputation and familiarity with Q Services in
particular and the oilfield service industry in general and because its
investment banking professionals have substantial experience in transactions
comparable to the merger.

    Pursuant to the terms of an engagement letter dated March 7, 2002, between
Lehman Brothers and Q Services, Q Services agreed to pay Lehman Brothers a
customary fee at the closing of the transaction. Q Services also agreed to
reimburse Lehman Brothers for its reasonable expenses incurred in connection
with its engagement, and to indemnify Lehman Brothers and certain related
persons against certain liabilities and expenses in connection with its
engagement. Lehman Brothers has previously rendered financial advisory and
investment banking services to Q Services and Key for which it has received
customary compensation.

RESALE OF KEY COMMON STOCK; REGISTRATION UNDER THE SECURITIES ACT

    The issuance of the shares of Key common stock to holders of Q Services
common stock in the merger will be registered under the Securities Act. Upon
issuance, these shares may be traded freely

                                       35

and without registration by those shareholders not deemed to be "affiliates" of
Q Services as that term is defined for purposes of Rule 145 under the Securities
Act. An affiliate of Q Services for this purpose is a person or entity that
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with Q Services. Any subsequent
transfer by an affiliate of Q Services must be permitted by the resale
provisions of Rule 145 or Rule 144 promulgated under the Securities Act in the
case of any person who became an affiliate of Key in the merger. Subject to
black-out periods, this proxy statement/prospectus may be used by affiliates to
resell their Key shares without regard to the restrictions on resale imposed by
Rule 145 or Rule 144.

    In the merger agreement, Key has agreed to take commercially reasonable
actions requested by a broker-dealer effecting block sales under this proxy
statement/prospectus of the Key common stock on behalf of an affiliate,
consistent with customary practice for transactions of this type. Key also has
agreed, with certain exceptions, not to issue any shares of Key common stock for
60 days following the effective date of the merger.

INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST

    In considering the recommendation of the Q Services board of directors in
favor of the merger, Q Services' shareholders should be aware that certain of Q
Services' directors and executive officers have interests in the merger that are
different from or in addition to the interests of other Q Services shareholders.

    EMPLOYMENT AGREEMENTS.  In connection with the merger agreement, Key will
enter into an employment agreement with each of Craig M. Johnson, the president
of Q Services, and David S. Schorlemer, chief financial officer of Q Services.
Pursuant to these agreements, these individuals are entitled to various
benefits, including, an annual base salary and discretionary cash bonuses,
participation in Key's stock option plan, reimbursement of certain expenses,
guaranteed vacation, and other fringe benefits, such as medical, life and
disability insurance, retirement plans, and a vehicle allowance. Several
officers and directors of Q Services, including Messrs. Johnson and Schorlemer,
will receive substantial severance benefits upon consummation of the merger, and
some of those persons will remain employees of Q Services or Key after the
merger. Messrs. Johnson and Schorlemer will, collectively, receive severance
payments of approximately $1,152,000 from Q Services upon consummation of the
merger due to the change in control and change of duties of Messrs. Johnson and
Schorlemer resulting from the merger. Messrs. Johnson and Schorlemer will be
entitled to additional severance benefits from Key if their employment with Key
should be terminated under certain circumstances.

    CONSULTING AND NON-COMPETITION AGREEMENT.  In connection with the merger
agreement, Key will enter into a consulting and non-competition agreement with
David M. Johnson, chairman and chief executive officer of Q Services. Pursuant
to the agreement, for a period of two years after the effective date of the
merger, Mr. Johnson will be paid $150,000 per year and receive medical benefits
and office support in exchange for certain noncompetition obligations to be set
forth in the agreement. Since Mr. Johnson's employment agreement with
Q Services will not continue beyond the merger, Mr. Johnson will receive
severance payments in the approximate amount of $450,000 from Q Services upon
consummation of the merger.

    ACCELERATION OF STOCK OPTIONS.  Officers and directors of Q Services who own
Q Services common stock will participate in the merger on the same terms and
conditions as Q Services' other shareholders. Many members of Q Services'
management and directors, however, have a substantial number of options to
purchase Q Services common stock. Under the terms of the option agreements, the
vesting of those options will accelerate as a result of the merger. All
outstanding options will either be converted into cash or will be exercised
before the merger for Q Services common stock and converted into Key common
stock in the merger. Therefore, holders of options to purchase Q Services

                                       36

common stock will receive immediate financial benefits as a result of the merger
that they would not receive if the merger were not occurring.

    INDEMNIFICATION.  The merger agreement provides that the surviving
corporation will continue to indemnify each person who is or was a director or
an executive officer of Q Services before the merger pursuant to any
indemnification provision contained in Q Services' articles of incorporation or
bylaws, each as in effect on the date of the merger agreement. In addition, the
merger agreement provides that the surviving corporation will, for a period of
not less than three years, maintain directors' and officers' liability insurance
covering Q Services' directors and executive officers that are currently covered
by Q Services directors' and officers' liability insurance policy on terms that
are not materially different.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

    The following is a summary of the material federal income tax consequences
of the merger to the holders of Q Services common stock, preferred stock, cash
out warrants or cash out options. This summary is based in part on the opinion
of Porter & Hedges, L.L.P., counsel to Key, described below to the effect that
the merger will qualify as a reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. This summary is based upon current provisions
of the Code, existing regulations under the Code and current administrative
rulings and court decisions, all of which are subject to change. No attempt has
been made to comment on all federal income tax consequences of the merger that
may be relevant to particular holders, including holders that are subject to
special tax rules, including the following:

    - dealers in securities;

    - foreign persons;

    - mutual funds;

    - insurance companies;

    - tax-exempt entities; and

    - holders who do not hold their shares as capital assets.

    Holders of Q Services common stock, preferred stock, cash out warrants or
cash out options are advised and expected to consult their own tax advisors
regarding the federal income tax consequences of the merger in light of their
personal circumstances and the consequences under applicable state, local and
foreign tax laws.

    Porter & Hedges, L.L.P. has provided to Key an opinion to the effect that
the merger will be treated for federal income tax purposes as a reorganization
qualifying under Section 368(a) and Section 368(a)(2)(E) of the Code. This
opinion is based upon:

    - the merger agreement;

    - facts set forth in this proxy statement/prospectus;

    - certificates of officers of Key, Key Merger Sub and Q Services;

    - current provisions of the Code;

    - existing regulations under the Code;

    - current administrative rulings of the Internal Revenue Service;

    - court decisions; and

    - the assumption that the transactions contemplated by the merger agreement
      will be carried out strictly in accordance with the terms of the merger
      agreement.

                                       37

    This opinion is not binding on the IRS and no assurance can be given that
the IRS will not adopt a contrary position or that a court would not sustain a
contrary position. The opinion of Porter & Hedges, L.L.P. to Key has been filed
as an exhibit to the post-effective amendment to the registration statement of
which this proxy statement/prospectus is a part. Except to the extent that a
holder makes arrangements with its personal tax advisor, none of the holders of
Q Services common stock, preferred stock, cash out warrants or cash out options
will receive or be provided with an opinion regarding the federal income or
other tax consequences of the merger.

    Assuming the merger is treated as a reorganization within the meaning of
Section 368(a) of the Code:

    - no gain or loss will be recognized by a Q Services common shareholder upon
      the receipt of Key common stock in exchange for Q Services common stock
      except with respect to cash, if any, received in respect of a Key
      adjustment payment;

    - the aggregate tax basis of the shares of Key common stock received by a Q
      Services common shareholder in the merger will be the same as the
      aggregate tax basis of the shares of Q Services common stock surrendered
      in exchange therefor minus the amount of any cash received and plus any
      gain recognized by such shareholder on the exchange;

    - the holding period of the shares of Key common stock received by a Q
      Services common shareholder in the merger will include the holding period
      of the shares of Q Services common stock surrendered in exchange, provided
      that the shares of Q Services common stock are held as capital assets at
      the effective date of the merger;

    - holders of Q Services preferred stock will recognize gain or loss equal to
      the difference, if any, between the shareholders' tax basis in the Q
      Services preferred stock and the amount of cash received therefor. The
      gain or loss will be capital gain or loss if the preferred stock is held
      by the stockholder as a capital asset at the effective date of the merger.
      In the case of an individual, the tax rate applicable to the capital gain
      or loss will depend on the holding period for the preferred stock as of
      that time;

    - holders of Q Services preferred stock will recognize ordinary income equal
      to the amount of cash received as accrued dividends on such preferred
      stock;

    - holders of Q Services cash out warrants will recognize gain or loss equal
      to the difference, if any, between the warrant holders' tax basis in the Q
      Services cash out warrants and the amount of cash received therefor. The
      gain or loss will be capital gain or loss if the warrants are held by the
      holder as a capital asset at the effective date of the merger. In the case
      of an individual, the tax rate applicable to the capital gain or loss will
      depend on the holding period for the cash out warrants as of that time;

    - holders of Q Services cash out options who receive cash in exchange for
      the cancellation of such cash out options will recognize ordinary
      compensation income equal to the amount of cash received and such income
      will be subject to withholding of tax; and

    - a holder of Q Services common stock who receives cash in respect of any
      adjustment payment made by Key will recognize taxable gain if the fair
      market value of the Key common stock plus cash received exceeds the
      holder's tax basis in the Q Services common stock exchanged therefor. Any
      such gain will be limited to the amount of cash received. The gain will be
      capital gain if the Key common stock is held by the shareholder as a
      capital asset at the effective date of the merger. In the case of an
      individual, the tax rate applicable to the capital gain will depend on the
      holding period of the Q Services stock as of that time.

                                       38

ACCOUNTING TREATMENT

    The merger will be accounted for as a purchase business combination for
financial reporting and accounting purposes under generally accepted accounting
principles. Under the purchase method of accounting, the purchase price paid by
Key for Q Services (including indirect costs of the merger) will be allocated to
the identifiable assets and liabilities of Q Services based upon the fair value
of Q Services identifiable assets and liabilities as of the effective date of
the merger, with the excess of the purchase price over the fair value of net
identifiable assets being allocated to goodwill. After consummation of the
merger, the financial condition and results of operations of Q Services will be
included (but not separately reported) in the consolidated financial position
and results of operations of Key.

GOVERNMENT AND REGULATORY APPROVALS

    The merger is subject to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, which requires prior notice to the United States Federal Trade Commission
and the Department of Justice of certain mergers before the consummation of the
merger to allow the FTC and the DOJ an opportunity to review the proposed merger
and, if deemed necessary, to oppose it for any anti-competitive effect.
Following notification, the parties are subject to a waiting period of a minimum
of 30 days during which the FTC and the DOJ review the proposed merger and may
request additional information. Key and Q Services filed all required
notifications with the FTC and the DOJ on June   , 2002.

    Neither Key nor Q Services is aware of any other material governmental or
regulatory approval required for completion of the merger.

DISSENTERS' RIGHTS

    If the merger is consummated, shareholders of Q Services who did not vote in
favor of the merger will have certain rights to dissent and demand the appraisal
of and payment in cash for the fair value of their shares of Q Services common
stock pursuant to the Texas Business Corporation Act. Under the TBCA, these
rights, if the statutory procedures are complied with, could lead to a judicial
determination of the fair value, which will be the value as of the day
immediately preceding the special meeting (excluding any depreciation or
appreciation in anticipation of the merger), required to be paid in cash to the
dissenting holders for their shares of Q Services common stock. The value so
determined could be more or less than the merger consideration pursuant to the
merger agreement.

    Any shareholder contemplating the exercise of appraisal rights is urged to
review carefully the provisions of Articles 5.12 and 5.13 of the TBCA (copies of
which is attached as Exhibit C to this proxy statement/prospectus), particularly
with respect to the procedural steps required to perfect the right of appraisal.
If the right of appraisal is lost due to the shareholder's failure to comply
with the procedural requirements of Articles 5.12 and 5.13 of the TBCA, the
shareholder will receive the consideration without interest for each share owned
as of the effective date of the merger. Set forth below is a summary of the
procedures relating to the exercise of the right of appraisal, which should be
read in conjunction with the full text of Articles 5.12 and 5.13 of the TBCA.

    Article 5.12 of the TBCA provides that a shareholder wishing to exercise its
rights for appraisal with respect to the merger must file, before the special
meeting, a written objection to the merger stating that the shareholder's right
to dissent will be exercised if the merger becomes effective and giving the
shareholder's address, to which notice of the approval of the merger will be
delivered or mailed in such event. If the merger is effected and the shareholder
did not vote in favor of the merger, Key will, within ten days after the
closing, deliver or mail to the shareholder written notice that the merger has
been effected. To exercise the right of appraisal, a shareholder must, within
ten days from the delivery or mailing of the notice from Key make a written
demand on Key for payment of the fair value of the shareholder's shares of
Q Services common stock. The demand must state the number of

                                       39

shares of Q Services common stock owned by such shareholder, and the
shareholder's estimate of the fair value of such shares of Q Services common
stock. Any shareholder failing to make the demand within the ten-day period will
be bound by the merger.

    The demand should be executed by or for the shareholder of record, fully and
correctly, as the shareholder's name appears on the certificate(s) formerly
representing the shares of Q Services common stock. If shares of Q Services
common stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in the appropriate
capacity. If shares of Q Services common stock are owned of record by more than
one person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. Any shareholder who has made a demand may
withdraw the demand at any time before payment for the shares of Q Services
common stock is made or before any petition asking for a determination of the
fair value of the shares of Q Services common stock is filed.

    Within 20 days after making a demand, the shareholder must submit the
certificates representing the shares of Q Services common stock to Key for
notation thereon that a demand has been made. The failure of a shareholder to
submit the certificates will terminate the shareholder's rights of appraisal.

    Within 20 days after receipt of a demand, Key must deliver or mail to the
shareholder a written notice that either:

    - accepts the amount claimed in the demand and agrees to pay such amount
      within 90 days after the closing upon the surrender of the duly endorsed
      certificates formerly representing such shareholder's shares of Q Services
      common stock; or

    - contains an estimate by Key of the fair value of the shares of Q Services
      common stock together with an offer to pay such amount within 90 days
      after the closing.

    If Key responds to the demand with an estimate of the fair value of the
shares of Q Services common stock and the shareholder wishes to accept Key's
estimate, Key must receive written notice from the shareholder accepting such
estimate within 60 days after the shareholder receives the estimate from Key and
surrendering the duly endorsed certificates formerly representing such
shareholder's shares of Q Services common stock. If, within 60 days after the
closing, the value of the shares of Q Services common stock is agreed upon
between the shareholder and Key, payment for the shares of Q Services common
stock will be made within 90 days after the closing and upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
will cease to have any interest in the shares of Q Services common stock or Q
Services.

    If, within the period of 60 days after the closing, the shareholder and Key
do not agree on the fair value of the shares of Q Services common stock, then
the shareholder or Key may, within 60 days following the expiration of such
60 day period, file a petition in any court of competent jurisdiction in the
county in which the principal office of Key is located, to obtain a judicial
finding and determination of the fair value of the shareholder's shares of Q
Services common stock. Upon filing the petition, the shareholder must serve Key
with a copy of such petition. Within 10 days after being served with a copy of
the petition, Key must file with the court a list of the names and addresses of
shareholders who have demanded payment for their shares of Q Services common
stock and with whom agreements as to the value of their shares have not been
reached. If the petition is filed by Key, the petition must contain such a list.
All shareholders will be notified by registered mail as to the time and place of
the hearing of the petition. All shareholders so notified and Key will then be
bound by the final judgement of the court. After the hearing of the petition,
the court will determine the shareholders who have complied with the provisions
of Article 5.12 and appoint one or more qualified appraisers who will determine
the fair value of the shares of Q Services common stock and will file a report
of that value with the clerk of the court. Each party will have reasonable
opportunity to submit to the appraisers pertinent evidence

                                       40

as to the value of the shares of Q Services common stock. Either party may make
exceptions to the appraiser's report. The court will then determine the fair
value of the shares of Q Services common stock and will direct Key, upon receipt
of the duly endorsed certificates formerly representing such shares of Q
Services common stock, to pay the value together with interest thereon beginning
on the 91st day after the closing to the date of the judgment to such
shareholders entitled to payment. Upon payment of the judgment, the dissenting
shareholders will cease to have any interest in the shares of Q Services common
stock or Q Services.

CERTAIN OTHER EFFECTS OF THE MERGER

    Q Services is a Texas corporation and Key is a Maryland corporation. The
rights of Q Services' shareholders who receive Key common stock in the merger
will be governed by Maryland law and also by the articles of incorporation and
bylaws of Key. The rights of Q Services' shareholders under Maryland law and
under Key's articles of incorporation and bylaws will differ in certain respects
from their current rights under Texas law and Q Services' articles of
incorporation and bylaws. See "Comparison of Rights of Shareholders of Key and Q
Services" beginning on page 69.

RECOMMENDATION OF THE BOARD OF DIRECTORS OF Q SERVICES

    The board of directors of Q Services has determined that the merger and the
transactions contemplated by the merger agreement are advisable and fair to and
in the best interest of its common shareholders. The board of directors of Q
Services unanimously recommends that its common and preferred shareholders vote
"FOR" the merger and the merger agreement.

VOTE REQUIRED

    Approval of the merger requires the affirmative vote of two-thirds of the
issued and outstanding Q Services common stock, series A preferred stock and
series B preferred stock, voting as a single class.

    Each holder of Q Services common stock is entitled to one vote per share of
Q Services common stock held by such holder. Each holder of Q Services series A
preferred stock or series B preferred stock is entitled to the number of votes
determined by dividing the number of shares of series A preferred stock or
series B preferred stock held by the holder by ten. Any fractional votes are
adjusted up or down as follows: a holder of ten shares of series A preferred
stock or series B preferred stock is entitled to one vote, a holder of 15 shares
of series A preferred stock or series B preferred stock is entitled to one vote
and a holder of 16 shares of Q Services series A preferred stock or series B
preferred stock is entitled to two votes.

    Shareholders of Q Services owning an aggregate of approximately 73% of the
combined voting power of Q Services issued and outstanding common stock,
series A preferred stock and series B preferred stock have agreed to vote all
their shares in favor of the merger agreement. Consequently, approval of the
merger agreement by Q Services common and preferred shareholders is assured.
However, because there are other conditions to closing that have not yet been
fulfilled, closing of the merger is not assured.

    The officers and directors of Q Services beneficially own approximately
12,965,080 shares of Q Services common stock and no shares of preferred stock.
No shares of common or preferred stock of Q Services are owned by any director
or officer of Key.

                                       41

                              THE MERGER AGREEMENT

    This section of the proxy statement/prospectus describes certain aspects of
the merger, including the material provisions of the merger agreement and
certain additional agreements being entered into in connection with the merger.
The following summary of the material terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement. The
merger agreement, as amended is attached as Exhibit A to this proxy
statement/prospectus and is incorporated herein by reference. You are encouraged
to read the merger agreement in its entirety for a more complete description of
the merger.

THE MERGER

    GENERAL STRUCTURE OF THE MERGER.  On May 13, 2002, Key, Merger Sub and Q
Services entered into a Plan and Agreement of Merger pursuant to which Merger
Sub would be merged into Q Services with Q Services being the surviving
corporation. The merger agreement was later amended by the parties on May 30,
2002. Upon consummation of the merger, all common shareholders of Q Services
will become holders of Key common stock and Q Services will be a wholly-owned
subsidiary of Key. The merger will be effective when Key, Merger Sub and Q
Services file articles of merger with the Secretary of State of Texas.

    At the effective date of the merger, all shares of Q Services common stock
will automatically be cancelled and will cease to exist. At that time, each
holder of a certificate representing shares of Q Services common stock (other
than shares as to which dissenters' rights to appraisal have been perfected)
will cease to have any rights as a shareholder except the right to receive Key
common stock in the merger. Holders who exercise and perfect dissenters' rights
will be paid cash in an amount determined as described in "The
Merger--Dissenters' Rights" on page 39 and will not receive a portion of the
merger consideration.

    In connection with the merger:

    - all issued and outstanding shares of Q Services common stock will be
      converted into Key common stock as described below;

    - all shares of Q Services series A and series B preferred stock will be
      redeemed immediately before the effective date of the merger through the
      issuance of a non-interest bearing promissory redemption note to each such
      holder, with the redemption notes being paid in cash on the effective date
      of the merger;

    - certain options to receive Q Services common stock will be designated as
      "cash out options." Each cash out option will be surrendered to Q Services
      immediately before the effective date of the merger in exchange for a
      non-interest bearing promissory option note to each holder of a cash out
      option. Each option note will be in a principal amount equal to the cash
      value related to the option less any applicable withholding obligations.
      Option notes will be paid in cash on the effective date of the merger;

    - options other than the cash out options will be amended to allow a
      cashless exercise and will be exercised for Q Services common stock
      immediately before the effective date of the merger. The Q Services common
      stock issued with respect to these options will be converted into Key
      common stock (less any applicable withholding obligations) pursuant to the
      merger;

    - certain warrants to receive Q Services common stock will be designated as
      "cash out warrants." Each cash out warrant will be surrendered to Q
      Services immediately before the effective date of the merger in exchange
      for a non-interest bearing promissory warrant note to each holder of a
      cash out warrant. Each warrant note will be in a principal amount equal to
      the cash value

                                       42

      related to the warrant less any applicable withholding obligations.
      Warrant notes will be paid in cash on the effective date of the merger;
      and

    - warrants other than the cash out warrants will be amended to allow a
      cashless exercise and will be exercised for Q Services common stock
      immediately before the effective date of the merger. The Q Services common
      stock issued with respect to these warrants will be converted into Key
      common stock (less applicable withholding obligations) pursuant to the
      merger.

    A more complete description of the conversion of Q Services common stock
into Key common stock, the redemption of the Q Services series A and series B
preferred stock and the treatment of options and warrants to purchase Q Services
common stock is set forth below.

    CALCULATION OF PURCHASE PRICE.  The aggregate merger consideration for the
outstanding shares of Q Services common stock is $265.0 million:

    - LESS "total liabilities" as recorded on the Q Services balance sheet,
      including all of Q Services' transaction costs associated with the merger
      and related expenses, but excluding "deferred income tax liability, net";
      and

    - LESS the aggregate principal amount of the promissory notes issued in
      connection with the redemption of Q Services series A and series B
      preferred stock (approximately $7,460,000);

    - PLUS the amount of Q Services' total current assets.

    The "total liabilities" will include, among other things, approximately
$1,600,000 of severance payments to executive officers and approximately
$3,500,000 of transaction costs, including finder's fees.

    MERGER CONSIDERATION.  The merger consideration to be received for each
share of Q Services common stock will be that number of Key shares equal to the
result determined by:

    - DIVIDING the sum of the aggregate merger consideration plus the total
      proceeds that would be received by Q Services upon exercise of all options
      and warrants assuming all options and warrants are exercised for cash
      immediately before the effective date of the merger, and not taking into
      account any cashless exercise effected in connection with the merger;

    - BY the Key share price, which is the average of the closing prices of the
      Key common stock on the New York Stock Exchange over the ten trading days
      ending on the day immediately before the effective date of the merger, but
      in any event, not less than $11.00 nor greater than $13.00 per share; and

    - DIVIDING the results of that calculation by the number of fully-diluted Q
      Services shares outstanding.

    The aggregate merger consideration to be received by each holder of Q
Services common stock will be equal to the result obtained by:

    - MULTIPLYING the merger consideration as calculated above;

    - BY the number of shares of Q Services common stock owned by such holder of
      Q Services common stock.

    Since the calculation of the number of shares of Key common stock issuable
in exchange for each share of Q Services common stock is subject to several
variables (including a post-closing adjustment), as of the date of this proxy
statement/prospectus, it is not possible to calculate the number of shares of
Key common stock that each Q Services shareholder will receive in the merger.
However, assuming the Q Services balance sheet used to calculate the merger
consideration is identical to the Q Services March 31, 2002 balance sheet
included elsewhere in this proxy statement/prospectus, approximately 1.0723
shares and approximately 0.9073 shares of Key common stock would be issuable in
exchange for

                                       43

each share of Q Services common stock assuming the Key share price of $11.00 or
lower and $13.00 or higher, respectively.

    TREATMENT OF Q SERVICES PREFERRED STOCK.  The merger agreement provides that
immediately before the effective date of the merger, each issued and outstanding
share of Q Services series A and series B preferred stock will be redeemed in
accordance with their certificates of designation. In connection with that
redemption, immediately before the effective date of the merger, Q Services will
issue a non-interest bearing promissory note to each holder of issued and
outstanding shares of Q Services series A and series B preferred stock in the
amount required to effect redemption in accordance with their respective
certificates of designation (or in accordance with agreements with holders of Q
Services series A or series B preferred stock). Upon the issuance of the
redemption notes, all shares of series A and series B preferred stock shall be
redeemed, cancelled and cease to exist. The aggregate principal amount of the
redemption notes will equal:

    - the stated value of the outstanding shares of series A and series B
      preferred stock;

    - PLUS accrued dividends payable in accordance with the respective
      certificates of designation of the series A and series B preferred stock
      through the date of redemption.

    On the effective date of the merger, the redemption notes will be paid in
cash to each holder of those notes.

    TREATMENT OF Q SERVICES STOCK OPTIONS.  The merger agreement provides that
as one of Key's conditions to closing, all issued and outstanding options to
purchase Q Services' common stock must be exercised or cancelled before the
effective date of the merger. Certain options may be classified as "cash out
options" that will be paid out in cash on the effective date of the merger. The
aggregate amount of cash to be paid for the cash out options may not exceed
$1,000,000. The cash out options will be amended to allow the holder to be
issued a note in the principal amount equal to the "option payout" with respect
to the option. The option payout is the dollar amount to be paid with respect to
an option calculated as:

    - the number of shares of Q Services common stock subject to the option
      MULTIPLIED BY,

    - the "option spread," which is an amount equal to the "effective price per
      share" of the option less the exercise price of the option.

    Upon issuance and delivery of the option notes (less any applicable
withholding obligations) to the holders of the cash out options, Q Services will
cancel the cash out options and they will cease to exist. On the effective date
of the merger, the option notes will be paid in cash subject to the purchase
price holdback described below.

    Options that are not cash out options will be amended to provide for
cashless exercise, and the Q Services common stock issued upon exercise of those
options will be converted into Key common stock (less any applicable withholding
obligations) in the merger.

    TREATMENT OF WARRANTS.  The merger agreement provides that as one of Key's
conditions to closing, all issued and outstanding warrants to purchase Q
Services common stock must be exercised before the effective date of the merger.
Certain warrants may be classified as "cash out warrants" that will be
surrendered to Q Services immediately before the effective date in exchange for
a "warrant payout." The aggregate amount of cash to be paid for the cash out
warrants may not exceed $500,000.

    A warrant payout means the dollar amount to be paid with respect to each
warrant calculated as:

    - the number of shares of Q Services common stock the holder would have been
      entitled to receive had the holder exercised the warrant MULTIPLIED BY,

                                       44

    - the "warrant spread," which is the amount equal to the "effective price
      per share" of the warrant less the exercise price of the warrant.

    Upon surrender of a cash out warrant, Q Services will issue a non-interest
bearing promissory warrant note in a principal amount equal to the warrant
payout less any applicable withholding obligations. Upon issuance and delivery
of the warrant notes to the holders of the cash out warrants, the cash out
warrants will be canceled and cease to exist. On the effective date of the
merger, the warrant notes will be paid in cash subject to the purchase price
holdback provisions described below.

    Warrants that are not cashout warrants will be amended to provide for
cashless exercise. Warrants exercised pursuant to the cashless exercise will
result in the issuance of Q Services common stock that will be converted into
Key common stock in the merger.

    PURCHASE PRICE HOLDBACK.  Because of the post-closing balance sheet
adjustments, the number of shares of Key common stock issuable in the merger
cannot be determined with precision on the effective date of the merger.
Therefore, 5% of the Key shares and cash payable as merger consideration payable
to Q Services' shareholders and to holders of options and warrants to purchase Q
Services common stock on the effective date will be held back by Key. The
escrowed shares and escrowed cash will be used to satisfy the adjustments to the
purchase price based on differences between the estimated and final balance
sheets of Q Services.

    PURCHASE PRICE ADJUSTMENT PAYMENT.  The calculation of the purchase price to
be paid at closing will be determined using an estimated balance sheet delivered
by Q Services at closing. After closing, Key and a Q Services representative
will agree on a "final balance sheet." The final balance sheet will be used to
determine the final merger consideration to be paid to:

    - the holders of Q Services common stock;

    - the holders of cash out options; and

    - the holders of cash out warrants.

    If the final merger consideration determined using the final balance sheet
EQUALS the merger consideration payable at closing:

    - the holders of the Q Services common stock will be entitled to receive
      from Key all of the escrowed shares in accordance with their PRO RATA
      ownership of Q Services common stock; and

    - the holders of cash out options and cash out warrants will be entitled to
      receive the escrowed cash in accordance with their respective option notes
      or warrant notes, as the case may be.

    If the final merger consideration determined using the final balance sheet
EXCEEDS the merger consideration payable at closing, in addition to receiving
the escrowed consideration:

    - the holders of the Q Services common stock will be entitled to receive
      from Key the difference between that holder's aggregate final merger
      consideration and that holder's aggregate merger consideration already
      received; and

    - the holders of cash out options and cash out warrants will be entitled to
      receive from Key the difference between the holder's final option or
      warrant payout and the holder's option payout and warrant payout already
      received.

    The difference between the final merger consideration and merger
consideration payable at closing will be paid by Key in either cash or
additional shares of Key common stock.

                                       45

    If the final merger consideration determined using the final balance sheet
IS LESS THAN the merger consideration payable at closing and the amount of the
deficiency is less than the aggregate value of the escrowed consideration, then
Key will:

    - deduct from the escrowed cash for each noteholder the difference between
      the holder's final option payout or final warrant payout and the holder's
      option payout or warrant payout already received;

    - deduct from the escrowed shares the number of shares of Key common stock
      equal to the Q Services adjustment payment (less the amount of escrowed
      cash divided by the Key share price); and

    - distribute the balance, if any, of the escrowed consideration to the
      holders of Q Services common stock, cash out options and cash out
      warrants.

    If the final merger consideration determined using the final balance sheet
IS LESS THAN the merger consideration payable at closing and the amount of the
deficiency is greater than the aggregate value of the escrowed consideration:

    - Key will retain the escrowed consideration;

    - the holders of the Q Services common stock will pay Key the difference
      between that holder's aggregate final merger consideration and that
      holder's aggregate merger consideration already received (after giving
      effect to the escrowed consideration); and

    - the holders of cash out options and cash out warrants will pay Key the
      difference between the holder's final option or warrant payout and the
      holder's option payout and warrant payout already received (after giving
      effect to the escrowed consideration).

    The deficiency payable by the holders of Q Services common stock, cash out
options and cash out warrants may be paid, at such holder's option, by tendering
shares of Key common stock already received or paying cash.

    FRACTIONAL SHARES.  Key will not issue any fractional shares in the merger.
If the number of shares of Key common stock issuable to a holder of Q Services
common stock pursuant to the merger agreement results in a fractional share,
then the number of shares of Key common stock issuable to such holder will be
rounded up to the next whole number.

    EXCHANGE OF CERTIFICATES.  Before the effective date of the merger, Key will
designate a paying agent and will make available to the paying agent shares of
Key common stock in amounts and at the times necessary for the payment of the
merger consideration on surrender of certificates representing Q Services common
stock. As soon as reasonably practical after the effective date of the merger,
but in any event within five days following the effective date, the paying agent
will mail to each holder of record of a certificate of Q Services common stock a
letter of transmittal and instructions for use by surrendering holders of Q
Services common stock to exchange the Q Services common stock certificates for
certificates representing that number of shares of Key common stock, reduced by
the number of shares that will be withheld as part of the escrow fund described
above. You should not surrender your Q Services stock certificates for exchange
until you receive the letter of transmittal and instructions. At and after the
merger and until so surrendered, the Q Services stock certificates will
represent only the right to receive the merger consideration.

    If any Q Services stock certificate is lost, stolen or destroyed, a Q
Services shareholder must provide an appropriate affidavit of that fact. Key may
require a Q Services shareholder to deliver a bond in a reasonable amount as
indemnity against any claim that may be made against Key with respect to any
lost, stolen or destroyed certificate.

                                       46

    REPRESENTATIONS AND WARRANTIES OF Q SERVICES.  The merger agreement includes
customary representations and warranties by Q Services to Key, including
representations and warranties as to:

    - due and valid corporate organization, good standing and authority to do
      business in all jurisdictions in which Q Services conducts business;

    - capitalization of Q Services;

    - the authorization, execution, delivery and enforceability of the merger
      agreement and certain other agreements contemplated by the merger
      agreement and related matters;

    - the identity of all Q Services common and preferred shareholders and the
      identity of each holder of options or warrants to purchase Q Services
      common stock;

    - the identity of all Q Services subsidiaries and Q Services ownership of
      those subsidiaries;

    - Q Services' financial statements;

    - the absence of certain changes in Q Services' business since March 31,
      2002;

    - the filing of all tax returns, the payment of all taxes due and other tax
      matters;

    - intellectual property matters;

    - title to and condition of assets;

    - contracts of Q Services and its subsidiaries;

    - possession of necessary licenses and permits to conduct business;

    - pending or threatened litigation;

    - environmental matters;

    - compliance with applicable laws;

    - Q Services' employee benefit plans and other related matters;

    - operation of saltwater disposal wells;

    - regulatory matters relating to the merger;

    - Q Services' title to the properties it leases and owns;

    - insurance matters;

    - compliance with the rules and regulations of the United States Department
      of Transportation and any applicable state department of transportation;
      and

    - broker's and finder's fees in connection with the merger.

    None of the representations or warranties of Q Services to Key survive the
closing of the merger.

    REPRESENTATIONS AND WARRANTIES OF KEY.  The merger agreement also contains
customary representations and warranties by Key to Q Services, including
representations and warranties as to:

    - due and valid corporate organization, good standing and authority of Key
      to do business in all jurisdictions in which Key conducts business;

    - regulatory matters relating to the merger;

    - capitalization of Key;

    - the authorization, execution, delivery and enforceability of the merger
      agreement by Key;

    - effectiveness of the registration statement of which this proxy
      statement/prospectus forms a part;

    - the authorization and validity of shares of Key common stock to be issued
      pursuant to the merger agreement;

    - absence of certain changes in Key's business since March 31, 2002; and

                                       47

    - broker's and finder's fees in connection with the merger.

    None of the representations and warranties of Key to Q Services survive the
closing of the merger.

    AGREEMENTS OF KEY AND Q SERVICES.  Each of Key and Q Services has agreed
that from the date of the merger agreement until the effective date of the
merger, other than contemplated by the merger agreement, it will:

    - operate its business only in the usual, regular and ordinary manner and
      preserve its business as it currently is being operated;

    - maintain its properties in customary repair and condition, reasonable wear
      and tear excepted;

    - maintain its books of account and records in the usual, regular and
      ordinary manner;

    - comply in all material respects with all laws applicable to it and the
      conduct of its business;

    - permit the other party and its officers and authorized representatives,
      during normal business hours, to inspect its records and to consult with
      its officers, employees, attorneys and agents for the purpose of
      determining the accuracy of the representations and warranties made in the
      merger agreement and the compliance with the covenants made in the merger
      agreement; and

    - use its reasonable best efforts to obtain all authorizations, consents,
      orders and approvals of federal, state, local and foreign regulatory
      bodies and officials that may become necessary for performance of their
      obligations under the merger agreement, including, without limitation,
      filing of a Notification and Report Form pursuant to Hart-Scott-Rodino
      Antitrust Improvements Act of 1976.

    ADDITIONAL AGREEMENTS OF Q SERVICES.  Q Services has agreed from the date of
the merger agreement to the effective date of the merger it will:

    - not enter into any employment contracts that cannot be terminated on
      14 days' notice or that provide for certain severance payments or
      benefits;

    - not incur certain borrowings;

    - not enter into commitments of a capital expenditure nature or any
      contingent liability except as may be necessary for the maintenance of
      existing facilities, machinery and equipment in good operating condition
      and repair, not to exceed $1,000,000 in the aggregate;

    - not sell, dispose of or encumber any property or assets;

    - maintain its insurance at current levels;

    - not amend its articles of incorporation or bylaws;

    - not issue or sell or issue options or rights to subscribe to any shares of
      Q Services capital stock;

    - not declare or pay any dividend on shares of its capital stock or make any
      other distribution of assets to holders of its capital stock other than
      the accrual of dividends on its series A and series B preferred stock;

    - no sooner than 20 days, but in any event as soon as practical after the
      date of this proxy statement/prospectus, call and hold a shareholders'
      meeting to vote for approval of the merger agreement and the merger;

    - not directly or indirectly solicit or encourage any inquiries regarding
      any acquisition proposal from any third party other than the proposals
      contemplated by the merger agreement; and

    - collect in full all related party receivables and advances to employees.

                                       48

ADDITIONAL AGREEMENTS OF KEY.  Key has agreed that it will:

    - file a post-effective amendment to its registration statement on Form S-4
      relating to the merger and resales of shares of Key common stock issued in
      the merger by individuals who may be deemed to be underwriters;

    - list the shares of Key common stock to be issued in connection with the
      merger for trading on the New York Stock Exchange;

    - indemnify those individuals identified as selling shareholders in this
      proxy statement/prospectus against certain liabilities under the
      Securities Act;

    - not issue any shares of Key common stock during the 60 calendar day period
      beginning on the effective date of the merger, except for:

       - the issuance of Key common stock under the merger agreement;

       - issuance of any options granted to employees or directors of Key;

       - the issuance of any equity securities in connection with the
         acquisition of the equity interest, business or assets of any
         unaffiliated entity;

       - the issuance of equity securities of Key in exchange for outstanding
         securities of Key; and

       - the issuance of equity securities of Key upon the exercise of
         outstanding options, warrants or other securities convertible into or
         exchangeable for equity securities of Key.

    CONDITIONS PRECEDENT TO THE OBLIGATIONS OF Q SERVICES.  The obligation of Q
Services to consummate the merger is conditioned upon the satisfaction of
certain conditions, including the following:

    - the representations and warranties of Key in the merger agreement must be
      true with the same effect as though made at the effective date of the
      merger, except as effected by transactions permitted or contemplated by
      the merger agreement, and except for breaches of such representations and
      warranties, which in the aggregate would not be reasonably likely to
      result in a material adverse effect on the financial condition or business
      of Key and its subsidiaries taken as a whole;

    - no material litigation shall be pending or threatened that seeks to
      prevent or prohibit the merger or that may have a material adverse effect
      on the value of the consolidated assets of Key;

    - the delivery of certain opinions of counsel;

    - listing of the Key common stock to be issued in connection with the merger
      for trading on the New York Stock Exchange;

    - all waiting periods required by the Hart-Scott-Rodino Antitrust
      Improvements Act of 1976 shall have expired with respect to the
      transactions contemplated by the merger agreement;

    - Key shall have entered into employment agreements with certain Q Services
      employees;

    - the approval by the requisite common and preferred shareholders of Q
      Services for the transactions contemplated by the merger agreement;

    - redemption of all issued and outstanding Q Services series A and series B
      preferred stock;

    - Key shall have paid obligations payable pursuant to Q Services' credit
      agreement; and

    - the SEC shall declare the post-effective amendment to the registration
      statement of which this proxy statement/prospectus forms a part effective
      under the Securities Act.

    CONDITIONS PRECEDENT TO THE OBLIGATIONS OF KEY.  The obligation of Key to
consummate the transactions contemplated by the merger agreement is subject to
the satisfaction of certain conditions, including the following:

                                       49

    - the representations and warranties of Q Services contained within the
      merger agreement must be true as of the effective date of the merger,
      except for breaches:

       - caused by transactions permitted or contemplated by the merger
         agreement;

       - of certain representations and warranties concerning environmental
         matters and the operation of salt water disposal wells that would not
         be reasonably likely to result in costs, damages, expenses, losses or
         liabilities with respect to the operations, assets or liabilities of Q
         Series and its subsidiaries taken as a whole of more than $5,000,000;
         or

       - breaches of representations and warranties, other than those relating
         to environmental matters or the operation of salt water disposal wells,
         which in the aggregate would not be reasonably likely to result in a
         material adverse effect on the financial condition or business of Q
         Services and its subsidiaries taken as a whole;

    - no material litigation shall be pending or threatened that seeks to
      prevent or prohibit the merger or that may have a material adverse effect
      on Key;

    - the delivery of certain opinions of counsel;

    - all waiting periods required under Hart-Scott-Rodino Antitrust
      Improvements Act of 1976 shall have expired;

    - each of the officers and directors of Q Services and each of its
      subsidiaries shall have resigned as an officer or director;

    - certain Q Services employees shall have entered into employment agreements
      with Key;

    - certain individuals shall have entered into noncompetition agreements with
      Key;

    - the approval of the requisite shareholder vote of the common and preferred
      shareholders of Q Services with respect to the transactions contemplated
      by the merger agreement;

    - Q Services shall have terminated any shareholder voting or similar
      agreements on or before the effective date of the merger;

    - certain agreements between Q Services and its officers, directors,
      employees or affiliates will have been amended to provide for termination
      by Q Services on 30 days' notice without penalty;

    - all issued and outstanding options to purchase Q Services common stock
      shall have been either amended to provide for cashless exercise and shall
      have been exercised, or classified as cash out options, and the aggregate
      option payout with respect to the cash out options will not exceed
      $1,000,000;

    - all issued and outstanding warrants to purchase Q Services common stock
      shall either have been amended to provide for cashless exercise and such
      warrants shall have been exercised, or classified as a cash out warrant,
      and the aggregate warrant payout with respect to all cash out warrants
      will not exceed $500,000;

    - Q Services shall have taken all necessary steps to ensure that its
      series A and series B preferred stock has been redeemed;

    - Q Services shall terminate any severance policy of Q Services or any Q
      Services subsidiary without cost to either Q Services or Key; and

    - all severance agreements or policies shall have been terminated.

    TERMINATION.  The merger agreement may be terminated at any time before the
effective date of the merger, whether before or after approval of the merger
agreement and the merger by the Q Services shareholders, by mutual written
consent of Key and Q Services. The merger agreement may also be terminated by
either Q Services or Key if the merger does not occur before July 17, 2002.
However, this date may be extended until October 15, 2002 if the failure to
consummate the merger results from a delay in the effectiveness of the
post-effective amendment to Key's registration statement

                                       50

of which this proxy statement/prospectus is a part. The merger agreement also
may be terminated by Key or Q Services as follows:

    TERMINATION BY KEY.  Key may terminate the merger agreement if:

    - the holders of more than 0.5% of Q Services issued and outstanding common
      stock elect to exercise their right to dissent to the merger;

    - Q Services has failed to perform any of its covenants or agreements
      contained in the merger agreement and such failure has not been waived by
      Key;

    - there has been a material adverse effect in the financial condition or
      business of Q Services and its subsidiaries since March 31, 2002; or

    - there has been a breach by Q Services of its representations or warranties
      concerning environmental matters or salt water disposal wells, and all of
      those untrue representation and warranties in the aggregate would be
      reasonably likely to result in costs damages, dimunitive in value,
      expenses, losses or liabilities of Q Services of more than $5,000,000.

    TERMINATION BY Q SERVICES.  Q Services may terminate the merger agreement
if:

    - Key has failed to perform any of its covenants or agreements contained in
      the merger agreement and such failure has not been waived by Q Services;
      or

    - there has been a material adverse effect on the financial condition or
      business of Key and its subsidiaries since March 31, 2002.

    EFFECT OF TERMINATION.  If the merger agreement is terminated in accordance
with its terms, the merger agreement will become void and have no force or
effect, without any liability on the part of any party thereto. Notwithstanding
the foregoing, the termination of the merger agreement will not relieve any
party thereto from any liability for damages incurred as a result of a willful
breach by such party of its covenants and agreements under the merger agreement
occurring before the termination. Both Key and Q Services acknowledge that, in
connection with a termination, breaches of a representation or warranty under
the merger agreement shall not give rise to liability for damages unless the
breach resulted from a knowing and intentional act involving actual fraud or an
intent to mislead or deceive. In addition, if Key terminates the merger
agreement under circumstances in which Key and Q Services are unable to agree as
to the amount of a potential liability from a breach of certain environmental
representations or warranties or certain representations or warranties relating
to the operation of salt water disposal wells, and Key was not permitted to
conduct environmental testing with respect to the disputed potential liability,
then the termination will be without liability to Key.

VOTING AGREEMENTS

    Certain officers, directors and shareholders of Q Services have entered into
voting agreements with Key, pursuant to which they have agreed to vote all of
their shares of Q Services common stock in favor of the merger. Each of these
shareholders has also granted an irrevocable proxy to Key representatives to
vote such shareholder's shares of Q Services common stock at the special
meeting. On the record date, these Q Services shareholders collectively owned
11,480,327 shares of Q Services common stock, representing approximately 73% of
the shares of the combined voting power of Q Services issued and outstanding
common stock, series A preferred stock and series B preferred stock.

                                       51

    In addition, pursuant to the terms of the voting agreements, certain of
these shareholders have agreed that, without the written consent of Key, they
will not:

    - sell or otherwise dispose of or transfer any of their shares of Q Services
      common stock;

    - purchase any Key common stock or securities convertible for Key common
      stock; or

    - consent to any amendment to the Q Services articles of incorporation or
      bylaws; and

    - that, without the written consent of SCF-IV, L.P., during a period of
      90 days from the effective date of the merger they will not:

       - sell, or otherwise dispose of or transfer any shares of Key common
         stock or any securities convertible into for Key common stock; or

       - enter into any swap or any other agreement or any transaction that
         transfers the economic consequence of ownership of Key common stock.

NONCOMPETITION AGREEMENTS

    As a condition to the closing of the merger agreement, certain shareholders
of Q Services will enter into a noncompetition agreement, which provides, among
other things, that for a period of five years from the closing of the merger
agreement, they will not, directly or indirectly:

    - engage in business conducted by Q Services or any subsidiaries of Q
      Services (and their predecessors in interest) during the three-year period
      ending on the effective date of the merger agreement in Texas, all of the
      parishes of Louisiana, Arkansas, New Mexico, Oklahoma and offshore and the
      inland waters of the Gulf Coast;

    - request any customers or suppliers of Key or any affiliate of Key to
      curtail or cancel their business with Key or any affiliate of Key;

    - disclose to any person, firm or corporation any trade, technical or
      technological secrets of Key or any affiliate of Key or any details of
      their organization or business affairs except as required by law or legal
      process; or

    - induce or actively attempt to influence any employee of Key or any
      affiliate of Key to terminate his employment or hire any former employee
      of Key or any affiliate of Key within six months of his termination date
      with Key or any affiliate of Key.

EMPLOYMENT AGREEMENTS

    As a condition to the closing of the merger agreement, Craig M. Johnson,
president of Q Services, and David S. Schorlemer, chief financial officer of Q
Services, will each enter into an employment agreement with Key. Each of the
employment agreements provides for an initial term of three years.
Mr. Johnson's employment agreement provides, among other things, that
Mr. Johnson will serve as vice president of Key and will receive a base annual
salary of $204,000. Mr. Schorlemer's employment agreement provides, among other
things, that Mr. Schorlemer will serve as a vice president of Key and will
receive a base annual salary of $180,000. Each of the employment agreements
provides that if employment is terminated for cause or by either Mr. Johnson or
Mr. Schorlemer, as the case may be, for any reason, Key shall have no further
obligations except that the affected employee will be entitled to receive
accrued but unpaid salary and unpaid expense reimbursements. If employment is
terminated by Key other than for cause (including death or disability), the
employee will be entitled to receive severance compensation equal to two times
his base salary in effect on the termination date, payable in 24 equal monthly
installments. Under certain circumstances, such as a change in control, the
severance benefit will be payable in one lump sum. In addition, during the
employment period, and for an additional period ranging between 12 and
24 months (depending upon the reason for the termination)

                                       52

after termination, the employee may not, directly or indirectly, participate or
engage, any competing enterprise, such as any business engaged in the business
of furnishing oilfield services, including, without limitation:

    - fluid hauling and disposal services;

    - trucking services;

    - frac tank rentals;

    - fishing and rental tools;

    - pressure pumping services;

    - contract drilling;

    - workover, completion and well maintenance; and

    - construction and field consulting

in any of the onshore or offshore oil or natural gas producing regions in the
continental United States, Canada and Argentina or in any other oil or natural
gas producing region throughout the world in which Key or any of its
subsidiaries or affiliates conduct their business or operations during the
employment period or the 12 to 24 month period thereafter.

The employment agreements also provide that the employee shall not, directly or
indirectly:

    - solicit, raid, entice or otherwise induce any employee of Key or any of
      its subsidiaries or affiliates to be employed by competing enterprise or
      to otherwise leave the employ of Key; or

    - hire any former employee of Key or any of its subsidiaries or affiliates
      within six months of the termination of such employee's employment with
      Key.

SECOND AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS AGREEMENT

    In connection with the execution and delivery of the merger agreement, the
shareholders of Q Services amended the existing Amended and Restated
Shareholders Agreement dated as of September 28, 2000, as previously amended.
The Second Amendment to Amended and Restated Shareholders Agreement amended the
termination provisions so that, in addition to the previous termination events,
the shareholders agreement would automatically terminate upon the closing of the
transactions contemplated by the merger agreement.

                                       53

               UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

    The Unaudited Pro Forma Combined Financial Statements of Key have been
prepared to give effect to the acquisition of Q Services. On May 13, 2002, Key
signed a definitive merger agreement with Q Services whereby Key will acquire
all of the capital stock of Q Services. The Unaudited Pro Forma Combined Balance
Sheet gives effect to the acquisition as if such transaction had taken place on
March 31, 2002 and the Unaudited Pro Forma Combined Statements of Operations
gives effect to the acquisition as if such transaction had taken place on
July 1, 2000.

    The pro forma adjustments are based on available information and upon
certain assumptions that Key believes are reasonable under the circumstances.
The unaudited pro forma combined financial statements and accompanying notes
should be read in conjunction with Key's historical consolidated financial
statements, including the notes thereto, incorporated herein by reference and
the financial statements of Q Services, including the notes thereto, included
within this filing.

    THESE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS ARE PROVIDED FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE
FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF KEY HAD THE TRANSACTIONS
DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT
INTENDED TO BE PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF
KEY AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.

                                       54

                           KEY ENERGY SERVICES, INC.
                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                                 MARCH 31, 2002



                                                                          PRO FORMA     PRO FORMA
                                                  KEY       Q SERVICES     ENTRIES       COMBINED
                                               ----------   ----------   ------------   ----------
                                                                   (THOUSANDS)
                                                                            
Current assets:
  Cash and cash equivalents..................  $   42,967    $  3,667    $ (42,000)(b)  $    3,134
                                                                            (1,500)(a)
  Accounts receivable, net of allowance for
    doubtful accounts........................     122,734      26,578           --         149,312
  Prepaid expenses and other current
    assets...................................      20,671      10,795        2,000 (a)      33,466
                                               ----------    --------                   ----------
Total current assets.........................     186,372      41,040                      185,912
                                               ----------    --------                   ----------
Net property and equipment...................     801,196      96,181       44,986 (a)     942,363
Goodwill, net................................     200,287      56,117       86,912 (a)     344,316
                                                                             1,000 (f)
Other assets.................................      44,052       8,465       (4,042)(a)      48,475
                                               ----------    --------                   ----------
Total assets.................................  $1,231,907    $201,803                   $1,521,066
                                               ==========    ========                   ==========
Current liabilities:
  Accounts payable...........................  $   20,521    $  5,693           --      $   26,214
  Other accrued liabilities..................      42,299      11,226        5,100 (a)      59,249
                                                                              (376)(c)
                                                                             1,000 (f)
  Accrued interest...........................       5,099         171         (171 )(b)      5,099
  Current portion of long-term debt and
    capital lease obligations................       8,370      15,941      (15,929)(b)       8,382
                                               ----------    --------                   ----------
Total current liabilities....................      76,289      33,031                       98,944
                                               ----------    --------                   ----------
Long-term debt, less current portion.........     437,349      68,492      (68,443)(b)     487,777
                                                                            42,543 (b)
                                                                             7,836 (c)
Other liabilities............................      20,857         773           --          21,630
Deferred tax liability.......................     151,197       6,749       16,870 (a)     174,816
Commitments and contingencies................          --          --                           --
Mandatorily redeemable preferred stock.......          --       7,460       (7,460)(c)          --
Stockholders' equity:
Common stock.................................      11,007      80,379        1,743(a)       12,750
                                                                           (80,379)(a)
Additional paid-in capital...................     513,378          --      189,941 (a)     703,319
Warrants.....................................          --       4,196       (4,196)(a)          --
Treasury stock, at cost......................      (9,682)         --           --          (9,682)
Accumulated other comprehensive income
  (loss).....................................     (44,083)        303         (303)(a)     (44,083)
Retained earnings............................      75,595         420         (420)(a)      75,595
                                               ----------    --------                   ----------
Total stockholders' equity...................     546,215      85,298                      737,899
                                               ----------    --------                   ----------
Total liabilities and stockholders' equity...  $1,231,907    $201,803                   $1,521,066
                                               ==========    ========                   ==========


SEE THE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.

                                       55

                           KEY ENERGY SERVICES, INC.
              UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                    FOR THE NINE MONTHS ENDED MARCH 31, 2002



                                                                            PRO FORMA    PRO FORMA
                                                      KEY      Q SERVICES    ENTRIES     COMBINED
                                                    --------   ----------   ----------   ---------
                                                            (THOUSANDS, EXCEPT SHARE DATA)
                                                                             
REVENUES:
  Well servicing..................................  $552,901    $143,792         --      $696,693
  Contract drilling...............................    73,624          --         --        73,624
  Other...........................................     6,290      (1,156)        --         5,134
                                                    --------    --------                 --------
                                                     632,815     142,636                  775,451
                                                    --------    --------                 --------
COSTS AND EXPENSES:
  Well servicing..................................   368,932      84,724         --       453,656
  Contract drilling...............................    49,920          --         --        49,920
  Depreciation, depletion and amortization........    57,482      10,569    $   736(e)     68,787
  General and administrative......................    42,613      31,861                   74,474
  Interest........................................    32,921       5,369     (2,492)(d)    36,124
                                                                                326 (d)
  Other expenses..................................     5,130          --         --         5,130
                                                    --------    --------                 --------
                                                     556,998     132,523                  688,091
                                                    --------    --------                 --------
  Income before income taxes......................    75,817      10,113                   87,360
  Income tax expense..............................   (28,818)     (2,883)      (317)(g)   (32,018)
                                                    --------    --------                 --------
  Income from continuing operations...............  $ 46,999    $  7,230                 $ 55,342
                                                    ========    ========                 ========
EARNINGS PER SHARE:
  Basic...........................................  $   0.45                             $   0.46
  Diluted.........................................  $   0.44                             $   0.45

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic...........................................   104,435                              121,133
  Diluted.........................................   105,781                              122,479


SEE THE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.

                                       56

                           KEY ENERGY SERVICES, INC.
              UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JUNE 30, 2001



                                                                            PRO FORMA    PRO FORMA
                                                     KEY      Q SERVICES     ENTRIES     COMBINED
                                                   --------   ----------   -----------   ---------
                                                           (THOUSANDS, EXCEPT SHARE DATA)
                                                                             
REVENUES:
  Well servicing.................................  $758,273    $119,332          --      $877,605
  Contract drilling..............................   107,639          --          --       107,639
  Other..........................................     7,350         396          --         7,746
                                                   --------    --------                  --------
                                                    873,262     119,728                   992,990
                                                   --------    --------                  --------
COSTS AND EXPENSES:
  Well servicing.................................   493,108      62,077          --       555,185
  Contract drilling..............................    77,366          --          --        77,366
  Depreciation, depletion and amortization.......    75,147       6,995    $ (5,512)(e)    76,630
  General and administrative.....................    67,334      27,754          --        95,088
  Interest.......................................    56,560       6,519      (2,483)(d)    61,307
                                                                                711 (d)
  Other expense..................................     4,464          --          --         4,464
                                                   --------    --------                  --------
                                                    773,979     103,345                   870,040
                                                   --------    --------                  --------
  Income before income taxes.....................    99,283      16,383                   122,950
  Income tax expense.............................   (37,002)     (5,433)        (98)(g)   (42,533)
                                                   --------    --------                  --------
  Income from continuing operations..............  $ 62,281    $ 10,950                  $ 80,417
                                                   ========    ========                  ========

EARNINGS PER SHARE:
  Basic..........................................  $   0.63                              $   0.76
  Diluted........................................  $   0.61                              $   0.73

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic..........................................    98,195                               105,732
  Diluted........................................   102,271                               109,808


SEE THE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.

                                       57

                           KEY ENERGY SERVICES, INC.
           NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

    The Unaudited Pro Forma Combined Financial Statements of Key have been
prepared to give effect to the acquisition of Q Services. On May 13, 2002, Key
signed a definitive merger agreement with Q Services whereby Key will acquire
all of the capital stock of Q Services. The Unaudited Pro Forma Combined Balance
Sheet gives effect to the acquisition as if such transaction had taken place on
March 31, 2002 and the Unaudited Pro Forma Combined Statements of Operations
give effect to the acquisition as if such transaction had taken place on
July 1, 2000.

    Key--Means the consolidated balance sheet of Key as of March 31, 2002 and
the consolidated statements of operations of Key for the nine months ended
March 31, 2002 and the year ended June 30, 2001.

    Q Services--Means the consolidated balance sheet of Q Services as of
March 31, 2002 and the consolidated statements of operations of Q Services for
the nine months ended March 31, 2002 and the year ended June 30, 2001.

    The historical statement of operations column for Q Services for the year
ended June 30, 2001, was obtained by subtracting the unaudited results for the
six months ended December 31, 2001 from and adding the unaudited results for the
six months ended December 31, 2000 to the operating results for the year ended
December 31, 2001 included in the audited statement of operations contained
elsewhere herein. Likewise, the historical statement of operations column for Q
Services for the nine months ended March 31, 2002 was obtained by adding the
unaudited results for the six months ended December 31, 2001 to the unaudited
operating results for the three months ended March 31, 2002, contained elsewhere
herein.

PRO FORMA ENTRIES

    (a) To record the allocation of the preliminary purchase price to the assets
acquired and liabilities assumed from Q Services using the purchase method of
accounting. The purchase price and the allocation of the purchase price to the
assets acquired and liabilities assumed are preliminary; however, the actual
purchase price and purchase price allocations are not expected to differ
materially from the preliminary estimates.

    The purchase price is to be determined as the total of $265 million dollars
plus current assets minus assumed liabilities but excluding deferred tax
amounts. Key common shares to be issued are based on an average of the closing
price for the ten trading days preceding closing. The calculation of Key shares
issued will be based on a minimum share price of $11 and a maximum share price
of $13. The calculation is illustrated below:



                                                                BALANCE AT
                                                              MARCH 31, 2002
                                                              ---------------
                                                                (THOUSANDS)
                                                           
Agreed enterprise value.....................................      $265,000
Current assets..............................................        43,040
Less: Assumed debt subject to immediate repayment...........       (84,372)
    Other liabilities assumed...............................       (17,924)
    Severance payments due to change in control.............        (1,600)
    Mandatory redemption of preferred stock.................        (7,460)
    Transaction costs.......................................        (3,500)
                                                                  --------
Purchase price of Q Services' equity........................      $193,184
                                                                  ========


                                       58

    An estimated $1,500,000 of the purchase price will be paid in cash
representing the redemption of certain employee stock options and warrants. The
remainder of the consideration will be an estimated 17,425,818 shares of Key
common stock including 664,905 shares issued for outstanding Q Services options
and warrants.

    The purchase price will be allocated based on the estimated fair values of
Q Services' assets and liabilities at the date of the merger. For purposes of
the unaudited pro forma financial statements, the purchase price has been
allocated as follows:


                                                           
Current assets..............................................   $ 43,040
Property, plant and equipment...............................    141,167
Goodwill and other intangibles..............................    143,029
Other assets................................................      4,423
                                                               --------
  Total assets acquired.....................................    331,659
                                                               --------
Current liabilities.........................................     38,131
Long-term debt..............................................     75,952
Deferred tax liability......................................     23,619
Other liabilities...........................................        773
                                                               --------
  Total liabilities assumed.................................    138,475
                                                               --------
  Net assets acquired.......................................   $193,184
                                                               ========


    (b) To record the repayment of Q Services' credit facility with cash and
proceeds from Key's credit facility of approximately $42.5 million.

    (c) To record the redemption of Q Services' mandatorily redeemable preferred
stock of approximately $7.4 million and accrued dividends of approximately
$0.4 million with proceeds from Key's existing credit facility.

    (d) To record the effects on interest expense of the elimination of Q
Services' debt and mandatorily redeemable preferred stock through borrowings
under Key's existing credit agreement.

    For the nine months ended March 31, 2002, a decrease in interest expense of
$2.2 million was recorded based on Q Services' average debt balance of
$73.4 million and additional borrowings of $7.8 million at Key's average
effective rate of 5.3% less Q Services' recorded interest expense of
$5.4 million.

    For the twelve months ended June 30, 2001, a decrease in interest expense of
$1.8 million was recorded based on Q Services' average debt balance of
$44.4 million and additional borrowings of $7.8 million at Key's average
effective rate of 9.1% less Q Services' recorded interest expense of
$6.5 million.

    (e) To record the estimated change in depreciation for the property, plant
and equipment acquired due to differences between historical cost and the fair
value assigned using the purchase method of accounting and the elimination of
amortization of goodwill as required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").

    (f) To record Key's estimated costs associated with the purchase.

    (g) To adjust pro forma income tax expense, excluding non-deductible
goodwill amortization.

                                       59

                      Q SERVICES' SELECTED FINANCIAL DATA

    The selected financial data for Q Services for the fiscal years 1997 to 2001
have been derived from the audited financial statements of Q Services for such
periods. Q Services' consolidated audited financial statements as of
December 31, 2001 and 2000 are included elsewhere in this document. The selected
financial data as of March 31, 2002, and for the three months ended March 31,
2002 and 2001 have been derived from Q Services' unaudited financial statements
for such periods, which are included elsewhere in this document. The interim
results set forth below for the three month period ended March 31, 2002 may not
be indicative of results for the full year.

    The consolidated selected financial data should be read in conjunction with,
"Management's Discussions and Analysis of Q Services' Financial Condition and
Results of Operations," and the consolidated financial statements and their
related notes.

                                Q SERVICES, INC.
                            SELECTED FINANCIAL DATA
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



                                                                                                 THREE MONTHS ENDED
                                                YEAR ENDED DECEMBER 31,                               MARCH 31,
                            ---------------------------------------------------------------   -------------------------
                               2001          2000         1999         1998         1997         2002          2001
                            -----------   ----------   ----------   ----------   ----------   -----------   -----------
                                                                                              (UNAUDITED)   (UNAUDITED)
                                                                                       
STATEMENT OF OPERATIONS
  DATA
Revenues..................  $   179,115   $   78,929   $   51,749   $   49,470   $   36,189   $   38,612    $   31,800
Operating Costs:
  Operating, general and
    administrative........      137,380       63,238       43,608       41,788       28,132       33,000        23,678
  Depreciation and
    amortization(1).......       11,319        4,881        9,307        8,935        4,417        3,549         1,622
  Impairment charge(2)....           --           --          945           --           --           --            --
                            -----------   ----------   ----------   ----------   ----------   -----------   ----------
Earnings (loss) from
  operations..............       30,416       10,810       (2,111)      (1,253)       3,640        2,063         6,500
Interest expense, net.....        6,470        6,174        5,229        4,359        1,884        1,764         1,456
Gain (loss) on sale of
  assets..................       (1,535)         598         (990)         152          111          389            25
                            -----------   ----------   ----------   ----------   ----------   -----------   ----------
Earnings (loss) before
  income taxes and
  extraordinary items.....       22,411        5,234       (8,330)      (5,460)       1,867          688         5,069
Income tax provision
  (benefit)...............        8,046          263          160       (1,160)       1,419          260         2,071
Extraordinary loss, net of
  income tax benefit......        2,365           --           --           --           --           --            --
Preferred stock
  dividends...............          243           --           --           --           --          133            --
                            -----------   ----------   ----------   ----------   ----------   -----------   ----------
Net earnings (loss).......  $    11,757   $    4,971   $   (8,490)  $   (4,300)  $      448   $      295    $    2,998
                            ===========   ==========   ==========   ==========   ==========   ===========   ==========
Net earnings (loss) per
  share
Basic:
  Earnings (loss) before
    extraordinary loss....  $      1.20   $     1.19   $    (2.94)  $    (1.49)  $     0.93   $     0.02    $     0.39
  Extraordinary loss......        (0.20)          --           --           --           --           --            --
    Net earnings (loss)...  $      1.00   $     1.19   $    (2.94)  $    (1.49)  $     0.93   $     0.02    $     0.39
Diluted:
  Earnings (loss) before
    extraordinary loss....  $      1.14   $     1.03   $    (2.94)  $    (1.49)  $     0.58   $     0.02    $     0.36
  Extraordinary loss......        (0.19)          --           --           --           --           --            --
    Net earnings (loss)...  $      0.95   $     1.03   $    (2.94)  $    (1.49)  $     0.58   $     0.02    $     0.36
Weighted average common
  shares outstanding:
  Basic...................   11,729,719    4,166,661    2,883,199    2,883,199      481,849   15,083,747     7,612,511
  Diluted.................   12,434,107    4,808,693    2,883,199    2,883,199      771,493   16,191,686     8,316,898
Common shares issued at
  period end..............   15,083,747    7,562,722    2,883,199    2,883,199    2,883,199   15,083,747     8,202,864


                                       60




                                                                                                 THREE MONTHS ENDED
                                                YEAR ENDED DECEMBER 31,                               MARCH 31,
                            ---------------------------------------------------------------   -------------------------
                               2001          2000         1999         1998         1997         2002          2001
                            -----------   ----------   ----------   ----------   ----------   -----------   -----------
                                                                                              (UNAUDITED)   (UNAUDITED)
                                                                                       
BALANCE SHEET DATA (AT END
  OF PERIOD)
Cash......................  $     5,963   $    4,668   $      586   $      367   $    1,438   $    3,667
Current assets............       42,379       22,450       12,305       10,680       11,456       41,040
Working capital
  (deficit)...............        7,199        5,001       (1,177)      (8,281)       3,132        8,009
Property, plant and
  equipment, gross........      130,124       67,299       48,942       51,648       34,168      130,192
Property, plant and
  equipment, net..........       95,966       42,103       27,452       36,550       26,810       96,181
Total assets..............      201,121       78,845       47,815       56,730       43,591      201,803
Current liabilities.......       35,180       17,449       13,482       18,961        8,324       33,031
Current portion of
  long-term debt and lease
  obligations.............       13,837        6,497        6,288       12,324        2,264       15,941
Current portion of non-
  compete obligations.....        1,242          279          645          165           --        1,182
Long-term debt and lease
  obligations, net of
  current portion.........       66,855       32,571       33,081       27,415       25,757       68,492
Non-current portion of
  non-compete
  obligations.............          998          931        1,036        1,655        1,912          773
Mandatorily redeemable
  preferred stock.........        7,460           --           --           --           --        7,460
Shareholders' equity......       84,698       27,360          172        8,662        6,780       85,298
OTHER DATA
EBITDA(3).................  $    40,200   $   16,289   $    6,206   $    7,834   $    8,168   $    6,001    $    8,147
Net cash provided by (used
  in)
  Operating activities....       23,089        7,219        3,345        4,392        3,755         (825)        2,700
  Investing activities....      (65,026)      (8,637)        (466)     (17,930)      (8,862)      (2,781)      (16,910)
  Financing activities....       43,232        5,500       (2,660)      12,467        6,344        1,310        13,341


------------------------

(1) Effective January 1, 2000, Q Services revised the estimated useful lives of
    its property, plant and equipment, thereby decreasing 2000 depreciation
    expense by approximately $3.6 million. Revisions were made to better reflect
    the expected usage of the assets over time and to be consistent with
    prevalent industry practice.

(2) A charge of $945 was recorded for the impairment of the goodwill of
    Q Services' subsidiary, Quality Oil Service, Inc., in 1999 in connection
    with the termination of such subsidiary's operations in New Mexico.

(3) EBITDA is earnings (including gain (loss) on sale of assets) before interest
    expense, preferred stock dividends, income tax expense, depreciation,
    amortization and other non-cash charges. EBITDA is presented because it is a
    widely accepted financial indication of a company's ability to service and
    incur debt. EBITDA should not be considered as an alternative to earnings
    (losses) as an indicator of our operating performance or as an alternative
    to cash flow as a measure of liquidity.

                                       61

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                            OPERATIONS OF Q SERVICES

RESULTS OF OPERATIONS

    THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF Q SERVICES AND THE NOTES THERETO CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.

QUARTER ENDED MARCH 31, 2002 VERSUS QUARTER ENDED MARCH 31, 2001

    GENERAL

    Q Services' revenues for the quarter ended March 31, 2002, increased
$6.8 million, or 21%, to $38.6 million from $31.8 million for the same period in
2001. The increase was primarily due to the incremental revenues associated with
Q Services' 2001 acquisitions of Niewoehner, Inc. d/b/a American Energy Services
and Palestine Contractors, LLC, which operate as Q Services' pressure pumping
services division and Central Texas region of the field production services
division, respectively. These acquisitions occurred after March 31, 2001.
Accordingly, Q Services' results for the quarter ended March 31, 2001, did not
include the effects of these acquisitions. Absent the effects of these
acquisitions, Q Services' revenues totaled $24.9 million for the quarter ended
March 31, 2002, representing a decline of approximately 22% when compared to the
same period last year. Such decline was primarily related to Q Services' fishing
and rental tool services business and was a direct result of a significant
year-over-year decline in operating rig counts in Q Services' operating
locations.

    OPERATING REVENUES

    FIELD PRODUCTION SERVICES.  Field production services revenues for the
quarter ended March 31, 2002, increased $1.2 million, or 6%, to $23.2 million
from $22.0 million for the same period in 2001. The increase was primarily due
to the incremental revenues associated with the Palestine acquisition, as
previously discussed. Absent the effects of the Palestine acquisition, field
production services revenues declined approximately $2.9 million, or 13%, to
$19.1 million. The decline is primarily related to a drop in fluid
transportation and frac tank rental revenues in Q Services' South Texas
operating region due to the year-over-year operating rig count decline.

    PRESSURE PUMPING SERVICES.  Pressure pumping services revenues for the
quarter ended March 31, 2002, totaled approximately $9.6 million. Q Services'
pressure pumping services segment was created in July 2001 in connection with
the American Energy Services acquisition. Accordingly, there are no comparative
2001 figures for this segment for the quarter ended March 31, 2001.

    FISHING AND RENTAL TOOL SERVICES.  Fishing and rental tool services revenues
for the quarter ended March 31, 2002, decreased $4.0 million, or 41%, to
$5.8 million from $9.8 million for the same period in 2001. The decline was due
to a reduction in fishing tool and jar rentals and related services in all of Q
Services' fishing and rental tool operating locations as a result of the
year-over-year operating rig count decline.

    OPERATING EXPENSES

    FIELD PRODUCTION SERVICES.  Field production services expenses for the
quarter ended March 31, 2002, increased $1.9 million, or 16%, to $13.8 million
from $11.9 million for the same period in 2001. The increase is primarily
related to the Palestine acquisition, which occurred in 2001, as previously
discussed. Absent the effects of such acquisition, field production services
expenses declined approximately $1.2 million, or 10%, to $10.7 million. The
decline was the result of lower overall wages and benefits expense due to a
reduction in operating personnel headcount, coupled with reduced operating and
maintenance costs due to the overall decline in revenues.

                                       62

    PRESSURE PUMPING SERVICES.  Pressure pumping services expenses for the
quarter ended March 31, 2002, totaled approximately $6.8 million. As previously
discussed, Q Services' pressure pumping services segment was created in
July 2001 in connection with the American Energy Services acquisition.
Accordingly, there are no comparative 2001 figures for this segment for the
quarter ended March 31, 2001.

    FISHING AND RENTAL TOOL SERVICES.  Fishing and rental tool services expenses
for the quarter ended March 31, 2002, decreased $1.7 million, or 35%, to
$3.1 million from $4.8 million for the same period in 2001. The decline was due
to lower fishing tool operators expense, lower supplies expense and lower
consigned equipment and jar rentals expense. Such reductions were directly
correlated to the decline in fishing and rental tool operating revenues, as
discussed above.

    DEPRECIATION AND AMORTIZATION EXPENSE

    Q Services' depreciation and amortization expense for the quarter ended
March 31, 2002, increased $1.9 million, or 119%, to $3.5 million from
$1.6 million for the same period in 2001. The increase is primarily due to
additional depreciation and amortization expense associated with the American
Energy Services and Palestine acquisitions consummated in 2001. Absent the
effects of these acquisitions, depreciation and amortization expense increased
by $0.1 million, or 6%, to $1.7 million. The increase is primarily due to
additional depreciation expense associated with capital expenditures made in Q
Services' field production services segment during the second half of 2001.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Q Services' selling, general and administrative expenses for the quarter
ended March 31, 2002, increased $2.4 million, or 34%, to $9.4 million from
$7.0 million for the same period in 2001. The increase is primarily due to the
American Energy Services and Palestine acquisitions that were consummated after
the first quarter of 2001. Absent the effects of these acquisitions, selling,
general and administrative expenses for the quarter ended March 31, 2002,
decreased by $0.2 million, or 3%, to $6.8 million. The reason for the decrease
is lower overall administrative salaries and benefits expense in Q Services'
field production services and fishing and rental tools segments as well as lower
bad debt expense in Q Services' field production services segment, offset
somewhat by higher overall corporate overhead costs as a result of the increased
size of the consolidated entity.

YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000

    GENERAL

    Q Services' revenues for the year ended December 31, 2001, increased
$100.2 million, or 127%, to $179.1 million from $78.9 million for the same
period in 2000. The higher results were primarily due to the incremental
revenues associated with the Palestine and American Energy Services acquisitions
consummated in May and July of 2001, respectively. Accordingly, Q Services'
results for the year ended December 31, 2000, did not include the effects of
such acquisitions. Absent the effects of these acquisitions, Q Services'
revenues totaled $133.3 million for the year ended December 31, 2001,
representing an increase of approximately 69% when compared to the same period
the previous year. These favorable results were a direct result of a significant
increase in operating rig counts in Q Services' operating locations.

    OPERATING REVENUES

    FIELD PRODUCTION SERVICES.  Field production services revenues for the year
ended December 31, 2001, increased $59.9 million, or 118%, to $110.7 million
from $50.8 million for the year 2000. The increase was primarily due to the
incremental revenues associated with the Palestine acquisition, as previously
discussed. Absent the effects of the Palestine acquisition, field production
services

                                       63

contributed $92.8 million in revenues, which was $42.0 million, or 83%, higher
than the comparable revenues in 2000. Growth in field production revenues was
primarily related to increases in vacuum and pump truck services and mud,
chemical and water sales in Q Services' various operating locations.

    PRESSURE PUMPING SERVICES.  Pressure pumping services revenues for the year
ended December 31, 2001, totaled approximately $27.8 million. Q Services'
pressure pumping services segment was created in July 2001 in connection with
the American Energy Services acquisition. Accordingly, there are no comparative
2000 figures for this segment for the year ended December 31, 2000.

    FISHING AND RENTAL TOOL SERVICES.  Fishing and rental tool revenues for the
year ended December 31, 2001, increased $12.5 million, or 44%, to $40.6 million
from $28.1 million for the same period in 2000. The rise was due to higher
fishing tool and jar rentals and related services in all of Q Services' fishing
and rental tool operating locations as a result of the year-over-year increase
in operating rigs in Q Services' operating locations.

    OPERATING EXPENSES

    FIELD PRODUCTION SERVICES.  Field production services expenses for the year
ended December 31, 2001, increased $34.7 million, or 126%, to $62.3 million from
$27.6 million for the same period in 2000. The increase is primarily related to
the Palestine acquisition, which occurred in May of 2001, as previously
discussed. Absent the effects of that acquisition, field production services
expenses increased approximately $22.6 million, or 82%, to $50.2 million. The
increase was the result of higher overall wages and benefits expense due to an
increase in operating personnel headcount, coupled with higher operating and
maintenance costs due to the significant increase in revenues.

    PRESSURE PUMPING SERVICES.  Pressure pumping services expenses for the year
ended December 31, 2001, totaled approximately $16.9 million. As previously
discussed, Q Services' pressure pumping services segment was created in
July 2001 in connection with the American Energy Services acquisition.
Accordingly, there are no comparative 2000 figures for this segment for the year
ended December 31, 2000.

    FISHING AND RENTAL TOOL SERVICES.  Fishing and rental tool services expenses
for the year ended December 31, 2001, increased $6.7 million, or 50%, to
$20.2 million from $13.5 million for the same period in 2000. The increase was
due to higher fishing tool operators expense, higher supplies expense, higher
consigned equipment and jar rentals expense and higher insurance premiums. The
increases were directly correlated to the growth in fishing and rental tool
operating revenues, as discussed above.

    DEPRECIATION AND AMORTIZATION EXPENSE

    Q Services' depreciation and amortization expense for the year ended
December 31, 2001, increased $6.4 million, or 131%, to $11.3 million from
$4.9 million for the same period in 2000. The increase is primarily due to
additional depreciation and amortization expense associated with the Palestine
and American Energy Services acquisitions consummated in May and July of 2001,
respectively. Absent the effects of these acquisitions, depreciation and
amortization expense increased $2.9 million, or 59%, to $7.8 million. The
increase is primarily due to additional depreciation expense associated with
capital expenditures made in Q Services' field production services segment,
specifically in Q Services' Northwest Texas region, during 2001.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Q Services' selling, general and administrative expenses for the year ended
December 31, 2001, increased $15.8 million, or 71%, to $37.9 million from
$22.1 million for the same period in 2000. The increase is primarily due to the
Palestine and American Energy Services acquisitions that were consummated in May
and July of 2001. Absent the effects of these acquisitions, selling, general and

                                       64

administrative expenses for the year ended December 31, 2001, increased by
$8.4 million, or 38%, to $30.5 million. The primary reason for the increase is
higher overall administrative salaries and benefits expense in Q Services' field
production services and fishing and rental tools segments and higher overall
corporate overhead costs as a result of the increased size of the consolidated
entity.

LIQUIDITY AND CAPITAL RESOURCES

    As of March 31, 2002, Q Services had approximately $3.7 million in cash and
cash equivalents, down from approximately $6.0 million at December 31, 2001. The
decline of approximately $2.3 million during the quarter was due to:

    - a net use of cash from investing activities of $2.8 million (primarily for
      capital expenditures in Q Services' pressure pumping services segment);

    - a net use of cash of $0.8 million from operating activities (primarily due
      to annual insurance premium prepayments); and

    - a net increase in cash of $1.3 million from financing activities due to
      borrowings under Q Services' revolving credit facility, somewhat offset by
      principal payments made under Q Services' term loan facility.

    As of March 31, 2002, Q Services had approximately $68.5 million in
long-term debt and $15.9 million in current maturities of long-term debt and
other short-term debt obligations outstanding. Included in long-term debt was
approximately $68.3 million under Q Services' existing term loan and revolving
credit facility and approximately $0.2 million in other long-term obligations.
Included in current maturities of long-term debt and other short-term
obligations was approximately $13.3 million under Q Services' existing term loan
facility, $2.4 million related to the financing of a portion of Q Services'
general and workers' compensation liability policy, and $0.2 million in other
short-term obligations. Additionally, Q Services had approximately $3.1 million
in outstanding letters of credit as of March 31, 2002.

    In March 2002, Q Services renewed its general and workers' compensation
liability insurance policies. In connection with the renewal of these policies,
Q Services paid approximately $1.4 million in up front premium and related
insurance costs and financed an additional $2.4 million over the remaining
one-year policy term. The amounts that were financed have been reflected in the
"Current portion of long-term debt and other short-term obligations" in Q
Services' unaudited consolidated balance sheet as of March 31, 2002.

    In addition to the $3.7 million in cash and cash equivalents on hand at
March 31, 2002, Q Services also had approximately $9.9 million in unused
borrowing capacity under its existing revolving credit facility as of March 31,
2002.

    As of December 31, 2001, Q Services had approximately $6.0 million in cash
and cash equivalents, up from approximately $4.7 million at December 31, 2000.
The increase of approximately $1.3 million during the year was due to:

    - a net increase in cash of $43.2 million from financing activities
      attributable to proceeds from stock issuances as well as net borrowings
      made under Q Services' newly executed term loan facility;

    - a net increase of cash of $23.1 million from operating activities
      (primarily from the operating results previously mentioned); and

    - an offset from a net use of cash from investing activities of
      $65.0 million (primarily for the acquisitions of Palestine and American
      Energy Services and incremental capital expenditures made during the
      year).

                                       65

    In December 2001, Q Services executed a $100.0 million term loan and credit
facility with a number of banks, including Lehman Brothers, who acted as the
lead syndication agent. The facility included an $80.0 million term loan
facility and up to $20.0 million in borrowing capacity under a revolving credit
facility. Additionally, the facility provides up to $5.0 million for the
issuance of letters of credit on behalf of Q Services. However, any outstanding
letters of credit reduce the borrowing capacity under the revolving credit
facility. Borrowings under the facility are secured by substantially all of the
assets of Q Services.

    As of December 31, 2001, Q Services had approximately $66.8 million in
long-term debt compared to $32.6 million at December 31, 2000, and
$13.8 million in current maturities of long-term debt and other short-term debt
obligations outstanding compared to $6.5 million at December 31, 2000. The
increase from December 31, 2000 to December 31, 2001 was primarily due to
incremental borrowings made during 2001 to finance Q Services' acquisitions and
capital expenditures. In connection with the closing of the term loan facility
in December 2001, Q Services used a majority of the new term loan to retire its
existing debt and lease obligations.

    In addition to the $6.0 million in cash and cash equivalents, Q Services
also had approximately $8.8 million in unused borrowing capacity under its
existing revolving credit facility with Lehman Brothers as of December 31, 2001
after accounting for the $1.5 million in outstanding letters of credit as of
December 31, 2001.

    Management of Q Services believes that existing cash and cash equivalents as
of December 31, 2001, supplemented by available borrowings under its revolving
credit facility and cash generated from ongoing operations, will be sufficient
to meet its anticipated cash needs for at least the next 12 months.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Q Services' exposure to market risk is effectively limited to the interest
rate risk associated with its various debt obligations. As of December 31, 2001,
Q Services had total debt outstanding of approximately $80.6 million. Of this
amount, approximately $0.6 million in various obligations carried a fixed rate
of interest. The remaining $80.0 million, which represents borrowings made under
Q Services' term loan facility, consummated in December 2001, bears interest at
a floating rate tied primarily to the three-month LIBOR rate, plus an applicable
margin. As of December 31, 2001, the average floating interest rate on
Q Services' outstanding term loan facility was approximately 6.50%.

    In February 2002, Q Services entered into an interest rate swap agreement
with three banks to fix the LIBOR interest rate on $48.0 million (or 60%) of the
$80.0 million term loan. Such swap agreement effectively fixed the floating rate
component of the term loan at 3.75% and expires in December 2004, consistent
with the maturity date of the underlying term loan. The notional amount of the
swap will amortize over the three-year term to match the principal amortization
of the underlying term loan.

    In March 2002, Q Services borrowed $5.0 million under its revolving credit
facility and paid approximately $3.3 million of its outstanding term loan
balance. Consistent with the term loan facility, borrowings under Q Services'
revolving credit facility bear interest at a floating rate tied to the three-
month LIBOR rate, plus an applicable margin.

    Based on a sensitivity analysis performed as of December 31, 2001, it is
estimated that a one percentage point increase or decrease in applicable
interest rates would increase or decrease Q Services' income before income taxes
in 2002 by approximately $0.8 million. However, after taking into consideration
the effects of the interest rate swap entered into in February 2002, such
sensitivity would have been reduced from $0.8 million to $0.3 million. Such
sensitivity calculations do not take into consideration the scheduled repayments
of the term loan in 2002, the effects of which would serve to further reduce the
computed from sensitivity amounts.

                                       66

                        DESCRIPTION OF KEY CAPITAL STOCK

    As of May 29, 2002, Key's authorized capital stock is 200,000,000 shares,
which may be issued as shares of common stock or up to 15,169,320 shares of
which may be issued as shares of preferred stock. As of May 29, 2002,
109,828,463 shares of Key common stock were issued and outstanding and no shares
of preferred stock were outstanding.

COMMON STOCK

    LISTING.  Key's common stock is listed on the New York Stock Exchange under
the symbol "KEG."

    DIVIDENDS.  Holders of Key's common stock may receive dividends when
declared by the board of directors. Dividends may be paid in cash, stock or
another form. However, certain of Key's existing debt agreements contain
covenants that currently restrict it from paying dividends. Additionally, in
certain cases, holders of Key common stock may not receive dividends until Key
has satisfied its obligations to any preferred stockholders.

    VOTING RIGHTS.  Each share of Key's common stock is entitled to one vote, in
person or by proxy, at any and all meetings of Key's stockholders in the
election of directors and all other matters before any meetings. Common
stockholders are not entitled to preemptive or cumulative voting rights.

    OTHER RIGHTS.  If Key liquidates, dissolves or winds-up its business, either
voluntarily or not, holders of Key's common stock will share equally in the
assets remaining after Key pays its creditors and preferred stockholders.

    TRANSFER AGENT AND REGISTRAR.  Key's transfer agent and registrar is
American Stock Transfer & Trust Company, New York, New York.

PREFERRED STOCK

    Key's board of directors can, without approval of its stockholders, issue
one or more series of preferred stock. The board can also determine the rights,
preferences and limitations of each series, including:

    - the specific designation, number of shares, seniority and purchase price;

    - any liquidation preference per share;

    - the maturity date;

    - any redemption, repayment or sinking fund provisions;

    - any dividend rate or rates and the dates on which any such dividends will
      be payable (or the method by which such rates or dates will be
      determined);

    - any voting rights;

    - if other than the currency of the United States, the currency or
      currencies including composite currencies in which such preferred stock is
      denominated and/or in which payments will or may be payable;

    - the method by which amounts in respect of such preferred stock may be
      calculated and any commodities, currencies or indices, or value, rate or
      price, relevant to such calculation;

    - whether such preferred stock is convertible or exchangeable and, if so,
      the securities or rights into which such preferred stock is convertible or
      exchangeable, and the terms and conditions

                                       67

      upon which such conversions or exchanges will be effected including
      conversion or exchange prices or rates, the conversion or exchange period
      and any other related provisions;

    - the place or places where dividends and other payments on the preferred
      stock will be payable; and

    - any additional voting, dividend, liquidation, redemption and other rights,
      preferences, privileges, limitations and restrictions.

    In some cases, the issuance of preferred stock could delay a change in
control of Key and make it harder to remove present management. Under certain
circumstances, preferred stock could also restrict dividend payments to holders
of Key common stock.

                                       68

           COMPARISON OF RIGHTS OF SHAREHOLDERS OF KEY AND Q SERVICES

    Key and Q Services, are incorporated in Maryland and Texas, respectively. At
the time the merger becomes effective, the common shareholders of Q Services
automatically will become common shareholders of Key. The rights of the
Q Services shareholders are currently governed by the Texas Business Corporation
Act, by the Q Services amended and restated articles of incorporation, as
amended, the Q Services amended and restated bylaws and by the Amended and
Restated Shareholders Agreement, as amended to date, among Q Services, RSTW
Partners, III, L.P., SCF-IV, L.P. and certain of the Q Services shareholders. As
shareholders of Key, their rights will be governed by Maryland General
Corporation Law and by Key's charter and bylaws.

    The following is a summary of certain material differences between the
rights of holders of Key common stock and the rights of holders of Q Services
common stock. You might regard as important other differences that are not
included. You should refer to the documents and statutory sections mentioned in
this section if you want more information. THE SUMMARY CONTAINED IN THE CHART
BELOW IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE RIGHTS OF HOLDERS OF KEY
COMMON STOCK AND Q SERVICES COMMON STOCK UNDER THE MARYLAND GENERAL CORPORATION
LAW OR THE TEXAS BUSINESS CORPORATION ACT, THE ARTICLES OF INCORPORATION OR
BYLAWS OF EITHER COMPANY OR THE Q SERVICES SHAREHOLDERS AGREEMENT MENTIONED
ABOVE.



                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
AUTHORIZED CAPITAL STOCK:  The total number of authorized    The total number of authorized
                           shares of capital stock of Key    shares of capital stock of Q
                           is 200,000,000, all of which are  Services is 50,000,000,
                           classified as Key common stock,   consisting of 40,000,000 shares
                           par value $.10 per share. The     of Q Services common stock, no
                           board of directors has the        par value, 100,000 shares of
                           authority, without shareholder    series A redeemable preferred
                           approval, to classify and         stock, no par value, 100,000
                           reclassify up to 15,169,320       shares of series B redeemable
                           unissued shares of capital stock  preferred stock, no par value,
                           by setting or changing the        and 9,800,000 shares of Q
                           preferences, conversion or other  Services preferred stock. The
                           rights, voting powers,            board of directors has the
                           restrictions, limitations as to   authority, without shareholder
                           dividends, qualifications or      approval, to issue preferred
                           terms or conditions of            stock with the powers, voting
                           redemption of such shares of      powers, designations,
                           stock; PROVIDED, HOWEVER, that,   preferences and relative,
                           no such classification or         participating or optional or
                           reclassification shall create a   other rights, and the
                           class of stock which shall (i)    limitations or restrictions
                           have more than one vote per       designated by the board of
                           share, (ii) be issued in          directors.
                           connection with any so-called
                           "shareholder rights plan",
                           "poison pill" or other
                           anti-takeover measure, or (iii)
                           be issued for consideration
                           which is less than fair
                           consideration as determined in
                           good faith by the board of
                           directors.

VOTING RIGHTS:             Each holder of Key common stock   Each holder of Q Services common
                           is entitled to one vote per       stock is entitled to one vote
                           share.                            per share. The Q Services


                                       69




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                                                             articles of incorporation
                                                             provide that the holders of Q
                                                             Services series A and series B
                                                             preferred stock are entitled to
                                                             vote, together with the holders
                                                             of the Q Services common stock
                                                             as a single class, with respect
                                                             to any matters upon which
                                                             holders of the Q Services common
                                                             stock have the right to vote.
                                                             Each holder of Q Services series
                                                             A and series B preferred stock
                                                             is entitled to the number of
                                                             votes determined by dividing the
                                                             number of shares of Q Services
                                                             series A and series B preferred
                                                             stock held by such holder held
                                                             by 10. Holders of Q Services
                                                             capital stock do not have
                                                             cumulative voting rights.

PREEMPTIVE RIGHTS:         The Key charter allows only such  The Q Services articles of
                           preemptive rights as the board    incorporation expressly deny
                           of directors, in its sole         preemptive rights. The
                           discretion, may authorize. At     shareholders agreement provides,
                           this time, the board of           however, that each shareholder
                           directors has not authorized any  that is a party to the agreement
                           such rights.                      has the preemptive right to
                                                             purchase, PRO RATA, all or any
                                                             part of any issuance of Q
                                                             Services common stock or common
                                                             stock equivalents, subject to
                                                             certain exceptions, other than
                                                             issuances pursuant to a
                                                             qualified initial public
                                                             offering or which comprise the
                                                             purchase price for the
                                                             acquisition of all the common
                                                             stock or substantially all the
                                                             assets of any unaffiliated
                                                             person.

TRANSFERABILITY OF         The Key charter and bylaws do     The Q Services articles of
  SHARES:                  not limit the transferability of  incorporation and bylaws do not
                           any shares of Key capital stock.  limit the transferability of any
                                                             shares of Q Services capital
                                                             stock; HOWEVER, the shareholders
                                                             agreement limits the
                                                             transferability of shares of Q
                                                             Services capital stock held by
                                                             the Q Services shareholders that
                                                             are subject to the agreement as
                                                             follows:


                                       70




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                                                             -Q Services and its designees,
                                                             and certain of the Q Services
                                                              shareholders are granted a
                                                              right of first offer;

                                                             -Certain of the Q Services
                                                              shareholders are granted a
                                                              right of co-sale;

                                                             -Q Services shareholders subject
                                                              to the shareholders agreement
                                                              owning 75% or more of the
                                                              issued and outstanding Q
                                                              Services capital stock on a
                                                              fully diluted basis, and
                                                              intending to sell or transfer
                                                              all the shares of Q Services
                                                              capital stock held by them to
                                                              any person are granted the
                                                              right to cause all holders of Q
                                                              Services capital stock subject
                                                              to the shareholders agreement
                                                              to participate in such sale or
                                                              transfer;

                                                             -Certain of the Q Services
                                                              shareholders have the option to
                                                              sell to Q Services, and Q
                                                              Services is obligated to
                                                              purchase from such
                                                              shareholders, certain shares of
                                                              Q Services capital stock held
                                                              by them at any time after the
                                                              occurrence of certain events;
                                                              and

                                                             -Certain of the Q Services
                                                              shareholders have granted Q
                                                              Services the option to require
                                                              such Q Services shareholders to
                                                              sell to Q Services, and such
                                                              shareholders are obligated to
                                                              sell to Q Services, all of
                                                              certain shares of Q Services
                                                              capital stock held by such
                                                              shareholders until a certain
                                                              date.

BOARD OF DIRECTORS:        The Key charter sets the number   The Q Services bylaws set the
                           of directors at six, which        number of directors at nine,
                           number may be increased or        which number may be increased by
                           decreased subject to the Key      an amendment to the bylaws, but
                           bylaws and Maryland law. Under    in no event will the number of
                           the Key bylaws, the number of     directors be less than nine. The
                           directors may be set by action    Q Services bylaws provide that
                           of the Key shareholders or of a   the manner and election of
                           majority of                       directors


                                       71




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                           the board of directors, but       shall be conducted in accordance
                           there may be no less than three   with the terms of the
                           and no more than 25 directors. A  shareholders agreement as
                           vacancy resulting from the        described below:
                           removal of a director may be      At any meeting of shareholders
                           similarly filled by an action of  at which members of the board of
                           the Key shareholders or of a      directors are to be elected,
                           majority of the remaining         each of four different
                           directors. A director elected by  shareholder groups has the right
                           the shareholders will serve for   to designate one candidate, a
                           the remainder of the term of the  nominating committee designated
                           removed director. A director      by David Johnson, has the right
                           elected by the board of           to designate four candidates,
                           directors to fill a vacancy will  the chief executive officer is a
                           serve until the next annual       designee for director, and the
                           meeting of the shareholders and   remaining candidates are chosen
                           until the successor is elected    by the then current board of
                           and qualified.                    directors.

REMOVAL OF DIRECTORS:      Under Maryland law, unless the    Under Texas law, the bylaws or
                           charter provides otherwise, the   articles of incorporation of a
                           shareholders may remove any       Texas corporation may provide
                           director, with or without cause,  that at any meeting of
                           by the affirmative vote of a      shareholders called expressly
                           majority of all the votes         for that purpose, the holders of
                           entitled to be cast for the       a majority of the shares then
                           election of directors.            entitled to vote at an election
                                                             of directors may vote to remove
                                                             any director or the entire board
                                                             of directors, with or without
                                                             cause, subject to further
                                                             restrictions on removal that the
                                                             bylaws may contain. The Q
                                                             Services amended and restated
                                                             bylaws provide that no director
                                                             designated by certain of the
                                                             persons entitled to designate
                                                             candidates pursuant to the
                                                             shareholders agreement may be
                                                             removed without cause without
                                                             the consent of such persons, and
                                                             that if such persons request
                                                             that their respective designated
                                                             directors be removed (with or
                                                             without cause), then such
                                                             director will be removed.

FILLING VACANCIES ON THE   Under Maryland law, the           Under Texas law, the
  BOARD OF DIRECTORS:      shareholders may elect a          shareholders or a majority of
                           successor to fill a vacancy on    the remaining directors may fill
                           the board of directors that       any vacancy occurring in the
                           results from the removal of a     board of directors. A director
                           director. A director elected by   elected to fill a vacancy is
                           the shareholders to fill a        elected for the unexpired term
                           vacancy resulting from the        of his predecessor in office. A
                           removal of a director will serve  directorship to be filled by
                           for the                           reason


                                       72




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                           balance of the term of the        of an increase in the number of
                           removed director. A majority of   directors may be filled by the
                           the remaining directors, whether  shareholders or by the board of
                           or not sufficient to constitute   directors for a term of office
                           a quorum, may fill a vacancy on   continuing only until the next
                           the board of directors that       election of one or more
                           results from any cause            directors by the shareholders.
                           (including a removal if the       However, the board of directors
                           shareholders have not filled the  may not fill more than two such
                           vacancy) except an increase in    directorships during the period
                           the number of directors, and a    between any two successive
                           majority of the entire board of   annual meetings of shareholders.
                           directors may fill a vacancy      The Q Services bylaws provide
                           that results from an increase in  that if any director elected to
                           the number of directors. A        the board of directors after
                           director elected by the board of  being designated a candidate by
                           directors to fill a vacancy will  one of the persons entitled to
                           serve until the next annual       designate candidates pursuant to
                           meeting of shareholders and       the shareholders agreement dies,
                           until his or her successor is     resigns, is removed or otherwise
                           elected and qualifies.            ceases to serve as a member of
                                                             the board of directors, the
                                                             person entitled to designate the
                                                             candidate will promptly
                                                             designate a successor. The
                                                             vacancies in the board of
                                                             directors that are created by an
                                                             increase in the number of
                                                             directors are appointed by the
                                                             current directors in accordance
                                                             with the terms of the
                                                             shareholders agreement. A
                                                             director elected to fill a
                                                             vacancy shall be elected for the
                                                             unexpired term of his
                                                             predecessor in office. The board
                                                             of directors does not have the
                                                             right to fill any vacancy on the
                                                             board of directors for which any
                                                             person has the right to
                                                             designate a candidate unless
                                                             such vacancy is filled by the
                                                             designee of the person having
                                                             the right to designate such
                                                             director.

STATUTORY TAKEOVER         The Maryland General Corporation  The Texas Business Corporation
  PROVISIONS:              Act provides protection for       Act does not contain any
                           Maryland corporations against     provisions regarding unsolicited
                           unsolicited takeovers by          takeovers.
                           protecting the board of
                           directors with regard to actions
                           taken in a takeover context.

CALL OF SPECIAL MEETINGS   Under Maryland law, a special     Under Texas law, a special
  OF SHAREHOLDERS:         meeting of shareholders may be    meeting of shareholders may be
                                                             called by


                                       73




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                           called by the president, the      the president, the board of
                           board of directors, shareholders  directors, other persons
                           entitled to cast at least 25% of  authorized in the corporation's
                           all shares entitled to vote or    articles of incorporation or
                           any other person specified in     bylaws and the holders of not
                           the charter or bylaws. The Key    less than 10% of all the shares
                           bylaws permit a special meeting   entitled to vote, unless the
                           of shareholders to be called by   articles of incorporation
                           the chairman of the board, the    otherwise specify a lower or
                           president and a majority of the   higher percentage (but no
                           board of directors or upon a      greater than 50%) of the
                           written request of shareholders   holders. The Q Services bylaws
                           entitled to cast at least 25% of  permit a special meeting of
                           all shares entitled to vote.      shareholders to be called by the
                                                             president, the board of
                                                             directors, the executive
                                                             committee of the board of
                                                             directors or the holders of not
                                                             less than 10% of the shares
                                                             entitled to vote.

SHAREHOLDER ACTION BY      Under Maryland law, any action    Unless otherwise provided in the
  WRITTEN CONSENT:         to be taken at a meeting of       articles of incorporation, under
                           shareholders may be taken         Texas law, any action which is
                           without a meeting if a unanimous  required to be taken or may be
                           written consent is signed by      taken at a meeting of
                           each shareholder entitled to      shareholders may be taken by a
                           vote on the matter. The Key       written consent signed by the
                           bylaws provide for action         holder or holders of all the
                           without a meeting of              shares entitled to vote with
                           shareholders in accordance with   respect to the action that is
                           Maryland law.                     the subject of the consent. The
                                                             Q Services articles of
                                                             incorporation provide for action
                                                             to be taken by the written
                                                             consent of the holder or holders
                                                             of shares having not less than
                                                             the minimum number of votes that
                                                             would be necessary to take such
                                                             action at a meeting at which
                                                             holders of all shares entitled
                                                             to vote on the action were
                                                             present and voted.

CONDUCT OF MEETINGS:       The Key bylaws provide that at    The Q Services articles of
                           all meetings of shareholders,     incorporation and bylaws do not
                           unless the voting is conducted    provide for the conduct of
                           by inspectors, the proxies and    meetings of shareholders.
                           ballots shall be received, and
                           all questions touching the
                           qualification of voters and the
                           validity of proxies, the
                           acceptance or rejection of votes
                           and procedures for the conduct
                           of business not otherwise
                           specified by the bylaws, the
                           articles of


                                       74




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                           incorporation or Maryland law,
                           shall be decided or determined
                           by the chairman of the meeting.
                           If demanded by shareholders,
                           present in person or by proxy,
                           entitled to cast 10% in number
                           of votes entitled to be cast, or
                           if ordered by the chairman, the
                           vote upon any election or
                           question shall be taken by
                           ballot and, upon like demand or
                           order, the voting shall be
                           conducted by two inspectors, in
                           which event the proxies and
                           ballots shall be received, and
                           all questions touching the
                           qualification of voters and the
                           validity of proxies and the
                           acceptance or rejection of votes
                           shall be decided, by such
                           inspectors. Unless so demanded
                           or ordered, no vote need be by
                           ballot and voting need not be
                           conducted by inspectors. The
                           shareholders at any meeting may
                           choose an inspector or
                           inspectors to act at such
                           meeting, and in default of such
                           election the chairman of the
                           meeting may appoint an inspector
                           or inspectors. No candidate for
                           election as a director at a
                           meeting shall serve as an
                           inspector thereat.

AMENDMENT OF CHARTER:      Under Maryland law, a             Under Texas law, a corporation's
                           corporation's charter may be      articles of incorporation may be
                           amended by the affirmative vote   amended by the affirmative vote
                           of two-thirds of all votes        of at least two-thirds of all
                           entitled to vote on the matter,   votes entitled to be cast,
                           unless a greater or lesser        unless the articles of
                           proportion of votes (but not      incorporation provide otherwise.
                           less than a majority of all       The Q Services articles of
                           votes entitled to be cast) is     incorporation do not require a
                           specified in the charter. The     number of votes different from
                           Key charter reduces the vote      Texas law to approve an
                           requirement to a majority of the  amendment to the Q Services
                           votes entitled to be cast.        articles of incorporation.

AMENDMENT OF BYLAWS:       Under Maryland law, the power to  Under Texas law, unless the
                           adopt, alter and repeal the       articles of incorporation or a
                           bylaws of a corporation is        bylaw adopted by the
                           vested in the shareholders,       shareholders provides otherwise,
                           unless the charter or the bylaws  as to all or some portion of the
                           provide otherwise. The Key        bylaws, the shareholders may
                           charter and bylaws grant the      amend, repeal or adopt bylaws.
                           power to amend the Key bylaws to  The Q Services


                                       75




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                           both the shareholders and the     articles of incorporation
                           board of directors.               provide that the board of
                                                             directors, and not the
                                                             shareholders, has the exclusive
                                                             power to adopt, alter, amend or
                                                             repeal the Q Services bylaws.

REQUIRED VOTE FOR CERTAIN  Except as provided below, and in  Except as provided below, and in
  BUSINESS COMBINATIONS:   certain other limited             certain other limited
                           circumstances, Maryland law       circumstances, Texas law
                           requires that a proposed          requires that a merger, a
                           consolidation, merger, share      disposition not in the regular
                           exchange or transfer of assets    course of business or a
                           be approved by the affirmative    dissolution of a corporation be
                           vote of two-thirds of all the     approved by the holders of at
                           votes entitled to vote on the     least two-thirds of the shares
                           matter, unless a greater or       entitled to vote thereon, unless
                           lesser proportion of votes (but   the corporation's articles of
                           not less than a majority of all   incorporation require the vote
                           votes entitled to be cast) is     of a different number of shares
                           specified in the charter. The     which may not be less than a
                           Key charter reduces the vote      majority of the shares entitled
                           requirement to a majority of the  to vote thereon. The Q Services
                           votes entitled to be cast.        articles of incorporation do not
                           However, approval of a merger by  require the vote of a different
                           the shareholders of a Maryland    number of shares.
                           corporation is not required if    However, approval of a merger by
                           the merger does not reclassify    the shareholders is not required
                           or change the terms of any class  if:
                           or series of stock that is        - the corporation is the sole
                           outstanding immediately before      surviving corporation in the
                           the merger becomes effective or     merger;
                           otherwise amend its charter, and  - the articles of incorporation
                           the number of shares of its       of the corporation will not
                           stock of such class or series       differ from its articles of
                           outstanding immediately after       incorporation before the
                           the effective time of the merger    merger;
                           does not increase by more than    - each shareholder of the
                           20% of the number of its shares     corporation whose shares are
                           of the class or series of stock     outstanding immediately before
                           that is outstanding immediately     the effective date of the
                           before the merger becomes           merger will hold the same
                           effective.                          number of shares, with
                                                               identical designations,
                                                               preferences, limitations and
                                                               relative rights, immediately
                                                               after the effective date of
                                                               the merger;
                                                             - the voting power of the number
                                                               of voting shares outstanding
                                                               immediately after the merger,
                                                               plus the voting power of the
                                                               number of voting shares
                                                               issuable


                                       76




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       

                                                               by the corporation in the
                                                               merger, will not exceed by
                                                               more than 20% the voting power
                                                               of the total number of voting
                                                               shares outstanding immediately
                                                               before the merger;
                                                             - the number of participating
                                                               shares, that is, shares whose
                                                               holders are entitled to
                                                               participate without limitation
                                                               on dividends or other
                                                               distributions, outstanding
                                                               immediately after the merger,
                                                               plus the number of
                                                               participating shares that the
                                                               corporation will issue in the
                                                               merger, will not exceed by
                                                               more that 20% the total number
                                                               of participating shares
                                                               outstanding immediately before
                                                               the merger; and
                                                             - the board of directors of the
                                                               corporation adopts a
                                                               resolution approving the plan
                                                               of merger.

BUSINESS COMBINATIONS:     The Maryland Business             Q Services is subject to Article
                           Combination Act has detailed      13 of the Texas Business
                           provisions concerning business    Corporation Act. Under Article
                           combinations that are not         13 of the TBCA, Q Services may
                           generally applicable to Key       not engage in a business
                           because Key was not               combination with an affiliated
                           automatically subject to such     shareholder, generally defined
                           provisions as of the date of      as a person owning 20% or more
                           their enactment by reason of      of a corporation's outstanding
                           having an "interested             voting stock, during the three
                           shareholder" as of such date and  year period immediately
                           Key did not subsequently opt to   following the affiliated
                           become subject to or governed by  shareholder's share acquisition
                           that Act.                         date unless the business
                                                             combination or acquisition by
                                                             such affiliated shareholder was
                                                             approved by:

                                                             - the board of directors before
                                                             the affiliated shareholder's
                                                               share acquisition date; or

                                                             - two-thirds of the holders of
                                                             the outstanding voting shares of
                                                               Q Services not beneficially
                                                               owned by the affiliated
                                                               shareholder at a meeting of
                                                               shareholders and not


                                       77




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                                                               by written consent, called for
                                                               that purpose not less than six
                                                               months after the affiliated
                                                               shareholder's share
                                                               acquisition date.

CONTROL SHARE              Key is subject to the Maryland    Neither the Texas Business
  ACQUISITIONS:            Control Share Acquisition Act,    Corporation Act nor the Q
                           which provides, among other       Services articles of
                           things, that shares of a          incorporation or bylaws contain
                           Maryland corporation that are     a similar control share
                           acquired in a "control share      acquisition provision.
                           acquisition," which is defined
                           as the acquisition of shares
                           comprising one-tenth, one-third
                           or a majority of all voting
                           shares, have no voting rights
                           except in certain defined
                           circumstances.

DIVIDENDS:                 Under Maryland law, the board of  Under Texas law, a board of
                           directors has the power to        directors may authorize a
                           declare and pay dividends in      corporation to make
                           cash, property or securities of   distributions to its
                           the corporation unless the        shareholders out of its surplus,
                           declaration of such dividends     subject to any restrictions in
                           would be contrary to the          its articles of incorporation.
                           charter. Maryland law further     Texas law does not permit
                           provides that no distribution     distributions if the
                           may be made:                      distribution exceeds the surplus
                           - if the corporation would        of the corporation or would
                           become unable to pay its debts    render the corporation
                             as they become due in the       insolvent.
                             usual course of business; or    The holders of the Q Services
                           - the corporation's total assets  series A and series B preferred
                             would be less than the sum of   stock are entitled to receive,
                             its liabilities plus, unless    out of funds legally available
                             the charter permits otherwise,  thereafter, cash dividends at an
                             the amount that would be        initial rate of 5% per annum
                             needed, if the corporation      compounded quarterly, increasing
                             were to be dissolved at the     by 1% on each anniversary of the
                             time of the distribution, to    date of issuance. Such dividends
                             satisfy any preferential        are cumulative from the date of
                             rights upon dissolution.        issuance and are payable in
                           The Key articles of               arrears when and as declared by
                           incorporation do not further      the board of directors. If the Q
                           restrict the ability of the       Services series A preferred
                           board of directors to pay         stock is not redeemed by
                           dividends; HOWEVER, the ability   July 16, 2006 and the Q Services
                           of Key to pay any dividends or    series B preferred stock is not
                           to make any distributions on the  redeemed by July 12, 2006, the
                           Key common stock is limited by    dividend rate will be increased
                           the terms of its credit facility  to 15% per annum until the
                           and indentures for its public     redemption price is paid in
                           debt securities.                  full. The ability of Q Services
                                                             to pay


                                       78




                                         KEY                            Q SERVICES
                           --------------------------------  --------------------------------
                                                       
                                                             any dividends or make any
                                                             distributions on the Q Services
                                                             series A and series B preferred
                                                             stock is limited by provisions
                                                             under certain credit agreements
                                                             to which Q Services is a party.

                                                             In addition, the shareholders
                                                             agreement provides that if Q
                                                             Services pays any cash dividend
                                                             or makes any cash distribution
                                                             to any holder of any class of Q
                                                             Services capital stock, each
                                                             holder of certain Q Services
                                                             capital stock will be entitled
                                                             to receive a dilution fee in
                                                             cash on the date of payment of
                                                             such dividend or distribution,
                                                             subject to certain terms and
                                                             conditions.

DERIVATIVE SUITS:          There is no statutory right to    The Texas Business Corporation
                           bring a derivative suit under     Act provides that a shareholder
                           the Maryland General Corporation  may bring suit on behalf of the
                           Law; however, there is a clear    corporation, provided that the
                           common law right in Maryland to   shareholder was a shareholder of
                           bring a derivative suit.          the corporation at the time of
                                                             the act or omission complained
                                                             of or became a shareholder by
                                                             operation of law from a person
                                                             that was a shareholder at that
                                                             time, and that the shareholder
                                                             fairly and adequately represents
                                                             the interests of the corporation
                                                             in enforcing the right of the
                                                             corporation.


                                       79

                   SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE
               OFFICERS AND PRINCIPAL SHAREHOLDERS OF Q SERVICES

    The following table presents certain information as of May 30, 2002,
regarding the beneficial ownership of Q Services common stock, series A
preferred stock and series B preferred stock, with respect to:

    - each person who, to the knowledge of Q Services, is the beneficial owner
      of 5% or more of Q Services outstanding common stock, series A preferred
      stock and series B preferred stock;

    - each of Q Services' directors;

    - Q Services' CEO and each of Q Services' four most highly paid executive
      officers other than the CEO in 2001; and

    - all of Q Services' executive officers and directors as a group.



                                              COMMON STOCK           SERIES A PREFERRED STOCK    SERIES B PREFERRED STOCK
                                      ----------------------------   -------------------------   -------------------------
                                          SHARES                        SHARES                      SHARES
                                       BENEFICIALLY    PERCENT OF    BENEFICIALLY   PERCENT OF   BENEFICIALLY   PERCENT OF
BENEFICIAL OWNER                         OWNED(1)      CLASS(2)(3)     OWNED(1)      CLASS(4)      OWNED(1)      CLASS(5)
----------------                      --------------   -----------   ------------   ----------   ------------   ----------
                                                                                              
SCF-IV, L.P.(6).....................   7,666,523           49.0%
David C. Baldwin(6).................   7,666,523(16)       49.0
David M. Johnson(7).................   1,395,971(17)        8.8
RSTW Partners, III, L.P.(8).........   1,339,388            8.6
Jeffrey A. Toole(7).................   1,339,388(18)        8.6
Craig M. Johnson(7).................     964,602(19)        6.1
Freddie Robeson.....................     284,215(20)        1.8
John P. Madden......................     280,251(21)        1.8
David S. Schorlemer.................     260,884            1.6
Scott D. Jones......................      66,463              *
Henry R. Hamman.....................      64,688              *
Gordon T. Hall......................      43,652              *
Richard C. Webb.....................      40,878              *
James D. Woods......................      39,597              *
Walter C. Wilson....................      37,382(22)          *

Autry Stephens(9)...................   1,220,905            7.8       35,572.58        49.4%       1,284.56        49.4%

Lewis L. Niewoehner(10).............     480,586(23)        3.0        9,414.78(23)    13.1          339.98(23)    13.1

RCN/HSJ/CCM/MCPI, L.P.(11)..........     353,085            2.3       10,055.54        14.0          363.12        14.0

Niewoehner Partnership, Ltd.(12)....     330,586            2.1        9,414.78        13.1          339.98        13.1

John Carnett(13)....................     377,632            2.4        7,194.73        10.0          259.81        10.0

Dennie Martin(14)...................     194,391            1.2        5,322.48         7.4          192.20         7.4

Brack Blackwood(15).................     163,401            1.0        4,439.89         6.2          160.33         6.2

All directors and executive officers
  as a group (14 persons)...........  12,965,080           76.5        9,414.78        13.1          339.98        13.1


------------------------

   * Less than one percent

 (1) Includes all shares of common stock, series A preferred stock or series B
     preferred stock with respect to each person, executive officer or director
     who directly, through any contract, arrangement, understanding,
     relationship or otherwise, has or shares the power to vote or to direct
     voting of such shares or to dispose or to direct the disposition of such
     shares. Includes shares that may be purchased under stock options (on the
     assumption that all stock options are accelerated pursuant to the merger
     and would be exercisable within 60 days).

                                       80

 (2) Based on 15,630,762 shares of common stock outstanding at May 30, 2002,
     plus, for each beneficial owner, those number of shares underlying stock
     options exercisable within 60 days held by each executive officer or
     director.

 (3) Percent of class for any shareholder listed is calculated without regard to
     shares of common stock issuable to others upon exercise of outstanding
     stock options or warrants. Any shares a shareholder is deemed to own by
     having the right to acquire by exercise of a stock option or warrant are
     considered to be outstanding solely for the purpose of calculating that
     shareholder's ownership percentage.

 (4) Based on 72,000 shares of series A preferred stock outstanding on May 30,
     2002.

 (5) Based on 2,600 shares of series B preferred stock outstanding on May 30,
     2002.

 (6) Address: 6600 Chase Tower, 600 Travis, Houston, Texas 77002.

 (7) Address: 3100 Timmons, Suite 300, Houston, Texas 77027.

 (8) Address: 5847 San Felipe, Suite 4350, Houston, Texas 77057.

 (9) Address: 110 North Marienfield, Midland, Texas 79701

 (10) Address: 1500 Douglas, Midland, Texas 79701.

 (11) Address: 5430 LBJ Freeway, Dallas, Texas 75240.

 (12) Address: 1500 Douglas, Midland, Texas 79701.

 (13) Address: 8108 ECR 90, Midland, Texas 79706.

 (14) Address: 5700 Devlin Place, Midland, Texas 79707.

 (15) Address: 4805 Breezeway Court; Midland, Texas 79707.

 (16) Includes 7,666,523 shares of Q Services common stock held of record by
      SCF-IV, L.P., all of which Mr. Baldwin disclaims beneficial ownership.

 (17) Includes 257,410 shares of common stock owned by his wife, Sally S.
      Johnson.

 (18) Includes 1,339,388 shares of Q Services common stock held of record by
      RSTW Partners, III, L.P., all of which Mr. Toole disclaims beneficial
      ownership.

 (19) Includes 13,713 shares of common stock held by Craig M. Johnson and
      Kathy S. Johnson as co-trustees for the benefit of the Johnson Family.

 (20) Includes 47,631 of common stock owned by his wife, Maurice Robeson.

 (21) Includes 27,045 shares of common stock held in an IRA by Charles Schwab,
      as custodian for Mr. Madden.

 (22) Includes 1,497 shares of common stock held by Walter C. Wilson as trustee
      for the benefit of the Nancy N. Wilson Family.

 (23) Includes 330,586 shares of Q Services common stock, 9,414.78 shares of Q
      Services series A preferred stock and 339.98 shares of Q Services series B
      preferred stock held of record by Niewoehner Partnership, Ltd., all of
      which Mr. Niewoehner disclaims beneficial ownership.

                                       81

                              SELLING SHAREHOLDERS

    This proxy statement/prospectus may be used by the selling shareholders
named below in connection with resales of the Key common stock received by them
in the merger. The following table sets forth certain information concerning
each of the selling shareholders. Assuming that the selling shareholders offer
all of their shares of Key common stock, the selling shareholders will not have
any beneficial ownership after the offering. The actual number of shares of Key
common stock issuable to each of the selling shareholders is subject to certain
variables that cannot be determined as of the date of this proxy
statement/prospectus. Therefore, the number of shares owned and offered set
forth below for each selling shareholder is equal to the maximum number of
shares of Key common stock issuable to each such selling shareholder under the
formula for calculating the merger consideration as set forth in the merger
agreement.



                                                              NUMBER OF SHARES
                                                                 OWNED AND       PERCENT OF
                    SELLING SHAREHOLDERS                          OFFERED          CLASS
------------------------------------------------------------  ----------------   ----------
                                                                           
SCF-IV, L.P.................................................      8,220,813       6.397  %
California Public Employees' Retirement System..............        287,245         *
IBM Retirement Plan Trust...................................        215,434         *
State of Michigan Retirement System.........................        215,434         *
The Board of Regents of the University of Texas System......         22,980         *
The Permanent University Fund of the State of Texas.........         91,918         *
Brinson Partnership Fund, L.P...............................          5,544         *
Brinson Partnership Fund Trust..............................         11,691         *
Illinois State Universities Retirement System...............         22,980         *
Washington State Investment Board...........................        143,623         *
Virginia Retirement System..................................        143,623         *
EDS Retirement System.......................................         17,235         *
New Mexicon State Investment Council........................          7,181         *
JCPenney Company Inc. Pension Plan..........................         21,543         *
D.C. Retirement Board.......................................         71,811         *
Unysis Pension Plan.........................................         43,087         *
Los Angeles County Employees Retirement Association.........         71,811         *
Chancellor LGT Partnership Fund, L.P........................         14,362         *
Southwestern Bell Corporation Master Pension Trust..........         14,362         *
RSTW Management, L.P........................................         14,362         *


------------------------

*   Less than 1%.

    As of the date of this proxy statement/prospectus, SCF-IV, L.P. owns
7,666,523 shares of common stock of Q Services, which were converted into a
maximum of 8,220,813 shares of Key common stock in the merger. As of such date,
RSTW Partners III, L.P. owns 1,339,388 shares of common stock of Q Services,
which were converted into a maximum of 1,436,226 shares of Key common stock in
the merger. All of those shares were distributed to the partners of RSTW
Partners III, L.P. in accordance with the RSTW partnership agreement. All of the
selling shareholders named in the table set forth above, other than SCF-IV,
L.P., were partners of RSTW Partners III, L.P.

                                       82

                              PLAN OF DISTRIBUTION

    The selling shareholders may sell shares of Key's common stock from time to
time in transactions on the exchanges or markets where Key's common stock may be
then listed for trading or otherwise than on such exchanges or markets. As used
herein, "selling shareholders" includes donees, pledgees, transferees or other
successors-in-interest selling shares received after the date of this prospectus
from a named selling shareholder as a gift, pledge, partnership distribution or
other non-sale related transfer. Shares may be also sold in privately-negotiated
transactions, in underwritten offerings or by a combination of such methods of
sale. Sales of shares of common stock may be made at fixed prices, which may be
changed, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. The selling shareholders
may effect such transactions by selling the shares of common stock to or through
broker-dealers, as principals or agents, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders or the purchasers of the shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular broker-dealer might be in excess of
customary commissions).

    Other methods by which selling shareholders may sell shares of Key's common
stock include, without limitation:

    - "at the market" to or through market makers or into an existing market for
      Key's common stock;

    - in other ways not involving market makers or established trading markets,
      including direct sales to purchasers or sales effected through agents;

    - through transactions in options or swaps or other derivatives, whether
      exchange-listed or otherwise;

    - through cross or block trades;

    - through short sales; or

    - any combination of any such methods of sale.

    A "short sale" or "selling short" is when an investor sells stock not owned
by the investor to take advantage of an anticipated decline in the price or to
protect a profit in the shares owned by such investor. The selling shareholders
may also enter into option or other transactions with broker-dealers that
require the delivery to those broker-dealers of the common stock offered by this
proxy statement/ prospectus, which common stock may be resold by such
broker-dealers under this prospectus. The selling shareholders may also make
sales under Rule 144 of the Securities Act if an exemption from registration is
available.

    The selling shareholders may enter into hedging transactions with
broker-dealers or other financial institutions. The broker-dealers or financial
institutions may engage in short sales of the common stock in the course of
hedging the positions they assume with the selling shareholders, including
positions assumed in connection with distributions of the shares by such
broker-dealers or financial institutions. In addition, the selling shareholders
may loan or pledge shares to a broker-dealer, which may sell the loaned shares
or, upon a default by the selling shareholders of the secured obligation, may
sell or otherwise transfer the pledged shares.

    The selling shareholders and any broker-dealers who act in connection with
the sale of shares of Key's common stock under this prospectus may be deemed to
be "underwriters" as that term is defined in the Securities Act, and any
commissions received by them and profit on any resale of the shares of Key's
common stock as principal might be deemed to be underwriting discounts and
commissions under the Securities Act. Because the selling shareholders may be
deemed to be underwriters, they will be

                                       83

subject to the prospectus delivery requirements of the Securities Act, which may
include delivery through the facilities of the New York Stock Exchange pursuant
to Rule 153 of the Securities Act. Key has informed the selling shareholders
that the anti-manipulative provisions of Regulation M of the Exchange Act may
apply to their sales in the market.

    Under the merger agreement, Key has agreed to indemnify the selling
shareholders and each underwriter, if any, against certain liabilities,
including certain liabilities under the Securities Act, or will contribute to
payments such selling shareholders or underwriters may be required to make in
respect of certain losses, claims, damages or liabilities.

    After Key is notified by a selling shareholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing:

    - the name of each such selling stockholder and of the participating
      broker-dealers;

    - the type and number of securities involved;

    - the price at which such securities were sold;

    - the commissions paid or discounts or concessions allowed to such
      broker-dealer, where applicable;

    - that such broker-dealer did not conduct any investigations to verify the
      information set out or incorporated by reference in this prospectus; and

    - other facts material to the transaction.

                                    EXPERTS

    The consolidated financial statements and schedules of Key Energy Services,
Inc. and subsidiaries as of June 30, 2001 and 2000, and for each of the years in
the three-year period ended June 30, 2001, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The report of KPMG LLP refers to a change in the
method of accounting for derivative instruments and hedging activities in 2001.

    The consolidated financial statements of Q Services, Inc. at December 31,
2001, and for each of the three years in the period ended December 31, 2001,
which are included in the post-effective amendment to Key's registration
statement on Form S-4 (Registration No. 333-83924) of which this proxy
statement/prospectus forms a part, have been audited by Arthur Andersen LLP,
independent auditors, as set forth in their report thereon. Arthur Andersen is
not subject to the liability provisions of Section 11 of the Securities Act for
their reports on the consolidated financial statements because Arthur Andersen
has not consented to being named as having prepared or certified those financial
statements within the meaning of Sections 7 and 11 of the Securities Act.

                                 LEGAL MATTERS

    The validity of the shares of Key common stock being offered hereby will be
passed upon for Key by Porter & Hedges, L.L.P., Houston, Texas. Porter & Hedges,
L.L.P. will be delivering an opinion concerning federal income tax consequences
of the merger.

                                       84

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    The statements made in this proxy statement/prospectus or in the documents
that have been incorporated by reference that are not statements of historical
fact are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking statements
generally can be identified by the use of words such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "believe" or similar expressions.

    Although Key believes that the expectations in its forward-looking
statements are reasonable, Key cannot give any assurance that those expectations
will be correct. Key's operations are subject to numerous uncertainties, risks
and other influences, many of which are outside its control; and any of which
could materially affect its results of operations and ultimately prove the
statements Key makes to be inaccurate. Key cautions you not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this proxy statement/prospectus.

    Future events and actual results may differ materially from the results set
forth in or implied in the forward-looking statements. Factors that might cause
such a difference include:

    - fluctuations in world-wide prices and demand for oil and natural gas;

    - fluctuations in the level of oil and natural gas exploration and
      development activities;

    - fluctuations in the demand for well servicing, contract drilling and
      ancillary oilfield services;

    - the existence of competitors, technological changes and developments in
      the industries in which Key is engaged;

    - the existence of operating risks inherent in the well servicing, contract
      drilling and ancillary oilfield services industries; and

    - general economic conditions, the existence of regulatory uncertainties and
      the possibility of political instability in any of the countries in which
      Key does business, in addition to other matters discussed herein.

    Other factors that could cause actual results to differ materially from
Key's expectations are discussed under the heading "Risk Factors" beginning on
page 15 of this proxy statement/prospectus.

                      WHERE YOU CAN FIND MORE INFORMATION

    Key has filed a registration statement on Form S-4 (Registration No.
333-83924) with the SEC with respect to the securities it may offer, including
the common stock, to be issued to holders of Q Services' common stock in the
merger. This proxy statement/prospectus is a part of that registration
statement, and constitutes both a prospectus of Key and a proxy statement of Q
Services for its special meeting. However, it does not contain all the
information contained in the registration statement, including its exhibits and
schedules. You should refer to the registration statement, including the
exhibits and schedules, for further information about Key and the securities Key
is offering. Statements made in this proxy statement/prospectus about certain
contracts or other documents are not necessarily complete; and you are referred
to the copies of the contracts or documents that are filed as exhibits to the
registration statement, because those statements are qualified in all respects
by reference to those exhibits. The registration statement, including exhibits
and schedules, is on file at the offices of the SEC and may be inspected without
charge.

                                       85

    Key files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document filed at the SEC's
public reference rooms in at the following locations:


                                        
450 Fifth Street, N.W.                     Citicorp Center
Public Reference Room                      500 West Madison Street, Suite 1400
Washington, D.C. 20549                     Chicago, IL 60661-2511


    Please call the SEC at 1-800-SEC-0330 for further information about the
public reference rooms. Key's filings with the SEC are also available to the
public from commercial document retrieval services and at the SEC's website at
WWW.SEC.GOV.

    SEC rules allow Key to "incorporate by reference" in this proxy
statement/prospectus the information Key files with the SEC, which means Key can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered part of this prospectus from
the date we file the information. Any reports filed by Key with the SEC after
the date of this proxy statement/prospectus and before the selling shareholders
sell all of the securities offered through this proxy statement/prospectus will
automatically update and, where applicable, supersede any information contained
in this proxy statement/prospectus or incorporated by reference in this proxy
statement/prospectus. In connection with the resale of the shares of Key common
stock by the selling shareholders, this proxy statement/prospectus incorporates
by reference the documents listed below:

    - Annual Report on Form 10-K for the year ended June 30, 2001, as amended;

    - Quarterly Reports on Form 10-Q for the quarters ended September 30, 2001,
      December 31, 2001 and March 31, 2002;

    - Current Reports on Form 8-K filed with the SEC on November 26, 2001,
      December 19, 2001, February 20, 2002, February 27, 2002, March 1, 2002 and
      May 17, 2002; and

    - The description of our common stock contained in the registration
      statement on Form 8-A dated March 27, 1998, including any amendments or
      reports that have been filed to update the description.

    Key also incorporates by reference into this proxy statement/prospectus
additional documents that may be filed with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act from the date of this proxy statement/prospectus
to the date that all shares of common stock received in the merger have been
sold by the selling shareholders.

    Copies of Key's Form 10-K for the year ended June 30, 2001 and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, are attached to this
proxy statement/prospectus as Appendices D and E, respectively.

    Key has supplied all information contained or incorporated by reference in
this proxy statement/ prospectus relating to Key; and Q Services has supplied
all such information relating to Q Services.

    If you are already a Key shareholder, you may have already received some of
the documents incorporated by reference, but you can obtain any of them through
Key, the SEC or the SEC's website as described above. Documents incorporated by
reference are available from Key without charge, excluding all exhibits unless
we have specifically incorporated by reference an exhibit in this proxy
statement/prospectus.

                                       86

    You may request a copy of these filings, which Key will provide to you at no
cost, by writing or telephoning Key at the following address and telephone
number:

       Key Energy Services, Inc.
       400 South River Road
       New Hope, Pennsylvania 18938
       Attn: General Counsel
       (215) 862-7900

    If you would like to request documents from Key, please do so by June 20,
2002, to receive them before the Q Services special meeting.

    Q Services is a privately held corporation that is not subject to the
reporting requirements of the Exchange Act, and therefore does not incorporate
information in this proxy statement/prospectus by reference unless such
information appears in an exhibit to this proxy statement/prospectus.

    You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the transactions
contemplated by the merger agreement. Key has not authorized anyone to provide
you with information that is different from what is contained in this proxy
statement/prospectus. You should not assume that the information contained in
this proxy statement/prospectus is accurate as of any date other than the date
set forth on the cover page, and neither the mailing of this proxy
statement/prospectus to shareholders nor the issuance of Key's common stock in
the merger shall create any implication to the contrary.

                                       87

                                    INDEX TO

                       Q SERVICES, INC. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS


                                                           
Report of Independent Public Accountants....................  F-2

Consolidated Balance Sheets--
  December 31, 2001 and 2000................................  F-3

Consolidated Statements of Operations--
  Years Ended December 31, 2001 and 2000....................  F-4

Consolidated Statements of Shareholders' Equity--
  Years Ended December 31, 2001 and 2000....................  F-5

Consolidated Statements of Cash Flows--
  Years Ended December 31, 2001 and 2000....................  F-6

Notes to Consolidated Financial Statements--December 31,
  2001 and 2000.............................................  F-7

Condensed Consolidated Balance Sheets--
  March 31, 2002 (unaudited) and December 31, 2001..........  F-21

Condensed Consolidated Statements of Operations--
  Quarters Ended March 31, 2002 and 2001 (unaudited)........  F-22

Condensed Consolidated Statements of Cash Flows--
  Quarters Ended March 31, 2002 and 2001 (unaudited)........  F-23

Notes to Unaudited Condensed Consolidated Financial
  Statements--March 31, 2002................................  F-24


                                      F-1

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Q Services, Inc., and Subsidiaries:

    We have audited the accompanying consolidated balance sheets of Q
Services, Inc., a Texas corporation, and subsidiaries (collectively, the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Q Services, Inc., and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

Houston, Texas
April 17, 2002

                                      F-2

                       Q SERVICES, INC., AND SUBSIDIARIES

            CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000

                    (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)



                                                                2001       2000
                                                              --------   --------
                                                                   
                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  5,963   $  4,668
  Accounts receivable--
    Trade, net of allowance for doubtful accounts of $1,948
      and $707, respectively................................    23,751     15,100
    Unbilled................................................     3,939      1,106
    Other, including amounts receivable from affiliates of
      $83 and $242, respectively............................       255        363
  Prepaid expenses and other current assets.................     8,471      1,213
                                                              --------   --------
        Total current assets................................    42,379     22,450
PROPERTY, PLANT AND EQUIPMENT, net..........................    95,966     42,103
INTANGIBLE ASSETS, net of accumulated amortization of $4,145
  and $2,038, respectively..................................    58,571     12,396
DEFERRED FINANCING COSTS....................................     3,243      1,532
OTHER ASSETS, including amounts receivable from affiliates
  of $574 and $0, respectively..............................       962        364
                                                              --------   --------
        Total assets........................................  $201,121   $ 78,845
                                                              ========   ========
                 LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt......................  $ 13,812   $  5,375
  Current maturities of capital leases......................        25      1,122
  Accounts payable..........................................     9,689      4,411
  Accrued expenses..........................................     9,832      6,262
  Other current liabilities.................................     1,822        279
                                                              --------   --------
        Total current liabilities...........................    35,180     17,449
LONG-TERM DEBT, net of current maturities...................    66,777     31,015
LONG-TERM PORTION OF CAPITAL LEASES, net of current
  maturities................................................        78      1,556
DEFERRED INCOME TAX LIABILITY, net..........................     5,929         --
OTHER LONG-TERM LIABILITIES.................................       999      1,465
                                                              --------   --------
        Total liabilities...................................   108,963     51,485
MANDATORILY REDEEMABLE PREFERRED STOCK......................     7,460         --
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
  Common stock, no par value; 40,000,000 shares authorized,
    15,083,747 shares and 7,562,722 shares issued,
    respectively............................................    80,379     35,253
  Warrants, 682,766 and 632,766 shares issued and
    outstanding in 2001 and 2000............................     4,196      3,991
  Treasury stock, at cost; 50,000 shares in 2000............        --       (250)
  Retained earnings (accumulated deficit)...................       123    (11,634)
                                                              --------   --------
        Total shareholders' equity..........................    84,698     27,360
                                                              --------   --------
        Total liabilities and shareholders' equity..........  $201,121   $ 78,845
                                                              ========   ========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3

                       Q SERVICES, INC., AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
                                 (IN THOUSANDS)



                                                                2001       2000
                                                              --------   --------
                                                                   
REVENUES:
  Field production services.................................  $110,697   $50,790
  Pressure pumping services.................................    27,833        --
  Fishing and rental tools..................................    40,585    28,139
                                                              --------   -------
      Total Revenues........................................   179,115    78,929
COSTS AND EXPENSES:
  Field production services.................................    62,344    27,614
  Pressure pumping services.................................    16,897        --
  Fishing and rental tools..................................    20,211    13,497
  Selling, general and administrative expenses..............    37,928    22,127
  Depreciation and amortization.............................    11,319     4,881
                                                              --------   -------
      Operating income......................................    30,416    10,810

OTHER INCOME (EXPENSE):
  Interest income...........................................       119        47
  Interest expense..........................................    (6,589)   (6,221)
  Gain (loss) on sale of assets.............................    (1,535)      598
                                                              --------   -------
      Income before income taxes and extraordinary loss.....    22,411     5,234
INCOME TAX PROVISION........................................     8,046       263
                                                              --------   -------
      Net income before extraordinary loss..................    14,365     4,971
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of
  income tax benefit of $1,277..............................     2,365        --
                                                              --------   -------
      Net income............................................    12,000     4,971
PREFERRED STOCK DIVIDENDS...................................       243        --
                                                              --------   -------
      Net income applicable to common shareholders..........  $ 11,757   $ 4,971
                                                              ========   =======


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4

                       Q SERVICES, INC., AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
                    (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)



                                  COMMON STOCK             WARRANTS           TREASURY STOCK      RETAINED        TOTAL
                              ---------------------   -------------------   -------------------   EARNINGS    SHAREHOLDERS'
                                SHARES      AMOUNT    WARRANTS    AMOUNT     SHARES     AMOUNT    (DEFICIT)      EQUITY
                              ----------   --------   --------   --------   --------   --------   ---------   -------------
                                                                                      
BALANCE, December 31,
  1999......................   2,883,199   $13,779    338,252     $2,998         --      $ --     $(16,605)      $   172
  Net income................          --        --         --         --         --        --        4,971         4,971
  Common stock issuances--
    Share offering, net of
      expenses..............   4,000,000    19,100         --         --         --        --           --        19,100
    Acquisitions............     679,523     2,374         --         --         --        --           --         2,374
  Warrants issued...........          --        --    294,514        993         --        --           --           993
  Treasury stock acquired...          --        --         --         --    (50,000)     (250)          --          (250)
                              ----------   -------    -------     ------    -------      ----     --------       -------
BALANCE, December 31,
  2000......................   7,562,722    35,253    632,766      3,991    (50,000)     (250)     (11,634)       27,360
  Net income................          --        --         --         --         --        --       12,000        12,000
  Preferred stock
    dividends...............          --        --         --         --         --        --         (243)         (243)
  Common stock issuances--
    Share offering, net of
      expenses..............   5,021,025    30,126         --         --         --        --           --        30,126
    Acquisitions............   2,500,000    15,000         --         --         --        --           --        15,000
  Warrants issued...........          --        --     50,000        205         --        --           --           205
  Treasury stock issuance...          --        --         --         --     50,000       250           --           250
                              ----------   -------    -------     ------    -------      ----     --------       -------
BALANCE, December 31,
  2001......................  15,083,747   $80,379    682,766     $4,196         --      $ --     $    123       $84,698
                              ==========   =======    =======     ======    =======      ====     ========       =======


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5

                       Q SERVICES, INC., AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
                                 (IN THOUSANDS)



                                                                2001       2000
                                                              --------   --------
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $ 12,000   $  4,971
  Adjustments to reconcile net income to net cash provided
    by operating activities--
    Depreciation and amortization...........................    11,319      4,881
    Provision for doubtful accounts.........................     1,602         69
    (Gain) loss on sale of assets...........................     1,535       (598)
    Provision for impaired or damaged tools.................       984         --
    Extraordinary loss on early extinguishment of debt......     3,642         --
    Deferred income tax (benefit) expense...................     2,139        (49)
    Amortization of debt discount and deferred financing
      costs.................................................       785      1,476
    Changes in assets and liabilities, net of businesses
      acquired--
      Accounts receivable...................................       867     (4,505)
      Accounts payable......................................    (2,723)    (1,483)
      Accrued expenses......................................    (2,864)     4,064
      Other, net............................................    (6,197)    (1,607)
                                                              --------   --------
          Net cash provided by operating activities.........    23,089      7,219
                                                              --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of businesses, net of cash acquired..............   (36,183)    (2,800)
  Purchase of property, plant and equipment.................   (30,964)    (7,090)
  Proceeds from sale of assets..............................     2,121      1,253
                                                              --------   --------
          Net cash used in investing activities.............   (65,026)    (8,637)
                                                              --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from stock issuance, net of offering costs.......    30,126     19,100
  Borrowings on long-term debt and capital leases...........    98,069      1,898
  Payments on long-term debt and capital leases.............   (81,299)   (14,465)
  Issuance (purchase) of treasury stock.....................       250       (250)
  Payments of penalties and other charges related to the
    early extinguishment of debt............................      (379)        --
  Payments of deferred financing costs......................    (3,535)      (783)
                                                              --------   --------
          Net cash provided by financing activities.........    43,232      5,500
                                                              --------   --------
INCREASE IN CASH AND CASH EQUIVALENTS.......................     1,295      4,082
CASH AND CASH EQUIVALENTS, beginning of year................     4,668        586
                                                              --------   --------
CASH AND CASH EQUIVALENTS, end of year......................  $  5,963   $  4,668
                                                              ========   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for-
    Interest................................................  $  5,978   $  4,592
                                                              ========   ========
    Income taxes............................................  $  8,597   $     --
                                                              ========   ========
  Noncash investing and financing activities--
    Rollover of accrued interest into long-term debt........  $     --   $    343
                                                              ========   ========
    Acquisition consideration and deferred financing costs
      paid via issuance of warrants.........................  $    205   $    993
                                                              ========   ========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6

                       Q SERVICES, INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

Q Services, Inc., and subsidiaries (collectively, the Company) is engaged in
services used to enhance and maintain the production of oil and natural gas
wells. The Company offers a variety of production-related services including
fluid transportation; frac tank rental; pressure pumping used for well
stimulation, enhancement and completion; and fishing and rental tools used in
workover and drilling operations. The Company operates principally in Texas,
Louisiana, Oklahoma, New Mexico and the inland and offshore waters of the Gulf
of Mexico.

The Company was formed October 1, 1997, and incorporated in the state of Texas
to act as a holding company for its predecessor, Quality Tubular
Services, Inc., and to acquire several affiliated entities. The Company is now
organized into six operating units that support its service lines and regionally
focused operations.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of Q
Services, Inc., and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and short-term deposits with
original maturities of three months or less.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation on property,
plant and equipment is calculated using the straight-line method over the
estimated useful lives of the assets. Plant and equipment held under capital
leases and leasehold improvements are amortized to depreciation expense using
the straight-line method over the shorter of the lease term or estimated useful
life of the asset. Depreciation expense in 2001 and 2000 totaled $9.3 million
and $4.5 million, respectively.

Routine maintenance and repairs are included in expense as incurred while costs
of betterments and renewals are capitalized and depreciated over the remaining
lives of the related assets. When an asset is retired or sold, its cost and
accumulated depreciation are removed from the accounts and the difference
between the net book value of the asset and the proceeds from disposition is
recognized as a gain or loss.

Effective January 1, 2000, the Company revised the estimated useful lives of its
property, plant and equipment, and management estimates that these changes
increased 2000 net income by $3.6 million. These revisions to the estimated
useful lives were made to better reflect the expected usage of the assets over
time and to be consistent with prevalent industry practice.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in

                                      F-7

circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted cash flows
expected to be generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or the expected net
realizable value. The Company did not record any such impairment during the
years ended December 31, 2001 or 2000.

INTANGIBLE ASSETS

Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired, is generally amortized on a straight-line basis over the
expected periods to be benefited, up to 30 years. The Company's goodwill at
December 31, 2001 and 2000, was $56.5 million and $12.5 million, respectively,
and related accumulated amortization was $1.8 million and $0.9 million,
respectively. See Note 2 for further discussion.

Other intangible assets, consisting mainly of noncompetition agreements, are
amortized on a straight-line basis over the life of the related asset or the
term of the related agreement. The related obligations for the Company's
noncompetition agreements, included in other current and long-term liabilities,
are classified based on the expected payment dates. The original liability was
discounted using the incremental borrowing rate of the Company at the time the
agreements were executed.

DEFERRED FINANCING COSTS

The Company capitalizes certain costs in connection with obtaining its
borrowings, such as lender's fees and related attorney's fees. These costs are
being amortized to interest expense over the term of the related debt. As of
December 31, 2001 and 2000, the amount of unamortized deferred financing costs
included in the accompanying consolidated balance sheets totaled approximately
$3.2 million and $1.5 million, respectively.

INCOME TAXES

Income taxes are accounted for under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

All financial instruments of the Company are stated at cost, which management
believes approximates fair value.

REVENUE RECOGNITION

Revenues from rental agreements are recognized over the rental period, and
revenues from service agreements are recognized when services have been
rendered. The associated costs and expenses are recognized as incurred. Revenues
from fixed-price construction contracts are recognized on the completed-contract
method in accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," due to the relatively
short duration of such contracts. Under the completed-contract method, income is
recognized only when the contract is completed or substantially

                                      F-8

completed. The Company generally considers contracts to be substantially
complete upon its departure from the work site and acceptance by the customer.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined, and the effects of revisions to estimated losses are recognized in
the period in which the revisions, if any, are determined.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration risk
consist primarily of temporary cash investments and trade receivables. The
Company restricts investment of temporary cash investments to financial
institutions with high credit standing. The Company's customer base consists
primarily of multinational and independent oil and natural gas producers. The
Company performs ongoing credit evaluations of its customers but generally does
not require collateral on its trade receivables. Credit risk is considered by
management to be limited due to the large number of customers comprising the
Company's customer base. The Company maintains reserves for potential credit
losses, and such losses have historically been within management's expectations.
During 2001 and 2000, sales to one customer accounted for 14.5 percent and
18.0 percent, respectively, of total sales for the Company. No other customer
accounted for more than 10.0 percent of sales during either year.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. Actual results could differ from those estimates. The Company's
significant estimates include the estimated useful lives and recoverability of
its long-lived assets, purchase price allocations for its acquisitions,
self-insurance accruals, potential legal and environmental exposures, and the
allowance for doubtful accounts.

SELF-INSURANCE

The Company retains the risk for workers' compensation, auto liability, general
liability and employee group health claims, subject to certain defined stop-loss
limits per occurrence. Losses up to the stop-loss amounts are accrued based upon
the Company's known claims incurred and an estimate of claims incurred but not
reported. The accruals are based upon known facts and historical trends, and
management believes such accruals to be adequate.

ENVIRONMENTAL CONTINGENCIES

The Company is subject to various federal, state and local environmental laws
and regulations which establish standards and requirements for protection of the
environment. The Company cannot predict the future impact of such standards and
requirements, which are subject to change and can have retroactive
effectiveness. The Company continues to monitor the status of these laws and
regulations. Currently, the Company has not been fined or cited for, or notified
of, any environmental violations which would have a material adverse effect upon
the consolidated financial position, liquidity or capital resources of the
Company.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangibles." Among other things, SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and

                                      F-9

requires that all business combinations consummated after June 30, 2001, be
accounted for under the purchase method of accounting. Additionally, SFAS
No. 141 requires that intangible assets other than goodwill, if present, be
assigned separate values in business combinations. The Company adopted SFAS
No. 141 effective July 1, 2001. Such adoption did not have a material impact on
the Company's consolidated financial position or results of operations.

SFAS No. 142 eliminates the requirement to amortize goodwill and requires that
companies annually assess the carrying value of its goodwill for impairment by
applying a fair value-based test. Intangible assets other than goodwill will
continue to be amortized over their estimated remaining useful lives. The
Company is in the process of assessing the potential impact of SFAS No. 142 on
its consolidated financial position and results of operations and will adopt the
statement in 2002.

In June 2001, the FASB issued SFAS No. 143, "Asset Retirement Obligations." SFAS
No. 143 requires that companies recognize a liability for the estimated costs
associated with the retirement of a long-lived asset in the period in which a
liability exists and a reasonable estimate of the fair value of such liability
can be made. Such statement is effective for fiscal years beginning after
June 15, 2002, and the Company plans to adopt the statement in 2003. Management
does not believe that the adoption of SFAS No. 143 will have a material impact
on its consolidated financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and
resolves significant implementation issues encountered with SFAS No. 121. SFAS
No. 144 also establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those assets be measured at the lower of
carrying amount or fair value less cost to sell. Such statement is effective for
fiscal years beginning after December 31, 2001, and the Company plans to adopt
the statement in 2002. Management does not believe that the adoption of SFAS
No. 144 will have a material impact on its consolidated financial position or
results of operations.

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS Nos. 137 and 138, effective January 1,
2001. The adoption of such statement did not have a material impact on the
Company's consolidated financial position or results of operations. SFAS
No. 133 requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and measure them at fair value. Any changes in
the derivative's fair value must be recognized currently in earnings unless
specific hedging criteria are met. The Company did not engage in activities or
enter into arrangements normally associated with derivative instruments in the
years ended December 31, 2001 and 2000. However, subsequent to December 31,
2001, the Company entered into an interest rate hedge transaction related to the
variable-rate debt under its new term loan facility (see Note 5).

RECLASSIFICATIONS

Certain 2000 amounts have been reclassified to conform to the 2001 presentation.

2.  ACQUISITIONS:

During 2001, the Company consummated three significant acquisitions, all of
which were recorded using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included in the
accompanying consolidated financial statements from their respective acquisition
dates.

On January 3, 2001, the Company acquired all of the outstanding common stock of
Goetz Services, Inc. (Goetz), for approximately $10.3 million in cash, net of
cash acquired, and the assumption of certain liabilities. Goetz is a provider of
fluid handling and related services to oil and gas producers operating

                                      F-10

in south-central Texas. The Company recorded approximately $8.0 million in
goodwill associated with this transaction.

On May 1, 2001, the Company acquired certain assets and assumed certain
liabilities of Palestine Contractors, Limited, Palestine Contracting Services,
Limited, and Dew Disposal, Limited (collectively Palestine), for approximately
$9.8 million in cash, net of cash acquired, $5.9 million in seller-financed debt
and $0.2 million associated with the issuance of 50,000 warrants. The warrants
provide the holders with the opportunity to purchase the Company's common stock
at a price of $6.00 per share (see Note 10). Palestine provides fluid handling,
site construction and lease crew services to oil and gas producers operating in
east-central Texas. The Company recorded approximately $9.8 million in goodwill
associated with this transaction.

On July 16, 2001, the Company acquired all of the outstanding common stock of
Niewoehner, Inc., d.b.a. American Energy Services (AES), for approximately
$35.4 million. Such consideration was comprised of approximately $12.9 million
in cash, net of cash acquired, $15.0 million associated with the issuance of
2.5 million of the Company's common shares, and $7.5 million associated with the
issuance of 74,600 shares of mandatorily redeemable preferred stock of the
Company (see Note 6). AES provides high-pressure fractionation and stimulation
services to oil and gas producers operating in Texas, Oklahoma and New Mexico.
The acquisition of AES significantly increases the Company's presence in this
particular segment of the industry. The Company allocated its purchase price to
the following assets and liabilities of AES upon acquisition (in thousands):


                                                         
Working capital...........................................  $ (3,897)
Property, plant and equipment.............................    23,870
Noncompete agreements and other intangible assets.........     2,200
Goodwill..................................................    25,675
Borrowings................................................   (12,498)
                                                            --------
Total purchase price......................................  $ 35,350
                                                            ========


Noncompete agreements and other intangible assets are being amortized on a
straight-line basis over a period of approximately three to five years.

For the year ended December 31, 2001, goodwill associated with the Goetz and
Palestine acquisitions was being amortized on a straight-line basis over a
period of 30 years. Goodwill generated from the AES acquisition, which was
consummated after July 1, 2001, is not subject to amortization, in accordance
with SFAS No. 142.

In addition to the above transactions, the Company acquired the assets of
certain other entities during the year for approximately $3.2 million. These
acquisitions were also recorded using the purchase method of accounting.

The accompanying December 31, 2001, consolidated balance sheet includes
preliminary allocations of the purchase price to the fair value of assets
acquired and liabilities assumed for each of the aforementioned transactions.
Accordingly, such allocations are subject to final adjustments. Management does
not believe that such adjustments will have a material impact on the Company's
consolidated financial position or results of operations.

In 2000, the Company completed three acquisitions for an aggregate total cost of
$5.2 million in cash and common stock. Goodwill associated with these
acquisitions totaled approximately $5.5 million.

                                      F-11

The following unaudited pro forma consolidated results of operations are
presented as if the above-mentioned acquisitions had taken place at the
beginning of the period presented (in thousands):



                                                              DECEMBER 31
                                                          -------------------
                                                            2001       2000
                                                          --------   --------
                                                              (UNAUDITED)
                                                               
Net sales...............................................  $217,377   $150,763
Net income before extraordinary loss....................    18,760      7,969
Net income..............................................    16,395      7,969


These pro forma consolidated results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
consolidated results of operations which actually would have resulted had the
acquisitions occurred at the beginning of the period presented or indicative of
the consolidated future results of operations.

3.  PROPERTY, PLANT AND EQUIPMENT:

Major classifications of property, plant and equipment and estimated depreciable
lives are as follows (in thousands):



                                                                          DECEMBER 31
                                                     ESTIMATED LIFE   -------------------
                                                        (NOTE 1)        2001       2000
                                                     --------------   --------   --------
                                                                        
Autos, trucks, trailers and related equipment......    5-10 years     $ 87,204   $ 36,401
Tubing, rental and fishing equipment...............    4-12 years       22,247     20,576
Buildings, facilities and wells....................    5-30 years       14,943      8,332
Furniture and equipment............................    3-10 years        2,172      1,244
Construction in progress...........................      N/A             2,027         --
Land...............................................      N/A             1,531        746
                                                                      --------   --------
                                                                       130,124     67,299
Less- Accumulated depreciation.....................                    (34,158)   (25,196)
                                                                      --------   --------
                                                                      $ 95,966   $ 42,103
                                                                      ========   ========


Construction in progress includes amounts expended for certain types of assets
that are not ready for service. Depreciation for such assets does not begin
until the assets are completely equipped and placed in service.

In 2001, the Company recorded a $984,000 provision to account for potentially
impaired or damaged tools associated with its fishing and rental tools business.
Such provision represents management's best estimate of the potential exposure
associated with impaired or damaged tools associated with this segment of its
business. The charge has been reflected as a direct reduction of tubing, rental
and fishing equipment.

4.  CAPITAL LEASES:

The Company is obligated under various capital leases for certain machinery and
equipment that expire at various dates during the next five years. As part of
the term loan financing closed in December 2001 (see Note 5), the Company paid
off the majority of its capital lease obligations at the end of 2001. As of
December 31, 2001, the Company's future minimum capital lease payments totaled
approximately $110,000, including interest, of which approximately $33,000 is
payable during 2002.

                                      F-12

5.  LONG-TERM DEBT:

Long-term debt consists of the following (in thousands):



                                                                  DECEMBER 31
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                   
Term Loan Facility..........................................  $ 80,000   $    --
Southwest Bank of Texas, N.A., credit facility..............        --    15,250
CIT Group/Business Credit, Inc., credit facility............        --     6,609
Subordinated Debt, net of discount of $-- and $2,126,
  respectively..............................................       100     9,929
Other.......................................................       489     4,602
                                                              --------   -------
      Total long-term debt..................................    80,589    36,390
Less--Current maturities....................................   (13,812)   (5,375)
                                                              --------   -------
      Long-term debt, net of current maturities.............  $ 66,777   $31,015
                                                              ========   =======


The aggregate maturities of long-term debt at December 31, 2001, are as follows
(in thousands):


                                                          
Year ending December 31,
  2002.....................................................  $13,812
  2003.....................................................   13,344
  2004.....................................................   53,333
  2005.....................................................      100
                                                             -------
      Total................................................  $80,589
                                                             =======


The Company executed a $100.0 million term loan and credit facility (the
Facility) in December 2001 with a number of banks, including Lehman Brothers,
who acted as the lead syndication agent. The Facility included an $80.0 million
term loan (the Term Loan Facility) and up to $20.0 million in borrowing capacity
under a revolving credit facility (the Revolving Credit Facility). Additionally,
the Facility provides up to $5.0 million for the issuance of letters of credit
on behalf of the Company. However, any outstanding letters of credit reduce the
borrowing capacity under the Revolving Credit Facility. Borrowings under the
Facility are secured by substantially all of the assets of the Company.

In connection with the execution of the Facility, the Company retired its
existing credit facilities with Southwest Bank of Texas, N.A., and CIT
Group/Business Credit, Inc., and the majority of its existing subordinated and
other debt obligations. The Company recognized an extraordinary loss of
$2.4 million, net of an income tax benefit of $1.3 million, in conjunction with
these early debt extinguishments related to the payment of certain penalties and
costs and the write-off of related unamortized deferred financing costs.

THE TERM LOAN FACILITY

The Term Loan Facility was provided to the Company in the amount of
$80.0 million ($76.7 million net of related debt issuance costs) upon closing of
the Facility on December 17, 2001 (the Funding Date). The Term Loan Facility has
a term of three years from the initial Funding Date. Eleven quarterly principal
payments of $3.33 million are required under the Term Loan Facility beginning on
March 31, 2002. The twelfth and final principal payment of $43.33 million is due
on December 17, 2004, the three-year anniversary of the Funding Date.

The Company must designate the types of borrowings it wishes to make under the
Term Loan Facility. Such borrowings, or tranches, can be made for periods
ranging from one to six months and can be comprised of either base rate loans or
Eurodollar loans, as defined in the Facility. Base rate loans accrue interest at
(a) the prime rate, (b) the base CD rate or (c) the federal funds effective
rate,

                                      F-13

whichever is higher, in effect at the time of the borrowing request, plus an
applicable margin of 3.50 percent. Eurodollar loans accrue interest based on the
three-month LIBOR in effect at the time of the borrowing request, plus an
applicable margin of 4.50 percent. Interest accrues daily and is payable at the
end of each quarter, regardless of the type of loan. As of December 31, 2001,
the $80.0 million Term Loan Facility was split between two borrowing tranches:
(a) a $10.0 million three-month Eurodollar loan accruing interest at
approximately 6.41percent annually and (b) a $70.0 million six-month Eurodollar
loan accruing interest at 6.50 percent annually.

In February 2002, the Company entered into an interest rate swap agreement with
three banks to fix the LIBOR interest rate on $48.0 million of the
$80.0 million Term Loan Facility. The interest rate swap agreement effectively
fixes the floating rate component of the Term Loan Facility at 3.75 percent and
expires in December 2004, consistent with the maturity date of the Term Loan
Facility. The notional amount of the swap will amortize down over the three-year
term to match the principal amortization of the Term Loan Facility.

THE REVOLVING CREDIT FACILITY

The Facility provides for a $20.0 million Revolving Credit Facility for a period
of three years from the Funding Date. Borrowings under the Revolving Credit
Facility, and their related interest charges, are made in the same manner as the
Term Loan Facility based on whether the borrowing is a base rate loan or a
Eurodollar loan. Furthermore, the Company must pay a commitment fee equal to
0.5 percent per annum on the average daily amount of the available revolving
credit commitment.

Borrowings available to the Company under the Revolving Credit Facility are
reduced by any letters of credit outstanding under the Facility. Additionally,
the amount available to the Company under the Revolving Credit Facility may be
limited based the amount of eligible accounts receivable and tangible property
of the Company, as defined in the Facility (hereinafter referred to as the
Borrowing Base Calculation). If the total outstanding borrowings under the
Facility, including term loans, revolving credit commitments and outstanding
letters of credit, exceed the applicable Borrowing Base Calculation, the Company
must immediately repay any outstanding loans under the Revolving Credit Facility
(including any outstanding letters of credit) and the Term Loan Facility, in
that order, until the amount of outstanding loans is less than the applicable
Borrowing Base Calculation.

As of December 31, 2001, the amount available for borrowing under the Revolving
Credit Facility, after taking into consideration outstanding letters of credit
and the aforementioned Borrowing Base Calculation, totaled approximately
$8.8 million. No amounts were outstanding under the Revolving Credit Facility at
December 31, 2001.

LETTERS OF CREDIT

The Facility initially provided the Company with up to $5.0 million for the
issuance of letters of credit for a period of three years from the Funding Date.
In April 2002, the Company amended the Facility to increase the amount of
issuable letters of credit to $8.0 million. The Company is required to pay a fee
of 4.50 percent per annum on any outstanding letters of credit. As of
December 31, 2001, approximately $1.45 million in letters of credit were
outstanding under the Facility.

FINANCIAL COVENANTS

Under the terms of the Facility, the Company is required to meet certain
financial covenants on a quarterly reporting basis. Among other restrictions,
such covenants include the maintenance of specified debt-to-capitalization
ratios and minimum net worth and liquidity requirements, as well as the
maintenance of sufficient levels of earnings to meet the Company's required
fixed charges and debt servicing obligations. If the Company violates any of the
covenants included in the Facility, and is unable to cure such violations within
the applicable time periods provided for in the Facility, all of the

                                      F-14

related debt obligations outstanding under the Facility could become immediately
due and payable. In April 2002, the Company revised certain of its financial
covenants. As of December 31, 2001, the Company was in compliance with all of
the related covenants, as amended, included under the Facility.

SUBORDINATED DEBT

In 1997, the Company entered into a subordinated credit agreement (the
Subordinated Debt) with a shareholder, RSTW Partners III, L.P., in the amount of
$10.0 million at a discount of $3.0 million. The Subordinated Debt was amended
in 2000 and 2001, providing for the addition of unpaid interest totaling
$2.1 million to the principal balance and for the amendment of certain
covenants. In conjunction with the amendment, the Company issued 257,014 common
stock warrants with an exercise price of $0.01 per share. In connection with the
closing of the Facility in December 2001, all but $100,000 of the outstanding
Subordinated Debt was paid off. The remaining balance of the Subordinated Debt
bears interest at an effective rate of 13.7 percent and is due in full in 2005.

OTHER

The Company has approximately $0.5 million in other notes payable outstanding as
of December 31, 2001. Such notes bear interest at rates ranging from
7.0 percent to 12.0 percent. The majority of the principal balance outstanding
as of December 31, 2001, is scheduled to be retired during 2002.

6.  MANDATORILY REDEEMABLE PREFERRED STOCK:

In connection with the Company's acquisition of AES in July 2001, the Company
issued 72,000 shares of Series A preferred stock and 2,600 shares of Series B
preferred stock (collectively the Preferred Shares) to certain former
shareholders of AES. The Preferred Shares were issued with a liquidation
preference of $100 per share and are mandatorily redeemable by the Company on or
before July 16, 2006 (the Final Redemption Date). The Preferred Shares must be
redeemed prior to the Final Redemption Date for $100 per share in the event the
Company (a) completes an initial public offering of common stock with net
proceeds in excess of $75.0 million or (b) the Company closes a debt financing
which generates net proceeds of at least $75.0 million. However, the Company may
not redeem any of the Preferred Shares so long as the Subordinated Debt, and any
amounts related thereto including accrued interest, remains outstanding. The
preferred shareholders are entitled to the equivalent of one common share vote
for every 10 Preferred Shares owned with respect to any matters upon which the
common shareholders have the right to vote.

The Preferred Shares accrue dividends initially at the rate of 5 percent per
annum. Such rate increases by one percentage point per year on each anniversary
of the original issuance date until such time as the Preferred Shares are
redeemed by the Company. Accrued but unpaid dividends are cumulative and accrue
additional dividends until paid by the Company. As of December 31, 2001, the
amount of accrued and unpaid dividends included in accrued expenses in the
accompanying December 31, 2001, consolidated balance sheet totaled approximately
$0.2 million.

                                      F-15

7.  INCOME TAXES:

Income tax expense attributable to income from continuing operations consists of
the following (in thousands):



                                                           DECEMBER 31
                                                       -------------------
                                                         2001       2000
                                                       --------   --------
                                                            
Current--
  U.S. federal.......................................   $4,173      $ 62
  State and local....................................    1,734       250
                                                        ------      ----
                                                         5,907       312
Deferred--
  U.S. federal.......................................    2,139       (62)
  State and local....................................       --        13
                                                        ------      ----
                                                         2,139       (49)
                                                        ------      ----
                                                        $8,046      $263
                                                        ======      ====


Income tax expense differed from the amounts computed by applying the U.S.
federal statutory income tax rate to income before income tax as follows (in
thousands). A 35 percent rate was utilized for the year ended December 31, 2001,
and a 34 percent rate was utilized for the year ended December 31, 2000.



                                                                 DECEMBER 31
                                                             -------------------
                                                               2001       2000
                                                             --------   --------
                                                                  
Federal income tax expense at statutory rate...............  $ 7,844     $1,780
Change in valuation allowance..............................   (1,506)      (991)
State income tax, net of federal income tax effect.........    1,127        174
Nondeductible expenses.....................................      787        288
Rate differential..........................................     (206)        --
Other......................................................       --       (988)
                                                             -------     ------
                                                             $ 8,046     $  263
                                                             =======     ======


                                      F-16

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):



                                                                DECEMBER 31
                                                            -------------------
                                                              2001       2000
                                                            --------   --------
                                                                 
Deferred tax assets--
  Net operating loss carryforward.........................  $ 4,248    $ 4,409
  Intangible assets and accounts receivable...............      814        613
  Accrued bonuses.........................................      353        280
  Credit carryforward.....................................       62         62
                                                            -------    -------
                                                              5,477      5,364
Less--Valuation allowance.................................       --     (1,506)
                                                            -------    -------
      Net deferred tax assets.............................    5,477      3,858
                                                            -------    -------
Deferred tax liabilities--
  Property and equipment, primarily due to differences in
    depreciation..........................................    9,763      3,853
  Other...................................................      162         --
                                                            -------    -------
      Gross deferred tax liabilities......................    9,925      3,853
                                                            -------    -------
      Net deferred tax asset (liability)..................  $(4,448)   $     5
                                                            =======    =======


A valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The valuation
allowance is then adjusted when the realization of deferred tax assets becomes
more likely than not. In 2001, the Company eliminated its valuation allowance
based on the presumption that the Company will have sufficient taxable income in
future periods to fully utilize its remaining deferred tax assets.

The Company has a net operating loss carryforward for federal income tax
purposes of approximately $12.1 million that will expire from 2012 to 2019.
Internal Revenue Service regulations restrict the utilization of net operating
loss carryforwards for any company in which an "ownership change" (as defined in
Section 382 of the Internal Revenue Code) has occurred. The Company has
concluded that an ownership change occurred during the year ended December 31,
2000, in conjunction with the private placement of 4.0 million common shares, as
discussed in Note 10. The effect of the ownership change limits the Company's
utilization of its net operating loss carryforwards existing prior to the
ownership change to approximately $1.2 million per year.

The Company currently estimates that it will receive a refund of approximately
$4.1 million related to the overpayment of its 2001 federal income taxes. This
amount is included in prepaid expenses and other current assets as of
December 31, 2001.

8.  EMPLOYEE BENEFIT PLAN:

The Company sponsors a 401(k) plan covering substantially all of its employees.
Eligibility requirements provide for 90 days of service, with entry into the
plan quarterly. Discretionary employer contributions are available to be made
annually. Beginning in the second year, the employer contributions vest
proportionally over six years. For the years ended December 31, 2001 and 2000,
contributions to the plan by the Company were $309,000 and $53,000,
respectively.

                                      F-17

9.  COMMITMENTS AND CONTINGENCIES:

LEGAL PROCEEDINGS

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.

OPERATING LEASES

The Company has entered into certain noncancelable operating leases that expire
over the next five years. Rental expense for operating leases (except those with
lease terms of one month or less that were not renewed) during 2001 and 2000
were $1.2 million and $1.1 million, respectively.

The Company has entered into various operating leases with related parties for
certain real estate and equipment. Related-party lease payments approximate
$15,000 per month.

Minimum future annual lease payments under these operating leases are as follows
(in thousands):


                                                           
Year ending December 31,
  2002......................................................   $1,915
  2003......................................................    1,814
  2004......................................................      943
  2005......................................................      302
  2006......................................................        2
  Thereafter................................................       --
                                                               ------
                                                               $4,976
                                                               ======


10. SHAREHOLDERS' EQUITY:

During 2001, the Company sold 5,021,025 shares of its common stock in a series
of private placements, resulting in net proceeds to the Company of approximately
$30.1 million. As previously discussed, the majority of the proceeds received
from these placements were used to finance the Palestine and AES acquisitions
consummated during 2001. The remaining proceeds were used to finance capital
expenditures and for working capital and general corporate purposes.

In October 2000, the Company sold 4,000,000 shares of its common stock in a
private placement, resulting in proceeds (net of issuance costs of approximately
$0.9 million) of $19.1 million. These net proceeds were used for working capital
and general corporate purposes and to support strategic acquisition
opportunities.

On November 16, 2000, the Company's board of directors approved an increase in
the number of authorized common shares from 20,000,000 shares to 40,000,000
shares.

At December 31, 2000, treasury stock consisted of 50,000 common shares which
were purchased by the Company at $5 per share. The treasury shares were reissued
for cash in February 2001 at cost to certain existing shareholders of the
Company.

STOCK OPTIONS

The Company maintains two stock incentive compensation plans under which the
Company may grant incentive stock options and nonqualified stock options to
employees, consultants and nonemployee directors. The options generally vest
over a period of one to four years and have lives of up to 10 years. As of
December 31, 2001, 1.6 million options were authorized under the Company's stock
incentive compensation plans.

                                      F-18

The following table summarizes the stock option activity:



                                                      OPTIONS     WEIGHTED AVERAGE
                                                    OUTSTANDING    EXERCISE PRICE
                                                    -----------   ----------------
                                                            
Balance, January 1, 2000..........................     169,549         $4.92
  Granted.........................................     389,544          4.61
  Canceled, exercised, forfeited..................          --            --
                                                     ---------         -----
Balance, December 31, 2000........................     559,093          4.70
  Granted.........................................     784,565          8.20
  Canceled, exercised, forfeited..................     (10,000)         6.00
                                                     ---------         -----
Balance, December 31, 2001........................   1,333,658         $6.75
                                                     =========         =====


The Company had 251,820 and 126,200 exercisable options as of December 31, 2001
and 2000, respectively. The following table summarizes information about stock
options outstanding at December 31, 2001:



                               OPTIONS OUTSTANDING          OPTIONS EXERCISABLE
                         --------------------------------   -------------------
                                     WEIGHTED    WEIGHTED              WEIGHTED
                                      AVERAGE    AVERAGE               AVERAGE
  RANGE OF EXERCISE                  REMAINING   EXERCISE              EXERCISE
        PRICES            SHARES       LIFE       PRICE      SHARES     PRICE
----------------------   ---------   ---------   --------   --------   --------
                                                        
$2.50 -- $ 3.72.......     183,894     4.62       $3.40      63,475     $3.25
$5.00 -- $ 5.50.......     375,199     4.97        5.34     165,562      5.07
$5.51 -- $ 6.50.......     343,065     9.03        6.00      22,783      6.00
$8.50 -- $10.00.......     431,500     9.54       10.00          --        --
                         ---------                          -------
                         1,333,658     7.45       $6.75     251,820     $4.70
                         =========                          =======


The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock options as all options have been granted with strike prices equal
to or greater than the fair market value of the Company's common stock at the
date of issuance. The weighted average grant-date fair values of options granted
in 2001 and 2000 were $5.88 per share and $2.80 per share, respectively. Options
issued in 2001 with a strike price greater than the market price of the stock on
the grant date have a weighted average exercise price and a weighted average
fair value of $10.00 per option and $3.74 per option, respectively. Had
compensation cost for the stock options been based on the estimated fair value
at the award dates, as prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma unaudited net income would have been
$11.7 million and $4.7 million in 2001 and 2000, respectively.

The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts. For purposes of this disclosure, the Company
estimated the fair value of each option grant on the date of grant using the
Black-Scholes option pricing model with the following assumptions:



                                                              DECEMBER 31
                                             ---------------------------------------------
                                                     2001                    2000
                                             ---------------------   ---------------------
                                                               
Expected dividend yield....................                   0.0%                    0.0%
Expected stock price volatility............         55.6% -- 59.0%          58.5% -- 62.8%
Risk-free interest rate....................         4.72% -- 5.50%          5.25% -- 6.50%
Expected life of options...................              5-7 years               5-7 years


                                      F-19

WARRANTS

In May 2001, the Company issued 50,000 warrants with an exercise price of $7.50
per share in connection with the Palestine acquisition. The Company determined
that such warrants had a fair market value of approximately $4.11 per share
based on the Black-Scholes option pricing model and similar assumptions as those
previously disclosed for options issued. Such warrants, which contain an
antidilution feature, were subsequently amended to provide for a $6.00 per share
exercise price. This amendment to the exercise price did not cause a material
change to the fair market value of the warrants. The issuance of these warrants
was treated as a component of the consideration paid in connection with the
Palestine acquisition.

In May 2000, the Company issued 257,014 detachable warrants with an exercise
price of $0.01 per share in connection with amendments made to the Subordinated
Debt. In June 2000, the Company issued 37,500 detachable warrants with an
exercise price of $0.01 per share in connection with amendments made to the
Company's former credit facilities. At the time that all warrants were issued in
2000, the Company's stock was valued at $3.38 per share. The issuance of the
warrants was recorded as an increase in the Company's deferred financing costs
of approximately $1.0 million. Total warrants outstanding as of December 31,
2001 and 2000, totaled 682,766 and 632,766, respectively. As of December 31,
2001, 50,000 outstanding warrants had an exercise price of $6.00 per warrant,
48,319 warrants had an exercise price of $11.38 per warrant and all other
warrants outstanding had an exercise price of $0.01 per warrant. No warrants
were exercised or canceled during either of the years ended December 31, 2001 or
2000.

11. RELATED-PARTY TRANSACTIONS:

The Company leased rental equipment from a related party, Q2 Rentals LLC. Rent
for 2001 and 2000 amounted to $0.2 million and $0.3 million, respectively.
Additionally, the Company has a note receivable from Q2 Rentals LLC in the
amount of $0.2 million as of December 31, 2001. Such note, which bears interest
at 7 percent per annum, has no scheduled maturity date. As management believes
that this amount will not be collected in 2002, such amount has been classified
as a component of other noncurrent assets in the accompanying December 31, 2001,
consolidated balance sheet.

Amounts receivable from officers and employees of $83,000 and $193,000 are
included in other receivables in the accompanying consolidated balance sheets as
of December 31, 2001 and 2000, respectively. Other current receivables as of
December 31, 2000, also includes a $49,000 receivable due from a related party.
An additional $172,000 in officer and employee advances are included in other
noncurrent assets in the accompanying December 31, 2001, consolidated balance
sheet.

In October 2001, the Company entered into a long-term note receivable with one
of the Company's executive officers. Under the terms of the note, the officer
may borrow up to $500,000 from the Company for a period of three years in
increments of $100,000. Such borrowings accrue interest at 5 percent per annum
and are repayable on the earlier of the Company's initial public offering date
or ratably over a period of 10 years beginning in 2003. As of December 31, 2001,
approximately $202,000 in principal and accrued interest was outstanding under
the note agreement. Such amount has been reflected in other noncurrent assets in
the accompanying December 31, 2001, consolidated balance sheet.

                                      F-20

                       Q SERVICES, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED BALANCE SHEETS--MARCH 31, 2002 AND DECEMBER 31, 2001
                    (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)



                                                               MARCH 31,
                                                                 2002       DECEMBER 31, 2001
                                                              -----------   -----------------
                                                              (UNAUDITED)
                                                                      
                                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................    $  3,667        $  5,963
  Accounts receivable-
    Trade, net of allowance for doubtful accounts of $1,771
      and $1,948, respectively..............................      24,561          23,751
    Unbilled................................................       1,591           3,939
    Other, including amounts receivable from affiliates of
    $308 and $83, respectively..............................         426             255
  Prepaid expenses and other current assets.................      10,795           8,471
                                                                --------        --------
      Total current assets..................................      41,040          42,379
PROPERTY, PLANT AND EQUIPMENT, net..........................      96,181          95,966
INTANGIBLE ASSETS, net of accumulated amortization of $4,572
  and $4,145, respectively..................................      59,559          58,571
DEFERRED FINANCING COSTS....................................       3,028           3,243
OTHER ASSETS, including amounts receivable from affiliates
  of $711 and $574, respectively............................       1,995             962
                                                                --------        --------
      Total assets..........................................    $201,803        $201,121
                                                                ========        ========
                            LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt......................    $ 15,929        $ 13,812
  Current maturities of capital leases......................          12              25
  Accounts payable..........................................       5,693           9,689
  Accrued expenses..........................................       9,606           9,832
  Other current liabilities.................................       1,791           1,822
                                                                --------        --------
      Total current liabilities.............................      33,031          35,180
LONG-TERM DEBT, net of current maturities...................      68,443          66,777
LONG-TERM PORTION OF CAPITAL LEASES, net of current
  maturities................................................          49              78
DEFERRED INCOME TAX LIABILITY, net..........................       6,749           5,929
OTHER LONG-TERM LIABILITIES.................................         773             999
                                                                --------        --------
      Total liabilities.....................................     109,045         108,963
MANDATORILY REDEEMABLE PREFERRED STOCK......................       7,460           7,460
SHAREHOLDERS' EQUITY:
  Common stock, no par value; 40,000,000 shares authorized,
    15,083,747 shares issued and outstanding................      80,379          80,379
  Warrants, 682,766 shares issued and outstanding...........       4,196           4,196
  Retained earnings (accumulated deficit)...................         420             123
  Accumulated other comprehensive income (loss).............         303              --
                                                                --------        --------
      Total shareholders' equity............................      85,298          84,698
                                                                --------        --------
      Total liabilities and shareholders' equity............    $201,803        $201,121
                                                                ========        ========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-21

                       Q SERVICES, INC. AND SUBSIDIARIES
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
                                 (IN THOUSANDS)



                                                                2002       2001
                                                              --------   --------
                                                                   
REVENUES:
  Field production services.................................  $23,244    $21,977
  Pressure pumping services.................................    9,584         --
  Fishing and rental tools..................................    5,784      9,823
                                                              -------    -------
      Total revenues........................................   38,612     31,800

COSTS AND EXPENSES:
  Field production services.................................  $13,777    $11,927
  Pressure pumping services.................................    6,771         --
  Fishing and rental tools..................................    3,096      4,787
  Selling, general and administrative expenses..............    9,356      6,964
  Depreciation and amortization.............................    3,549      1,622
                                                              -------    -------
      Operating income......................................    2,063      6,500

OTHER INCOME (EXPENSE):
  Interest income...........................................       26         --
  Interest expense..........................................   (1,790)    (1,456)
  Gain (loss) on sale of assets.............................      389         25
                                                              -------    -------
      Income before income taxes............................      688      5,069

INCOME TAX PROVISION........................................      260      2,071
                                                              -------    -------
      Net income............................................      428      2,998

PREFERRED STOCK DIVIDENDS...................................      133         --
                                                              -------    -------
      Net income applicable to common shareholders..........  $   295    $ 2,998
                                                              =======    =======


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-22

                       Q SERVICES, INC. AND SUBSIDIARIES
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
                                 (IN THOUSANDS)



                                                                2002       2001
                                                              --------   --------
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $   295    $  2,998
  Adjustments to reconcile net income to net cash provided
    by operating activities-
    Depreciation and amortization...........................    3,549       1,622
    Gain on sale of assets..................................     (389)        (25)
    Amortization of debt discount and deferred financing
    costs...................................................      248         157
    Changes in assets and liabilities, net of businesses
    acquired-
      Accounts receivable...................................    1,214      (6,729)
      Accounts payable......................................   (3,996)        450
      Accrued expenses......................................     (226)      3,905
      Other, net............................................   (1,520)        322
                                                              -------    --------
        Net cash provided by (used in) operating
          activities........................................     (825)      2,700
                                                              -------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of businesses, net of cash acquired..............       --     (12,363)
  Purchase of property, plant and equipment.................   (4,183)     (5,480)
  Proceeds from sale of assets..............................    1,402         933
                                                              -------    --------
        Net cash used in investing activities...............   (2,781)    (16,910)
                                                              -------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from stock issuance, net of offering costs.......       --       3,840
  Borrowings on long-term debt and capital leases...........    5,000      10,758
  Payments on long-term debt and capital leases.............   (3,690)     (1,507)
  Issuance of treasury stock................................       --         250
                                                              -------    --------
        Net cash provided by financing activities...........    1,310      13,341
                                                              -------    --------
DECREASE IN CASH AND CASH EQUIVALENTS.......................   (2,296)       (869)
CASH AND CASH EQUIVALENTS, beginning of period..............    5,963       4,668
                                                              -------    --------
CASH AND CASH EQUIVALENTS, end of period....................  $ 3,667    $  3,799
                                                              =======    ========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-23

                       Q SERVICES, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2002

1.  BASIS OF PRESENTATION:

The unaudited condensed consolidated financial statements of Q Services, Inc.
and subsidiaries ("the Company") for the three months ended March 31, 2002
should be read in conjunction with the Company's audited annual financial
statements for the year ended December 31, 2001, included elsewhere herein. The
accompanying unaudited interim financial statements reflect all adjustments
(which include only normal, recurring adjustments) that are, in the opinion of
management, necessary to state fairly the results for the period presented. The
results of operation for the three months ended March 31, 2002, are not
necessarily indicative of the results to be expected for the Company's entire
fiscal year.

2.  COMPREHENSIVE INCOME:

The components of other comprehensive income for the three months ended
March 31, 2002, are as follows (in thousands):


                                                           
Net income applicable to common shareholders................    $428
Unrealized gain on interest rate hedge, net of taxes........     303
                                                                ----

Comprehensive income........................................    $731
                                                                ====


3.  LONG-TERM DEBT:

The Company closed a $100.0 million term loan and revolving credit facility with
a number of banks in December 2001 ("the Facility"). The Company is required to
repay $3.33 million per quarter in principal payments under the term loan
portion of the Facility. On March 28, 2002, the Company made the first of such
quarterly principal payments to the lenders under the Facility.

During the quarter ended March 31, 2002, the Company borrowed approximately
$5.0 million under the revolving credit portion of the Facility. Such amount is
not due until the final maturity date of the Facility, which is December 17,
2004. Accordingly, such borrowing has been reflected as a long-term debt in the
accompanying condensed consolidated balance sheet as of March 31, 2002.
Additionally, during the quarter ended March 31, 2002, the Company issued
approximately $1.6 million in letters of credit under the Facility bringing the
total amount of outstanding letters of credit as of March 31, 2002 to
approximately $3.1 million. The Company had approximately $9.9 million in unused
capacity under the revolving credit portion of the Facility as of March 31,
2002, after taking into consideration existing borrowings and outstanding
letters of credit.

In February 2002, the Company entered into an interest rate swap agreement with
three banks to fix the floating interest rate on $48.0 million of the
$80.0 million term loan portion of the Facility. The interest rate swap
effectively fixes the rate at 3.75 percent, plus the applicable margin, on the
amount hedged and expires in December 2004, consistent with the maturity date of
the underlying term loan. Pursuant to Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("SFAS No. 133"), the swap is reflected at fair value in
the Company's condensed consolidated balance sheet in other long-term assets
with a corresponding amount being reflected as other accumulated comprehensive
income, net of taxes, in shareholders' equity. The net effect of this accounting
on the Company's operating results is that interest expense on the portion of
the variable-rate term loan being hedged is recorded based on a fixed rate of

                                      F-24

3.75 percent plus the applicable margin. The Company has designated the swap as
a perfectly effective cash flow hedge under SFAS No. 133, and accordingly, the
change in fair value of the swap is recognized entirely as other comprehensive
income, net of taxes.

4.  SUBSEQUENT EVENTS

On May 13, 2002, the Company signed a definitive merger agreement with Key
Energy Services, Inc. ("Key"). Under the terms of the agreement, Key plans to
acquire 100 percent of the outstanding capital stock of the Company for
approximately $185 to $190 million in Key common stock issued at a price between
$11.00 and $13.00 per share, and the assumption of the Company's outstanding
debt obligations. The merger, which is expected to close sometime in July 2002,
is subject to anti-trust clearance, the completion of due diligence efforts for
both companies, and other typical closing conditions.

                                      F-25


                                                                       EXHIBIT A



                          PLAN AND AGREEMENT OF MERGER

                                      AMONG

                           KEY ENERGY SERVICES, INC.,

                              KEY MERGER SUB, INC.

                                       AND

                                Q SERVICES, INC.


                                  MAY 13, 2002



                                TABLE OF CONTENTS


                                                                                                              
Article 1 DEFINITIONS.............................................................................................2
              1.1      DEFINITIONS................................................................................2

Article 2 THE MERGER.............................................................................................10
              2.1      SURVIVING CORPORATION.....................................................................10
              2.2      EFFECTIVE DATE............................................................................10
              2.3      CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION....................................10
              2.4      GOVERNING LAW AND ARTICLES OF INCORPORATION OF SURVIVING CORPORATION......................10
              2.5      BYLAWS OF SURVIVING CORPORATION...........................................................10
              2.6      DIRECTORS OF SURVIVING CORPORATION........................................................10
              2.7      OFFICERS OF SURVIVING CORPORATION.........................................................10
              2.8      VACANCIES.................................................................................10
              2.9      CONVERSION OF SECURITIES UPON MERGER......................................................11
                       2.9.1    CANCELLATION OF TREASURY SHARES..................................................11
                       2.9.2    QSI STOCK OPTIONS AND WARRANTS...................................................11
                       2.9.3    REDEMPTION OF PREFERRED STOCK....................................................12
                       2.9.4    CONVERSION OF QSI COMMON STOCK...................................................12
                       2.9.5    HOLDBACK.........................................................................13
                       2.9.6    CONVERSION OF MERGER SUB COMMON STOCK............................................13
                       2.9.7    NO FRACTIONAL SHARES.............................................................13
              2.10     PURCHASE PRICE ADJUSTMENT PAYMENT.........................................................13
                       2.10.1   KEY ADJUSTMENT PAYMENT...........................................................14
                       2.10.2   QSI ADJUSTMENT PAYMENT...........................................................14
              2.11     SURRENDER OF QSI CERTIFICATES.............................................................15
                       2.11.1   CERTIFICATES NOT DELIVERED ON THE EFFECTIVE DATE.................................15
                       2.11.2   LOST, STOLEN OR DESTROYED CERTIFICATES...........................................16
              2.12     QSI TRANSFER BOOKS CLOSED.................................................................16
              2.13     ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF SURVIVING CORPORATION......16
              2.14     DISSENTING SHAREHOLDERS...................................................................16
              2.15     FEDERAL INCOME TAX TREATMENT..............................................................16
              2.16     CLOSING...................................................................................16

Article 3 REPRESENTATIONS AND WARRANTIES OF QSI..................................................................16
              3.1      REPRESENTATIONS AND WARRANTIES QSI........................................................16
                       3.1.1    ORGANIZATION, GOOD STANDING AND AUTHORITY........................................16
                       3.1.2    AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS.........................17
                       3.1.3    CAPITALIZATION...................................................................17
                       3.1.4    OWNERSHIP OF THE QSI SHARES......................................................17
                       3.1.5    SUBSIDIARIES.....................................................................18
                       3.1.6    FINANCIAL STATEMENTS.............................................................18
                       3.1.7    LIABILITIES......................................................................18
                       3.1.8    ADDITIONAL COMPANY INFORMATION...................................................19
                       3.1.9    NO DEFAULTS......................................................................21
                       3.1.10   ABSENCE OF CERTAIN CHANGES AND EVENTS............................................21





                                                                                                              
                       3.1.11   TAXES............................................................................21
                       3.1.12   INTELLECTUAL PROPERTY............................................................24
                       3.1.13   TITLE TO AND CONDITION OF ASSETS.................................................24
                       3.1.14   CONTRACTS........................................................................24
                       3.1.15   LICENSES AND PERMITS.............................................................25
                       3.1.16   LITIGATION.......................................................................25
                       3.1.17   ENVIRONMENTAL COMPLIANCE.........................................................25
                       3.1.18   COMPLIANCE WITH OTHER LAWS.......................................................27
                       3.1.19   ERISA PLANS OR LABOR ISSUES......................................................27
                       3.1.20   REPRESENTATIONS RELATING TO OPERATION OF SALTWATER DISPOSAL WELLS................28
                       3.1.21   INVESTIGATIONS...................................................................29
                       3.1.22   REAL PROPERTY OWNED..............................................................29
                       3.1.23   REAL PROPERTY LEASED.............................................................29
                       3.1.24   ABSENCE OF CERTAIN BUSINESS PRACTICES............................................30
                       3.1.25   INSURANCE........................................................................30
                       3.1.26   FINDER'S FEE.....................................................................30
                       3.1.27   RELATED PARTY INTERESTS..........................................................30
                       3.1.28   COMPLIANCE WITH DEPARTMENT OF TRANSPORTATION RULES AND REGULATIONS...............31
                       3.1.29   PREDECESSORS IN INTEREST.........................................................31

Article 4 REPRESENTATIONS AND WARRANTIES OF KEY..................................................................31
              4.1      REPRESENTATIONS AND WARRANTIES OF KEY.....................................................31
                       4.1.1    ORGANIZATION AND GOOD STANDING OF MERGER SUB.....................................31
                       4.1.2    AGREEMENTS AUTHORIZED BY MERGER SUB AND ITS EFFECT ON OTHER OBLIGATIONS..........31
                       4.1.3    INVESTIGATIONS...................................................................31
                       4.1.4    ORGANIZATION AND GOOD STANDING OF KEY............................................32
                       4.1.5    AGREEMENT AUTHORIZED BY KEY AND ITS EFFECT ON OTHER OBLIGATIONS..................32
                       4.1.6    ISSUANCE OF KEY SHARES...........................................................32
                       4.1.7    CAPITALIZATION...................................................................32
                       4.1.8    REPORTS AND FINANCIAL STATEMENTS.................................................33
                       4.1.9    ABSENCE OF CERTAIN CHANGES AND EVENTS............................................33
                       4.1.10   FINDER'S FEE.....................................................................33

Article 5 OBLIGATIONS PENDING EFFECTIVE DATE.....................................................................34
              5.1      AGREEMENTS OF KEY AND QSI.................................................................34
                       5.1.1    MAINTENANCE OF PRESENT BUSINESS..................................................34
                       5.1.2    MAINTENANCE OF PROPERTIES........................................................34
                       5.1.3    MAINTENANCE OF BOOKS AND RECORDS.................................................34
                       5.1.4    COMPLIANCE WITH LAW..............................................................34
                       5.1.5    INSPECTION OF KEY AND QSI........................................................34
              5.2      REGULATORY AND OTHER AUTHORIZATIONS.......................................................34
              5.3      ADDITIONAL AGREEMENTS.....................................................................35
                       5.3.1    PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS......................................35
                       5.3.2    PROHIBITION OF CERTAIN LOANS.....................................................35
                       5.3.3    PROHIBITION OF CERTAIN COMMITMENTS...............................................35


                                       ii



                                                                                                              
                       5.3.4    DISPOSAL OF ASSETS...............................................................35
                       5.3.5    MAINTENANCE OF INSURANCE.........................................................35
                       5.3.6    ACQUISITION PROPOSALS............................................................35
                       5.3.7    NO AMENDMENT TO ARTICLES OF INCORPORATION, ETC...................................36
                       5.3.8    NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES.....................................36
                       5.3.9    PROHIBITION ON DIVIDENDS.........................................................36
                       5.3.10   SHAREHOLDER MEETING..............................................................36
                       5.3.11   INVESTIGATION....................................................................36
                       5.3.12   RELATED PARTY OBLIGATIONS.  BEFORE THE EFFECTIVE DATE,...........................37
              5.4      ADDITIONAL AGREEMENTS OF KEY..............................................................37
                       5.4.1    REGISTRATION STATEMENT...........................................................37
                       5.4.2    LISTING OF KEY STOCK.............................................................38
                       5.4.3    DELIVERY OF REPORTS..............................................................38
                       5.4.4    RESALE OF KEY SHARES.............................................................38
                       5.4.5    ASSISTANCE IN BLOCK SALE TRANSACTIONS............................................42
                       5.4.6    ISSUANCES OF KEY COMMON STOCK....................................................42
              5.5      SUPPLEMENTAL INFORMATION..................................................................42

Article 6 CONDITIONS PRECEDENT TO OBLIGATIONS....................................................................42
              6.1      CONDITIONS PRECEDENT TO OBLIGATIONS OF QSI................................................42
                       6.1.1    REPRESENTATIONS AND WARRANTIES OF KEY TRUE AT EFFECTIVE DATE.....................42
                       6.1.2    NO MATERIAL LITIGATION...........................................................43
                       6.1.3    OPINION OF KEY COUNSEL...........................................................43
                       6.1.4    LISTING OF KEY COMMON STOCK......................................................44
                       6.1.5    CONSENT OF CERTAIN PARTIES IN PRIVITY WITH KEY...................................44
                       6.1.6    HSR..............................................................................44
                       6.1.7    SECRETARY'S CERTIFICATES.........................................................44
                       6.1.8    EMPLOYMENT AGREEMENTS............................................................44
                       6.1.9    QSI SHAREHOLDER APPROVAL.........................................................44
                       6.1.10   REDEMPTION OF PREFERRED STOCK....................................................44
                       6.1.11   CREDIT AGREEMENT.................................................................44
                       6.1.12   REGISTRATION STATEMENT...........................................................44
              6.2      CONDITIONS PRECEDENT TO OBLIGATIONS OF KEY AND MERGER SUB.................................44
                       6.2.1    REPRESENTATIONS AND WARRANTIES OF QSI TRUE AT EFFECTIVE DATE.....................45
                       6.2.2    NO MATERIAL LITIGATION...........................................................45
                       6.2.3    OPINION OF QSI COUNSEL...........................................................45
                       6.2.4    HSR..............................................................................46
                       6.2.5    RESIGNATIONS.....................................................................46
                       6.2.6    EMPLOYMENT AGREEMENTS............................................................46
                       6.2.7    QSI SHAREHOLDER APPROVAL.........................................................46
                       6.2.8    NON-COMPETE AGREEMENTS...........................................................46
                       6.2.9    SECRETARY'S CERTIFICATE..........................................................46
                       6.2.10   QSI REPRESENTATIVES..............................................................46
                       6.2.11   SHAREHOLDERS AGREEMENT...........................................................46
                       6.2.12   RELATED PARTY AGREEMENTS.........................................................46
                       6.2.13   OPTIONS..........................................................................47
                       6.2.14   WARRANTS.........................................................................47


                                       iii



                                                                                                              
                       6.2.15   REDEMPTION OF PREFERRED STOCK....................................................47
                       6.2.16   AFFILIATE AGREEMENTS.............................................................47
                       6.2.17   SEVERANCE POLICY.................................................................47

Article 7 TERMINATION AND ABANDONMENT............................................................................47
              7.1      TERMINATION...............................................................................47
                       7.1.1    BY MUTUAL CONSENT................................................................47
                       7.1.2    BY KEY BECAUSE OF DISSENTING SHAREHOLDERS........................................47
                       7.1.3    BY QSI BECAUSE OF CONDITIONS PRECEDENT...........................................48
                       7.1.4    BY QSI BECAUSE OF MATERIAL ADVERSE EFFECT........................................48
                       7.1.5    BY KEY OR MERGER SUB BECAUSE OF CONDITIONS PRECEDENT.............................48
                       7.1.6    BY KEY OR MERGER SUB BECAUSE OF MATERIAL ADVERSE EFFECT..........................48
                       7.1.7    BY KEY OR MERGER SUB, OR BY QSI BECAUSE OF LEGAL PROCEEDINGS.....................48
                       7.1.8    BY KEY OR MERGER SUB, OR BY QSI, IF TRANSACTIONS NOT EFFECTIVE BY JULY 17, 2002..48
                       7.1.9    BY KEY OR MERGER SUB BECAUSE OF MATERIAL DEVELOPMENTS............................48
              7.2      TERMINATION BY BOARD OF DIRECTORS.........................................................49
              7.3      EFFECT OF TERMINATION.....................................................................49
              7.4      WAIVER OF CONDITIONS......................................................................49

Article 8 ADDITIONAL AGREEMENTS..................................................................................49
              8.1      EMPLOYMENT MATTERS........................................................................49
              8.2      VOTING AND SUPPORT AGREEMENTS.............................................................50
              8.3      LIABILITY THRESHOLD.......................................................................50
              8.4      FURTHER ASSURANCES........................................................................51

Article 9 MISCELLANEOUS..........................................................................................52
              9.1      SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.....................................52
                       9.1.1    REPRESENTATIONS, WARRANTIES AND COVENANTS OF KEY AND MERGER SUB..................52
                       9.1.2    REPRESENTATIONS, WARRANTIES AND COVENANTS OF QSI.................................52
              9.2      ENTIRETY; AMENDMENTS......................................................................52
              9.3      COUNTERPARTS..............................................................................52
              9.4      NOTICES AND WAIVERS.......................................................................52
              9.5      CAPTIONS..................................................................................53
              9.6      SUCCESSORS AND ASSIGNS....................................................................53
              9.7      SEVERABILITY..............................................................................53
              9.8      JOINT DRAFTING............................................................................53
              9.9      APPLICABLE LAW............................................................................54


EXHIBITS

Exhibit A         Form of Non-Compete Agreement
Exhibit B         QSI Affiliate Agreement
Exhibit C         Voting and Support Agreement
Exhibit D         Letter of Transmittal
Exhibit E         Employment Agreements

                                       iv


                          PLAN AND AGREEMENT OF MERGER

     THIS PLAN AND AGREEMENT OF MERGER (this "Agreement") is entered into as of
May 13, 2002 among Key Energy Services, Inc., a Maryland corporation ("Key");
Key Merger Sub, Inc., a Texas corporation and a wholly-owned subsidiary of Key
("Merger Sub"); and Q Services, Inc., a Texas corporation ("QSI"). Merger Sub
and QSI are sometimes collectively referred to herein as the "Merging
Corporations."

                               W I T N E S S E T H

     WHEREAS, Key is a corporation duly organized and validly existing under the
laws of the State of Maryland, with its principal place of business at 6 Desta
Drive, Midland, Texas 79705;

     WHEREAS, the authorized capital stock of Key consists of 200,000,000 shares
of Key Common Stock, of which as of May 9, 2002, 109,772,863 shares are issued
and outstanding, and 11,680,658 shares are reserved for issuance pursuant to
outstanding stock options, warrants and other convertible securities;

     WHEREAS, Merger Sub is a corporation duly organized and validly existing
under the laws of the State of Texas, with its principal place of business at 6
Desta Drive, Midland, Texas 79705;

     WHEREAS, Key owns 1,000 shares of Merger Sub Common Stock, which
constitutes all of the issued and outstanding shares of capital stock of Merger
Sub;

     WHEREAS, QSI is a corporation duly organized and validly existing under the
laws of the State of Texas, with its principal place of business at 3100 Timmons
Lane, Suite 300, Houston, Texas 77027;

     WHEREAS, the authorized capital stock of QSI consists of (i) 40,000,000
shares of QSI Common Stock, of which on the date hereof 15,083,815 shares are
issued and outstanding, 0 shares are held in treasury, and 2,276,368 shares are
reserved for issuance pursuant to outstanding stock options and warrants and
(ii) 200,000 shares of preferred stock, no par value, of which (A) 100,000
shares are designated as Series A Preferred Stock, of which 72,000 shares are
issued and outstanding and (B) 100,000 shares are designated as Series B
Redeemable Preferred Stock, of which 2,600 shares are issued and outstanding;

     WHEREAS, (i) the board of directors of Key, (ii) Key (in its capacity as
Merger Sub's sole shareholder) and the board of directors of Merger Sub, and
(iii) the board of directors of QSI desire to merge Merger Sub with and into QSI
in accordance with the provisions of Section 5.03 of the TBCA pursuant to the
terms and provisions of this Agreement, and have approved such merger (the
"Merger") and the other terms and provisions of this Agreement; and

     WHEREAS, in connection with the merger contemplated by this Agreement, Key
will issue shares of Key Common Stock that will be registered on a registration
statement on Form S-4 (File No. 333-83924) (the "Registration Statement"), which
has been declared effective under the Securities Act.



     NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and to prescribe the terms and
conditions of the Merger contemplated hereby, the mode of carrying the Merger
into effect, the manner and basis of converting the shares of QSI Common Stock
outstanding on the Effective Date of the Merger into the right to receive the
Merger Consideration described in Section 2.9 hereof, and such other details and
provisions as are deemed necessary or proper, the parties hereto hereby agree as
follows:

                                    ARTICLE 1

                                   DEFINITIONS

     1.1 DEFINITIONS. In addition to the other defined terms used herein, as
used in this Agreement, the following terms when capitalized have the meanings
indicated.

          "ACQUISITION PROPOSAL" means any proposal for a merger, consolidation
     or other business combination involving QSI or for the acquisition or
     purchase of any equity interest in, or a material portion of the assets of,
     QSI, other than the transactions with Key and Merger Sub contemplated by
     this Agreement.

          "AGREEMENT" means this Plan and Agreement of Merger, as the same may
     be amended or modified.

          "AUDITED FINANCIAL STATEMENTS" means the audited consolidated balance
     sheets and related consolidated statements of income, retained earnings,
     and cash flows of QSI and its subsidiaries, with appended notes which are
     an integral part of such statements, as at and for fiscal years ended
     December 31, 1999, 2000 and 2001.

          "BALANCE SHEET DATE" means March 31, 2002.

          "CASH OUT OPTIONS" has the meaning specified in Section 2.9.2.1
     hereof.

          "CASH OUT WARRANTS" has the meaning specified in Section 2.9.2.2
     hereof.

          "CERTIFICATES" means the certificates representing issued and
     outstanding shares of QSI Common Stock.

          "COBRA" means Consolidated Omnibus Budget Reconciliation Act of 1985,
     as amended.

          "CODE" means the United States Internal Revenue Code of 1986, as
     amended.

          "DISPUTED POTENTIAL LIABILITY" has the meaning specified in
     Section 7.3 hereof.

          "EFFECTIVE DATE" has the meaning specified in Section 2.2 hereof.

          "EFFECTIVE PRICE PER SHARE" means the sum of the Purchase Price plus
     the Option/Warrant Strike Proceeds divided by the Fully Diluted QSI Shares
     Outstanding.

                                        2


          "EMPLOYEE PLAN" means (i) any "employee benefit plan" as defined in
     Section 3(3) of the ERISA, maintained or contributed to; and (ii) any
     personnel policy, stock option plan, collective bargaining agreement, bonus
     plan or arrangement, incentive award plan or arrangement, vacation policy,
     severance pay plan, policy, or agreement, deferred compensation agreement
     or arrangement, executive compensation or supplemental income arrangement,
     consulting agreement, employment agreement, cafeteria plans and each other
     employee or fringe benefit plan, agreement, arrangement, program, practice,
     or understanding which is not described in clause (i), in each case
     currently sponsored, maintained or contributed to by QSI, any QSI
     Subsidiary or ERISA Affiliate or for which QSI, any QSI Subsidiary or ERISA
     Affiliate has or could have any liability.

          "EMPLOYMENT AGREEMENTS" has the meaning specified in Section 6.1.8
     hereof.

          "ENCUMBRANCES" means all liens, security interests, pledges,
     mortgages, deeds of trust, claims, rights of first refusal, options,
     charges, restrictions or conditions to transfer or assignment, and other
     encumbrance of any kind or nature, except (i) liens for Taxes, impositions,
     assessments, fees, rents or other governmental charges levied or assessed
     or imposed and not yet delinquent or such liens being contested in good
     faith by appropriate proceedings, which proceedings are set forth on
     SCHEDULE 1.1 hereto, (ii) statutory liens (including materialmen's,
     warehousemen's, mechanics', repairmen's, landlords', and other similar
     liens) arising in the ordinary course of business securing payments not yet
     delinquent or being contested in good faith by appropriate proceedings,
     which proceedings are set forth on SCHEDULE 1.1 hereto; (iii) with respect
     to each individual asset, defects, imperfections or irregularities of title
     or similar liens that would not materially and adversely impact the use or
     ownership of such asset by QSI or any QSI Subsidiary; and (iv) preferential
     purchase rights and other similar arrangements with respect to which
     consents or waivers are obtained for this transaction or as to which the
     time for asserting such rights has expired at the Effective Date without an
     exercise of such rights, (iv) Encumbrances entered into in the ordinary
     course of business that do not secure the payment of indebtedness for
     borrowed money and none of which affect the benefit or use of the asset or
     assets subject thereto or affect the ability of QSI or any QSI Subsidiary
     to conduct its business; and (vi) any conditions relating to the real
     property or real property rights owned or leased by QSI or any QSI
     Subsidiary that are set forth on SCHEDULES 3.1.8.1 or 3.1.22.1 hereto.

          "ENVIRONMENTAL ASSESSMENT" means the right of Key or its contractors
     or agents to: (i) review QSI's environmental records in any publicly
     available environmental records; (ii) submit a pre-inspection environmental
     questionnaire to QSI; (iii) make a site assessment to visually inspect the
     problems and operations of QSI and each QSI Subsidiary; (iv) conduct
     interviews with QSI's corporate and site personnel responsible for
     environmental matters; and (v) copy any governmental documents regarding
     the properties and operations of QSI or any QSI Subsidiary.

          "ENVIRONMENTAL LAW" means any and all laws, rules, orders,
     regulations, statutes, ordinances, codes, decrees, and other legally
     enforceable requirements (including, without limitation, common law) of the
     United States, or any federal, state, local,

                                        3


     municipal or other governmental authority, or quasi-governmental authority,
     regulating, relating to, or imposing liability or standards of conduct for
     soil surface water or groundwater quality, solid, liquid or contained
     gaseous waste, subsurface disposal operations, wastewater or stormwater
     discharge, air emissions, protection of the environment or of human health,
     or employee health and safety as such were in effect at the time of the
     relevant conduct.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
     amended.

          "ERISA AFFILIATE" means any entity which is a member of QSI's or a QSI
     Subsidiary's controlled group under Section 414 of the Code or Section
     4001(a)(14) of ERISA.

          "ESCROWED CASH" has the meaning specified in Section 2.9.5 hereof.

          "ESCROWED CONSIDERATION" means the Escrowed Shares (determined at the
     Key Share Price), plus the Escrowed Cash.

          "ESCROWED SHARES" has the meaning specified in Section 2.9.5 hereof.

          "ESTIMATED BALANCE SHEET" has the meaning specified in Section 2.9.4.2
     hereof.

          "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

          "FINAL BALANCE SHEET" has the meaning specified in Section 2.10
     hereof.

          "FINAL EFFECTIVE PRICE PER SHARE" means the sum of the Final Purchase
     Price plus the Option/Warrant Strike Proceeds divided by the Fully Diluted
     QSI Shares Outstanding.

          "FINAL MERGER CONSIDERATION" has the meaning specified in Section 2.10
     hereof.

          "FINAL OPTION PAYOUT" means the dollar amount to be paid with respect
     to an Option, calculated as (i) that number of shares of QSI Common Stock
     subject to such Option, MULTIPLIED BY (ii) the Final Option Spread.

          "FINAL OPTION SPREAD" means, with respect to an Option, that amount
     equal to (i) the Final Effective Price Per Share, less (ii) the exercise
     price per share of such Option.

          "FINAL PURCHASE PRICE" means $265,000,000 less (i) "Total Liabilities"
     as recorded on the Final Balance Sheet and calculated in accordance with
     Section 2.10 hereof and (ii) the aggregate amount of Redemption Notes, plus
     "Total Current Assets" as recorded on the Final Balance Sheet and
     calculated in accordance with Section 2.10 hereof.

                                        4


          "FINAL WARRANT PAYOUT" means the dollar amount to be paid with respect
     to each Cash Out Warrant, calculated as (i) that number of shares of QSI
     Common Stock such holder would have been entitled to receive had such
     holder exercised the warrant, MULTIPLIED BY (ii) the Final Warrant Spread.

          "FINAL WARRANT SPREAD" means, with respect to each Cash Out Warrant,
     that amount equal to (i) the Final Effective Price Per Share, LESS (ii) the
     exercise price per share of such Warrant.

          "FULLY DILUTED QSI SHARES OUTSTANDING" means the sum of the currently
     issued and outstanding shares of QSI Common Stock plus the number of shares
     of QSI Common Stock issuable if all outstanding Warrants and Options were
     exercised in full immediately prior to the Effective Date, without taking
     into account any cashless exercise thereof effected in connection with this
     Agreement.

          "FUTURE ACQUISITION" means any future acquisition of any business,
     assets or capital stock by Key.

          "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of 1978
     and the rules and regulations promulgated thereunder.

          "INDEMNIFIED EXECUTIVES" means each person who is now, or has been
     before the date hereof or who becomes before the Effective Date, an officer
     or director of QSI or any of the QSI's subsidiaries.

          "INDEMNIFIED QSI SHAREHOLDER" has the meaning specified in
     Section 5.4.4.2 hereof.

          "INDEMNIFIED PERSON" has the meaning specified in Section 5.4.4.4
     hereof.

          "INTELLECTUAL PROPERTY" means all patents, patent applications,
     trademarks and service marks (including registrations and applications
     therefore), trade names, copyrights and written know-how, trade secrets and
     all other similar proprietary data and the goodwill associated therewith.

          "KEY" has the meaning specified in the preamble to this Agreement.

          "KEY ADJUSTMENT PAYMENTS" has the meaning specified in Section 2.10.1
     hereof.

          "KEY COMMON STOCK" means the common stock, par value $0.10 per share,
     of Key.

          "KEY SHARES" means the shares of Key Common Stock to be issued in the
     Merger.

          "KEY SHARE PRICE" means the average of the closing prices of Key
     Common Stock on the New York Stock Exchange for the 10 trading days
     immediately preceding the day before the Effective Date (the "10-Day
     Average"); PROVIDED, HOWEVER, that if the 10-Day Average is equal to or
     less than $11.00, then the Key Share Price shall be $11.00, and if

                                        5


     the 10-Day Average is equal to or greater than $13.00, the Key Share Price
     shall be $13.00.

          "LIABILITY NOTICE" means the notice given by Key to QSI pursuant to
     Section 8.3.1.2 hereof.

          "LIABILITY THRESHOLD" has the meaning specified in Section 6.2.1
     hereof.

          "MERGER" has the meaning specified in the recitals to this Agreement.

          "MERGER CONSIDERATION" has the meaning specified in Section 2.9.4.1
     hereof.

          "MERGER SUB" has the meaning specified in the preamble to this
     Agreement.

          "MERGER SUB COMMON STOCK" means the common stock, par value $.001 per
     share, of Merger Sub.

          "MERGING CORPORATIONS" has the meaning specified in the preamble to
     this Agreement.

          "NON-COMPETE AGREEMENT" means the non-compete agreement in the form of
     EXHIBIT A hereto.

          "NOTE HOLDER" means each holder of either an Option Note or Warrant
     Note.

          "OPTIONS" means all options to purchase QSI Common Stock, including,
     without limitation, all options issued under the Q Services, Inc. 1999
     Stock Incentive Plan and the Q Services, Inc. 2000 Stock Incentive Plan.

          "OPTION NOTES" has the meaning specified in Section 2.9.2.1 hereof.

          "OPTION PAYOUT" means the dollar amount to be paid with respect to an
     Option, calculated as (i) that number of shares of QSI Common Stock subject
     to such Option, MULTIPLIED BY (ii) the Option Spread.

          "OPTION SPREAD" means, with respect to an Option, that amount equal to
     (i) the Effective Price Per Share, LESS (ii) the exercise price per share
     of such option.

          "OPTION/WARRANT STRIKE PROCEEDS" means the total dollar proceeds which
     would be received by QSI upon exercise of the Options and Warrants assuming
     all Options and Warrants were exercised for cash immediately prior the
     Effective Date and not taking into account any cashless exercise thereof
     effected in connection with this Agreement.

          "OTHER OPTIONS" has the meaning specified in Section 2.9.2.1 hereof.

          "OTHER WARRANTS" has the meaning specified in Section 2.9.2.2 hereof.

                                        6


          "PAYING AGENT" means at any time the bank or trust company acting as
     Key's paying agent at that time in connection with the exchange of
     Certificates for the Merger Consideration.

          "PERMITS" has the meaning specified in Section 3.1.8.14 hereof.

          "PERSON" shall mean an individual, firm, corporation, general or
     limited partnership, limited liability company, limited liability
     partnership, joint venture, trust, governmental authority or body,
     association, unincorporated organization or other entity.

          "POTENTIAL LIABILITY" means (i) an environmental condition identified
     in the Environmental Assessment of or on a particular property owned,
     leased or operated by QSI or a QSI Subsidiary or (ii) any other condition,
     fact or item identified by Key in the course of its inspection of QSI
     pursuant to Section 5.1.5 hereof with respect to any SWD Well that, in
     either case, would make a representation or warranty contained in Sections
     3.1.8.17, 3.1.8.18, 3.1.17 (including all subparagraphs thereto) and 3.1.20
     hereof untrue in any respect.

          "PROSPECTUS" means the prospectus contained in the Registration
     Statement, as amended pursuant to a post-effective amendment to the
     Registration Statement, that complies as to form and substance with the
     requirements of the Securities Act, pursuant to which the Key Shares will
     be issued and which will also be available for use by the holders of QSI
     Common Stock who are affiliates of QSI in the resale of the Key Shares they
     receive in the Merger without restriction under the Securities Act.

          "PURCHASE PRICE" means $265,000,000, LESS (i) "Total Liabilities" as
     recorded on the Estimated Balance Sheet and calculated in accordance with
     Section 2.9.4.2 hereof and (ii) the aggregate amount of the Redemption
     Notes, PLUS "Total Current Assets" as recorded on the Estimated Balance
     Sheet and calculated in accordance with Section 2.9.4.2 hereof.

          "QSI" means Q Services, Inc., a Texas corporation.

          "QSI ADJUSTMENT PAYMENT" has the meaning specified in Section 2.10.2
     hereof.

          "QSI AFFILIATE AGREEMENT" means the affiliate agreement in the form of
     EXHIBIT B hereto.

          "QSI COMMON STOCK" means the common stock, no par value per share, of
     QSI.

          "QSI DEFICIENCY" has the meaning specified in Section 2.10.2 hereof.

          "QSI EMPLOYEE" has the meaning specified in Section 8.1 hereof.

          "QSI LEASED PROPERTIES" has the meaning specified in Section 3.1.23.1
     hereof.

          "QSI OWNED PROPERTIES" has the meaning specified in Section 3.1.22.1
     hereof.

                                        7


          "QSI PREFERRED STOCK" means, collectively, the Series A Preferred
     Stock and the Series B Preferred Stock.

          "QSI REPRESENTATIVES" means David Schorlemer and Anthony DeLuca.

          "QSI SHARES" means the issued and outstanding shares of QSI Common
     Stock and QSI Preferred Stock.

          "QSI SHAREHOLDERS" means the holders of QSI Common Stock and QSI
     Preferred Stock, all of which are identified on SCHEDULE 3.1.4 hereto.

          "QSI SUBSIDIARIES" means any corporation, partnership, joint venture
     or other legal entity in which QSI beneficially owns a controlling equity
     interest, each of which are identified on SCHEDULE 3.1.5 hereto.

          "REDEMPTION NOTES" has the meaning set forth in Section 2.9.3 hereof.

          "REGISTRATION STATEMENT" has the meaning specified in the recitals to
     this Agreement.

          "REPLACEMENT PLANS" has the meaning specified in Section 8.1 hereof.

          "REPORTS" has the meaning specified in Section 4.1.8 hereof.

          "REQUIRED INTELLECTUAL PROPERTY" has the meaning specified in Section
     3.1.12 hereof.

          "REQUIRED PERMITS" has the meaning specified in Section 3.1.15 hereof.

          "SEC" means the United States Securities and Exchange Commission.

          "SECURITIES ACT" means the Securities Act of 1933, as amended.

          "SELLING QSI SHAREHOLDERS" means the Persons identified on
     SCHEDULE 1.2 hereto.

          "SERIES A PREFERRED STOCK" means the preferred stock, no par value, of
     QSI designated as Series A Redeemable Preferred Stock.

          "SERIES B PREFERRED STOCK" means the preferred stock, no par value of
     QSI designated as Series B Redeemable Preferred Stock.

          "SHAREHOLDERS MEETING" means the meeting of the QSI Shareholders to be
     held to approve this Agreement and the Merger contemplated hereby.

          "SHAW LITIGATION" means the litigation filed in the District Court in
     Karnes County, Texas, 218th Judicial District, Case No. 02--03--0056--CK,
     styled SHAW V. NABORS INDUSTRIES, INC. & POOL COMPANY TEXAS, LTD.

                                        8


          "SUBSTANCE OF ENVIRONMENTAL CONCERN" means any substance that is
     defined as toxic or hazardous under any Environmental Law or that is
     regulated pursuant to or could give rise to liability under any
     Environmental Law.

          "SUPPLEMENTAL INFORMATION" has the meaning specified in Section 5.5
     hereof.

          "SURVIVING CORPORATION" has the meaning specified in Section 2.1
     hereof.

          "SWD WELLS" means each of those saltwater disposal wells identified on
     SCHEDULE 3.1.8.18 hereto.

          "TAX" means any federal, state, local, or foreign income, gross
     receipts, license, payroll, employment, excise, severance, stamp,
     occupation, premium, windfall profits, environmental (including taxes under
     Section 59A of the Code), customs duties, capital stock, franchise,
     profits,   withholding,   social   security  (or  similar),   unemployment,
     disability,   real  property,  personal  property,  sales,  use,  transfer,
     registration,  value added,  alternative or add-on minimum,  estimated,  or
     other tax of any kind  whatsoever,  including  any  interest,  penalty,  or
     addition thereto, whether disputed or not, and including any obligations to
     indemnify or otherwise  assume or succeed to the Tax liability of any other
     person.

          "TAX RETURN" means any return, declaration, report, claim for refund,
     or information return or statement relating to Taxes, including any
     schedule or attachment thereto, and including any amendment thereof.

          "TBCA" means the Texas Business Corporation Act, as amended.

          "TRADING DAY" means any day the New York Stock Exchange is open for
     trading.

          "UNAUDITED FINANCIAL STATEMENTS" means the unaudited consolidated
     balance sheet and related consolidated statements of income, retained
     earnings and cash flows of QSI and its consolidated subsidiaries as at and
     for the period ended on the Balance Sheet Date.

          "VOTING AND SUPPORT AGREEMENT" means a Voting and Support Agreement
     dated the date hereof in substantially the form of EXHIBIT C hereto.

          "WARRANTS" means all warrants to purchase QSI Common Stock.

          "WARRANT NOTES" has the meaning specified in Section 2.9.2.2 hereof.

          "WARRANT PAYOUT" means the dollar amount to be paid with respect to
     each Warrant, calculated as (i) that number of shares of QSI Common Stock
     such holder would have been entitled to receive had such holder exercised
     the Warrant, MULTIPLIED by (ii) the Warrant Spread.

          "WARRANT SPREAD" means, with respect to each Warrant, that amount
     equal to (i) the Effective Price Per Share, LESS (ii) the exercise price
     per share of such Warrant.

                                        9


                                   ARTICLE 2

                                   THE MERGER

     2.1 SURVIVING CORPORATION. Subject to the terms and conditions hereof,
Merger Sub shall be, upon the Effective Date, merged with and into QSI with QSI
being the surviving corporation (the "Surviving Corporation"), which shall
continue its corporate existence and remain a Texas corporation governed by and
subject to the laws of that state. Accordingly, on the Effective Date, the
separate existence of Merger Sub, except insofar as continued by statute, shall
cease.

     2.2 EFFECTIVE DATE. The Merger shall become effective upon the filing of
the articles of merger with the Secretary of State of Texas following its
execution in accordance with Sections 5.04 and 5.05 of the TBCA. The date upon
which the Merger becomes effective is referred to in this Agreement as the
"Effective Date."

     2.3 CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION. On the
Effective Date, the corporate identity and existence of QSI shall continue
unaffected and unimpaired by the Merger as provided in and in accordance with
the TBCA, and the corporate identity and existence of Merger Sub shall be wholly
merged into QSI and QSI shall be fully vested therewith as provided in and in
accordance with the TBCA.

     2.4 GOVERNING LAW AND ARTICLES OF INCORPORATION OF SURVIVING CORPORATION.
The laws of Texas shall continue to govern the Surviving Corporation after the
Effective Date. On and after the Effective Date, the articles of incorporation
of Merger Sub shall be the articles of incorporation of the Surviving
Corporation; PROVIDED, HOWEVER, that Article 1 thereof shall be amended to read
"The name of the corporation is Q Services, Inc. (the "Corporation")."
Thereafter the articles of incorporation may be amended as provided by law and
such articles of incorporation of the Surviving Corporation.

     2.5 BYLAWS OF SURVIVING CORPORATION. On the Effective Date, the bylaws of
Merger Sub shall be the bylaws of the Surviving Corporation until altered,
amended or repealed, or until new bylaws shall be adopted in accordance with the
provisions of law, the articles of incorporation of Surviving Corporation and
the bylaws of Surviving Corporation.

     2.6 DIRECTORS OF SURVIVING CORPORATION. The incumbent director of Merger
Sub immediately before the Effective Date shall constitute the board of
directors of the Surviving Corporation from and after the Effective Date, and
such person shall remain the director of the Surviving Corporation until his
successor is duly elected and qualified in accordance with the articles of
incorporation and the bylaws of the Surviving Corporation.

     2.7 OFFICERS OF SURVIVING CORPORATION. The incumbent officers of Merger Sub
immediately before the Effective Date shall be the officers of the Surviving
Corporation from and after the Effective Date and until their successors are
duly elected and qualified in accordance with the articles of incorporation and
the bylaws of the Surviving Corporation.

     2.8 VACANCIES. If on or after the Effective Date, a vacancy shall for any
reason exist in the board of directors or in any of the offices of the Surviving
Corporation, such vacancy shall be

                                       10


filled in the manner provided in the articles of incorporation and bylaws of the
Surviving Corporation.

     2.9 CONVERSION OF SECURITIES UPON MERGER.

          2.9.1 CANCELLATION OF TREASURY SHARES. On the Effective Date, as a
     result of the Merger and without any action on the part of the holder
     thereof, all shares of capital stock of QSI held in treasury by QSI shall
     be canceled and retired and shall cease to exist from the Effective Date,
     and no consideration shall be paid with respect thereto.

          2.9.2 QSI STOCK OPTIONS AND WARRANTS.

               2.9.2.1 OPTIONS. As of the Effective Date, this Agreement shall
          be amended to include SCHEDULE 2.9.2.1 hereto, which identifies each
          of the Options that has been designated by QSI to receive an Option
          Payout in cash (which Options shall be amended to provide for an
          Option Payout in accordance with this Section 2.9.2.1) (the "Cash Out
          Options"), and such Options shall be surrendered to QSI immediately
          before the Effective Date in exchange for an amount equal to the
          Option Payout. Upon such surrender, QSI shall issue a non-interest
          bearing promissory note (in a form reasonably acceptable to Key) to
          each holder of a Cash Out Option, which note shall be in a principal
          amount equal to the Option Payout relating to such Option, less any
          applicable withholding obligations (collectively, the "Option Notes").
          Upon issuance and delivery of the Option Notes to the holders of the
          Cash Out Options, QSI shall cancel the Cash Out Options and such
          Options shall cease to exist. On the Effective Date, the Option Notes
          shall be paid by QSI subject to Section 2.9.5 hereof. QSI shall, to
          the extent required, accelerate the time at which Options other than
          the Cash Out Options (the "Other Options") may be exercised in full to
          a limited period of time before the Effective Date, and amend the
          Other Options, to the extent required, to provide that the holder may
          surrender all or a portion of each Other Option during such period in
          exchange for an Option Payout (or a portion thereof corresponding to
          the portion of the Other Option that is so surrendered), less any
          applicable withholding obligations payable in the form of QSI Common
          Stock (valued at the Effective Price Per Share).

               2.9.2.2 WARRANTS. As of the Effective Date, this Agreement shall
          be amended to include SCHEDULE 2.9.2.2 hereto, which identifies each
          of the Warrants that has been designated by QSI to receive a Warrant
          Payout in cash (which such Warrant shall be amended to provide for a
          Warrant Payout in accordance with this Section 2.9.2.2) (the "Cash Out
          Warrants"), and such Warrants shall be surrendered to QSI immediately
          before the Effective Date in exchange for an amount equal to the
          Warrant Payout. Upon such surrender, QSI shall issue a non-interest
          bearing promissory note (in a form reasonably acceptable to Key) to
          each holder of a Cash Out Warrant, which note shall be in a principal
          amount equal to the Warrant Payout, less any applicable withholding
          obligations (collectively, the "Warrant Notes"). Upon issuance and
          delivery of the Warrant Notes to the holders of the Cash Out Warrants,
          the Cash Out

                                       11


          Warrants shall be cancelled and shall cease to exist. On the Effective
          Date, the Warrant Notes shall be paid by QSI subject to Section 2.9.5
          hereof. QSI shall, to the extent required, accelerate the time at
          which Warrants other than the Cash Out Warrants (the "Other Warrants")
          may be exercised in full to a limited period of time before the
          Effective Date and amend the Other Warrants, to the extent required,
          to provide that the holder may surrender all or a portion of each
          Other Warrant during such period in exchange for a Warrant Payout (or
          a portion thereof corresponding to the portion of the Other Warrant
          that is so surrendered), less any applicable withholding obligations
          payable in the form of QSI Common Stock (valued at the Effective Price
          Per Share).

          2.9.3 REDEMPTION OF PREFERRED STOCK. Immediately before the Effective
     Date, QSI shall issue a non-interest bearing promissory note (in a form
     reasonably acceptable to Key) to each holder of the issued and outstanding
     shares of QSI Preferred Stock in the amount required to effect the
     redemption of such shares in accordance with their respective certificates
     of designation (or in accordance with agreements with holders of QSI
     Preferred Stock) (collectively, the "Redemption Notes"). Upon issuance and
     delivery of the Redemption Notes to the holders of the shares of QSI
     Preferred Stock, the QSI Preferred Stock shall be redeemed, cancelled, and
     cease to exist. The aggregate principal amount of the Redemption Notes
     shall equal the stated value of the outstanding shares of QSI Preferred
     Stock, plus accrued dividends payable in accordance with their respective
     certificates of designation. On the Effective Date, QSI shall pay the
     Redemption Notes in cash to each holder of such Redemption Notes. As soon
     as practicable after the date of this Agreement, QSI shall take all
     corporate action necessary to redeem the QSI Preferred Stock on the
     Effective Date as provided herein, including, but not limited to, the
     notice of redemption as required by the QSI Articles of Incorporation.

          2.9.4 CONVERSION OF QSI COMMON STOCK. On the Effective Date and
     without any action on the part of the holders thereof, each of the issued
     and outstanding shares of QSI Common Stock shall automatically become and
     be converted into the right to receive from Key the Merger Consideration.

               2.9.4.1 MERGER CONSIDERATION. The merger consideration to be
          received for each share of QSI Common Stock (the "Merger
          Consideration") will be that number of Key Shares equal to the result
          determined by (i) dividing the sum of the Purchase Price plus the
          Option/Warrant Strike Proceeds by the Key Share Price and (ii)
          dividing the result obtained in clause (i) by the Fully Diluted QSI
          Shares Outstanding. The aggregate Merger Consideration to be received
          by each holder of QSI Common Stock is equal to the result obtained by
          (x) multiplying the Merger Consideration by (y) the number of shares
          of QSI Common Stock owned by such holder of QSI Common Stock. As of
          the Effective Date, this Agreement shall be amended to include as
          SCHEDULE 2.9.4.1 hereto the calculation of the Purchase Price. In the
          event of any split, combination or reclassification of Key Common
          Stock or the authorization of any issuance of any other securities in
          exchange or in substitution for shares of Key Common Stock at any time
          during the period from the date of this Agreement to the Effective
          Date, Key and QSI

                                       12


          shall make such adjustment to the Merger Consideration as Key and QSI
          shall mutually agree so as to preserve the economic benefits that the
          parties each reasonably expected on the date of this Agreement to
          receive as a result of the consummation of the Merger and the other
          transactions contemplated by this Agreement.

               2.9.4.2 ESTIMATED BALANCE SHEET. No later than one business day
          before the Effective Date, QSI shall have prepared and delivered to
          Key a consolidated balance sheet of QSI and the QSI Subsidiaries
          estimated as of the Effective Date (the "Estimated Balance Sheet"),
          which balance sheet will be prepared, except as provided below, in
          accordance with generally accepted accounting principles, consistent
          with past practices, and which shall be in the form attached hereto as
          SCHEDULE 2.9.4.2. In connection with its preparation of the Estimated
          Balance Sheet, QSI shall consult with and accept input from Key in an
          effort to facilitate the adjustment process and procedures in
          Section 2.10 hereof. "Total Liabilities" as reflected on the Estimated
          Balance Sheet (and on the Final Balance Sheet) shall (i) include,
          whether or not in accordance with generally accepted accounting
          principles, all of QSI's transaction costs associated with the Merger,
          including without limitation, finder's fees, whether identified on
          SCHEDULE 3.1.26 or otherwise, accounting fees and attorneys' fees
          (including fees payable pursuant to Section 5.3.11 hereof) and all
          expenses related to the foregoing, but (ii) exclude "Deferred Income
          Tax Liability, net."

          2.9.5 HOLDBACK. Notwithstanding any other provision of this
     Section 2.9 to the contrary, (i) 5% of the aggregate Merger Consideration
     issuable to all of the holders of QSI Common Stock on the Effective Date
     (the "Escrowed Shares"), and (ii) 5% of the aggregate amount of cash
     payable to the holders of the Option Notes and Warrant Notes (the "Escrowed
     Cash"), shall be held in escrow by Key pending calculation of the Final
     Merger Consideration set forth in Section 2.10 of this Agreement.

          2.9.6 CONVERSION OF MERGER SUB COMMON STOCK. On the Effective Date, as
     a result of Merger, each issued and outstanding share of Merger Sub Common
     Stock shall be converted into one share of common stock, par value $.001
     per share, of the Surviving Corporation.

          2.9.7 NO FRACTIONAL SHARES. If the number of Key Shares issuable to a
     holder of QSI Common Stock pursuant to this Section 2.9 results in a
     fractional share, then the number of Key Shares issuable as the Merger
     Consideration to such holder of QSI Common Stock shall be rounded up to the
     next whole share.

     2.10 PURCHASE PRICE ADJUSTMENT PAYMENT. Within 60 days after the Effective
Date, Key shall cause to be prepared and delivered to the QSI Representatives a
consolidated balance sheet of the Surviving Corporation as of the Effective Date
(the "Final Balance Sheet"), which balance sheet will be prepared in accordance
with generally accepted accounting principles (subject to the adjustments in
Section 2.9.4.2) consistent with past practices and consistent with the form
attached hereto as SCHEDULE 2.9.4.2. Key and the QSI Representatives shall
jointly review the Final Balance Sheet, and endeavor in good faith to resolve
all disagreements

                                       13


regarding the entries thereon and reach a final determination thereof within 15
days from the expiration of the 60-day period. If the parties cannot agree on
the entries to be placed on the Final Balance Sheet, the dispute will be
resolved by PriceWaterhouseCoopers, LLP, or if such firm is unable or unwilling
to serve in such capacity, by an independent accounting firm mutually agreed to
by the QSI Representatives and Key, whose resolution shall be binding on and
enforceable against the parties hereto. Within 10 days of reaching the
determination of the Final Balance Sheet, Key shall re-calculate the Merger
Consideration pursuant to this Section 2.10. The final Merger Consideration to
be received for each share of QSI Common Stock (the "Final Merger
Consideration") will be that number of Key Shares equal to the result determined
by (i) dividing the sum of the Final Purchase Price plus the Option/Warrant
Strike Proceeds by the Key Share Price and (ii) dividing the result obtained in
clause (i) by the Fully Diluted QSI Shares Outstanding. Key shall also calculate
the Final Effective Price Per Share, the Final Option Spread, the Final Option
Payout, the Final Warrant Spread and the Final Warrant Payout. The aggregate
Final Merger Consideration to be received by each holder of the QSI Common Stock
is equal to the result obtained by (x) multiplying the Final Merger
Consideration by (y) the number of shares of QSI Common Stock owned by each
holder of QSI Common Stock giving effect to differences between the Final Option
Payout and the Option Payout and differences between the Final Warrant Payout
and the Warrant Payout. Upon calculation of the Final Merger Consideration, the
aggregate Final Merger Consideration for each holder of QSI Common Stock will be
compared to the holder's aggregate Merger Consideration. Any and all adjustments
necessary to reconcile any difference in amounts between the aggregate Final
Merger Consideration for a holder and such holder's aggregate Merger
Consideration shall be made in accordance with Sections 2.10.1 and 2.10.2
hereof. The Final Option Payout and the Final Warrant Payout for each Note
Holder will be compared to the Option Payout or Warrant Payout received by such
Note Holder. Any and all adjustments necessary to reconcile any difference in
amount shall be made in accordance with Sections 2.10.1 and 2.10.2 hereof.

          2.10.1 KEY ADJUSTMENT PAYMENT. If the aggregate Final Merger
     Consideration equals the aggregate Merger Consideration, (i) the holders of
     QSI Common Stock shall be entitled to receive from Key the Escrowed Shares
     in accordance with their pro rata ownership of QSI Common Stock as set
     forth on SCHEDULE 3.1.4 hereto, and (ii) the Note Holders shall be entitled
     to receive from Key the Escrowed Cash in accordance with each Note Holder's
     respective Option Note or Warrant Note, as the case may be. In addition to
     the foregoing, if the Final Merger Consideration is greater than the Merger
     Consideration, (i) each holder of QSI Common Stock shall be entitled to
     receive the difference between the holder's aggregate Final Merger
     Consideration and such holder's aggregate Merger Consideration already
     received and each Note Holder shall be entitled to receive the difference
     between the holder's Final Option Payout or Final Warrant Payout and such
     holder's Option Payout or Warrant Payout already received (the "Key
     Adjustment Payments"). The Key Adjustment Payments will include first, the
     Escrow Consideration and, second, at Key's Option, cash or a number of Key
     Shares equal to the additional amount necessary for Key to satisfy the Key
     Adjustment Payments divided by the Key Share Price.

          2.10.2 QSI ADJUSTMENT PAYMENT. If the aggregate Final Merger
     Consideration is less than the aggregate Merger Consideration and the
     amount of such deficiency (the amount of such deficiency being referred to
     as the "QSI Adjustment Payment") is less

                                       14


     than the value of the Escrowed Consideration, then Key shall (i) deduct
     from the Escrowed Cash for each Note Holder the difference between the
     holder's Final Option Payout or Final Warrant Payout and such holder's
     Option Payout or Warrant Payout already received; and (ii) deduct from the
     Escrowed Shares the number of Key Shares equal to the QSI Adjustment
     Payment (less the amount of Escrowed Cash deducted pursuant to clause (i))
     divided by the Key Share Price. The holders of QSI Common Stock and the
     Note Holders shall be entitled to receive the balance, if any, of the
     Escrow Consideration in either cash or Key Shares based on the difference
     between their aggregate Final Merger Consideration and their aggregate
     Merger Consideration. If the amount of the QSI Adjustment Payment is
     greater than the value of the Escrowed Consideration, (the amount of such
     deficiency being referred to as the "QSI Deficiency"), then Key shall be
     entitled to retain the Escrow Consideration, and (ii) each holder of QSI
     Common Stock shall pay to Key the difference between their aggregate Final
     Merger Consideration and their aggregate Merger Consideration already
     received (after giving credit for the final Escrow Consideration applicable
     to each holder of QSI Common Stock) and each Note Holder shall pay to Key
     the difference between the holder's Final Option Payout or Final Warrant
     Payout and such holder's Option Payout or Warrant Payout already received
     (after giving credit for the final Escrow Consideration applicable to each
     Note Holder). At the option of the holders of the QSI Common Stock or the
     Note Holders, such holders may satisfy the QSI Deficiency by tendering Key
     Shares equal to the QSI Deficiency divided by the Key Share Price or
     otherwise paying cash.

     2.11 SURRENDER OF QSI CERTIFICATES. Before the Effective Date, Key will
designate the Paying Agent and from time to time will make or cause to be made
available to the Paying Agent Key Shares in the amounts and at the times
necessary for the payment of the Merger Consideration on surrender of
Certificates. QSI shall use all reasonable efforts to cause each holder of QSI
Common Stock to surrender all the Certificates to Key on the Effective Date. On
the first business day following the Effective Date, Key will cancel all the
Certificates delivered to it as of the Effective Date, and the holders of the
QSI Common Stock delivering such Certificates together with a completed and
executed Letter of Transmittal, in substantially the form attached hereto as
EXHIBIT D, will receive the Merger Consideration to which they are entitled,
subject to Section 2.9.5 hereof. Until any Certificate has been surrendered and
replaced pursuant to this Section 2.11, that Certificate will, for all purposes,
be deemed to evidence ownership of the Merger Consideration such holder of QSI
Common Stock is entitled to receive, subject to Section 2.9.5 hereof.

          2.11.1 CERTIFICATES NOT DELIVERED ON THE EFFECTIVE DATE. With respect
     to the Certificates not delivered on the Effective Date, as soon as
     reasonably practicable after the Effective Date, but in any event within
     five days following the Effective Date, the Paying Agent will mail to each
     holder of record of a Certificate set forth in SCHEDULE 3.1.4 hereto:

               2.11.1.1    LETTER OF TRANSMITTAL. A letter of transmittal, which
          will specify that delivery will be effected, and risk of loss and
          title to Certificates will pass, only on delivery of Certificates to
          the Paying Agent and will be in a form and have such other provisions
          as Key may specify; and

                                       15


               2.11.1.2    INSTRUCTIONS FOR SURRENDER. Instructions for use in
          effecting the surrender of Certificates in exchange for the Merger
          Consideration.

          2.11.2 LOST, STOLEN OR DESTROYED CERTIFICATES. If any Certificates
     shall have been lost, stolen or destroyed, upon the making of an affidavit
     of that fact by the person claiming such Certificates to be lost, stolen or
     destroyed, and delivery of such indemnity as Key may reasonably request, a
     Paying Agent will deliver in exchange for such lost, stolen or destroyed
     Certificates one or more certificates representing Key Common Stock
     deliverable in respect thereof, as determined in accordance with the terms
     hereof.

     2.12 QSI TRANSFER BOOKS CLOSED. Upon the Effective Date, the stock transfer
books of QSI shall be closed, and no transfer of any shares of capital stock of
QSI shall thereafter be made or consummated.

     2.13 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF
SURVIVING CORPORATION. The Merger shall have the effects set forth in the TBCA,
including Section 5 of the TBCA.

     2.14 DISSENTING SHAREHOLDERS. Key agrees that if the Merger becomes
effective, it promptly will pay to dissenting shareholders of QSI the amounts,
if any, to which they are entitled under the provisions of Sections 5.11 and
5.12 of the TBCA.

     2.15 FEDERAL INCOME TAX TREATMENT. The Merger is intended to qualify as a
tax-free reorganization described in Section 368(a) of the Code. The parties
intend that this Agreement constitutes a "plan of reorganization" among QSI, Key
and Merger Sub within the meaning of Treas. Reg. Section 1.368-2(g). Neither Key
nor QSI will take any action or permit  any of their  respective  affiliates  to
take any action that would result in the Merger failing to qualify as a tax-free
reorganization under Section 368(a) of the Code.

     2.16 CLOSING. The Closing of the Merger shall be at the offices of Porter &
Hedges, L.L.P., 700 Louisiana Street, Houston, Texas, 77002, on such date as
mutually agreed by the parties, which shall be no later than the third business
day after satisfaction or waiver of the conditions set forth herein unless
another date or place is agreed to in writing by the parties hereto.


                                    ARTICLE 3

                      REPRESENTATIONS AND WARRANTIES OF QSI

     3.1 REPRESENTATIONS AND WARRANTIES QSI. QSI hereby represents and warrants
to Key and Merger Sub as follows:

          3.1.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. QSI is a corporation
     duly organized, validly existing and in good standing under the laws of the
     State of Texas, has full requisite corporate power and authority to carry
     on its business as it is currently conducted, and to own and operate the
     properties currently owned and operated by it, and is duly qualified or
     licensed to do business and is in good standing as foreign entity
     authorized to do business in all jurisdictions in which the character of
     the properties

                                       16


     owned or the nature of the business conducted by it would make such
     qualification or licensing necessary.

          3.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS. The
     execution and delivery of this Agreement and the transactions contemplated
     hereby have been authorized by the board of directors of QSI. This
     Agreement and the transactions contemplated hereby are the valid and
     binding obligations of QSI, enforceable against QSI in accordance with its
     terms. The Voting and Support Agreements are valid and binding obligations
     of the parties thereto (other than Key), enforceable against each of the
     parties thereto (other than Key) in accordance with their terms. Except as
     reflected in SCHEDULE 3.1.2 hereto, the execution, delivery and performance
     of this Agreement by QSI will not conflict with or result in a violation or
     breach of any term or provision of, nor constitute a default under (x) the
     articles of incorporation, bylaws or other organizational documents of QSI
     or any of the QSI Subsidiaries; (y) any obligation, indenture, mortgage,
     deed of trust, lease, contract or other agreement to which QSI or any of
     the QSI Subsidiaries is a party or by which QSI, any of the QSI
     Subsidiaries or their respective properties are bound, or (z) any provision
     of any law, rule, regulation, order, permit, certificate, writ, judgment,
     injunction, decree, determination award or other decision of any court,
     arbitrator or other governmental authority to which QSI, any of the QSI
     Subsidiaries or any of their respective properties are subject.

          3.1.3 CAPITALIZATION. The authorized capitalization of QSI consists of
     (i) 40,000,000 shares of QSI Common Stock, of which, as of the date hereof,
     15,083,815 shares are issued and outstanding and all of which are held
     beneficially and of record by the holders of the QSI Common Stock, 0 shares
     are held in treasury and 2,276,368 shares are reserved for issuance
     pursuant to stock options and warrants; and (ii) 200,000 shares of QSI
     Preferred Stock, of which (a) 72,000 shares of Series A Preferred Stock and
     (b) 2,600 shares of Series B Preferred Stock are issued and outstanding.
     Other than as set forth in the previous sentence of this Section 3.1.3 and
     as reflected on SCHEDULE 3.1.3 hereto on the date hereof, QSI does not have
     any outstanding options, convertible securities, warrants, calls or
     commitments of any character relating to any of its authorized but unissued
     shares of capital stock. All issued and outstanding shares of QSI Common
     Stock and QSI Preferred Stock are validly issued, fully paid and
     non-assessable and, except as set forth on SCHEDULE 3.1.3 hereto, are not
     subject to preemptive rights. Except as set forth on SCHEDULE 3.1.3 hereto,
     and except as contemplated by the Voting and Support Agreements, none of
     the outstanding shares of QSI Common Stock or QSI Preferred Stock is
     subject to any voting trusts, voting agreement or other agreement or
     understanding with respect to the voting thereof. All QSI Shares have been
     issued in compliance with applicable state and federal securities laws.

          3.1.4 OWNERSHIP OF THE QSI SHARES. SCHEDULE 3.1.4 hereto sets forth a
     complete and accurate list of (i) each of the holders of QSI Common Stock
     and the number of shares of QSI Common Stock owned of record by each such
     holder; (ii) each holder of QSI Preferred Stock and the number of and class
     of the shares of QSI Preferred Stock owned of record by each such holder;
     (iii) each holder of an Option or Warrant, and the number of shares of QSI
     Common Stock issuable upon the exercise of each such Option

                                       17


     and the exercise price of each such Option; and (iv) each holder of a
     Warrant, and the number of shares of QSI Common Stock issuable upon the
     exercise of each such Warrant and the exercise price of each such Warrant.
     On the Effective Date, SCHEDULE 3.1.4 hereto shall be amended to include
     the Merger Consideration payable to each of the holders of QSI Common Stock
     and the amount of Escrowed Shares attributable to each such holder.

          3.1.5 SUBSIDIARIES. SCHEDULE 3.1.5 hereto sets forth a complete list
     of all QSI Subsidiaries, and also sets forth (i) its jurisdiction of
     incorporation, formation, or organization, (ii) each jurisdiction in which
     it is qualified to do business as a foreign entity, (iii) its authorized,
     issued, and outstanding shares of capital stock, membership, partnership,
     or other equity interests and (iv) the record holder or holders of all
     outstanding shares of capital stock or equity interest and the percentage
     ownership of each such holder or holders. All outstanding shares of capital
     stock and all partnership or limited liability company interests of the QSI
     Subsidiaries are validly issued, fully paid and nonassessable, and except
     as set forth on SCHEDULE 3.1.5 hereto, QSI has good and valid title
     thereto, free and clear of any Encumbrance. Except as set forth on SCHEDULE
     3.1.5 hereto, each such QSI Subsidiary is a corporation, limited
     partnership or limited liability company that is duly organized, validly
     existing and in good standing under the laws of the jurisdiction under
     which it is incorporated, has full requisite corporate, partnership or
     limited liability company power and authority to carry on its business as
     it is currently conducted, and to own and operate the properties currently
     owned and operated by it, and is duly qualified and licensed to do business
     and is in good standing as a foreign entity authorized to do business in
     all jurisdictions in which the character of the properties owned or the
     nature of the business conducted makes such qualification or licensing
     necessary.

          3.1.6 FINANCIAL STATEMENTS. QSI has delivered to Key copies of the
     Audited Financial Statements. Such Audited Financial Statements are
     complete in all materials respects, present fairly the financial condition
     of QSI and its consolidated subsidiaries as of the dates indicated and the
     results of operations for the respective periods indicated, and have been
     prepared in accordance with generally accepted accounting principles
     applied on a consistent basis, except as noted therein. QSI also has
     delivered to Key copies of the Unaudited Financial Statements. Such
     Unaudited Financial Statements are complete in all material respects
     (except for the omission of notes and schedules), present fairly the
     financial condition of QSI and its consolidated subsidiaries as of the date
     indicated and the results of operations for the period indicated and have
     been prepared in accordance with generally accepted accounting principles
     applied on a consistent basis, subject to normal year-end adjustments and
     other adjustments described therein. The Audited Financial Statements and
     Unaudited Financial Statements are attached hereto as SCHEDULE 3.1.6.

          3.1.7 LIABILITIES. QSI does not have any liabilities or obligations,
     either accrued, absolute, contingent or otherwise, including any
     liabilities for Taxes, other than those (i) reflected or reserved against
     in the unaudited consolidated balance sheet of QSI on the Balance Sheet
     Date; (ii) incurred in the ordinary course of business since the Balance
     Sheet Date (which will be properly reflected or reserved against in the
     Estimated Balance

                                       18


     Sheet and the Final Balance Sheet); (iii) set forth on SCHEDULE 3.1.7
     hereto; or (iv) contracts in the ordinary course of business which
     individually do not involve payments by or liability of QSI in excess of
     $10,000.

          3.1.8 ADDITIONAL COMPANY INFORMATION. Attached as SCHEDULES 3.1.8.1
     through 3.1.8.18 hereto are true, complete and correct lists of the
     following items, copies of each of which have been delivered to Key:

               3.1.8.1 REAL ESTATE. All real property owned, leased or subject
          to a contract of purchase and sale, or lease commitment, by QSI or any
          QSI Subsidiary;

               3.1.8.2 MACHINERY AND EQUIPMENT. All equipment, pressure pumping
          equipment, machinery, transportation equipment, trucks, transport
          trailers, frac tanks, open top tanks, rental tools and other major
          items of equipment, which in each case has a value on QSI's
          consolidated financial records in excess of $25,000, owned, leased or
          subject to a contract of purchase and sale, or lease commitment, by
          QSI or any QSI Subsidiary;

               3.1.8.3 INVENTORY. All material inventory items or groups of
          material inventory items owned by QSI or any QSI Subsidiary;

               3.1.8.4 RECEIVABLES. All accounts and notes receivable of QSI or
          any QSI Subsidiary, together with (i) aging schedules by invoice date;
          (ii) the amounts provided for as an allowance for bad debts; and (iii)
          the identity and location of any asset in which QSI or any QSI
          Subsidiary holds a security interest to secure payment of the
          underlying indebtedness;

               3.1.8.5 PAYABLES. All trade accounts payable of QSI or any QSI
          Subsidiary together with an aging schedule;

               3.1.8.6 INSURANCE. All insurance policies or surety and
          performance bonds currently maintained by QSI or any QSI Subsidiary,
          including title insurance policies and those covering QSI or any QSI
          Subsidiary properties, machinery and equipment identified on SCHEDULE
          3.1.8.2 hereto, employees and operations, as well as listing of any
          premiums, deductibles or retroactive adjustments due or pending on
          such policies or any predecessor policies;

               3.1.8.7 CONTRACTS. All contracts, which includes the payment by
          or to QSI or a QSI Subsidiary of an amount in excess of $100,000,
          including leases under which QSI or any QSI Subsidiary is lessor or
          lessee, which are to be performed in whole or in part after the date
          hereof, but excluding master service agreements entered into by QSI or
          any QSI Subsidiary in the ordinary course of business;

               3.1.8.8 EMPLOYEE PLANS. All Employee Plans;

                                       19


               3.1.8.9 SALARIES. The names and salary rates of all present
          employees of QSI or any QSI Subsidiary, and, to the extent existing on
          the date hereof, all arrangements with respect to any bonuses to be
          paid to them from and after the date hereof;

               3.1.8.10 BANK ACCOUNTS. The name of each bank in which QSI or any
          QSI Subsidiary has an account and the names of all persons authorized
          to draw thereon;

               3.1.8.11 EMPLOYEE AGREEMENTS. Any collective bargaining
          agreements of QSI or any QSI Subsidiary or ERISA Affiliate with any
          labor union or other representative of employees, including
          amendments, supplements, and written or oral understandings, and all
          employment, non-competition and consulting and severance agreements of
          QSI or any QSI Subsidiary;

               3.1.8.12 INTELLECTUAL PROPERTY. All Intellectual Property.

               3.1.8.13 TRADE NAMES. All trade names, assumed and fictitious
          names used or held by QSI or any QSI Subsidiary, whether and where
          such names are registered and where used;

               3.1.8.14 LICENSES AND PERMITS. All material permits,
          authorizations, certificates, approvals, registrations, variances,
          waivers, exemptions, rights-of-way, franchises, ordinances, licenses
          and other rights of every kind and character of QSI or any QSI
          Subsidiary (collectively, the "Permits") under which QSI or any QSI
          Subsidiary conducts its business. For purposes of this Section
          3.1.8.14, all environmental permits and permits pertaining to the SWD
          Wells shall be deemed to be material;

               3.1.8.15 PROMISSORY NOTES. All long-term and short-term
          promissory notes, installment contracts, loan agreements,
          credit-agreements, and any other agreements of QSI or any QSI
          Subsidiary relating thereto or with respect to collateral securing the
          same;

               3.1.8.16 GUARANTEES. All indebtedness, liabilities and
          commitments of others and as to which QSI or any QSI Subsidiary is a
          guarantor, endorser, co-maker, surety, or accommodation maker, or is
          contingently liable therefor and all letters of credit, whether
          stand-by or documentary, issued by any third party for the benefit of
          QSI or any QSI Subsidiary;

               3.1.8.17 ENVIRONMENT. All environmental permits, approvals,
          certifications, licenses, registrations, orders and decrees applicable
          to current operations conducted by QSI or any QSI Subsidiary and all
          environmental audits, assessments, investigations and reviews
          conducted by QSI or any QSI Subsidiary within the last three years or
          otherwise in QSI's or any QSI Subsidiary's possession on any property
          owned, leased or used by QSI or any QSI Subsidiary; and

                                       20


               3.1.8.18 SWD WELLS. All SWD Wells owned or leased by QSI or any
          QSI Subsidiary including the location of such SWD Wells.

     SCHEDULES 3.1.8.1 through 3.1.8.18 hereto shall be true, complete and
correct as of the Effective Date except for the items contained in
SCHEDULES 3.1.8.3, 3.1.8.4 and 3.1.8.5 hereto, which are true, complete and
correct as of the Balance Sheet Date.

          3.1.9 NO DEFAULTS. Neither QSI nor any QSI Subsidiary is in default in
     any obligation or covenant on its part to be performed under any
     obligation, lease, contract, order, plan or other arrangement.

          3.1.10 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as disclosed on
     SCHEDULE 3.1.10 hereto, and other than as a result of the transactions
     contemplated by this Agreement, since the Balance Sheet Date, there has not
     been:

               3.1.10.1 FINANCIAL CHANGE. Any material adverse change in the
          financial condition, results of operations, assets, liabilities or
          business of QSI and the QSI Subsidiaries taken as a whole;

               3.1.10.2 PROPERTY DAMAGE. Any material damage, destruction, or
          loss to the business or properties of QSI and the QSI Subsidiaries
          taken as a whole (whether or not covered by insurance);

               3.1.10.3 DIVIDENDS. Any declaration, setting aside, or payment of
          any dividend or other distribution in respect of QSI Common Stock, QSI
          Preferred Stock or any direct or indirect redemption, purchase or any
          other acquisition by QSI of any such stock;

               3.1.10.4 CAPITALIZATION CHANGE. Any change in the capital stock
          or in the number of shares or classes of QSI's authorized or
          outstanding capital stock as described in Section 3.1.3 hereof (other
          than exercise of Options or Warrants); or

               3.1.10.5 LABOR DISPUTES. Any labor or employment dispute of
          whatever nature.

          3.1.11 TAXES.

               3.1.11.1 FILING TAX RETURNS. SCHEDULE 3.1.11.1 hereto lists all
          federal, state, local, and foreign income Tax Returns filed with
          respect to QSI and each of the QSI Subsidiaries for taxable periods
          ended on or after December 31, 1996, and indicates those Tax Returns
          that have been audited and those Tax Returns that currently are the
          subject of audit. Each of QSI and the QSI Subsidiaries has delivered
          to Key correct and complete copies of all federal income Tax Returns,
          examination reports, and statements of deficiencies assessed against
          or agreed to by QSI or any of the QSI Subsidiaries since January 1,
          1997. Each of QSI and the QSI Subsidiaries filed all Tax Returns that
          it was required to

                                       21


          file under applicable laws and regulations. All such Tax Returns were
          correct and complete in all material respects and have been prepared
          in substantial compliance with all applicable laws and regulations.
          All Taxes owed by QSI and each of the QSI Subsidiaries (whether or not
          shown on any Tax Return) have been paid. Except as provided on
          SCHEDULE 3.1.11.1 hereto, neither QSI nor any of the QSI Subsidiaries
          currently are the beneficiary of any extension of time within which to
          file any Tax Return. No claim has ever been made against QSI or any of
          the QSI Subsidiaries by an authority in a jurisdiction where it does
          not file Tax Returns that it is or may be subject to taxation by that
          jurisdiction. There are no security interests on any of the assets of
          QSI or any of the QSI Subsidiaries that arose in connection with any
          failure (or alleged failure) to pay any Tax.

               3.1.11.2 WITHHOLDING. Except as set forth on SCHEDULE 3.1.11.2
          hereto, each of QSI and the QSI Subsidiaries has withheld and paid all
          Taxes required to have been withheld and paid in connection with
          amounts paid or owing to any employee, stockholder or other third
          party.

               3.1.11.3 NO ADDITIONAL TAXES. Except as set forth on SCHEDULE
          3.1.11.3 hereto, neither QSI nor any director or officer (or employee
          responsible for Tax matters) of QSI or any of the QSI Subsidiaries
          expects any authority to assess any additional Taxes for any period
          for which Tax Returns have been filed. There is no dispute or claim or
          audits or proceedings pending or being conducted concerning any
          liability for Taxes of QSI or any of the QSI Subsidiaries. Neither QSI
          nor any of the QSI Subsidiaries has received from any foreign,
          federal, state or local taxing authority (including jurisdictions
          where QSI or the QSI Subsidiaries have not filed Tax Returns) any (i)
          notice indicating an intent to open an audit or other review, (ii)
          request for information related to Tax matters or (iii) notice of
          deficiency or proposed adjustment for any amount of Tax proposed,
          asserted or assessed by any taxing authority against QSI or any of the
          QSI Subsidiaries.

               3.1.11.4 NO WAIVER OF LIMITATIONS PERIODS. Except as provided in
          SCHEDULE 3.1.11.4 hereto, neither QSI nor any QSI Subsidiary has
          waived any statute of limitations in respect of Taxes or agreed to any
          extension of time with respect to a Tax assessment or deficiency.

               3.1.11.5 TAX BASIS, NOLS, ETC. SCHEDULE 3.1.11.5 hereto sets
          forth the following information with respect to QSI and each of the
          QSI Subsidiaries (or, in the case of clause (ii) below, with respect
          to each of the QSI Subsidiaries) as of the most recent practicable
          date (as well as on an estimated pro forma basis as of the Effective
          Date giving effect to the consummation of the transactions
          contemplated hereby): (i) the basis of QSI or the QSI Subsidiary in
          its assets; (ii) the basis of QSI in each QSI Subsidiary's capital
          stock (or the amount of any excess loss account) or other equity
          interest; (iii) the amount of any net operating loss, net capital
          loss, unused investment or other credit, unused foreign tax, credit,
          foreign loss, or excess charitable contribution allocable to QSI or
          the QSI

                                       22


          Subsidiary; and (iv) the amount of any deferred gain or loss allocable
          to QSI or the QSI Subsidiary arising out of any deferred intercompany
          transaction.

               3.1.11.6 UNPAID TAXES. The unpaid Taxes of QSI and the QSI
          Subsidiaries (i) did not, as of the Balance Sheet Date, exceed the
          reserve for Tax liability (other than any reserve for deferred Taxes
          established to reflect timing differences between book and Tax income)
          set forth on QSI's unaudited consolidated balance sheet at the Balance
          Sheet Date, and (ii) do not exceed that reserve as adjusted for the
          passage of time through the date hereof in accordance with the past
          custom and practice of QSI and the QSI Subsidiaries in filing their
          Tax Returns. Since the Balance Sheet Date, neither QSI nor any of the
          QSI Subsidiaries has incurred any liability for Taxes arising from
          extraordinary gains or losses, as that term is used in generally
          accepted accounting principles, outside of the ordinary course of
          business consistent with past custom and practice.

               3.1.11.7 ACCOUNTING METHOD. Except as set forth on
          SCHEDULE 3.1.11.7 hereto, QSI has used the accrual method of
          accounting for federal income tax purposes since 1996 and has been
          entitled to use such method of accounting for each taxable year
          thereafter.

               3.1.11.8 ADDITIONAL TAX MATTERS. None of QSI nor any of the QSI
          Subsidiaries has filed a consent under Code Section 341(f) concerning
          collapsible corporations. Neither QSI nor any of the QSI Subsidiaries
          has made any payments, is obligated to make any payments, or is a
          party to any agreement that under certain circumstances could obligate
          it to make any payments that will not be deductible under Code
          Section 280G. Neither QSI nor any of the QSI Subsidiaries is, or has
          been during the last five years, a United States real property holding
          corporation within the meaning of Code Section 897(c)(2) during the
          applicable period specified in Code Section 897(c)(1)(A)(ii). Except
          as provided in SCHEDULE 3.1.11.8 hereto, neither QSI nor any of the
          QSI Subsidiaries is a party to any Tax allocation or sharing
          agreement. Neither QSI nor any of the QSI Subsidiaries (i) has been a
          member of an affiliated group filing a consolidated federal income Tax
          Return (other than a group the common parent of which was QSI) or (ii)
          has any liability for the Taxes of any person (other than QSI and the
          QSI Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar
          provision of state, local or foreign law), as a transferee or
          successor, by contract or otherwise. None of QSI or the QSI
          Subsidiaries will be required to include any item of income in, or
          exclude any item of deduction from, taxable income for any taxable
          period (or portion thereof) ending after the Effective Date as a
          result of any: (i) change in method of accounting for a taxable period
          ending on or before the Effective Date; (ii) "closing agreement" as
          described in Code Section 7121 (or any corresponding or similar
          provision of state, local or foreign income Tax law) executed on or
          before the Effective Date; (iii) intercompany transactions or any
          excess loss account described in Treasury Regulations under Code
          Section 1502 (or any corresponding or similar provision of state,
          local or foreign income Tax law); (iv) installment sale or open
          transaction disposition made on or before the Effective Date; or (v)
          prepaid amount received on or before the Effective Date.

                                       23


               3.1.11.9 CONTINUITY OF BUSINESS ENTERPRISE. QSI operates at least
          one significant historic business line, or owns at least a significant
          portion of its historic business assets, in each case within the
          meaning of Treas. Reg. Section-1.368-1(d).

          3.1.12 INTELLECTUAL PROPERTY. QSI and each QSI Subsidiary owns or
     possesses licenses to use all Intellectual Property that is either material
     to the business of QSI or such QSI Subsidiary or that is necessary for the
     rendering of any services rendered by QSI or such QSI Subsidiary and the
     use or sale of any equipment or products used or sold by QSI or such QSI
     Subsidiary, including all such Intellectual Property listed in SCHEDULES
     3.1.8.12 and 3.1.8.13 hereto (the "Required Intellectual Property"). Except
     as set forth on SCHEDULE 3.1.12 hereto, the Required Intellectual Property
     is owned or licensed by QSI or such QSI Subsidiary free and clear of any
     Encumbrance. Except as set forth on SCHEDULE 3.1.12 hereto, neither QSI nor
     any QSI Subsidiary has granted to any other person any license to use any
     Required Intellectual Property. Except as set forth on SCHEDULE 3.1.12
     hereto, neither QSI nor any QSI Subsidiary has infringed, misappropriated,
     or conflicted with the Intellectual Property rights of others in connection
     with the use by QSI or such QSI Subsidiary of the Required Intellectual
     Property or otherwise in connection with QSI's or such QSI Subsidiary's
     operation of its business, nor has QSI or any QSI Subsidiary received any
     notice of such infringement, misappropriation, or conflict with such
     Intellectual Property rights of others.

          3.1.13 TITLE TO AND CONDITION OF ASSETS. Except as set forth on
     SCHEDULE 3.1.13 hereto, (i) QSI and each QSI Subsidiary has good and
     indefeasible title to all its properties, interests in properties and
     assets, real and personal, free and clear of any Encumbrance of any nature
     whatsoever, (ii) all leases pursuant to which QSI or any QSI Subsidiary
     leases (whether as lessee or lessor) any substantial amount of real or
     personal property are in good standing, valid, and effective, and there is
     not, under any such leases, any existing default or event of default, or
     event that with notice or lapse of time, or both, would constitute a
     default by QSI or any QSI Subsidiary and in respect to which QSI or such
     QSI Subsidiary has not taken adequate steps to prevent a default from
     occurring, (iii) the buildings and premises of QSI or any QSI Subsidiary
     that are used in its business are in good operating condition and repair,
     subject only to ordinary wear and tear, (iv) all equipment, pressure
     pumping equipment, machinery, transportation equipment, trucks, transport
     trailers, frac tanks, open top tanks, rental tools and other major items of
     equipment of QSI and each QSI Subsidiary listed on SCHEDULE 3.1.8.2 hereto
     are in good operating condition and in a state of good maintenance and
     repair, ordinary wear and tear excepted, (v) all such assets conform to all
     applicable laws governing their use, and (vi) neither QSI nor any QSI
     Subsidiary has violated any law, statute, ordinance, or regulation relating
     to any such assets, nor has any notice of such violation been received by
     QSI or any QSI Subsidiary, except such as have been fully complied with.

          3.1.14 CONTRACTS. All contracts, leases, plans or other arrangements
     to which QSI or any QSI Subsidiary is a party, by which QSI or any QSI
     Subsidiary is bound or to which QSI or any QSI Subsidiary or their
     respective assets are subject are in full force and effect, and constitute
     valid and binding obligations of QSI or such QSI Subsidiary.

                                       24


     Neither QSI nor such QSI Subsidiary is, and no other party to any such
     contract, lease, plan or other arrangement is in default thereunder, and no
     event has occurred that (with or without notice, lapse of time, or the
     happening of any other event) would constitute a default thereunder. Except
     as set forth on SCHEDULE 3.1.14 hereto, no consent by any party to any of
     the contracts to which QSI or any QSI Subsidiary is a party is required in
     connection with the consummation of the transactions contemplated hereby
     other than such consents as have been obtained on or before the date hereof
     or that will be obtained prior to the Effective Date. Neither QSI nor any
     QSI Subsidiary has received any notice from a customer that such customer
     will (or is likely to) cease doing business with QSI or any QSI Subsidiary
     (or their successors) as a result of the consummation of the transactions
     contemplated hereby.

          3.1.15 LICENSES AND PERMITS. QSI and each QSI Subsidiary possess all
     Permits necessary under law or otherwise for QSI or such QSI Subsidiary to
     conduct its business as now being conducted and to conduct, own, operate,
     maintain and use its assets in the manner in which they are now being
     conducted, operated, maintained and used, including all such Permits listed
     in SCHEDULE 3.1.8.14 and SCHEDULE 3.1.8.17 hereto (collectively, the
     "Required Permits"), but excluding Permits required under applicable
     Environmental Law that are covered by Section 3.1.17.2 hereof. Each of the
     Required Permits and QSI's and each QSI Subsidiary's rights with respect
     thereto is valid and subsisting, in full force and effect, and enforceable
     by QSI and such QSI Subsidiary subject to administrative powers of
     regulatory agencies having jurisdiction and will continue in full force and
     effect after the Effective Date assuming Key takes all necessary action on
     its part for the continuation of such permits. QSI and each QSI Subsidiary
     is in compliance in all respects with the terms of each of its Required
     Permits. None of the Required Permits has been, or to the knowledge of QSI
     or any QSI Subsidiary, is threatened to be, revoked, canceled, suspended or
     modified.

          3.1.16 LITIGATION. Except as set forth on SCHEDULE 3.1.16 hereto,
     there is no suit, action, or legal, administrative, arbitration, or other
     proceeding or governmental investigation pending to which QSI or any QSI
     Subsidiary is a party or to which QSI or any QSI Subsidiary might
     reasonably be likely to become a party or, to the knowledge of QSI, or any
     QSI Subsidiary, threatened.

          3.1.17 ENVIRONMENTAL COMPLIANCE. Notwithstanding any other provision
     of Article 3 to the contrary, this Section 3.1.17 contains the exclusive
     representations and warranties of QSI with respect to environmental
     matters. Except as set forth on SCHEDULE 3.1.17 hereto:

               3.1.17.1 ENVIRONMENTAL CONDITIONS. There are no environmental
          conditions or circumstances, including, without limitation, the
          presence or release of any Substance of Environmental Concern in
          concentrations that would require remedial action to meet standards
          under applicable law, in, on, under or relating to any property
          presently or previously owned, leased or operated by QSI or any QSI
          Subsidiary, or in, on, under or relating to any property where any
          Substance of Environmental Concern or waste generated by QSI's or any
          QSI Subsidiary's operations or use of its assets was disposed of;

                                       25


               3.1.17.2 PERMITS, ETC. QSI and each QSI Subsidiary has and,
          within the period of all applicable statutes of limitations, has had
          in full force and effect all Permits required under applicable
          Environmental Law to conduct its operations as now conducted or at the
          time any prior operations were conducted, and is, and within the
          period of all applicable statutes of limitations has been, operating
          in compliance thereunder;

               3.1.17.3 COMPLIANCE. QSI's and each QSI Subsidiary's operations
          and use of its assets are, and within the period of all applicable
          statutes of limitations, have been in compliance with applicable
          Environmental Law;

               3.1.17.4 ENVIRONMENTAL CLAIMS. No notice has been received by QSI
          or any QSI Subsidiary from any entity, governmental agency or
          individual regarding any existing, pending or threatened
          investigation, inquiry, inspection, notice of violation, complaint,
          enforcement action, litigation, demand, or liability, including,
          without limitation, any claim for remedial obligations, response costs
          or contribution, relating to any Substance of Environmental Concern or
          any Environmental Law;

               3.1.17.5 ENFORCEMENT. Neither QSI nor any QSI Subsidiary or other
          party acting on behalf of QSI has entered into or agreed to any
          consent decree, order, settlement or other binding agreement, nor is
          subject to any judgment, decree, order or other binding agreement, in
          any judicial, administrative, arbitral, or other forum, relating to
          compliance with or liability under any Environmental Law;

               3.1.17.6 LIABILITIES. Neither QSI nor any QSI Subsidiary has,
          pursuant to contract or by operation of law, any liabilities of any
          kind, fixed or contingent, known or unknown, under any Environmental
          Law, except to the extent reserved against on the Estimated Balance
          Sheet and Final Balance Sheet;

               3.1.17.7 RENEWALS. QSI, each QSI Subsidiary (or their respective
          successors) will be able to renew without material expense each of the
          permits, licenses, or other authorizations required pursuant to
          Environmental Law to conduct or use any of QSI's or any of QSI's
          Subsidiaries' current or planned operations; and

               3.1.17.8 ASBESTOS, PCBS, MOLD AND MILDEW. No friable asbestos or
          friable asbestos-containing materials currently exist on any property
          owned, leased or operated by QSI or any QSI Subsidiary, or are now or
          were ever used to produce any intermediate, component or product
          manufactured or marketed by QSI or any QSI subsidiary. No
          polychlorinated biphenyls exist in concentrations of 50 parts per
          million or more in electrical equipment owned or being used by QSI or
          any QSI Subsidiary in its operations or on its properties. No mold or
          mildew of a type that affects human health currently exists at any
          building or structure owned, leased or operated by QSI or any QSI
          Subsidiary in amounts that present a threat to human health or safety.

                                       26


          3.1.18 COMPLIANCE WITH OTHER LAWS. Neither QSI nor any QSI Subsidiary
     is in violation of or in default with respect to, or in alleged violation
     of or alleged default with respect to, the Occupational Safety and Health
     Act (29 U.S.C. Sections 651 ET SEQ.) as amended, or any other applicable
     law or any applicable rule, regulation,  or any writ or decree of any court
     or any governmental commission,  board, bureau, agency, or instrumentality,
     or  delinquent  with  respect to any report  required  to be filed with any
     governmental commission, board, bureau, agency or instrumentality.

          3.1.19 ERISA PLANS OR LABOR ISSUES. True, correct, and complete copies
     of each of the Employee Plans, and related trusts, contracts and
     agreements, if applicable, including all amendments thereto, and any
     governmental correspondence and determination letters have been furnished
     to Key. There has also been furnished to Key, with respect to each Employee
     Plan required to file such report, the Form 5500s for the past three years
     and the most recent summary plan description. Except as identified in
     SCHEDULE 3.1.8.8 hereto, neither QSI nor any QSI Subsidiary currently
     sponsors, maintains or contributes to or has or could have any liability
     with respect to any Employee Plan. Each Employee Plan complies currently,
     and has complied in the past, in form and operation, with the plan's terms
     and with the applicable provisions of ERISA, the Code and all other
     applicable laws, including, without limitation, the qualification and
     reporting and disclosure requirements of the Code and ERISA including,
     without limitation, filing of all applicable Forms 5500 and timely
     providing all notices, including, but not limited to, under COBRA and the
     Health Insurance, Portability and Accountability Act. Each Employee Plan
     intended to be qualified under Code Section 401(a) or 501, (i) satisfies in
     form the requirements of such Section except to the extent amendments are
     not required by law to be made until a date after the Effective Date, (ii)
     has received, or will apply for during the applicable time period, a
     favorable determination letter from the IRS that covers all amendments
     required to be made by the Code and the regulations as in effect as of the
     date of this Agreement regarding such qualified status, and (iii) has not
     been operated in a way that would adversely affect its qualified status.
     Also, with respect to each Employee Plan, QSI, each QSI Subsidiary, and any
     other party in interest have not engaged in any prohibited transaction or
     any violation of its fiduciary duties to such plan. All contributions,
     premiums or payments required to be made with respect to each Employee Plan
     under the terms of such Employee Plan, ERISA, the Code or other applicable
     law have been timely made and there will be no delinquent contributions as
     of the Effective Date. For completed years of such Employee Plans, all such
     contributions have been fully deducted for income tax purposes and no such
     deduction has been challenged or disallowed by any governmental entity, and
     no fact or event exists that could give rise to any such challenge or
     disallowance. All Employee Plans may be amended or terminated at any time
     without any liability other than for administrative expenses. There has
     been no amendment to, written interpretation of, announcement specifically
     relating to, or change in employee participation or coverage under, any
     Employee Plan that would increase the expense of maintaining such Employee
     Plan above the level of the expense incurred in respect thereto for the
     most recent fiscal year ended before the date hereof. Except as set forth
     on SCHEDULE 3.1.19 hereto, none of the Employee Plans (i) is a "voluntary
     employees' beneficiary association" within the meaning of Code Section
     501(c)(9), (ii) provides for medical or other insurance or welfare benefits
     to current or future retired employees or

                                       27


     former employees of QSI, any QSI Subsidiary or ERISA Affiliate (other than
     as required for group health plan continuation coverage under COBRA or
     applicable state law at the expense of the participant or employee), (iii)
     obligates QSI, any QSI Subsidiary or ERISA Affiliate to pay any benefits,
     including but not limited to severance benefits, make any other payments
     whether in stock or cash, or vest any benefits as a result of a change in
     control of QSI or any QSI Subsidiary or the transactions contemplated by
     this Agreement, (iv) require payments or property or vesting of such to be
     characterized as an "Excess Parachute Payment" as defined in Code Section
     280G, (v) is a foreign plan or covers non-U.S. residents and non-U.S.
     citizens, or (vi) is a multi-employer welfare arrangement as defined in
     ERISA Section (3)(40). With respect to any Employee Plans, during the seven
     years preceding the Effective Date, (A) no under-funded pension plan
     subject to Code Section 412 will have been transferred out of QSI, any QSI
     Subsidiary or ERISA Affiliate, (B) neither QSI, any QSI Subsidiary nor any
     ERISA Affiliate will have participated in or contributed to, or had an
     obligation to contribute to, any multiemployer plan and neither QSI, any
     QSI Subsidiary nor any ERISA Affiliate will have withdrawal liability with
     respect to any multiemployer plan, (C) neither QSI, any QSI Subsidiary nor
     any ERISA Affiliate will have maintained any pension plan subject to Title
     IV of ERISA and (D) all contributions (including installments to any plan
     subject to Code Section 412 or ERISA Section 302) have been timely made and
     no accumulated funding deficiency, whether or not waived, has ever been
     incurred. There are no claims, events, lawsuits, audits or any other
     actions or proceedings that have been asserted, instituted or threatened
     against any Employee Plan (or against QSI, any QSI Subsidiary or ERISA
     Affiliate concerning any Employee Plan) for which QSI or any QSI Subsidiary
     could be liable (x) by an employee or foreign employee of QSI, any QSI
     Subsidiary or ERISA Affiliate, an independent contractor or any other
     individual or third party entity, (y) by any fiduciary, participant or
     beneficiary of such plan, except routine claims for benefits thereunder, or
     (z) by any governmental entity. Neither QSI nor any QSI Subsidiary has
     engaged in any unfair labor practices. Neither QSI nor any QSI Subsidiary
     is a party to and has no liability under any collective bargaining
     agreement. No QSI or any QSI Subsidiary employees are leased employees.
     Neither QSI, any QSI Subsidiary, any ERISA Affiliate is aware of any
     pending or threatened dispute with any of its existing or former employees
     or independent contractors for which QSI or any QSI Subsidiary could be
     liable.

          3.1.20 REPRESENTATIONS RELATING TO OPERATION OF SALTWATER DISPOSAL
     WELLS. QSI and the QSI Subsidiaries own or lease the Real Property on which
     the SWD Wells and the tanks, lines, pipes, equipment and other assets used
     in the operation of the SWD Wells are located. Except as set forth in
     SCHEDULE 3.1.20 hereto, QSI and the QSI Subsidiaries own the wellbores of
     the SWD Wells, and the wellbores of the SWD Wells and the casing therein
     are sound, free of holes or other defects and are fully operational. Except
     as set forth in SCHEDULE 3.1.20 hereto, the SWD Wells are fully capable of
     being used to discharge saltwater and other non-hazardous oil and gas
     wastes (including that produced from wells not located on the Real Property
     on which the SWD Wells are located) in the quantities and at the depths
     indicated in the permits and licenses issued to QSI and the QSI
     Subsidiaries in connection with the SWD Wells by the Railroad Commission of
     Texas or any other regulatory agency having jurisdiction over such
     operations. QSI and the QSI Subsidiaries hold and, during the period of all
     applicable

                                       28


     statute of limitations, have held all permits and licenses required by law
     or regulation and other regulatory agencies to operate the SWD Wells as a
     saltwater and other non-hazardous oil and gas wastes disposal well, and to
     operate the tanks, lines, pipes, equipment and other assets used in the
     operation of the SWD Wells, is in full compliance with all of those permits
     and licenses, and all of those permits and licenses are valid, current and
     in full force and effect, and none of those licenses or permits are under
     threat of revocation, cancellation, suspension or modification. The SWD
     Wells have been at all times, up to and including the date hereof, operated
     in compliance with all laws, rules, regulations (including, specifically,
     federal, state and environmental laws and regulations) and permits
     applicable to its operation, and no notices of violation or non-compliance
     have been received by QSI or any of the QSI Subsidiaries and none are
     expected. There are no contracts or other commitments applicable to the
     ownership or operation of the SWD Wells that cannot be cancelled, without
     penalty, upon 30 days (or less) notice.

          3.1.21 INVESTIGATIONS. Except as required pursuant to the HSR, no
     investigation or review by any governmental entity with respect to QSI or
     any QSI Subsidiary or any of the transactions contemplated by this
     Agreement is pending or, to the knowledge of QSI or any QSI Subsidiary,
     threatened, nor has any governmental entity indicated to QSI or any QSI
     Subsidiary an intention to conduct the same, and there is no action, suit
     or proceeding pending or, to the knowledge of QSI or any QSI Subsidiary,
     threatened against or affecting QSI or any QSI Subsidiary at law or in
     equity, or before any federal, state, municipal or other governmental
     department, commission, board, bureau, agency or instrumentality.

          3.1.22 REAL PROPERTY OWNED.

               3.1.22.1 QSI OWNED PROPERTIES. SCHEDULE 3.1.8.1 hereto sets forth
          a true and complete list of all real property owned in fee simple
          title by QSI or any QSI Subsidiary (collectively, the "QSI Owned
          Properties"). QSI or a QSI Subsidiary has good and indefeasible title
          to all QSI Owned Properties, except as disclosed in SCHEDULE 3.1.22.1
          hereto.

               3.1.22.2 COMPLIANCE WITH LAW. All improvements on the QSI Owned
          Properties and the operations therein conducted conform in all
          material respect to all applicable health, fire, safety, zoning and
          building laws, ordinances and administrative regulations. Except as
          set forth on SCHEDULE 3.1.22.2 hereto, the operating condition and
          state of repair of all buildings, structures, improvements and
          fixtures on the QSI Owned Properties are sufficient to permit the use
          and operation of all such buildings, structures, improvements and
          fixtures for their intended use.

          3.1.23 REAL PROPERTY LEASED.

               3.1.23.1 QSI LEASED PROPERTIES. SCHEDULE 3.1.8.1 hereto sets
          forth a list of all leases with respect to all real properties in
          which QSI or any QSI Subsidiary has a leasehold, subleasehold, or
          other occupancy interest (the "QSI

                                       29


          Leased Properties"). Complete and accurate copies of all such leases
          and all amendments thereto have been provided to Key. Except as set
          forth on SCHEDULE 3.1.13 hereto, all of the leases for the QSI Leased
          Properties are valid and effective in favor of QSI or a QSI Subsidiary
          in accordance with their respective terms.

               3.1.23.2 NOTICE OF DEFAULT. QSI has not received written notice
          that it is in breach of or default (and, to the knowledge of QSI, no
          event has occurred, that, with due notice or lapse of time or both,
          would constitute such a breach or default) under any lease.

               3.1.23.3 SUBLEASES. No QSI Leased Property is subject to any
          sublease, license or other agreement granting to any Person any right
          to the use, occupancy or enjoyment of QSI Leased Property or any
          portion thereof through QSI or any QSI Subsidiary.

          3.1.24 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither QSI, any QSI
     Subsidiary nor any officer, employee or agent of QSI or any QSI Subsidiary,
     nor any other person acting on QSI's behalf or on behalf of any QSI
     Subsidiary, has directly or indirectly, within the past five years, given
     or agreed to give any gift or similar benefit to any customer, supplier,
     government employee or other person who is or may be in a position to help
     or hinder the business of QSI or any QSI Subsidiary (or to assist QSI or
     any QSI Subsidiary in connection with any actual or proposed transaction)
     was made in violation of applicable law, or that might subject QSI or any
     QSI Subsidiary to any damage or penalty in any civil, criminal or
     governmental litigation or proceeding.

          3.1.25 INSURANCE. Insurance policies identified on SCHEDULE 3.1.8.6
     hereto are in full force and effect and will fully cover all pending claims
     against QSI or any of the QSI Subsidiaries.

          3.1.26 FINDER'S FEE. Other than as set forth on SCHEDULE 3.1.26
     hereto, all negotiations relative to this Agreement, and the transactions
     contemplated hereby, have been carried on by QSI and its counsel directly
     with Key, Merger Sub and their counsel, without the intervention of any
     other person in such manner as to give rise to any valid claim against any
     of the parties hereto for a brokerage commission, finder's fee or any
     similar payments.

          3.1.27 RELATED PARTY INTERESTS. Except as described in reasonable
     detail in SCHEDULE 3.1.27 hereto, no shareholder, employee, officer or
     director, or former employees, officers or directors of QSI (or any entity
     owned or controlled by one or more of such parties) (i) has any interest in
     any property, real or personal, tangible or intangible, used in or
     pertaining to QSI's business, (ii) is indebted to QSI or any QSI
     Subsidiary, or (iii) has any financial interest, direct or indirect, in any
     outside business which has significant transactions with QSI. QSI is not
     indebted to any of its shareholders, directors or officers (or any entity
     owned or controlled by one or more of such parties), except for amounts due
     under normal salary arrangements and for reimbursement of ordinary business
     expenses.

                                       30


          3.1.28 COMPLIANCE WITH DEPARTMENT OF TRANSPORTATION RULES AND
     REGULATIONS. QSI and the QSI Subsidiaries are and, except as set forth on
     SCHEDULE 3.1.28 hereto, have been in compliance with the rules and
     regulations of the United States Department of Transportation and any
     applicable state department of transportation.

          3.1.29 PREDECESSORS IN INTEREST. For purposes of this Agreement, the
     references to QSI and to the QSI Subsidiaries shall include and apply to
     any predecessors in interest of QSI or any QSI Subsidiary.

                                    ARTICLE 4

                      REPRESENTATIONS AND WARRANTIES OF KEY

     4.1 REPRESENTATIONS AND WARRANTIES OF KEY. Key hereby represents and
warrants to QSI as follows:

          4.1.1 ORGANIZATION AND GOOD STANDING OF MERGER SUB. Merger Sub is a
     corporation duly organized, validly existing and in good standing under the
     laws of the State of Texas, has full requisite corporate power and
     authority to carry on its business as it is currently conducted, and to own
     and operate the properties currently owned and operated by it, and is duly
     qualified or licensed to do business and is in good standing as a foreign
     corporation authorized to do business in all jurisdictions in which the
     character of the properties owned or the nature of the business conducted
     by it would make such qualification or licensing necessary.

          4.1.2 AGREEMENTS AUTHORIZED BY MERGER SUB AND ITS EFFECT ON OTHER
     OBLIGATIONS. The consummation of the transactions contemplated hereby have
     been duly and validly authorized by all necessary corporate and shareholder
     action on the part of Merger Sub and this Agreement is a valid and binding
     obligation of Merger Sub enforceable against Merger Sub in accordance with
     its terms. The execution, delivery and performance of this Agreement and
     the consummation of the transactions contemplated hereby will not conflict
     with or result in a violation or breach of any term or provision of, nor
     constitute a default under (i) the articles of incorporation or bylaws of
     Merger Sub; (ii) any obligation, indenture, mortgage, deed of trust, lease,
     contract or other agreement to which Merger Sub is a party or by which
     Merger Sub or its properties are bound; or (iii) any provision of any law,
     rule, regulation, order, permit, certificate, writ, judgment, injunction,
     decree, determination, award or other decision of any court, arbitrator, or
     other governmental authority to which Merger Sub or any of its properties
     are subject.

          4.1.3 INVESTIGATIONS. Except as required pursuant to HSR, no
     investigation or review by any governmental entity with respect to Key or
     any of the transactions contemplated by this Agreement is pending, or to
     the knowledge of Key threatened, nor has any governmental entity indicated
     to Key an intention to conduct the same, and there is no action superseding
     suit or proceeding pending, or the knowledge of Key threatened, against or
     affecting Key at law or equity or before any federal, state, municipal or
     other governmental department, commission, board, bureau, agency or
     instrumentality.

                                       31


          4.1.4 ORGANIZATION AND GOOD STANDING OF KEY. Key is a corporation duly
     organized, validly existing and in good standing under the laws of the
     State of Maryland, has full requisite corporate power and authority to
     carry on its business as it is currently conducted, and to own and operate
     the properties currently owned and operated by it, and is duly qualified or
     licensed to do business and is in good standing as a foreign corporation
     authorized to do business in all jurisdictions in which the character of
     the properties owned or the nature of the business conducted by it would
     make such qualification or licensing necessary.

          4.1.5 AGREEMENT AUTHORIZED BY KEY AND ITS EFFECT ON OTHER OBLIGATIONS.
     The consummation of the transactions contemplated hereby have been duly and
     validly authorized by all necessary corporate action on the part of Key,
     and this Agreement is a valid and binding obligation of Key enforceable
     against Key in accordance with its terms. The execution, delivery and
     performance of this Agreement and the consummation of the transactions
     contemplated hereby will not conflict with or result in a violation or
     breach of any term or provision of, nor constitute a default under (i) the
     charter or bylaws (or other organizational documents) of Key; (ii) any
     obligation, indenture, mortgage, deed of trust, lease, contract or other
     agreement to which Key is a party or by which Key or its properties are
     bound; or (iii) any provision of any law, rule, regulation, order, permit,
     certificate, writ, judgment, injunction, decree, determination, award or
     other decision of any court, arbitrator, or other governmental authority to
     which Key or any of its properties are subject.

          4.1.6 ISSUANCE OF KEY SHARES. The Key Shares, when issued and
     delivered in accordance with the terms of this Agreement, will (i) be
     validly issued, fully paid and nonassessable shares of Key Common Stock
     that will have been issued under the Registration Statement; (ii) not be
     subject to any preemptive rights; and (iii) be listed for trading on the
     New York Stock Exchange subject to notice of issuance. The Registration
     Statement will be effective under the Securities Act and no order
     suspending the effectiveness of the Registration Statement will have been
     issued and, to Key's knowledge, no proceedings with respect thereto will
     have been commenced or threatened.

          4.1.7 CAPITALIZATION. The capitalization of Key consists of
     200,000,000 shares of Key Common Stock, of which as of May 9, 2002,
     109,772,863 shares are issued and outstanding, 11,680,658 shares are
     reserved for issuance pursuant to outstanding stock options, warrants and
     conversion of other convertible securities. Pursuant to Key's articles of
     incorporation, Key's board of directors has the authority, without further
     shareholder action, to redesignate up to 15,169,320 of the authorized and
     unissued shares of Key Common Stock into one or more series of preferred
     stock. As of the date hereof, no shares have been so designated or issued.
     Except as set forth in this Section 4.1.7, as of the date hereof there are
     (i) no securities of Key or any other person convertible into or
     exchangeable or exercisable for shares of capital stock or other voting
     securities of Key and (ii) no subscriptions, options, warrants, calls,
     rights obligating Key to issue, deliver, sell, purchase, redeem or acquire
     shares of capital stock or other voting securities of Key. All of the
     outstanding shares of Key Common Stock are validly issued, fully paid and
     nonassessable and not subject to any preemptive right. As of the date
     hereof there is no,

                                       32


     and at the Effective Date there will not be any, stockholder agreement,
     voting trust or other agreement or understanding to which Key is a party or
     by which it is bound relating to the voting of any shares of capital stock
     of Key.

          4.1.8 REPORTS AND FINANCIAL STATEMENTS. Since December 31, 1998, Key
     has filed with the Commission all reports required to be filed by Key under
     the Exchange Act and the rules and regulations of the Commission. The
     consolidated financial statements of Key and its subsidiaries included in
     Key's most recent report on Form 10-K and most recent report on Form 10-Q,
     and any other reports filed with the Commission by Key under the Exchange
     Act since December 31, 1998 (the "Reports") were prepared in accordance
     with generally accepted accounting principles applied on a consistent basis
     during the periods involved and fairly present the consolidated financial
     position for Key and its subsidiaries as of the dates thereof and the
     consolidated results of their operations and changes in financial position
     for the periods then ended; and the Reports did not and will not contain
     any untrue statement of a material fact or omit to state a material fact
     required to be stated therein or necessary to make the statements therein,
     in light of the circumstances under which they were made, not misleading.

          4.1.9 ABSENCE OF CERTAIN CHANGES AND EVENTS. Other than as set forth
     on SCHEDULE 4.1.9 hereto and as a result of the transactions contemplated
     by this Agreement, since March 31, 2002, there has not been:

                4.1.9.1 FINANCIAL CHANGE. Any material adverse change in the
          financial condition, results of operations, assets, liabilities or
          business of Key;

                4.1.9.2 DIVIDENDS. Any declaration, setting aside, or payment of
          any dividend or other distribution in respect of Key Common Stock or
          any direct or indirect redemption, purchase or any other acquisition
          by Key of any such stock;

                4.1.9.3 CAPITALIZATION CHANGE. Any change in the capital stock
          or in  the  number  of  shares  or  classes  of  Key's  authorized  or
          outstanding  capital  stock  as  described  in the  recitals  to  this
          Agreement (other than exercise of outstanding options or warrants); or

                4.1.9.4 OTHER CHANGES. Any other event or condition known to Key
          particularly pertaining to and materially adversely affecting the
          operations, assets or business of Key, other than events or conditions
          that are of a general or industry-wide nature and of general public
          knowledge, or which have been disclosed in writing to QSI.

          4.1.10 FINDER'S FEE. All negotiations relative to this Agreement and
     the transactions contemplated hereby have been carried on by Key, Merger
     Sub and their counsel directly with QSI and their counsel, without the
     intervention by any other person as the result of any act of Key in such a
     manner as to give rise to any valid claim against any of the parties hereto
     for any brokerage commission, finder's fee or any similar payments.

                                       33


                                    ARTICLE 5

                       OBLIGATIONS PENDING EFFECTIVE DATE

     5.1 AGREEMENTS OF KEY AND QSI. Each of Key and QSI agree that from the date
hereof to the Effective Date, it will (and unless otherwise indicated by the
context, since March 31, 2002, it has):

          5.1.1 MAINTENANCE OF PRESENT BUSINESS. Other than as contemplated by
     this Agreement, operate its business only in the usual, regular, and
     ordinary manner so as to maintain the goodwill it now enjoys and, to the
     extent consistent with such operation, use all reasonable efforts to
     preserve intact its present business organization, keep available the
     services of its present officers and employees, and preserve its
     relationships with customers, suppliers, jobbers, distributors and others
     having business dealings with it. Notwithstanding any provision in this
     Agreement to the contrary, each of the parties hereto agree and acknowledge
     that Key may continue to pursue any Future Acquisitions in its sole
     discretion;

          5.1.2 MAINTENANCE OF PROPERTIES. At its expense, maintain all of its
     property and assets in customary repair, order, and condition, reasonable
     wear and use and damage by fire or unavoidable casualty excepted;

          5.1.3 MAINTENANCE OF BOOKS AND RECORDS. Maintain its books of account
     and records in the usual, regular, and ordinary manner, in accordance with
     generally accepted accounting principles applied on a consistent basis;

          5.1.4 COMPLIANCE WITH LAW. Duly comply in all material respects with
     all laws applicable to it and to the conduct of its business; and

          5.1.5 INSPECTION OF KEY AND QSI. Permit the other party, and its
     officers and authorized representatives, during normal business hours, to
     inspect its records and to consult with its officers, employees, attorneys,
     and agents for the purpose of determining the accuracy of the
     representations and warranties hereinabove made and the compliance with
     covenants contained in this Agreement. Each of Key and QSI agree that it
     and its officers and representatives shall hold all data and information
     obtained with respect to the other party hereto, including information
     obtained pursuant to the Environmental Assessment, in confidence in
     accordance with the terms of the Confidentiality Agreement previously
     entered into by Key and QSI, and each further agree that it will not use
     such data or information or disclose the same to others, except to the
     extent such data or information either are, or become, published or a
     matter of public knowledge.

     5.2 REGULATORY AND OTHER AUTHORIZATIONS. Each party hereto agrees to use
its reasonable best efforts to obtain all authorizations, consents, orders and
approvals of federal, state, local and foreign regulatory bodies and officials
and non-governmental third parties that may be or become necessary for its
execution and delivery of, and the performance of its obligations pursuant to,
this Agreement, and each party will cooperate fully with the other parties in
promptly seeking to obtain all such authorizations, consents, orders and
approvals. Without

                                       34


limitation, Key and QSI shall each make an appropriate filing of a Notification
and Report Form pursuant to the HSR as promptly as practicable. Each such filing
shall request early termination of the waiting period imposed by the HSR.

     5.3 ADDITIONAL AGREEMENTS. QSI agrees that from the date hereof to the
Effective Date, it will:

          5.3.1 PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS. Not enter into any
     contracts of employment that (i) cannot be terminated on notice of 14 days
     or less or (ii) provide for any severance payments or benefits covering a
     period beyond the earlier of the termination date of this Agreement or
     notice thereof, except as may be required by law.

          5.3.2 PROHIBITION OF CERTAIN LOANS. Not incur any borrowings in excess
     of except (i) the refinancing of indebtedness now outstanding, (ii) trade
     payables incurred in the ordinary course of business, (iii) additional
     borrowings under existing credit facilities, not to exceed $4,000,000, or
     (iv) as is otherwise agreed to in writing by Key.

          5.3.3 PROHIBITION OF CERTAIN COMMITMENTS. Not enter into commitments
     of a capital expenditure nature or incur any contingent liability other
     than a contractual contingent liability except (i) as may be necessary for
     the maintenance of existing facilities, machinery and equipment in good
     operating condition and repair in the ordinary course of business, not to
     exceed $1,000,000 in the aggregate, (ii) as may be required by law or (iii)
     as is otherwise agreed to in writing by Key.

          5.3.4 DISPOSAL OF ASSETS. Not sell, dispose of, or encumber, any
     property or assets except (i) the assets set forth on SCHEDULE 5.3.4
     hereto, or (ii) as is otherwise agreed to in writing by Key.

          5.3.5 MAINTENANCE OF INSURANCE. Maintain the current insurance upon
     all its properties and with respect to the conduct of its business, which
     insurance may be added to from time to time in its discretion; PROVIDED,
     that if during the period from the date hereof to and including the
     Effective Date any of its property or assets are damaged or destroyed by
     fire or other casualty, the obligations of Key, Merger Sub and QSI under
     this Agreement shall not be affected thereby (subject, however, to the
     provision that the coverage limits of such policies are adequate in amount
     to cover the replacement value of such property or assets and loss of
     profits during replacement, less commercially reasonable deductible, if of
     material significance to the assets or operations of QSI) but it shall
     promptly notify Key in writing thereof and proceed with the repair or
     restoration of such property or assets in such manner and to such extent as
     may be approved by Key, and upon the Effective Date all proceeds of
     insurance and claims of every kind arising as a result of any such damage
     or destruction shall remain the property of the Surviving Corporation.

          5.3.6 ACQUISITION PROPOSALS. Not directly or indirectly (i) solicit,
     initiate or encourage any inquiries regarding any Acquisition Proposals at
     any time before termination of this Agreement pursuant to Article 7 hereof
     from any person or (ii)

                                       35


     participate in any discussions or negotiations regarding, or furnish to any
     person other than Key or its representatives any information with respect
     to, or otherwise, facilitate or encourage any Acquisition Proposal by any
     other person. QSI shall promptly communicate to Key the terms of any such
     written Acquisition Proposal that it may receive or any inquiries made to
     it or any of its directors, officers, representatives or agents.

          5.3.7 NO AMENDMENT TO ARTICLES OF INCORPORATION, ETC. Not amend its
     certificate of incorporation or bylaws or other organizational documents or
     merge or consolidate with or into any other corporation or change in any
     manner the rights of its capital stock or the character of its business.

          5.3.8 NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES. Not issue or sell,
     or issue options or rights to subscribe to, or enter into any contract or
     commitment to issue or sell (upon conversion or otherwise), any shares of
     its capital stock or subdivide or in any way reclassify any shares of its
     capital stock, or acquire, or agree to acquire, any shares of its capital
     stock other than in connection with exercise of stock options and warrants
     issued and outstanding as of the date hereof.

          5.3.9 PROHIBITION ON DIVIDENDS. Not declare or pay any dividend on
     shares of its capital stock or make any other distribution of assets to the
     holders thereof; PROVIDED THAT, QSI may accrue dividends with respect to
     the QSI Preferred Stock to the extent required under the certificates of
     designation.

          5.3.10 SHAREHOLDER MEETING. No sooner than 20 days, but in any event,
     as soon as practicable, after the date Key has delivered the Prospectus to
     QSI for delivery to the QSI Shareholders as provided in Section 5.4.1
     hereof, QSI shall call and hold the Shareholders' Meeting in accordance
     with QSI's organizational documents to vote on the approval of this
     Agreement and the Merger contemplated hereby, and deliver to each QSI
     shareholder a copy of the Prospectus no later than the date the notice with
     respect to the Shareholders' Meeting is delivered to the QSI Shareholders.
     At the Shareholders' Meeting, the board of directors of QSI shall (i)
     confirm that it has made a determination that this Agreement and the Merger
     are fair and in the best interest of the QSI Shareholders; (ii) declare the
     advisability of this Agreement, including the Merger; and (iii) recommend
     to the QSI Shareholders that they approve and adopt this Agreement,
     including the Merger it contemplates and (iv) recommend to the QSI
     Shareholders to approve any existing compensation arrangements for
     employees in accordance with Code Section 280G(b)(5)(B).

          5.3.11 INVESTIGATION. ENGAGEMENT OF PORTER & HEDGES, L.L.P. QSI will
     engage Porter & Hedges, L.L.P. to investigate the allegations made with
     respect to QSI in the Shaw Litigation. The cost of such investigation shall
     be paid by QSI and included on the Final Balance Sheet, which cost shall
     not exceed $20,000. The terms of QSI's engagement of Porter & Hedges,
     L.L.P. pursuant to this Section 5.3.11.1 will be set forth in an engagement
     letter executed by each such party on the date hereof. Such engagement
     letter will establish an attorney/client relationship between Porter &
     Hedges, L.L.P. and QSI designed to preserve the attorney/client privilege
     with respect to the

                                       36


     information Porter & Hedges, L.L.P. obtains or develops in the course of
     its investigation. Such engagement letter will include a waiver by QSI of
     the conflict of interest that Porter & Hedges, L.L.P. will have by virtue
     of conducting its investigation pursuant to this Section 5.3.11.1 at the
     same time it is representing Key in connection with this Agreement. In
     addition, Porter & Hedges, L.L.P. will agree to maintain any information it
     obtains or develops in the course of its investigation in strict
     confidence, and at the conclusion of its investigation, to return to QSI
     all such information, including written materials derived therefrom.

               5.3.11.1 SCOPE OF INVESTIGATION. QSI will cooperate fully with
          Key in its investigation, and will allow Porter & Hedges, L.L.P. to
          interview all QSI personnel and the personnel of any relevant QSI
          Subsidiary who may have knowledge of the events surrounding QSI's
          alleged conduct in the Shaw Litigation. QSI also will provide Porter &
          Hedges, L.L.P. all internal written materials in QSI's or its
          counsel's possession that reasonably relates to the allegations
          concerning QSI made in the Shaw Litigation, including any information
          QSI has assembled pursuant to any internal investigation QSI has
          conducted with respect thereto. Porter & Hedges, L.L.P. will be
          instructed to submit a preliminary report to Key no later than 14
          calendar days after the date hereof. Key will have the opportunity to
          ask questions of Porter & Hedges, L.L.P. and the officers and
          personnel of QSI and any relevant QSI Subsidiary concerning Porter &
          Hedges, L.L.P.'s initial findings. Porter & Hedges, L.L.P. will then
          conduct any additional investigation necessary to complete its
          investigation and will deliver a final report to Key on the day before
          the Effective Date. The preliminary report mentioned above and the
          final report will be oral summaries of the information that Porter &
          Hedges, L.L.P. obtains or derives in the course of its investigation
          and will not include any specific information concerning QSI's pricing
          models or other information that would reasonably be considered
          confidential with respect to QSI's competitors. Key will maintain any
          information it receives through Porter & Hedges, L.L.P.'s reports in
          strict confidence.

          5.3.12 RELATED PARTY OBLIGATIONS. Before the Effective Date, QSI will
     collect in full all related party receivables and advances to employees,
     including those shown on SCHEDULE 3.1.27 hereto.

     5.4  ADDITIONAL AGREEMENTS OF KEY.

          5.4.1 REGISTRATION STATEMENT. Key will take such steps as are required
     to obtain the effectiveness under the Securities Act of the post-effective
     amendment to the Registration Statement containing the Prospectus and to
     deliver to QSI a sufficient number of copies of the Prospectus, so that QSI
     can deliver a copy of the Prospectus to each of the Selling QSI
     Shareholders in accordance with Section 5.3.10 hereof; provided, however,
     that before filing such post-effective amendment, Key shall furnish to and
     afford each of the Selling QSI Shareholders a reasonable opportunity to
     review copies of such post-effective amendment and provided, further, that
     Key shall not file such post-effective amendment if Selling QSI
     Shareholders that in the aggregate hold in excess of

                                       37


     25% of the outstanding shares of QSI Common Stock before the Effective Date
     or, after the Effective Date, 25% of the Key Shares that may be sold under
     the Prospectus shall reasonably object.

          5.4.2 LISTING OF KEY STOCK. Key will take such steps as are required
     to list on the New York Stock Exchange the Key Shares to be issued pursuant
     to this Agreement.

          5.4.3 DELIVERY OF REPORTS. Key will promptly furnish to QSI copies of
     all communications from Key to its stockholders and all reports filed by
     Key with the SEC and the New York Stock Exchange.

          5.4.4 RESALE OF KEY SHARES.

                5.4.4.1 REGISTRATION STATEMENT AND PROSPECTUS. Key will use its
          reasonable efforts to maintain the effectiveness of the Registration
          Statement and make the Prospectus available for use by the Selling QSI
          Shareholders for resale of their Key Shares received in the Merger
          until the restrictions imposed by Rule 145 under the Securities Act no
          longer apply to such Selling QSI Shareholders, except for such periods
          that Key may require the Selling QSI Shareholders to refrain from
          effecting any public sales or distributions of the Key Shares under
          the Prospectus due to the existence of material, non-public
          information the disclosure of which would be required in the
          Prospectus in order to prevent such Prospectus from containing any
          untrue statement of material fact or omitting to state any material
          fact necessary to make the statements therein not misleading. In
          connection with its efforts to maintain the effectiveness of the
          Registration Statement, Key agrees to (i) file with the SEC in a
          timely manner all reports and other documents required of Key under
          the Exchange Act; (ii) promptly use its reasonable efforts to prevent
          the issuance of any stop order or to obtain its withdrawal if such
          stop order should be issued; and (iii) promptly prepare and file with
          the SEC any amendments or supplements to the Registration Statement or
          Prospectus that may be required under the Securities Act or the rules
          and regulations thereunder so that the Registration Statement, at the
          time the post-effective amendment thereto containing the Prospectus
          becomes effective shall not contain any untrue statement of a material
          fact or omit to state a material fact required to be stated therein or
          necessary to make the statements therein not misleading, or so the
          Prospectus, on any date that it is delivered in connection with the
          sale of the Key Shares, will not contain any untrue statement of a
          material fact or omit to state a material fact necessary in order to
          make the statements therein, in light of the circumstances under which
          they were made, not misleading; provided, however, that before filing
          any such amendment or supplement to the Registration Statement or the
          Prospectus, Key shall furnish to and afford the Selling QSI
          Shareholders a reasonable opportunity to review copies thereof; and
          provided, further, that Key shall not file any such amendment or
          supplement to the Registration Statement or the Prospectus if any
          Selling QSI Shareholder shall reasonably object. Key agrees to take
          such steps as are required under the Securities Act to cause the
          Prospectus, as of the Effective Date, to be available for use by the
          Selling QSI Shareholders for resale of their Key Shares

                                       38


          received in the Merger and to continue to be available for a period of
          22 consecutive Trading Days immediately after the Effective Date. Key
          agrees to file such Prospectus on the Effective Date with the New York
          Stock Exchange under Rule 153 of the Securities Act and to provide
          each Selling QSI Shareholder at the sole expense of Key as many copies
          of the Prospectus and each amendment or supplement thereto and any
          documents incorporated by reference therein as such Selling QSI
          Shareholder may reasonably request. Key hereby consents to the use of
          such Prospectus and each amendment or supplement thereto by each
          Selling QSI Shareholder and the agents, if any, and dealers (if any),
          in connection with the offering and sale of the Key Shares covered by
          such Prospectus and any amendment or supplement thereto.

               5.4.4.2 INDEMNIFICATION AND CONTRIBUTION. Key will indemnify and
          hold harmless (i) each Selling QSI Shareholder; (ii) any person that
          may be deemed an "underwriter" for a Selling QSI Shareholder; (iii)
          each person, if any, who controls (within the meaning of either
          Section 15 of the Securities Act or Section 20 of the Exchange Act)
          any Selling QSI Shareholder or any such "underwriter" (any of the
          persons referred to in this clause (iii) being hereinafter referred to
          as a "controlling person"); and (iv) the respective officers,
          directors, partners, employees, representatives and agents of the
          Selling QSI Shareholders or any controlling person (any person
          referred to in clause (i), (ii), (iii) or (iv) may hereinafter be
          referred to as an "Indemnified QSI Shareholder"), from and against any
          and all losses, claims, damages, liabilities and judgments (including,
          without limitation, reasonable legal fees and other expenses
          reasonably incurred in connection with any suit, action or proceeding
          or any claim asserted) caused by any untrue statement or alleged
          untrue statement of a material fact contained in the Registration
          Statement or Prospectus, or any amendment or supplement thereto, or
          caused by any omission or alleged omission to state therein a material
          fact required to be stated therein or necessary to make the statements
          therein not misleading, except insofar as such losses, claims, damages
          or liabilities are caused by any untrue statement or omission or
          alleged untrue statement or omission made in reliance upon and in
          conformity with information relating to such Selling QSI Shareholder
          furnished to Key in writing by such Selling QSI Shareholder expressly
          for use in therein. Key shall notify Indemnified QSI Shareholders
          promptly of the institution, threat or assertion of any claim,
          proceeding (including any governmental investigation) or litigation in
          connection with the matters addressed by this Agreement that involves
          Key or such Indemnified QSI Shareholder.

               5.4.4.3 INDEMNIFICATION BY SELLING QSI SHAREHOLDERS. Each Selling
          QSI Shareholder agrees, severally and not jointly, to indemnify and
          hold harmless Key, its directors, officers and each person who
          controls Key within the meaning of either Section 15 of the Securities
          Act or Section 20 of the Exchange Act to the same extent as the
          foregoing indemnity from Key to each Selling QSI Shareholder, but only
          with reference to such losses, claims, damages or liabilities which
          are caused by any untrue statement or omission or alleged untrue
          statement or omission made in reliance upon and in conformity with
          information relating to

                                       39


          such Selling QSI Shareholder furnished to Key in writing by such
          Selling QSI Shareholder expressly for use in any Registration
          Statement or Prospectus, or any amendment or supplement thereto or any
          related preliminary prospectus.

               5.4.4.4 INDEMNIFICATION PROCEDURES. If any suit, action,
          proceeding (including any governmental or regulatory investigation),
          claim or demand shall be brought or asserted against any person in
          respect of which indemnity may be sought pursuant to either Section
          5.4.4.2 or Section 5.4.4.3 hereof, such person (the "Indemnified
          Person") shall promptly notify the person or persons against whom such
          indemnity may be sought (each an "Indemnifying Person") in writing,
          and such Indemnifying Person, upon request of the Indemnified Person,
          shall retain counsel reasonably satisfactory to the Indemnified Person
          to represent the Indemnified Person and any others entitled to
          indemnification pursuant to this Section 5.4.4.4 that the Indemnifying
          Person may designate in such proceeding and shall pay the reasonable
          fees and expenses of such counsel related to such proceeding. In any
          such proceeding, any Indemnified Person shall have the right to retain
          its own counsel, but the fees and expenses of such counsel shall be at
          the expense of such Indemnified Person unless (i) such Indemnifying
          Person and the Indemnified Person shall have mutually agreed to the
          contrary; (ii) such Indemnifying Person has failed within a reasonable
          time to retain counsel reasonably satisfactory to such Indemnified
          Person; or (iii) the named parties in any such proceeding (including
          any impleaded parties) include an Indemnifying Person and an
          Indemnified Person and representation of both parties by the same
          counsel would be inappropriate due to a conflict of interests between
          them. It is understood that an Indemnifying Person shall not, in
          connection with any proceeding or related proceedings in the same
          jurisdiction, be liable for the fees and expenses of more than one
          separate firm (in addition to any local counsel) for all Indemnified
          Persons, and that all such fees and expenses shall be reimbursed as
          they are incurred. Any such separate firm for the Indemnified QSI
          Shareholders shall be designated in writing by the Indemnified QSI
          Shareholders holding a majority of the Key Shares subject to the
          Registration Statement and the Prospectus, and any such separate firm
          for Key, its directors, respective officers and such control persons
          of Key shall be designated in writing by Key. The Indemnifying Person
          shall not be liable for any settlement of any proceeding effected
          without its written consent, but if settled with such consent or if
          there be a final judgment for the plaintiff, such Indemnifying Person
          agrees to indemnify any Indemnified Person from and against any loss
          or liability by reason of such settlement or judgment. No Indemnifying
          Person shall, without the prior written consent of the Indemnified
          Person, effect any settlement of any pending or threatened proceeding
          in respect of which any Indemnified Person is or could have been a
          party and indemnity could have been sought hereunder by such
          Indemnified Person, unless such settlement includes an unconditional
          release of such Indemnified Person from all liability on claims that
          are the subject matter of such proceeding.

               5.4.4.5 CONTRIBUTION. If the indemnification provided for in
          Section 5.4.4.2 hereof and Section 5.4.4.3 hereof is unavailable to an
          Indemnified

                                       40


          Person or insufficient in respect of any losses, claims, damages or
          liabilities referred to therein, then each Indemnifying Person under
          such paragraph, in lieu of indemnifying such Indemnified Person
          thereunder, shall contribute to the amount paid or payable by such
          Indemnified Person as a result of such losses, claims, damages or
          liabilities in such proportion as is appropriate to reflect the
          relative fault of the Indemnifying Person on the one hand and the
          Indemnified Person on the other in connection with the statements or
          omissions that resulted in such losses, claims, damages or
          liabilities, as well as any other relevant equitable considerations.
          The relative fault of the parties shall be determined by reference to,
          among other things, whether the untrue or alleged untrue statement of
          a material fact or the omission or alleged omission to state a
          material fact relates to information supplied by Key or such
          Indemnified QSI Shareholder and the parties' relative intent,
          knowledge, access to information and opportunity to correct or prevent
          such statement or omission.

               Each of Key and each of the Indemnified QSI Shareholders agree
          that it would not be just and equitable if contribution pursuant to
          this Section 5.4.4.5 were determined by pro rata allocation or by any
          other method of allocation that does not take account of the equitable
          considerations referred to in the immediately preceding paragraph. The
          amount paid or payable by an Indemnified Person as a result of the
          losses, claims, damages and liabilities referred to in the immediately
          preceding paragraph shall be deemed to include, subject to the
          limitations set forth above, any legal or other expenses incurred by
          such Indemnified Person in connection with investigating or defending
          any such action or claim. Notwithstanding the provisions of this
          Section 5.4.4.5, in no event shall any Indemnified QSI Shareholder be
          required to contribute any amount in excess of the amount by which the
          net proceeds received by such Indemnified QSI Shareholder from the
          sale of the Key Shares pursuant to the Registration Statement or
          Prospectus exceeds the amount of damages that such Indemnified QSI
          Shareholder would have otherwise been required to pay by reason of
          such untrue or alleged untrue statement or omission or alleged
          omission. No person guilty of fraudulent misrepresentation (within the
          meaning of Section 11(f) of the Securities Act) shall be entitled to
          contribution from any person who was not guilty of such fraudulent
          misrepresentation.

               The remedies provided for in Sections 5.4.4.2 through 5.4.4.5
          shall not limit any rights or remedies that may otherwise be available
          to any indemnified party under federal or state securities laws, which
          shall remain operative and in full force and effect regardless of any
          investigation made by or on behalf of any Indemnified QSI Shareholder
          or by or on behalf of Key, its officers or directors or any other
          person controlling Key.

               5.4.4.6 THIRD PARTY BENEFICIARIES. The Indemnified QSI
          Shareholders are intended to be third party beneficiaries of the
          provisions of this Section 5.4.4, which may be enforced by such
          Indemnified QSI Shareholders. This Section 5.4.4 may not be amended
          without the consent of Selling QSI Shareholders holding a majority of
          (i) the outstanding shares of QSI common

                                       41


          stock held by Selling QSI Shareholders (before the Effective Date) or
          (ii) the Key Shares held by the Selling QSI Shareholders (after the
          Effective Date).

          5.4.5 ASSISTANCE IN BLOCK SALE TRANSACTIONS. Key understands that one
     or more Selling QSI Shareholders is contemplating a "block sale" of all or
     a portion of the Key Shares received by such Selling QSI Shareholder in the
     Merger. Key agrees to take commercially reasonable actions requested by the
     broker/dealer engaged by a Selling QSI Shareholder for this purpose,
     consistent with customary practice for transactions of this type.

          5.4.6 ISSUANCES OF KEY COMMON STOCK. Key will not issue any shares of
     Key Common Stock during the 60 calendar day period beginning on the
     Effective Date except for (i) the issuance of Key Shares pursuant to this
     Agreement; (ii) the issuance of any options granted to employees or
     directors of Key; (iii) the issuance of any equity securities of Key in
     connection with the acquisition of the equity interest, businesses or
     assets of any unaffiliated entity; (iv) the issuance of equity securities
     of Key in exchange for outstanding securities of Key; and (v) the issuance
     of equity securities of Key upon the exercise of outstanding options,
     warrants or other securities convertible into or exchangeable for equity
     securities of Key.

     5.5 SUPPLEMENTAL INFORMATION. The parties acknowledge and agree that QSI
shall have the continuing right until the Effective Date to provide Key promptly
with such additional supplemental information (collectively, the "Supplemental
Information"), in the form of (i) amendments to then existing Schedules or (ii)
additional Schedules, as would be necessary to make each of those
representations and warranties true and correct as of the Effective Date;
PROVIDED, HOWEVER, that Key shall be entitled to use such Supplemental
Information so provided (i) in the calculation of the Liability Threshold
pursuant to clause (iii) of Section 6.2.1 and Section 7.1.9 hereof to the extent
such Supplemental Information pertains to representations or warranties set
forth in Sections 3.1.8.17, 3.1.8.18, 3.1.17 (including all subparagraphs
thereto) and 3.1.20 hereof, and (ii) to determine with respect to all other
representations and warranties if a material adverse effect has occurred
pursuant to clause (iii) of Section 6.2.1 hereof. QSI and Key acknowledge that
new contracts, permits and other matters which are permitted by the terms of
this Agreement and are entered into in the ordinary course of business following
the execution hereof shall not be included in calculating the Liability
Threshold.


                                    ARTICLE 6

                       CONDITIONS PRECEDENT TO OBLIGATIONS

     6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF QSI. The obligation of QSI to
consummate and effect the transactions hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by QSI in the
manner contemplated by Section 7.4 hereof before the Effective Date.

          6.1.1 REPRESENTATIONS AND WARRANTIES OF KEY TRUE AT EFFECTIVE DATE.
     The representations and warranties of Key herein contained shall be true as
     of and at the

                                       42


     Effective Date with the same effect as though made at such date, except (i)
     as affected by transactions permitted or contemplated by this Agreement and
     (ii) which breaches of such representations and warranties in the aggregate
     would not be reasonably likely to result in a material adverse effect on
     the financial condition or business of Key and its subsidiaries, taken as a
     whole; each of Key and Merger Sub shall have performed and complied with
     all agreements and covenants required by this Agreement to be performed or
     complied, in all material respects, with by Key and Merger Sub before the
     Effective Date; and each of Key and Merger Sub shall have delivered to QSI
     a certificate, dated the Effective Date and signed by its respective chief
     executive officer or its president, and by its chief financial or
     accounting officer, and its secretary, to both such effects.

          6.1.2 NO MATERIAL LITIGATION. No suit, action, or other proceeding
     shall be pending, or to Key's or Merger Sub's knowledge, threatened, before
     any court or governmental agency in which it will be, or it is, sought to
     restrain or prohibit or to obtain damages or other relief in connection
     with this Agreement or the consummation of the transactions contemplated
     hereby or that might result in a material adverse change in the value of
     the consolidated assets and business of Key.

          6.1.3 OPINION OF KEY COUNSEL. QSI shall have received a favorable
     opinion, dated as of the Effective Date, from Porter & Hedges, L.L.P.,
     counsel for Key and Merger Sub, in form and substance satisfactory to QSI
     to the effect that (i) Key and Merger Sub have been duly incorporated and
     are validly existing as corporations in good standing under the laws of
     their respective states of organization; (ii) all corporate proceedings
     required to be taken by or on the part of the Key and Merger Sub to
     authorize the execution and delivery of this Agreement and the
     implementation of the transactions contemplated hereby have been taken;
     (iii) the Key Shares to be delivered to the holders of QSI Common Stock in
     accordance with this Agreement have been duly authorized, and when issued,
     will be validly issued, fully paid and nonassessable outstanding shares of
     Key Common Stock; (iv) the Registration Statement and the post-effective
     amendment to the Registration Statement have become effective under the
     Securities Act, and no order suspending the effectiveness of the
     Registration Statement (including the post-effective amendment) has been
     issued, and to the knowledge of such counsel, no proceedings with respect
     to thereto have been commenced or threatened; (v) the Prospectus complies
     as to form under the Securities Act and the rules and regulations of the
     SEC thereunder for use of the Selling QSI Shareholders in the resale of the
     Key Shares; and (vi) this Agreement has been duly executed and delivered
     by, and is the legal, valid and binding obligation of Key and Merger Sub
     and is enforceable against Key and Merger Sub in accordance with its terms
     except as enforceability may be limited by (a) equitable principles of
     general applicability or (b) bankruptcy, insolvency, reorganization,
     fraudulent conveyance or similar laws affecting the rights of creditors
     generally. In rendering such opinion, such counsel may rely upon
     certificates of public officials and of officers of Key and Merger Sub as
     to matters of fact and the opinion or opinions of other counsel, which
     opinions shall be reasonably satisfactory to QSI, as to matters other than
     federal, general corporate law of Delaware or Texas law.

                                       43


          6.1.4 LISTING OF KEY COMMON STOCK. The New York Stock Exchange shall
     have agreed that on the Effective Date it will list the shares of Key
     Common Stock issuable at the Effective Date of this Agreement.

          6.1.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH KEY. The holders of
     any material indebtedness of Key or Merger Sub, the lessors of any material
     property leased by Key or Merger Sub, and the other parties to any other
     material agreements to which Key or Merger Sub is a party shall, when and
     to the extent necessary in the reasonable opinion of the QSI
     Representatives, have consented to the transactions contemplated hereby.

          6.1.6 HSR. All waiting periods required by HSR shall have expired with
     respect to the transactions contemplated by this Agreement, or early
     termination with respect thereto shall have been obtained. In addition, any
     approvals required under any state laws comparable to HSR shall have been
     obtained.

          6.1.7 SECRETARY'S CERTIFICATES. Each of Key and Merger Sub shall
     deliver a secretary's certificate, which certificates shall have all
     corporate and charter documents of such entity attached thereto and
     attesting to: (i) the due organization of Key and the Merger Sub; (ii) the
     due authorization of the transactions contemplated by this Agreement; and
     (iii) all corporate, shareholder or other resolutions adopted by Key and
     the Merger Sub in connection with the transactions contemplated by this
     Agreement.

          6.1.8 EMPLOYMENT AGREEMENTS. Key shall have executed and delivered
     each of the employment agreements with the persons identified therein, each
     of which are attached hereto as EXHIBIT E (the "Employment Agreements").

          6.1.9 QSI SHAREHOLDER APPROVAL. The approval of the requisite number
     of QSI Shareholders of this Agreement and the transactions contemplated
     hereby, including without limitation the Merger, on or before the Effective
     Date, and such approval shall not have been amended, modified or rescinded
     on or before the Effective Date.

          6.1.10 REDEMPTION OF PREFERRED STOCK. On or before the Effective Date,
     QSI shall have redeemed all of the issued and outstanding shares of QSI
     Preferred Stock and filed with the Secretary of State of Texas a
     certificate of elimination with respect to each of the Series A Preferred
     Stock and Series B Preferred Stock.

          6.1.11 CREDIT AGREEMENT. Key shall have paid the obligations payable
     pursuant to the Credit Agreement dated as of December 17, 2001 among QSI,
     Lehman Brothers, Inc., Lehman Commercial Paper, Inc. and Southwest Bank of
     Texas, N.A.

          6.1.12 REGISTRATION STATEMENT. The SEC shall have declared the
     post-effective amendment to the Registration Statement effective on or
     before the Effective Date.

     6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF KEY AND MERGER SUB. The
obligations of Key and Merger Sub to consummate and effect the transactions
hereunder shall be subject to the satisfaction of the following conditions, or
to the waiver thereof by Key and Merger Sub in the manner contemplated by
Section 7.4 before the Effective Date.

                                       44


          6.2.1 REPRESENTATIONS AND WARRANTIES OF QSI TRUE AT EFFECTIVE DATE.
     The representations and warranties of QSI herein contained shall be true as
     of and at the Effective Date with the same effect as though made at such
     date, except (i) as affected by transactions permitted or contemplated by
     this Agreement, (ii) which breaches of representations and warranties
     contained in Sections 3.1.8.17, 3.1.8.18, 3.1.17 (including all
     subparagraphs thereto) and 3.1.20 hereof would not be reasonably likely to
     result in costs, damages, expenses, losses or liabilities with respect to
     the operations, assets or liabilities of QSI and the QSI Subsidiaries taken
     as a whole of more than $5,000,000 (the "Liability Threshold"), and (iii)
     which breaches of such representations and warranties (other than the
     representations and warranties contained in Sections 3.1.8.17, 3.1.8.18,
     3.1.17 (including all subparagraphs thereto) and 3.1.20 hereof) in the
     aggregate would not be reasonably likely to result in a material adverse
     effect on the financial condition or business of QSI and the QSI
     Subsidiaries, taken as a whole; QSI shall have performed and complied with
     all agreements and covenants required by this Agreement to be performed or
     complied with, in all material respects, by it before the Effective Date;
     and QSI shall have delivered to Key and Merger Sub a certificate, dated the
     Effective Date and signed by its chief executive officer or its president,
     and by its chief financial or accounting officer, and by its secretary to
     both such effects.

          6.2.2 NO MATERIAL LITIGATION. No suit, action, or other proceeding
     shall be pending, or to QSI's knowledge, threatened, before any court or
     governmental agency in which it will be, or it is, sought to restrain or
     prohibit or to obtain damages or other relief in connection with this
     Agreement or the consummation of the transactions contemplated hereby or
     which might result in a material adverse change in the value of the assets
     and business of QSI. Neither QSI nor any QSI Subsidiary shall have become a
     party to any legal or regulatory proceeding arising out of the allegations
     made by the plaintiff in the Shaw litigation. Based upon the report of
     Porter & Hedges, L.L.P. delivered to Key pursuant to Section 5.3.11 hereof,
     Key shall not, in good faith, have any reasonable basis to conclude that
     the allegations concerning QSI in the Shaw Litigation are true.

          6.2.3 OPINION OF QSI COUNSEL. Key and Merger Sub shall have received a
     favorable opinion, dated the Effective Date, from Vinson & Elkins L.L.P.
     counsel to QSI, in form and substance satisfactory to Key and Merger Sub,
     to the effect that (i) QSI and each QSI Subsidiary is duly organized and is
     validly existing as a corporation, limited partnership or limited liability
     company in good standing under the laws of its state of organization; (ii)
     all corporate and shareholder proceedings required to be taken by or on the
     part of QSI to authorize the execution and delivery of this Agreement and
     the implementation of the transactions contemplated hereby have been taken;
     (iii) all outstanding shares of QSI Common Stock have been validly issued
     and are fully paid and nonassessable outstanding shares of QSI Common
     Stock; (iv) QSI owns of record all of the equity interests in each QSI
     Subsidiary; (v) all outstanding shares of QSI Preferred Stock have been
     validly issued and are fully paid and nonassessable outstanding shares of
     QSI Preferred Stock; and (vi) this Agreement has been duly executed and
     delivered by and is the legal, valid and binding obligation of QSI and is
     enforceable against QSI in accordance with its terms except as
     enforceability may be limited by (a) equitable principles of general
     applicability or (b) bankruptcy, insolvency, reorganization, fraudulent
     conveyance or similar laws affecting the rights of creditors generally. In

                                       45


     rendering such opinion, such counsel may rely upon certificates of public
     officials and officers of QSI as to matters of fact and the opinion or
     opinions of other counsel, which opinions shall be reasonably satisfactory
     to Key and Merger Sub, as to matters other than federal or Texas law.

          6.2.4 HSR. All waiting periods required by HSR shall have expired with
     respect to the transactions contemplated by this Agreement, or early
     termination with respect thereto shall have been obtained. In addition, any
     approvals required under any state laws comparable to HSR shall have been
     obtained.

          6.2.5 RESIGNATIONS. Each of the officers and directors of QSI and QSI
     Subsidiaries shall have submitted his or her resignation as an officer or
     director of QSI or QSI Subsidiary, as the case may be, in form and
     substance satisfactory to Key.

          6.2.6 EMPLOYMENT AGREEMENTS. Each of the Employment Agreements shall
     have been executed and delivered. QSI shall have terminated each of the
     employment agreements identified on SCHEDULE 6.2.6 hereto, and shall have
     received a full release with respect to each such employment agreement of
     its obligations thereunder.

          6.2.7 QSI SHAREHOLDER APPROVAL. The approval of the requisite number
     of QSI Shareholders of this Agreement and the transactions contemplated
     hereby, including without limitation the Merger, on or before the Effective
     Date, and such approval shall not have been amended, modified or rescinded
     on or before the Effective Date.

          6.2.8 NON-COMPETE AGREEMENTS. Each of the individuals identified on
     SCHEDULE 6.2.8 hereto shall have executed and delivered a Non-Compete
     Agreement.

          6.2.9 SECRETARY'S CERTIFICATE. Each of QSI and the QSI Subsidiaries
     shall deliver a secretary's certificate, which certificates shall have all
     corporate and charter documents of such entity attached thereto and
     attesting to: (a) the due organization of such entity; (b) the due
     authorization of the transactions contemplated by this Agreement; and (c)
     all corporate, shareholder or other resolutions adopted by QSI or the QSI
     Subsidiaries in connection with the transactions contemplated by this
     Agreement.

          6.2.10 QSI REPRESENTATIVES. All corporate and shareholder action shall
     have been take to authorize the QSI Representatives to act as the
     representatives of the QSI Shareholders, including the authorization to act
     on behalf of the QSI Shareholders and to take any and all actions required
     or permitted to be taken by the QSI Representatives under this Agreement.

          6.2.11 SHAREHOLDERS AGREEMENT. QSI shall have terminated any
     shareholder, voting or similar agreements on or prior to the Effective
     Date, all in form and substance satisfactory to Key.

          6.2.12 RELATED PARTY AGREEMENTS. Each of the agreements described in
     SCHEDULE 6.2.12 hereto shall have been amended to provide that Key or the
     Surviving Corporation or its subsidiaries may terminate such agreements on
     30 days notice without

                                       46


     penalty and shall remove any purchase option, all in form and substance
     satisfactory to Key.

          6.2.13 OPTIONS. All issued and outstanding Options shall have either
     been (i) amended to provide for cashless exercise and such Options shall
     have been exercised, or (ii) classified as a Cash Out Option, and the
     aggregate Option Payout with respect to such Cash Out Options shall not
     exceed $1,000,000. Each holder of an Option classified as a Cash Out Option
     shall have been issued an Option Note in accordance with Section 2.9.2.1
     hereof.

          6.2.14 WARRANTS. All issued and outstanding Warrants shall have either
     been (i) amended to provide for cashless exercise and such Warrants shall
     have been exercised, or (ii) classified as a Cash Out Warrant and the
     aggregate Warrant Payout with respect to such Cash Out Warrants shall not
     exceed $500,000. Each holder of a Warrant classified as a Cash Out Warrant
     shall have been issued a Warrant Note in accordance with Section 2.9.2.2
     hereof.

          6.2.15 REDEMPTION OF PREFERRED STOCK. QSI shall have taken all
     necessary steps to insure that the QSI Preferred Stock has been redeemed in
     accordance with Section 2.9.3 hereof.

          6.2.16 AFFILIATE AGREEMENTS. To insure compliance with Rule 145 of the
     rules and regulations promulgated by the SEC under the Securities Act, each
     of QSI's directors, executive officers and beneficial owners of 5% or more
     of QSI's Common Stock shall have executed and delivered to Key the QSI
     Affiliate Agreements.

          6.2.17 SEVERANCE POLICY. QSI shall have terminated any severance
     policy of QSI or any QSI Subsidiary without cost to either QSI or Key,
     other than any severance contained within any agreement set forth in
     SCHEDULE 3.1.8.11 hereto.

                                    ARTICLE 7

                           TERMINATION AND ABANDONMENT

     7.1 TERMINATION. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
hereby abandoned at any time before the Effective Date:

          7.1.1 BY MUTUAL CONSENT. By mutual written consent of Key, Merger Sub
     and QSI.

          7.1.2 BY KEY BECAUSE OF DISSENTING SHAREHOLDERS. By Key, if the
     holders of any shares of QSI Common Stock representing in excess of 0.5% of
     the issued and outstanding shares of QSI Common Stock elect to exercise the
     right to dissent under applicable provisions of Texas law in connection
     with the Merger contemplated by this Agreement.

                                       47


          7.1.3 BY QSI BECAUSE OF CONDITIONS PRECEDENT. By QSI, if any condition
     set forth in Section 6.1 hereof has not been met and has not been waived,
     notwithstanding any investigation made by or on behalf of QSI.

          7.1.4 BY QSI BECAUSE OF MATERIAL ADVERSE EFFECT. By QSI, if there has
     been a material adverse effect in the financial condition or business of
     Key and its subsidiaries, taken as a whole, since March 31, 2002.

          7.1.5 BY KEY OR MERGER SUB BECAUSE OF CONDITIONS PRECEDENT. By Key or
     Merger Sub, if any condition set forth in Section 6.2 hereof has not been
     met and has not been waived, notwithstanding any investigation made by or
     on behalf of Key.

          7.1.6 BY KEY OR MERGER SUB BECAUSE OF MATERIAL ADVERSE EFFECT. By Key
     or Merger Sub, if there has been a material adverse effect in the financial
     condition or business of QSI and the QSI Subsidiaries, taken as a whole,
     since March 31, 2002.

          7.1.7 BY KEY OR MERGER SUB, OR BY QSI BECAUSE OF LEGAL PROCEEDINGS. By
     either Key or Merger Sub, or by QSI, if any suit, action, or other
     proceeding shall be pending or threatened by the federal or a state
     government before any court or governmental agency, in which it is sought
     to restrain, prohibit, or otherwise affect the consummation of the
     transactions contemplated hereby.

          7.1.8 BY KEY OR MERGER SUB, OR BY QSI, IF TRANSACTIONS NOT EFFECTIVE
     BY JULY 17, 2002. By either Key or Merger Sub, or by QSI, if the
     transactions contemplated hereby shall not have become effective on or
     before July 17, 2002; PROVIDED, HOWEVER, that such date shall be extended
     but not beyond October 15, 2002, if Key is notified by the SEC that the
     post-effective amendment to the Registration Statement filed in connection
     with the transactions contemplated by this Agreement shall be reviewed or
     if there is any other delay in its effectiveness.

          7.1.9 BY KEY OR MERGER SUB BECAUSE OF MATERIAL DEVELOPMENTS. By Key or
     Merger Sub if, one or more of QSI's representations or warranties contained
     in Sections 3.1.8.17, 3.1.8.18, 3.1.17 (including all subparagraphs
     thereto), and 3.1.20 hereof was not true as of the date hereof or not true
     immediately before the Effective Date, and all of such untrue
     representations and warranties, in the aggregate, would be reasonably
     likely to result in costs, damages, diminution in value, expenses, losses
     or liabilities with respect to the business, operations, assets or
     liabilities of QSI and the QSI Subsidiaries taken as a whole of more than
     the Liability Threshold; PROVIDED THAT no claims, costs, damages, expenses,
     losses or liabilities shall be included in the calculation of the Liability
     Threshold to the extent such amounts are insured against without
     reservation of rights (but only to the extent collectable and less any
     deductibles or self insured retentions) or to the extent that the Estimated
     Balance Sheet (and Final Balance Sheet) includes a specific reserve with
     respect to such matter of this kind or nature. Notwithstanding the other
     provisions of this Section 7.1.9 or any other provision of this Agreement,
     for the purposes of calculating the Liability Threshold (i) the disclosures
     on SCHEDULE 3.1.17 and SCHEDULE 3.1.20 shall not be taken into account in
     determining whether there has been a breach of the representations and
     warranties contained in

                                       48


     Sections 3.1.8.17, 3.1.8.18, 3.1.17 and 3.1.20 hereof, and (ii) plugging
     and abandonment costs with regard to the items set forth in such Schedules
     shall be included.

     7.2 TERMINATION BY BOARD OF DIRECTORS. An election of Key, Merger Sub or
QSI terminate this Agreement and abandon the Merger as provided in Section 7.1
hereof shall be exercised on behalf of Key, Merger Sub or QSI, as the case may
be, by its board of directors.

     7.3 EFFECT OF TERMINATION. In the event of the termination and abandonment
of this Agreement pursuant to and in accordance with the provisions of Section
7.1 hereof, this Agreement shall become void and have no force or effect,
without any liability on the part of any party hereto (or the stockholders,
general partner or controlling persons or directors or officers of any party
hereto). Notwithstanding the foregoing, a termination of this Agreement shall
not relieve any party hereto from any liability for damages incurred as a result
of a willful breach by such party of its covenants and agreements hereunder
occurring before such termination. Each party hereto acknowledges and agrees
that, in connection with such termination, breaches of a representation or
warranty hereunder by the other party shall not give rise to liability for
damages except in the event of a breach of a representation or warranty
resulting from a knowing and intentional act involving actual fraud or an intent
to mislead or deceive. In addition, if there are one or more Potential
Liabilities that have been the subject of one or more Liability Notices (i) as
to which Key and QSI have been unable to determine are properly characterized as
such or as to which Key and QSI have been unable to agree as to the most
reasonable, cost-effective remedy in accordance with Section 8.3.1.2 hereof
(each, a "Disputed Potential Liability"); (ii) Key believes the Liability
Threshold has been exceeded; and (iii) QSI had previously withheld its
permission for Key to conduct testing with respect to the Disputed Potential
Liabilities as contemplated in Section 8.3.1.1 hereof, then Key's termination of
this Agreement pursuant to Section 6.2.1 or 7.1.9 hereof shall be without
liability to Key.

     7.4 WAIVER OF CONDITIONS. Subject to the requirements of any applicable
law, any of the terms or conditions of this Agreement may be waived at any time
by the party that is entitled to the benefit thereof, by action taken by its
board of directors, the executive committee of its board of directors or its
chief executive officer or its general partner. No waiver of a particular term
or condition of this Agreement shall constitute a waiver of any other term or
condition.

                                    ARTICLE 8

                              ADDITIONAL AGREEMENTS

     8.1 EMPLOYMENT MATTERS. After the Effective Date, Key, in its sole
discretion, may take all actions necessary or appropriate to (i) permit each
individual who is an employee of QSI or any QSI Subsidiary immediately before
the Effective Date (a "QSI Employee") to continue to participate from and after
the Effective Date in an Employee Plan, or (ii) terminate, freeze or merge any
Employee Plan. Before the Effective Date, upon written request from Key, QSI and
each QSI Subsidiary shall terminate, freeze or merge any identified Employee
Plan maintained by QSI or any QSI Subsidiary effective as of a date specified by
Key before the Effective Date; PROVIDED, HOWEVER, that no Employee Plan shall be
terminated unless QSI agrees to such termination. If Key terminates or
discontinues an Employee Plan after the Effective Date or requests QSI or a QSI
Subsidiary to terminate an Employee Plan before the Effective Date, Key

                                       49


shall take all actions necessary or appropriate to permit the QSI Employees
participating in such Employee Plan to participate in the comparable benefit
plan, if any, maintained by Key or any of its affiliates for similarly situated
employees (the "Replacement Plans"); PROVIDED, HOWEVER, that if the Employee
Plan that is so terminated or discontinued is a group health plan, then Key
shall cause each QSI Employee participating in such group health plan and his or
her eligible dependents (including, without limitation, all such QSI Employee's
dependents covered by such group health plan as of the time such coverage
ceases) to be covered under a Replacement Plan that (i) provides medical and
dental benefits to each such QSI Employee and such eligible dependents effective
immediately upon the cessation of coverage of such individuals under such group
health plan in accordance with such plan's terms, and (ii) waives any
preexisting condition restrictions to the extent necessary to provide immediate
coverage, if such waiver is required under the Health Insurance Portability and
Accountability Act. Key and its affiliates shall recognize each QSI Employee's
years of service and level of seniority prior to the Effective Date with QSI and
any QSI Subsidiaries for purposes of eligibility and vesting under any
Replacement Plan that is a medical, dental or Code Section 401(k) Plan. In the
event that Key adopts a severance plan to address reduction in force implemented
in connection with the integration of the operations of Key and QSI, such plan
shall treat similarly situated employees of Key and QSI the same. Further, if,
on or after the Effective Date, Key terminates the employment of any QSI
Employee to whom QSI or any QSI Subsidiary is obligated to pay severance
benefits as identified on SCHEDULES 3.1.8.8, 3.1.8.11 or 3.1.19 hereto, and such
obligation is not waived, Key, and not QSI, any QSI Subsidiary or the QSI
Shareholders, shall be responsible for the payment of such severance benefits.

     8.2 VOTING AND SUPPORT AGREEMENTS. Contemporaneously with the execution and
delivery of this Agreement, each of the QSI Shareholders identified on SCHEDULE
8.2 hereto shall execute and deliver the Voting and Support Agreements.

     8.3 LIABILITY THRESHOLD.

               8.3.1.1 ENVIRONMENTAL ASSESSMENT. Key shall have the right, at
          its sole cost, risk and expense, to conduct or have conducted an
          Environmental Assessment of the properties and operations of QSI and
          each QSI Subsidiary. QSI agrees to provide Key (or its agents or
          contractors) with reasonable access as necessary to conduct the
          Environmental Assessment and the investigation. QSI shall have the
          right to require Key (or its agents or contractors) to conform to
          QSI's (or the operator's, if not QSI's) safety and industrial hygiene
          procedures in the conduct of the Environmental Assessment. During the
          Environmental Assessment, Key shall not be permitted to (i) conduct
          any soil, water or groundwater sampling or subsurface testing of any
          kind; or (ii) contact any governmental authority regarding the
          properties and operations of QSI or any QSI Subsidiary, in either case
          without first obtaining written permission from QSI, which permission
          shall be granted or denied within three days of receipt by QSI of the
          written request therefor, with respect to the specific sampling,
          testing or contact proposed by Key; provided, however, that Key may
          make such contacts as may be necessary to arrange to review and copy
          publicly available agency records relating to environmental conditions
          and permitted operations at properties owned, leased or operated by
          QSI or any QSI Subsidiary.

                                       50


               8.3.1.2 IDENTIFICATION AND CALCULATION8.3.1.3. Key shall deliver
          to QSI a written notice as soon as practicable after receiving a
          report identifying any Potential Liability. Such notice (the
          "Liability Notice") shall:

                    (i)   identify the property on which the Potential Liability
               exists;

                    (ii)  set forth Key's estimate of the most cost-effective
               remedy to cure the Potential Liability; and

                    (iii) set forth Key's estimate of any liability for damages
               to third parties that could arise out of the Potential Liability.

          Key and QSI will negotiate in good faith to determine (a) whether each
          Potential Liability identified on the Liability Notice is properly
          characterized as such, (b) the cost of implementing the remedy
          determined in accordance with clause (ii) above, and (c) the net
          present value of any damages that could arise out of third party
          claims identified on the Liability Notice. The estimate of the most
          cost-effective remedy determined in accordance with clause (ii) above
          shall include investigation costs typically associated with the
          proposed remedy, but shall not include investigation costs incurred by
          Key in the investigation pursuant to which Key assembled the
          information on the Liability Notice. In estimating the amount of the
          potential third party damages pursuant to clause (iii) above, Key and
          QSI shall consider both the magnitude of the Potential Liability and
          the likelihood of liability actually arising out of the Potential
          Liability. A Potential Liability identified on a Liability Notice
          shall not be included in the Liability Threshold to the extent Key and
          QSI agree in writing that it should not so be included or to the
          extent it has been corrected or remedied by QSI to Key's satisfaction
          before the Effective Date.

     8.4 FURTHER ASSURANCES. From time to time, as and when requested by any
party hereto, any other party hereto shall execute and deliver, or cause to be
executed and delivered, such documents and instruments and shall take, or cause
to be taken, such further or other actions as may be reasonably necessary to
effect the transactions contemplated hereby.

     8.5 INDEMNIFICATION; OFFICERS AND DIRECTORS INSURANCE. Except to the extent
Surviving Corporation is merged into Key or its affiliates, the Surviving
Corporation's articles of incorporation and bylaws shall not be amended in a
manner that adversely affects the rights of any Indemnified Executive thereunder
unless otherwise required by applicable law. The Surviving Corporation shall
maintain, for not less than three years after the Effective Date, director's and
officer's liability insurance covering each Indemnified Executive on terms not
materially less favorable than the insurance maintained in effect by QSI on the
date hereof in terms of coverage (including without limitation types of claims,
time period of claims, exclusions and persons covered), amounts and deductibles;
provided that the costs of such insurance shall not exceed $100,000 or the
covered Indemnified Executive shall be responsible for payments in amounts in
excess of such $100,000, shall reduce the coverage limits to levels that will
not exceed the $100,000 premium, or may elect to terminate coverage. Each

                                       51


Indemnified Executive is intended to be a third party beneficiary of this
Section 8.5 and may specifically enforce its terms. This Section 8.5 shall not
limit or otherwise adversely affect any rights any Indemnified Executive may
have under any agreement with QSI or under QSI's articles of incorporation or
bylaws.

     8.6 PUBLIC ANNOUNCEMENTS. Except as may be required by applicable law, no
party hereto shall make any public announcements or otherwise communicate with
any news media or any other party, with respect to this Agreement or any of the
transactions contemplated hereby without prior consultation with the other
parties as to the timing and contents of any such announcement or communications
as may be reasonable under the circumstances; provided, however, that nothing
contained herein shall prevent any party from (i) promptly making all filings
with governmental authorities as may, in its judgment, be required or advisable
in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby or (ii) disclosing the
terms of this Agreement to such party's legal counsel, financial advisors or
accountants in furtherance of the transactions contemplated by this Agreement.

                                    ARTICLE 9

                                  MISCELLANEOUS

     9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.

          9.1.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF KEY AND MERGER SUB.
     The representations, warranties, covenants and agreements made by Key or
     Merger Sub shall not survive the Effective Date; PROVIDED THAT nothing
     herein shall limit the survival of any covenant or agreement of the parties
     hereto which by its terms requires performance after the Effective Date.

          9.1.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF QSI. The
     representations, warranties, covenants and agreements made by QSI shall not
     survive the Effective Date; PROVIDED THAT nothing herein shall limit the
     survival of any covenant or agreement of the parties hereto which by its
     terms requires performance after the Effective Date.

     9.2 ENTIRETY; AMENDMENTS. This Agreement and each agreement executed
contemporaneously herewith embodies the entire agreement among the parties with
respect to the subject matter hereof, and all prior agreements between the
parties with respect thereto are hereby superseded in their entirety. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.

     9.3 COUNTERPARTS. Any number of counterparts of this Agreement may be
executed and each such counterpart shall be deemed to be an original instrument,
but all such counterparts together shall constitute but one instrument.

     9.4 NOTICES AND WAIVERS. Any notice or waiver to be given to any party
hereto shall be in writing and shall be delivered by courier, sent by facsimile
transmission or first class registered or certified mail, postage prepaid,
return receipt requested:

                                       52


                             IF TO KEY OR MERGER SUB

Addressed to:                              With a copy to:
Key Energy Services, Inc.                  Porter & Hedges, L.L.P.
400 South River Road                       700 Louisiana
New Hope, Pennsylvania 18938               Houston, Texas 77210-4744
Attn: General Counsel                      Attn: Samuel N. Allen
Facsimile: (215) 862-7902                  Facsimile:  (713) 228-1331


                                    IF TO QSI

Addressed to:                              With a copy to:
Q Services, Inc.                           Vinson & Elkins L.L.P.
3100 Timmons Lane                          2300 First City Tower
Suite 300                                  1001 Fannin
Houston, Texas 77027                       Houston, Texas 77002-6760
Attn: David S. Schorlemer                  Attn: T. Mark Kelly
Facsimile: (713) 869-2978                  Fax: (713) 758-2346


     Any communication so addressed and mailed by first-class registered or
certified mail, postage prepaid, with return receipt requested, shall be deemed
to be received on the third business day after so mailed, and if delivered by
courier or facsimile to such address, upon delivery during normal business hours
on any business day.

     9.5 CAPTIONS. The captions contained in this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any article, section, or paragraph hereof.

     9.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall
inure to the benefit of and be enforceable by the successors and assigns of the
parties hereto.

     9.7 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.

     9.8 JOINT DRAFTING. This Agreement and its exhibits have been jointly
drafted by each of the parties hereto and their counsel. Neither this Agreement
nor any of its exhibits shall be construed against any party based on its
authorship.

                                       53


     9.9 APPLICABLE LAW. This Agreement shall be governed by and construed and
enforced in accordance with the applicable laws of the State of Texas.

                            [SIGNATURE PAGE FOLLOWS]

                                       54


     IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in
their individual names or their respective corporate names by their respective
duly authorized representatives, as applicable, all as of the day and year first
above written.

                            KEY ENERGY SERVICES, INC.


                            By:  /s/ Jack D. Loftis, Jr.
                                --------------------------------------------
                                     Jack D. Loftis, Jr., SENIOR VICE PRESIDENT


                            KEY MERGER SUB, INC.


                            By:  /s/ Jack D. Loftis, Jr.
                                --------------------------------------------
                                     Jack D. Loftis, Jr., VICE PRESIDENT


                            Q SERVICES, INC.


                            By:  /s/ Craig M. Johnson
                                -----------------------------------------
                                     Craig M. Johnson, PRESIDENT




                  FIRST AMENDMENT TO PLAN AND AGREEMENT OF MERGER

      THIS FIRST AMENDMENT TO PLAN AND AGREEMENT OF MERGER (this "Agreement") is
entered into as of May 30, 2002 among Key Energy Services, Inc., a Maryland
corporation ("Key"); Key Merger Sub, Inc., a Texas corporation and a
wholly-owned subsidiary of Key ("Merger Sub"); and Q Services, Inc., a Texas
corporation ("QSI"). Capitalized terms not otherwise defined herein shall have
the meanings given them in the Plan and Agreement of Merger, dated as of May 13,
2002 (the "Merger Agreement"), among Key, Merger Sub and QSI.

                               W I T N E S S E T H

      WHEREAS, Key, Merger Sub and QSI previously entered into the Merger
Agreement;

      WHEREAS, the Merger Agreement provides that on and after the Effective
Date, the articles of incorporation of Merger Sub shall be the articles of
incorporation of the Surviving Corporation;

      WHEREAS, Key, Merger Sub and QSI desire to amend the Merger Agreement to
provide that on and after the Effective Date, the articles of incorporation of
QSI shall be the articles of incorporation of the Surviving Corporation; and

      WHEREAS, Section 9.2 of the Merger Agreement provides that the Merger
Agreement may not be amended except by an instrument in writing signed by the
parties thereto.

      NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and pursuant to Section 9.2 of the
Merger Agreement, the parties hereto hereby agree as follows:

      1. Section 2.4 of the Merger Agreement is hereby amended in its entirety
to read as set forth below:

             "2.4 GOVERNING LAW AND ARTICLES OF INCORPORATION OF SURVIVING
       CORPORATION. The laws of Texas shall continue to govern the Surviving
       Corporation after the Effective Date. On and after the Effective Date,
       the articles of incorporation of QSI shall be the articles of
       incorporation of the Surviving Corporation. Thereafter the articles of
       incorporation may be amended as provided by law and such articles of
       incorporation of the Surviving Corporation."

      2. Except as set forth in this Agreement, all provisions, terms,
conditions and representations in the Merger Agreement and the exhibits and
schedules thereto remain unmodified and in full force and effect, and the Merger
Agreement and all exhibits and schedules thereto, as amended by this Agreement,
are hereby in all respects ratified and confirmed.

      3. Any number of counterparts of this Agreement may be executed and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute one instrument. This Agreement may be
executed by facsimile signature, which signature shall be binding upon the
parties so executing this Agreement.




      IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in
their individual names or their respective corporate names by their respective
duly authorized representatives, as applicable, all as of the day and year first
above written.

                                KEY ENERGY SERVICES, INC.



                                By:  /s/ JACK D.  LOFTIS
                                   --------------------------------------------
                                     Jack D. Loftis, Jr., SENIOR VICE PRESIDENT


                                KEY MERGER SUB, INC.



                                By:  /s/ JACK D.  LOFTIS
                                   --------------------------------------------
                                     Jack D. Loftis, Jr., VICE PRESIDENT


                                Q SERVICES, INC.



                                By:  /s/ DAVID S.  SCHORLEMER
                                   --------------------------------------------
                                    David S. Schorlemer, VICE PRESIDENT





                                                                       EXHIBIT B



                                 LEHMAN BROTHERS


                                                                    May 10, 2002

Board of Directors
Q Services, Inc.
3100 Timmons Road
Suite 300
Houston, TX  77027


Members of the Board:

     We understand that Q Services, Inc. (the "Company") and Key Energy
Services, Inc. ("Key") are considering entering into a transaction pursuant to
which (i) the Company will be merged with and into Key (the "Merger")") and (ii)
upon effectiveness of the Merger, each outstanding share of Company common stock
will be converted into the right to receive that number of shares of Key common
stock determined by (a) a fraction, the numerator of which shall be $265,000,000
less the amount of Total Liabilities plus the amount of Total Current Assets,
and the denominator of which is the Key Share Price divided by (b) the total
number of shares of Company common stock issued and outstanding as of the
Effective Date (the "Consideration"). The terms and conditions of the Merger are
set forth in detail in a Plan and Agreement of Merger to be entered into between
Key, Key Merger Sub, Inc. and the Company (the "Agreement"). Capitalized terms
used but not defined herein shall have the meanings ascribed to such terms in
the Agreement.

     We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Consideration to be received by such stockholders
in the Merger. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to proceed
with or effect the Merger.

     In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Merger, (2) publicly available information concerning
Key that we believe to be relevant to our analysis, including the Annual Report
on Form 10-K for the fiscal year ended June 30, 2001 and Quarterly Reports on
Form 10-Q for the quarters ended September 30, 2001 December 31, 2001 and March
31, 2002, (3) financial and operating information with respect to the business,
operations and prospects of the Company and Key furnished to us by the Company
and Key, respectively, (4) a trading history of Key's common stock from April
10, 2001 to the present and a comparison of that trading history with those of
other companies that we deemed relevant, (5) a comparison of the historical
financial results and present financial condition of the Company and Key with
each other and with those of other companies that we deemed relevant, (6) a
comparison of the financial terms of the Merger with the financial terms of
certain other



recent public and private oil services transactions that we deemed relevant, (7)
published estimates of third party research analysts with respect to the future
financial performance of Key, (8) the pro forma consequences of the Merger on
the future financial performance of Key, including the potential synergies and
cost savings expected by managements of the Company and Key to result from the
Merger, and (9) the Company's current ability to fund future capital
requirements to support the growth of the Company as set forth in the Company's
business plan. In addition, we have had discussions with the management of the
Company concerning its business, operations, assets, financial condition and
prospects and have undertaken such other studies, analyses and investigations as
we deemed appropriate.

     In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company and Key
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Company and Key, upon advice of the Company we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of each of the
Company and Key as to the future financial performance of the Company and Key
and that each of the Company and Key will perform substantially in accordance
with such projections. Upon advice of the Company, we also have assumed that the
amounts and timing of the expected synergies are reasonable and that the
expected synergies will be realized substantially in accordance with such
estimates. In arriving at our opinion, we have not conducted a physical
inspection of the properties and facilities of each of the Company and Key and
have not made or obtained any evaluations or appraisals of the assets or
liabilities of the Company or Key. In addition, you have not authorized us to
solicit, and we have not solicited, any indications of interest from any third
party with respect to the purchase of all or a part of the Company's business.
Upon advice of the Company and its legal and accounting advisors, we have
assumed that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, and therefore
as a tax-free transaction to the stockholders of the Company. Our opinion
necessarily is based upon market, economic and other conditions as they exist
on, and can be evaluated as of, the date of this letter.

     Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Consideration to be
received by the stockholders of the Company in the Merger is fair to such
stockholders.

     We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services which is contingent upon the
consummation of the Merger. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. We
also from time to time have performed various investment banking services for
the Company in the past and have received customary fees for such services. In
addition, we currently have a commitment of $18 million to the Company's Senior
Secured Credit Facilities, of which approximately $15 million is currently
funded and which is expected to be repaid in connection with the Merger.



     We also have performed various investment banking services for Key in the
past and have received customary fees for such services. In addition, we
currently have a commitment of $15 million to Key's Senior Secured Credit
Facility, of which $3 million is currently funded. In the ordinary course of our
business, we actively trade in the debt and equity securities of Key for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.

          This opinion is solely for the use and benefit of the Board of
Directors of the Company and shall not be disclosed publicly or made available
to, or relied upon by, any third party without our prior approval.

                                             Very truly yours,

                                             LEHMAN BROTHERS



                                                                       EXHIBIT C



                         TEXAS BUSINESS CORPORATION ACT

Article 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions

     A.   Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:

          (1)  (a) With respect to proposed corporate action that is submitted
     to a vote of shareholders at a meeting, the shareholder shall file with the
     corporation, prior to the meeting, a written objection to the action,
     setting out that the shareholder's right to dissent will be exercised if
     the action is effective and giving the shareholder's address, to which
     notice thereof shall be delivered or mailed in that event. If the action is
     effected and the shareholder shall not have voted in favor of the action,
     the corporation, in the case of action other than a merger, or the
     surviving or new corporation (foreign or domestic) or other entity that is
     liable to discharge the shareholder's right of dissent, in the case of a
     merger, shall, within ten (10) days after the action is effected, deliver
     or mail to the shareholder written notice that the action has been
     effected, and the shareholder may, within ten (10) days from the delivery
     or mailing of the notice, make written demand on the existing, surviving,
     or new corporation (foreign or domestic) or other entity, as the case may
     be, for payment of the fair value of the shareholder's shares. The fair
     value of the shares shall be the value thereof as of the day immediately
     preceding the meeting, excluding any appreciation or depreciation in
     anticipation of the proposed action. The demand shall state the number and
     class of the shares owned by the shareholder and the fair value of the
     shares as estimated by the shareholder. Any shareholder failing to make
     demand within the ten (10) day period shall be bound by the action.

          (b) With respect to proposed corporate action that is approved
     pursuant to Section A of Article 9.10 of this Act, the corporation, in the
     case of action other than a merger, and the surviving or new corporation
     (foreign or domestic) or other entity that is liable to discharge the
     shareholder's right of dissent, in the case of a merger, shall, within ten
     (10) days after the date the action is effected, mail to each shareholder
     of record as of the effective date of the action notice of the fact and
     date of the action and that the shareholder may exercise the shareholder's
     right to dissent from the action. The notice shall be accompanied by a copy
     of this Article and any articles or documents filed by the corporation with
     the Secretary of State to effect the action. If the shareholder shall not
     have consented to the taking of the action, the shareholder may, within
     twenty (20) days after the mailing of the notice, make written demand on
     the existing, surviving, or new corporation (foreign or domestic) or other
     entity, as the case may be, for payment of the fair value of the
     shareholder's shares. The fair value of the shares shall be the value
     thereof as of the date the written consent authorizing the action was
     delivered to the corporation pursuant to Section A of Article 9.10 of this
     Act, excluding any appreciation or deprecation in anticipation of the
     action. The demand shall state the number and class of shares owned by the
     dissenting shareholder and the fair value of the



     shares as estimated by the shareholder. Any shareholder failing to make
     demand within the twenty (20) day period shall be bound by the action.

     (2)  Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.

     (3)  If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.

     B.   If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.

     C.   After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The

                                        2


appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.

     D.   The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
Payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.

     E.   Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.

     F.   The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.

     G.   In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.

                                        3


Article 5.13. Provisions Affecting Remedies of Dissenting Shareholders

     A.   Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.

     B.   Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.

     C.   Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.

                                        4










                                   EXHIBIT D



--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-K/A

(MARK ONE)


        
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934


                    FOR THE FISCAL YEAR ENDED JUNE 30, 2001
                                       OR


        
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934


        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 1-8038
                            ------------------------

                           KEY ENERGY SERVICES, INC.

             (Exact name of registrant as specified in its charter)


                                             
                MARYLAND                                     04-2648081
    (State or other jurisdiction of             (I.R.S. Employer Identification No.)
     incorporation or organization)                            79705
     6 DESTA DRIVE, MIDLAND, TEXAS                           (Zip Code)
(Address of principal executive offices)


       Registrant's telephone number, including area code: (915) 620-0300
                            ------------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



    TITLE OF EACH CLASS       NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------------  -----------------------------------------
                           
Common Stock, $.10 par value      New York Stock Exchange


          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                   5% Convertible Subordinated Notes Due 2004
                            ------------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 /X/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

    The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of October 25, 2001 was approximately $854,169,893.

    Common Stock outstanding at October 25, 2001: 102,357,547

    DOCUMENTS INCORPORATED BY REFERENCE: None

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                           KEY ENERGY SERVICES, INC.
                                     INDEX


                                                                      

PART I.

Item 1.       Business....................................................    3

Item 2.       Properties..................................................    9

Item 3.       Legal Proceedings and Other Actions.........................   10

Item 4.       Submission of Matters to a Vote of Security Holders.........   10

PART II.

Item 5.       Market for the Registrant's Common Equity and Related
                Stockholder Matters.......................................   10

Item 6.       Selected Financial Data.....................................   11

Item 7.       Management's Discussion and Analysis of Results of
                Operations and Financial Condition........................   12

Item 7A.      Quantitative and Qualitative Disclosures About Market
                Risk......................................................   20

Item 8.       Consolidated Financial Statements and Supplementary Data....   21

Item 9.       Changes in and Disagreements With Accountants on Accounting
                and Financial Disclosure..................................   60

PART III.

Item 10.      Directors and Executive Officers............................   60

Item 11.      Executive Compensation......................................   62

Item 12.      Security Ownership of Certain Beneficial Owners and
                Management................................................   66

Item 13.      Certain Relationships and Related Transactions..............   68

PART IV.

Item 14.      Exhibits, Financial Statements and Reports on Form 8-K......   68


                                       2

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this document and the documents incorporated
by reference, words such as "anticipate," "believe," "expect," "plan," "intend,"
"estimate," "project," "will," "could," "may," "predict" and similar expressions
are intended to identify forward-looking statements. Further events and actual
results may differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a difference include:

    - fluctuations in world-wide prices and demand for oil and natural gas;

    - fluctuations in level of oil and natural gas exploration and development
      activities;

    - fluctuations in the demand for well servicing, contract drilling and
      ancillary oilfield services;

    - the existence of competitors, technological changes and developments in
      the industry;

    - the existence of operating risks inherent in the well servicing, contract
      drilling and ancillary oilfield services; and

    - general economic conditions, the existence of regulatory uncertainties,
      and the possibility of political instability in any of the countries in
      which Key does business, in addition to other matters discussed under
      "Part II--Item 7--Management's Discussion and Analysis of Results of
      Operations and Financial Condition."

                                     PART I

ITEM 1. BUSINESS.

                                  THE COMPANY

    Key Energy Services, Inc. (the "Company" or "Key"), is the largest onshore,
rig-based well servicing contractor in the world, with approximately 1,477 well
service rigs and 1,455 oilfield service vehicles as of June 30, 2001. Key
provides a complete range of well services to major oil companies and
independent oil and natural gas production companies, including: rig-based well
maintenance, workover, completion, and recompletion services (including
horizontal recompletions); oilfield trucking services; and ancillary oilfield
services. Key conducts well servicing operations onshore the continental United
States in the following regions: Gulf Coast (including South Texas, Central Gulf
Coast of Texas and South Louisiana), Permian Basin of West Texas and Eastern New
Mexico, Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins and the
ArkLaTex region), Four Corners (including the San Juan, Piceance, Uinta, and
Paradox Basins), Eastern (including the Appalachian, Michigan and Illinois
Basins), Rocky Mountains (including the Denver-Julesberg, Powder River, Wind
River, Green River and Williston Basins), and California (the San Joaquin
Basin), and internationally in Argentina and Ontario, Canada. Key is also a
leading onshore drilling contractor, with 79 land drilling rigs as of June 30,
2001. Key conducts land drilling operations in a number of major domestic
producing basins, as well as in Argentina and in Ontario, Canada. Key also
produces and develops oil and natural gas reserves in the Permian Basin region
and Texas Panhandle.

    Key's principal executive office is located at 6 Desta Drive, Midland, Texas
79705. Key's phone number is (915) 620-0300 and website address is
www.keyenergy.com.

                               BUSINESS STRATEGY

    Key has built its leadership position through the consolidation of smaller,
less viable competitors. This consolidation, together with a continuing decline
in the number of available domestic well service rigs due to attrition,
cannibalization and transfers outside of the United States, has given Key the
opportunity to

                                       3

capitalize on improved market conditions which existed during fiscal 2001. Key
has focused on maximizing results by reducing debt, building strong customer
alliances, refurbishing rigs and related equipment, and training personnel to
maintain a qualified and safe employee base.

    REDUCING DEBT.  Over the past fiscal year, Key has significantly reduced
debt and strengthened its balance sheet. At June 30, 2001, Key's long-term
funded debt net of cash and capitalized leases ("net funded debt") was
approximately $468,845,000 and its net funded debt to capitalization ratio was
approximately 50% as compared to approximately $534,816,000 and 58%,
respectively, at June 30, 2000. Key expects to be able to continue to reduce
debt from available cash flow from operations and from anticipated interest
savings resulting from prior and future debt reductions and future debt
refinancings.

    BUILDING STRONG CUSTOMER ALLIANCES.  Key seeks to maximize customer
satisfaction by offering a broad range of equipment and services in conjunction
with highly trained and motivated employees. As a result, Key is able to offer
proactive solutions for most of its customer's wellsite needs. Key ensures
consistent high standards of quality and customer satisfaction by continually
evaluating its performance. Key maintains strong alliances with major oil
companies as well as numerous independent oil and natural gas production
companies and believes that such alliances improve the stability of demand for
its oilfield services.

    REFURBISHING RIGS AND RELATED EQUIPMENT.  Key intends to continue actively
refurbishing its rigs and related equipment to maximize the utilization of its
rig fleet. The increase in Key's cash flow, both from operations and from
anticipated interest savings from reduced levels of debt, combined with Key's
borrowing availability under its revolving credit facility, has provided ample
liquidity and resources necessary to make the capital expenditures to refurbish
such equipment.

    TRAINING AND DEVELOPING EMPLOYEES.  Key has, and will continue to, devote
significant resources to the training and professional development of its
employees with a special emphasis on safety. Key currently has two training
centers in Texas and one training center in California to improve its employees'
understanding of operating and safety procedures. Key recognizes the
historically high turn-over rate in the industry and is committed to offering
compensation, benefits and incentive programs for its employees that are
attractive and competitive in its industry, in order to ensure a steady stream
of qualified, safe personnel to provide quality service to its customers.

                     MAJOR DEVELOPMENTS DURING FISCAL 2001

FAVORABLE INDUSTRY CONDITIONS

    Operating conditions improved significantly during fiscal 2001 as capital
spending by oil and natural gas producers for well servicing and contract
drilling services increased over prior year levels. The increased spending was
primarily due to higher commodity prices with WTI Cushing prices for light sweet
crude averaging approximately $26.97 per barrel and Nymex Henry Hub natural gas
prices averaging approximately $5.09 per MMbtu during fiscal 2001, as compared
to an average WTI Cushing price for light sweet crude of $25.97 per barrel and
an average Nymex Henry Hub natural gas price of $3.04 per MMbtu during fiscal
2000.

    This increase in commodity prices during fiscal 2001 led to a steady,
sequential increase in the demand for Key's services and equipment during fiscal
2001 as Key's customers increased their exploration and development activity in
Key's primary market areas, enabling Key to increase the rates it charges for
its services. This increase in demand and rates resulted in sequential increases
in revenues, cash flow and net income in each quarter of fiscal 2001 over the
same quarter of fiscal 2000. Key expects demand for its services to remain at or
above current levels as long as capital spending by Key's customers remains at
or near their current levels.

                                       4

    During fiscal 2001, crude oil prices continued to trade at healthy levels
due largely to the ability of the Organization of Petroleum Exporting Countries
("OPEC") to adhere to its production quotas designed to keep crude oil prices in
the range of $22.00 to $28.00 per barrel. The adherence to the production quotas
brought more stability to crude oil prices. Since June 30, 2001, however, both
crude oil and natural gas prices have weakened significantly, falling below
$22.00 per barrel and $2.00 per Mmbtu, respectively. While management believes
that many of its customers generally base their capital spending budgets on a
crude oil price of $18.00 to $22.00 per barrel and a natural gas price of $2.00
to $2.75 per MMbtu, there can be no assurances that its customers will not
postpone and/or reduce their capital spending plans if crude oil prices and
natural gas prices continue to remain at or below their current levels. In
addition, the terrorist attacks on the World Trade Center and the Pentagon that
occurred on September 11, 2001 threaten to increase the downward pressure on
commodity prices as U.S. fuel consumption decreases due to significantly reduced
air and other travel, the general demand for energy decreases as consumer
anxiety further weakens the U.S. economy, and OPEC faces political pressure to
reduce its price targets for crude oil.

    The level of Key's revenues, cash flows, losses and earnings are
substantially dependent upon, and affected by, the level of domestic and
international oil and gas exploration and development activity (see
Part II-Item 7-Management's Discussion and Analysis of Results of Operations and
Financial Condition).

DEBT REDUCTION

    During fiscal 2001, Key significantly reduced its long-term debt and
strengthened its balance sheet. At June 30, 2001, Key's net funded debt was
approximately $468,845,000 and its net funded debt to capitalization ratio was
approximately 50% as compared to approximately $534,816,000 and 58%,
respectively, at June 30, 2000. Proceeds from the Debt Offering (defined below)
and from the exercise of options and warrants, as well as cash flow from
operations were used to accomplish this reduction in net funded debt (see
Part II-Item 7-Management's Discussion and Analysis of Results of Operations and
Financial Condition-Long-Term Debt).

DEBT OFFERING

    On March 6, 2001, Key completed the public offering of $175,000,000 of
8 3/8% Senior Notes Due 2008 (the "Debt Offering"). Net proceeds from the Debt
Offering were approximately $170.0 million, which was used to immediately repay
the term loans in full and to repay a portion of the revolver outstanding under
Key's senior credit facility.

                        DESCRIPTION OF BUSINESS SEGMENTS

    Key operates in two primary business segments which are well servicing and
contract drilling. Key's operations are conducted domestically and in Argentina
and Canada. The following is a description of each of these business segments
(for financial information regarding these business segments, see Note 15 to
Consolidated Financial Statements-Business Segment Information).

WELL SERVICING

    Key provides a full range of well services, including rig-based services,
oilfield trucking services and ancillary oilfield services, necessary to
maintain and workover oil and natural gas producing wells. Rig-based services
include: maintenance of existing wells, workovers of existing wells, completion
of newly drilled wells, recompletion of existing wells (including horizontal
recompletions) and plugging and abandonment of wells at the end of their useful
lives.

                                       5

WELL SERVICE RIGS

    Key uses its well service rig fleet to perform four major categories of rig
services for oil and natural gas producers.

    MAINTENANCE SERVICES.  Key estimates that there are approximately 600,000
producing oil wells and approximately 300,000 producing natural gas wells in the
United States. Key provides the well service rigs, equipment and crews for
maintenance services, which are performed on both oil and natural gas wells, but
which are more commonly required on oil wells. While some oil wells in the
United States flow oil to the surface without mechanical assistance, most
require pumping or some other method of artificial lift. Oil wells that require
pumping characteristically require more maintenance than flowing wells due to
the operation of the mechanical pumping equipment installed. Few natural gas
wells have mechanical pumping systems in the wellbore, and, as a result,
maintenance work on natural gas wells is less frequent.

    Maintenance services are required throughout the life of most producing oil
and natural gas wells to ensure efficient and continuous operation. These
services consist of routine mechanical repairs necessary to maintain production
from the well, such as repairing inoperable pumping equipment in an oil well or
replacing defective tubing in an oil or natural gas well, and removing debris
such as sand and paraffin from the well. Other services include pulling the
rods, tubing, pumps and other downhole equipment out of the wellbore to identify
and repair a production problem.

    Maintenance services are often performed on a series of wells in proximity
to each other and typically require less than 48 hours per well to complete. The
general demand for maintenance services is closely related to the total number
of producing oil and natural gas wells in a geographic market, and maintenance
services are generally the most stable type of well service activity.

    WORKOVER SERVICES.  In addition to periodic maintenance, producing oil and
natural gas wells occasionally require major repairs or modifications, called
"workovers." Workover services are performed to enhance the current production
of existing wells. Such services include extensions of existing wells to drain
new formations either through deepening wellbores to new zones or through
drilling of horizontal lateral wellbores to improve reservoir drainage patterns.
In less extensive workovers, Key's rigs are used to seal off depleted zones in
existing wellbores and access previously bypassed productive zones. Key's
workover rigs are also used to convert former producing wells to injection wells
through which water or carbon dioxide is then pumped into the formation for
enhanced recovery operations. Other workover services include: major subsurface
repairs such as casing repair or replacement, recovery of tubing and removal of
foreign objects in the wellbore, repairing downhole equipment failures, plugging
back the bottom of a well to reduce the amount of water being produced with the
oil and natural gas, cleaning out and recompleting a well if production has
declined, and repairing leaks in the tubing and casing. These extensive workover
operations are normally performed by a well service rig with a workover package,
which may include rotary drilling equipment, mud pumps, mud tanks and blowout
preventers depending upon the particular type of workover operation. Most of
Key's well service rigs are designed for and can be equipped to perform complex
workover operations.

    Workover services are more complex and time consuming than routine
maintenance operations and consequently may last from a few days to several
weeks. These services are almost exclusively performed by well service rigs.

    The demand for workover services is more sensitive to expectations relating
to, and changes in, oil and natural gas prices than the demand for maintenance
services. As oil and natural gas prices increase, the level of workover activity
tends to increase as operators seek to increase production by enhancing the
efficiency of their wells at higher commodity prices with correspondingly higher
rates of return.

                                       6

    COMPLETION SERVICES.  Key's completion services prepare a newly drilled oil
or natural gas well for production. The completion process may involve
selectively perforating the well casing to access producing zones, stimulating
and testing these zones and installing downhole equipment. Key typically
provides a well service rig and may also provide other equipment such as a
workover package to assist in the completion process. Producers use well service
rigs to complete their wells because the rigs have specialized equipment,
properly trained employees and the experience necessary to perform these
services. However, during periods of weak drilling rig demand, drilling
contractors may compete with service rigs for completion work.

    The completion process typically requires a few days to several weeks,
depending on the nature and type of the completion, and generally requires
additional auxiliary equipment that can be provided for an additional fee. The
demand for well completion services is directly related to drilling activity
levels, which are highly sensitive to expectations relating to, and changes in,
oil and natural gas prices. As the number of newly drilled wells decreases, the
number of completion jobs correspondingly decreases.

    PLUGGING AND ABANDONMENT SERVICES.  Well service rigs and workover equipment
are also used in the process of permanently closing oil and natural gas wells at
the end of their productive lives. Plugging and abandonment work can be
performed with a well servicing rig along with wireline and cementing equipment.
The services generally include the sale or disposal of equipment salvaged from
the well as part of the compensation received and require compliance with state
regulatory requirements. The demand for oil and natural gas does not
significantly affect the demand for plugging and abandonment services, as well
operators are required by state regulations to plug a well that it is no longer
productive. The need for these services is also driven by lease and/or operator
policy requirements.

OILFIELD TRUCKING

    Key provides liquid/vacuum truck services and fluid transportation and
disposal services for operators whose wells produce saltwater and other fluids,
in addition to oil and natural gas. These trucks are also utilized in connection
with drilling and workover projects, which tend to produce and use large amounts
of various oilfield fluids. Key also owns a number of salt water disposal wells.
In addition, Key provides haul/ equipment trucks that are used to move large
pieces of equipment from one wellsite to the next. Demand and pricing for these
services are generally related to demand for Key's well service and drilling
rigs.

ANCILLARY OILFIELD SERVICES

    Key provides ancillary oilfield services, which include among others: hot
oiling; wireline; frac tank rentals; well site construction; roustabout
services; fishing and other tool rentals; blowout preventers (BOPs); and foam
units and air drilling services. Demand and pricing for these services are
generally related to demand for Key's well service and drilling rigs.

CONTRACT DRILLING

    Key provides contract drilling services to major oil companies and
independent oil and natural gas producers onshore the continental United States
in the Permian Basin, the Four Corners region, Michigan, the Northeast, and the
Rocky Mountains and internationally in Argentina and Ontario, Canada. Contract
drilling services are primarily provided under standard dayrate, and, to a
lesser extent, footage or turnkey contracts. Drilling rigs vary in size and
capability and may include specialized equipment. The majority of Key's drilling
rigs are equipped with mechanical power systems and have depth ratings ranging
from approximately 4,500 to 12,000 feet. Key has one drilling rig with a depth
rating of approximately 18,000 feet. Like workover services, the demand for
contract drilling is directly related to expectations relating to, and changes
in, oil and natural gas prices which in turn, are driven by the supply of and
demand for these commodities.

                                       7

                               FOREIGN OPERATIONS

    Key also operates each of its business segments discussed above in Argentina
and Ontario, Canada. Key's foreign operations currently own 26 well servicing
rigs, 57 oilfield trucks and eight drilling rigs in Argentina and three well
servicing rigs, four oilfield trucks and three drilling rigs in Ontario, Canada.

                                   CUSTOMERS

    Key's customers include major oil companies, independent oil and natural gas
production companies, and foreign national oil and natural gas production
companies. No single customer in fiscal 2001 accounted for 10% or more of Key's
consolidated revenues.

                     COMPETITION AND OTHER EXTERNAL FACTORS

    Despite the significant consolidation in the domestic well servicing
industry, there are numerous smaller companies that compete in Key's well
servicing markets. Nonetheless, Key believes that its performance, equipment,
safety, and availability of equipment to meet customer needs and availability of
experienced, skilled personnel is superior to that of its competitors.

    In the well servicing markets, an important competitive factor in
establishing and maintaining long-term customer relationships is having an
experienced, skilled and well-trained work force. In recent years, many of Key's
larger customers have placed increased emphasis on the safety records and
quality of the crews, equipment and services provided by their contractors. Key
has, and will continue to devote substantial resources toward employee safety
and training programs. Management believes that many of Key's competitors,
particularly small contractors, have not undertaken similar training programs
for their employees. Management believes that Key's safety record and reputation
for quality equipment and service are among the best in the industry.

    In the contract drilling market, Key competes with other regional and
national oil and natural gas drilling contractors, some of which have larger rig
fleets with greater average depth capabilities and a few that have better
capital resources than Key. Management believes that the contract drilling
industry is less consolidated than the well servicing industry, resulting in a
contract drilling market that is more price competitive. Nonetheless, Key
believes that it is competitive in terms of drilling performance, equipment,
safety, pricing, availability of equipment to meet customer needs and
availability of experienced, skilled personnel in those regions in which it
operates.

    The need for well servicing and contract drilling fluctuates, primarily, in
relation to the price of oil and natural gas which, in turn, is driven by the
supply of and demand for oil and natural gas. As supply of those commodities
decreases and demand increases, service and maintenance requirements increase as
oil and natural gas producers attempt to maximize the producing efficiency of
their wells in a higher priced environment.

                                   EMPLOYEES

    As of June 30, 2001, Key employed approximately 9,300 persons (approximately
9,220 in well servicing and contract drilling and 80 in corporate). Key's
employees are not represented by a labor union and are not covered by collective
bargaining agreements. Key has not experienced work stoppages associated with
labor disputes or grievances and considers its relations with its employees to
be satisfactory.

                           ENVIRONMENTAL REGULATIONS

    Key's operations are subject to various local, state and federal laws and
regulations intended to protect the environment. Key's operations routinely
involve the handling of waste materials, some of which are classified as
hazardous substances. Consequently, the regulations applicable to Key's
operations include those with respect to containment, disposal and controlling
the discharge of any hazardous oilfield

                                       8

waste and other non-hazardous waste material into the environment, requiring
removal and cleanup under certain circumstances, or otherwise relating to the
protection of the environment. Laws and regulations protecting the environment
have become more stringent in recent years, and may in certain circumstances
impose "strict liability," rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws and
regulations may expose us to liability for the conduct of, or conditions caused
by, others, or for Key's acts, which were in compliance with all applicable laws
at the times such acts were performed. Cleanup costs and other damages arising
as a result of environmental laws, and costs associated with changes in
environmental laws and regulations could be substantial and could have a
material adverse effect on Key's financial condition. From time to time, claims
have been made and litigation has been brought against Key under such laws.
However, the costs incurred in connection with such claims and other costs of
environmental compliance have not had any material adverse effect on Key's
operations or financial statements in the past, and management is not currently
aware of any situation or condition that it believes is likely to have any such
material adverse effect in the future. Management believes that it conducts
Key's operations in substantial compliance with all material federal, state and
local regulations as they relate to the environment. Although Key has incurred
certain costs in complying with environmental laws and regulations, such amounts
have not been material to Key's financial results during the past three fiscal
years.

ITEM 2. PROPERTIES.

    Key's corporate headquarters are located in Midland, Texas. Key leases
office space at this location from an independent third party.

                      WELL SERVICING AND CONTRACT DRILLING

    The following table sets forth the type, number and location of the major
equipment owned and operated by Key's operating divisions as of June 30, 2001:



                                                   WELL SERVICE/    OILFIELD    DRILLING
OPERATING DIVISION                                 WORKOVER RIGS     TRUCKS       RIGS
------------------                                 --------------   ---------   --------
                                                                       
DOMESTIC:
  Permian Basin (well servicing).................        466            357         0
  Gulf Coast.....................................        244            338         0
  Mid-Continent..................................        313            285         0
  Four Corners...................................         61             79        17
  Eastern........................................         95            208         3
  Rocky Mountains................................        134             54        12
  California.....................................        135             24         0
  Key Energy Drilling (Permian Basin)............          0             48        36
DOMESTIC SUBTOTAL................................      1,448          1,393        68
INTERNATIONAL:
  Argentina......................................         26             57         8
  Canada.........................................          3              5         3
TOTALS...........................................      1,477          1,455        79


                                       9

    The Permian Basin Well Servicing division owns 35 and leases six office and
yard locations. The Gulf Coast division owns 16 and leases 18 office and yard
locations. The Mid-Continent division owns 28 and leases 20 office and yard
locations. The Four Corners division owns eight and leases two office and yard
locations. The Eastern division owns three and leases ten office and yard
locations. The Rocky Mountain division owns 17 and leases three office and yard
locations. The California division owns one and leases one office and yard
locations. The Permian Basin Drilling division owns two and leases two office
and yard locations. The Argentina division owns two and leases one office and
yard locations. The Canadian operation owns one yard location. Odessa
Exploration owns interests in 515 gross (348 proved developed) oil properties
and 53 gross (45 proved developed) gas properties. The corporate division leases
two office locations in addition to its headquarters.

    All operating facilities are one story office and/or shop buildings. All
buildings are occupied and considered to be in satisfactory condition.

ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.

    See Note 4 to Consolidated Financial Statements--Commitments and
Contingencies.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

    Key's common stock is currently traded on the New York Stock Exchange, under
the symbol "KEG". As of June 30, 2001, there were 669 registered holders of
101,440,166 issued and outstanding shares of common stock, including 416,666
shares of common stock held in treasury (101,023,500 net of treasury shares).

    The following table sets forth, for the periods indicated, the high and low
sales prices of Key's common stock on the New York Stock Exchange for fiscal
2001 and fiscal 2000, as derived from published sources.



                                                                 HIGH         LOW
                                                              ----------   ---------
                                                                     
Fiscal Year Ending 2001:
  Fourth Quarter............................................  $15 1/3      $9 11/20
  Third Quarter.............................................   13 13/25     8 1/8
  Second Quarter............................................   10 1/2       6 13/16
  First Quarter.............................................   11 11/25     7 1/16

Fiscal Year Ending 2000:
  Fourth Quarter............................................  $11 7/8      $8 1/16
  Third Quarter.............................................   12 1/4       5
  Second Quarter............................................    5 7/8       3 1/8
  First Quarter.............................................    5 13/16     3 3/8


    There were no dividends paid on Key's common stock during the fiscal years
ended June 30, 2001, 2000 or 1999. Key does not intend, for the foreseeable
future, to pay dividends on its common stock. In addition, Key is contractually
restricted from paying dividends under the terms of its existing credit
facilities.

                                       10

                    RECENT SALES OF UNREGISTERED SECURITIES

    Key did not make any unregistered sales of its securities during the twelve
months ended June 30, 2001 that were not previously included in its Quarterly
Reports filed for such period.

ITEM 6. SELECTED FINANCIAL DATA.



                                                                FISCAL YEAR ENDED JUNE 30,
                                                -----------------------------------------------------------
                                                   2001         2000       1999(1)       1998        1997
                                                ----------   ----------   ----------   ---------   --------
                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                    
OPERATING DATA:
  Revenues....................................  $  873,262   $  637,732   $  491,817   $ 424,543   $165,773
  Operating costs:
    Direct costs..............................     574,938      462,386      371,428     293,448    114,598
    Depreciation, depletion and
      amortization............................      75,147       70,972       62,074      31,001     11,076
    General and administrative................      66,071       58,772       53,108      38,987     17,447
    Bad debt expense..........................       1,263        1,648        5,928         826         98
    Debt issuance costs.......................          --           --        6,307          --         --
    Restructuring charge......................          --           --        4,504          --         --
    Interest..................................      56,560       71,930       67,401      21,476      7,879
  Income (loss) before income taxes, minority
    interest, and extraordinary items.........      99,283      (27,976)     (78,933)     38,805     14,675
  Net income (loss)...........................      62,710      (18,959)     (53,258)     24,175      9,098
  Income (loss) per common share:
    Basic.....................................  $     0.63   $    (0.23)  $    (1.94)  $    1.41   $   0.81
    Diluted...................................  $     0.61   $    (0.23)  $    (1.94)  $    1.23   $   0.66
  Average common shares outstanding:
    Basic.....................................      98,195       83,815       27,501      17,153     11,216
    Assuming full dilution....................     102,271       83,815       27,501      24,024     17,632
  Common shares issued at period end..........     101,440       97,210       82,738      18,267     12,298
  Market price per common share at period
    end.......................................  $    10.84   $     9.64   $     3.56   $   13.12   $  17.81
  Cash dividends paid on common shares........          --           --           --          --         --
BALANCE SHEET DATA:
  Cash........................................  $    2,098   $  109,873   $   23,478   $  25,265   $ 41,704
  Current assets..............................     206,150      253,589      132,543     127,557     93,333
  Property and equipment......................   1,014,675      920,437      871,940     547,537    227,255
  Property and equipment, net.................     793,716      760,561      769,562     499,152    208,186
  Total assets................................   1,228,284    1,246,265    1,148,138     698,640    320,095
  Current liabilities.........................     115,553       92,848       73,151      48,029     33,142
  Long-term debt, including current portion...     493,907      666,600      699,978     399,779    174,167
  Stockholders' equity........................     476,878      382,887      288,094     154,928     73,179
OTHER DATA:
  Adjusted EBITDA(2)..........................  $  232,253   $  116,574   $   67,281   $  92,108   $ 33,728
  Net cash provided by (used in):
    Operating activities......................     142,717       34,860      (13,427)     40,925        843
    Investing activities......................     (83,350)     (37,766)    (294,654)   (306,339)   (80,749)
    Financing activities......................    (167,142)      89,301      306,294     248,975    117,399
  Working capital.............................      90,597      160,741       59,392      79,528     60,191
  Book value per common share(3)..............  $     4.70   $     3.94   $     3.47   $    8.48   $   5.95


--------------------------

(1) FINANCIAL DATA FOR THE YEAR ENDED JUNE 30, 1999 INCLUDES THE ALLOCATED
    PURCHASE PRICE OF DAWSON PRODUCTION SERVICES, INC. AND THE RESULTS OF THEIR
    OPERATIONS, BEGINNING SEPTEMBER 15, 1998.

(2) ADJUSTED EBITDA IS NET INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
    DEPRECIATION, DEPLETION AND AMORTIZATION, BAD DEBT EXPENSE, DEBT ISSUANCE
    COSTS CHARGED TO EARNINGS, RESTRUCTURING CHARGE AND EXTRAORDINARY ITEMS.
    ADJUSTED EBITDA IS PRESENTED BECAUSE OF ITS ACCEPTANCE AS A COMPONENT OF A
    COMPANY'S POTENTIAL VALUATION IN COMPARISON TO COMPANIES

                                       11

    IN THE SAME INDUSTRY AND OF A COMPANY'S ABILITY TO SERVICE OR INCUR DEBT.
    MANAGEMENT INTERPRETS TRENDS INDICATED BY CHANGES IN ADJUSTED EBITDA AS AN
    INDICATOR OF THE EFFECTIVENESS OF ITS STRATEGIES IN ACHIEVING REVENUE GROWTH
    AND CONTROLLING DIRECT AND INDIRECT COSTS OF SERVICES PROVIDED. INVESTORS
    SHOULD CONSIDER THAT THIS MEASURE DOES NOT TAKE INTO CONSIDERATION DEBT
    SERVICE, INTEREST EXPENSES, COSTS OF CAPITAL, IMPAIRMENTS OF LONG LIVED
    ASSETS, DEPRECIATION OF PROPERTY, THE COST OF REPLACING EQUIPMENT OR INCOME
    TAXES. ADJUSTED EBITDA SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
    INCOME, INCOME BEFORE TAXES, CASH FLOWS FROM OPERATING ACTIVITIES OR ANY
    OTHER MEASURE OF FINANCIAL PERFORMANCE PRESENTED IN ACCORDANCE WITH
    GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND IS NOT INTENDED TO REPRESENT
    CASH FLOW. ADJUSTED EBITDA MAY NOT BE COMPARABLE TO SIMILARLY TITLED
    MEASURES OF OTHER COMPANIES.

(3) BOOK VALUE PER COMMON SHARE IS STOCKHOLDERS' EQUITY AT PERIOD END DIVIDED BY
    THE NUMBER OF ISSUED COMMON SHARES AT PERIOD END.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION.

    Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.

    The following discussion provides information to assist in the understanding
of the Company's financial condition and results of operations. It should be
read in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this report. Please note that certain reclassifications
have been made to the fiscal 2000 and 1999 financial data presented below to
conform to the fiscal 2001 presentation. The reclassifications consist primarily
of reclassifying oil and natural gas production revenues and expenses. Oil and
natural gas production revenues and related expenses have been reclassified to
other revenues and other expenses because the Company does not believe this
business segment is material to the Company's consolidated financial statements.

                             RESULTS OF OPERATIONS

FISCAL YEAR ENDED JUNE 30, 2001 VERSUS FISCAL YEAR ENDED JUNE 30, 2000

    The Company's results of operations for the year ended June 30, 2001 reflect
the impact of favorable industry conditions resulting from increased commodity
prices which in turn caused increased demand for the Company's equipment and
services during fiscal 2001 (see Part I--Item--Major Developments During Fiscal
2001--Favorable Industry Conditions). The positive impact of this increased
demand on the Company's operating results was partially offset by increased
operating expenses incurred as a result of the increase in the Company's
business activity.

THE COMPANY

    Revenues for the year ended June 30, 2001 increased $235,530,000, or 36.9%,
to $873,262,000 from $637,732,000 in fiscal 2000, while net income for fiscal
2001 increased $81,669,000 to $62,710,000 from a net loss of $18,959,000 in
fiscal 2000. The increase in revenues and net income is due to improved
operating conditions, higher rig hours, and increased pricing, with lower
interest expense from debt reduction also contributing to net income.

OPERATING REVENUES

    WELL SERVICING.  Well servicing revenues for the year ended June 30, 2001
increased $198,781,000, or 35.5%, to $758,273,000 from $559,492,000 in fiscal
2000. The increase was due to increased demand for the Company's well servicing
equipment and services and higher pricing.

                                       12

    CONTRACT DRILLING.  Contract drilling revenues for the year ended June 30,
2001 increased $39,211,000, or 57.3%, to $107,639,000 from $68,428,000 in fiscal
2000. The increase was due to increased demand for the Company's contract
drilling equipment and services and higher pricing.

OPERATING EXPENSES

    WELL SERVICING.  Well servicing expenses for the year ended June 30, 2001
increased $93,168,000, or 23.3%, to $493,108,000 from $399,940,000 in fiscal
2000. The increase in expenses is due to higher utilization of the Company's
well servicing equipment, higher labor costs and the overall increase in the
Company's well servicing business. Despite the increased costs, well servicing
expenses as a percentage of well servicing revenues decreased from 71.5% for
fiscal 2000 to 65% for fiscal 2001. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.

    CONTRACT DRILLING.  Contract drilling expenses for the year ended June 30,
2001, increased $19,067,000, or 32.7%, to $77,366,000 from $58,299,000 in fiscal
2000. The increase is due to higher utilization of the Company's contract
drilling equipment, higher labor costs and the overall increase in the Company's
contract drilling business. Despite the increased costs, contract drilling
expenses as a percentage of contract drilling revenues decreased from 85.2% in
fiscal 2000 to 71.9% in fiscal 2001. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

    The Company's depreciation, depletion and amortization expense for the year
ended June 30, 2001 increased $4,175,000, or 5.9%, to $75,147,000 from
$70,972,000 in fiscal 2000. The increase is due to higher capital expenditures
incurred during fiscal 2001 as the Company refurbished equipment and increased
utilization of its contract drilling equipment (which it depreciates partially
based on utilization).

GENERAL AND ADMINISTRATIVE EXPENSES

    The Company's general and administrative expenses for the year ended
June 30, 2001 increased $7,299,000, or 12.4%, to $66,071,000 from $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs resulting from
the growth of the Company's operations as a result of improved industry
conditions. Despite the increased costs, general and administrative expenses as
a percentage of total revenues declined from 9.2% in fiscal 2000 to 7.6% in
fiscal 2001.

INTEREST EXPENSE

    The Company's interest expense for the year ended June 30, 2001 decreased
$15,370,000, or 21.4%, to $56,560,000 from $71,930,000 in fiscal 2000. The
decrease was primarily due to the impact of the long-term debt reduction during
fiscal 2001 and, to a lesser extent, lower short-term interest rates and
borrowing margins on floating rate debt.

BAD DEBT EXPENSE

    The Company's bad debt expense for the year ended June 30, 2001 decreased
$385,000, or 23.4%, to $1,263,000 from $1,648,000 in fiscal 2000. The decrease
was primarily due to improved industry conditions for Key's customers and, to a
lesser extent, the centralization of the Company's internal credit approval
process.

EXTRAORDINARY GAIN

    During fiscal 2001, the Company repurchased $257,115,000 of its long-term
debt at various discounts and premiums to par value and expensed related
unamortized debt issuance costs, all of which resulted in an after-tax
extraordinary gain of $429,000.

                                       13

INCOME TAXES

    The Company's income tax expense for the year ended June 30, 2001 increased
$44,408,000 to $37,002,000 from a benefit of $7,406,000 in fiscal 2000. The
increase in income tax expense is due to increased pre-tax income. The Company's
effective tax rate for fiscal 2001 and 2000 was 37.2% and 26.5%, respectively.
The effective tax rates vary from the statutory rate of 35% principally because
of certain non-deductible goodwill amortization, other non-deductible expenses
and state and local taxes.

CASH FLOW

    The Company's net cash provided by operating activities for the year ended
June 30, 2001 increased $107,857,000 to $142,717,000 from $34,860,000 in fiscal
2000. The increase is due to higher revenues resulting from increased demand for
the Company's equipment and services and higher pricing, partially offset by
higher operating and general and administrative expenses resulting from
increased business activity.

    The Company's net cash used in investing activities for the year ended
June 30, 2001 increased $45,584,000 to $83,350,000 from $37,766,000 in fiscal
2000. The increase is due primarily to higher capital expenditures.

    The Company's net cash used by financing activities for the year ended
June 30, 2001 increased $256,443,000 to a use of $167,142,000 from cash provided
of $89,301,000 in fiscal 2000. The increase is primarily the result of
significant debt reduction during fiscal 2001, partially offset by proceeds from
the Debt Offering and the exercise of stock options and warrants.

FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999

    The Company's results of operations for the year ended June 30, 2000 reflect
the impact of the industry recovery during such period resulting from increased
commodity prices which in turn caused increased demand for the Company's
equipment and services during fiscal 2000. The positive impact of this increased
demand on the Company's operating results was partially offset by increased
operating expenses incurred as a result of the increase in the Company's
business activity.

THE COMPANY

    Revenues for the year ended June 30, 2000 increased $145,915,000, or 29.7%,
to $637,732,000 from $491,817,000 in fiscal 1999, while net income for fiscal
2000 increased $34,299,000 to a net loss of $18,959,000 from a net loss of
$53,258,000 in fiscal 1999. The increase in revenues is due to improved
operating conditions and higher rig hours, the full year effect of the
acquisitions completed during the early portion of fiscal 1999 and, to a lesser
extent, higher pricing. The decrease in net loss is the result of improved
operating conditions, higher pricing, and cost reduction initiatives. In
addition, fiscal 1999 included non-recurring charges for debt issuance costs and
restructuring initiatives as well as higher bad debt expense.

OPERATING REVENUES

    WELL SERVICING.  Well servicing revenues for the year ended June 30, 2000
increased $125,835,000 or 29%, to $559,492,000 from $433,657,000 in fiscal 1999.
The increase was due to increased demand for the Company's well servicing
equipment and services, the full year effect of the acquisitions completed
during the early portion of fiscal 1999 and, to a lesser extent, higher pricing.

    CONTRACT DRILLING.  Contract drilling revenues for the year ended June 30,
2000 increased $17,815,000, or 35.2%, to $68,428,000 from $50,613,000 in fiscal
1999. The increase was due to increased demand for the Company's contract
drilling equipment and services, the full year effect of the acquisition
completed during the early portion of fiscal 1999 and, to a lesser extent,
higher pricing.

                                       14

OPERATING EXPENSES

    WELL SERVICING.  Well servicing expenses for the year ended June 30, 2000
increased $74,975,000, or 23.1%, to $399,940,000 from $324,965,000 in fiscal
1999. The increase in expenses is due to higher utilization of the Company's
well servicing equipment, higher labor costs and the overall increase in the
Company's well servicing business. Despite the increased costs, well servicing
expenses as a percent of well servicing revenues decreased from 74.9% for fiscal
1999 to 71.5% for fiscal 2000. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.

    CONTRACT DRILLING.  Contract drilling expenses for the year ended June 30,
2000, increased $14,743,000, or 33.8%, to $58,299,000 from $43,556,000 in fiscal
1999. The increase is due to higher utilization of the Company's contract
drilling equipment, higher labor costs and the overall increase in the Company's
contract drilling business. Despite the increased costs, contract drilling
expenses as a percentage of contract drilling revenues decreased from 86.1% in
fiscal 1999 to 85.2% in fiscal 2000. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

    The Company's depreciation, depletion and amortization expense for the year
ended June 30, 2000 increased $8,898,000, or 14.3%, to $70,972,000 from
$62,074,000 in fiscal 1999. The increase is due to higher capital expenditures
incurred during fiscal 2000 as the Company refurbished equipment and increased
utilization of its contract drilling equipment (which it depreciates partially
based on utilization).

GENERAL AND ADMINISTRATIVE EXPENSES

    The Company's general and administrative expenses for the year ended
June 30, 2000 increased $5,664,000, or 10.7%, from $53,108,000 to $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs necessitated by
the growth of the Company's operations as a result of the fiscal 1999
acquisitions and improved industry conditions. Despite the increased costs,
general and administrative expenses as a percentage of total revenues declined
from 10.8% in fiscal 1999 to 9.2% in fiscal 2000.

INTEREST EXPENSE

    The Company's interest expense for the year ended June 30, 2000 increased
$4,529,000, or 6.7%, to $71,930,000 from $67,401,000 in fiscal 1999. The
increase was primarily due to the full year effect of the debt incurred in
connection with the acquisitions completed during the early portion of fiscal
1999, and, to a lesser extent, higher interest rates during fiscal 2000
partially offset by the impact of the long-term debt reduction during fiscal
2000.

BAD DEBT EXPENSE

    The Company's bad debt expense for the year ended June 30, 2000 decreased
$4,280,000, or 72.2%, to $1,648,000 from $5,928,000 in fiscal 1999. The decrease
was primarily due to improved industry conditions for Key's customers and, to a
lesser extent, the centralization of the Company's internal credit approval
process.

EXTRAORDINARY GAIN

    During the fourth quarter of fiscal 2000, the Company repurchased
$10,190,000 of its 5% Convertible Subordinated Notes which resulted in an
after-tax gain of $1,611,000.

                                       15

INCOME TAXES

    The Company's income tax benefit for the year ended June 30, 2000 decreased
$18,269,000 to $7,406,000 from $25,675,000 in fiscal 1999. The decrease in
income tax benefit is due to the decrease in pretax loss. The Company's
effective tax benefit rate for fiscal 2000 and 1999 was 26.5% and 32.5%,
respectively. The fiscal 2000 effective tax benefit rate is different from the
statutory rate of 35% principally because of certain non-deductible goodwill
amortization, other non-deductible expenses and state and local taxes. The
decrease in the fiscal 2000 effective tax benefit rate was due to an increase in
the amount of non-deductible expenses, primarily as a result of the full year
effect of the goodwill amortization of the acquisitions completed during the
early portion of fiscal 1999.

CASH FLOW

    The Company's net cash provided by operating activities for the year ended
June 30, 2000 increased $48,287,000 to a $34,860,000 from a use of $13,427,000
in fiscal 1999. The increase is due to higher revenues resulting from increased
demand for the Company's equipment and services, the full year effect of the
acquisitions completed during the early portion of fiscal 1999 and, to a lesser
extent, higher pricing, partially offset by higher operating and general and
administrative expenses resulting from increased business activity.

    The Company's net cash used in investing activities for the year ended
June 30, 2000 decreased $256,888,000, or 87.2%, to $37,766,000 from $294,654,000
in fiscal 1999. The decrease is due to no acquisitions having occurred during
fiscal 2000 partially offset by higher capital expenditures.

    The Company's net cash provided by financing activities for the year ended
June 30, 2000 decreased $216,993,000, or 70.8%, to $89,301,000 from $306,294,000
in fiscal 1999. The decrease is primarily the result of significantly decreased
borrowings during fiscal 2000 and, to a lesser extent, the repayment of
long-term debt partially offset by proceeds from the equity offering and the
volumetric production payment completed in fiscal 2000.

                        LIQUIDITY AND CAPITAL RESOURCES

    The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and the issuance of equity and long-term debt. The Company
believes that its current reserves of cash and cash equivalents, availability of
its existing credit lines, access to capital markets and internally generated
cash flow from operations are sufficient to finance the cash requirements of its
current and future operations.

    The Company's cash and cash equivalents decreased $107.8 million to
$2.1 million as of June 30, 2001 from $109.9 million as of June 30, 2000, which
included $100.6 million in net proceeds from the Company's equity offering which
closed on June 30, 2000 and had not yet been applied to debt reduction.

    The Company projects approximately $65 million for capital expenditures for
fiscal 2002 as compared to $82 million and $38 million in fiscal 2001 and 2000,
respectively. The Company expects to finance its capital expenditures using net
cash provided by operating activities and available credit. The Company believes
that its cash flow and, to the extent required, borrowings under its current and
future credit facilities, will be sufficient to fund such expenditures.

    As of June 30, 2001 the Company had working capital (excluding the current
portion of long-term debt) of approximately $98,543,000, which includes cash and
cash equivalents of approximately $2,098,000, as compared to working capital
(excluding the current portion of long-term debt) of approximately $175,396,000,
which includes cash and cash equivalents of approximately $109,873,000, as of
June 30, 2000. The decrease in working capital is primarily due to the use of
the net cash proceeds of $100,571,000 from the June 30, 2000 equity offering to
repay long-term debt during the fiscal year ended June 30, 2001. Working capital
at June 30, 2001, excluding the change in cash, increased from June 30, 2000 due
to

                                       16

continuing improvement in operating results and timing differences related to
cash receipts and disbursements.

LONG-TERM DEBT

    Other than capital lease obligations and miscellaneous notes payable, as of
June 30, 2001, the Company's long-term debt was comprised of (i) a senior credit
facility, (ii) a series of 8 3/8% Senior Notes Due 2008, (iii) a series of 14%
Senior Subordinated Notes Due 2009, (iv) a series of 5% Convertible Subordinated
Notes Due 2004, and (v) a series of 9 3/8% Senior Notes Due 2007.

SENIOR CREDIT FACILITY

    As of June 30, 2001, the Company had a senior credit facility with PNC Bank,
National Association, as Administrative Agent, Norwest Bank Texas, N.A., as
Collateral Agent, PNC Capital Markets, Inc., as Arranger, and the other lenders
named from time to time parties thereto (as subsequently amended, the "Senior
Credit Facility"), which consisted of a $125 million revolving loan facility. In
addition, up to $20 million of letters of credit can be issued under the Senior
Credit Facility, but any outstanding letters of credit reduce borrowing
availability under the revolving loan facility. The commitment to make revolving
loans was reduced to $100 million on September 14, 2001 and will reduce to
$75 million on September 14, 2002. The revolving commitment will terminate on
September 14, 2003, and all the revolving loans must be paid on or before that
date. The revolving loan bears interest at rates based upon, at the Company's
option, either the prime rate plus a margin ranging from 0.75% to 2.00% or a
Eurodollar rate plus a margin ranging from 2.25% to 3.50%, in each case
depending upon the ratio of the Company's total debt (less cash on hand over
$5 million) to the Company's trailing 12-month EBITDA, as adjusted.

    During fiscal 2001, the Company repaid in full approximately $198.9 million
under the term loans which were originally included in the Senior Credit
Facility while decreasing net borrowings under the revolver by $91 million. As a
result, at June 30, 2001 the principal amounts outstanding under (i) the
original term loans were fully repaid and (ii) the revolver was approximately
$2.0 million. Additionally, at June 30, 2001, the Company had outstanding
letters of credit totaling approximately $12.0 million related to its workers
compensation insurance program. Since June 30, 2001 the principal amount
outstanding under the revolver has increased to $38.0 million as of
September 25, 2001. These funds were used to repurchase certain long-term debt
of the Company.

    See Note 5 to Consolidated Financial Statements-Long Term Debt for further
discussion of the Senior Credit Facility.

8 3/8% SENIOR NOTES

    On March 6, 2001, the Company completed a private placement of $175,000,000
of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The net cash
proceeds from the private placement were used to repay all of the remaining
balance of the original term loans under the Senior Credit Facility and a
portion of the revolving loans under the Senior Credit Facility. The 8 3/8%
Senior Notes are senior unsecured obligations, ranking equally with the
Company's other senior unsecured indebtedness. The 8 3/8% Senior Notes are
effectively subordinated to Key's secured indebtedness which includes borrowings
under the Senior Credit Facility and the Dawson 9 3/8% Senior Notes.

    On and after March 1, 2005 the Company may redeem some or all of the 8 3/8%
Senior Notes at any time at varying redemption prices in excess of par, plus
accrued interest. In addition, before March 1, 2004, the Company may redeem up
to 35% of the aggregate principal amount of the 8 3/8% Senior Notes with the
proceeds of certain sales of equity at 108.375% of par plus accrued interest.

    At June 30, 2001, $175,000,000 principal amount of the 8 3/8% Senior Notes
remained outstanding. The 8 3/8% Senior Notes pay interest semi-annually on
March 1 and September 1 of each year.

                                       17

14% SENIOR SUBORDINATED NOTES

    On January 22, 1999 the Company completed the private placement of 150,000
units (the "Units") consisting of $150,000,000 of 14% Senior Subordinated Notes
due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase
2,173,433 shares of common stock at an exercise price of $4.88125 per share (the
"Unit Warrants"). The net cash proceeds from the private placement were used to
repay substantially all of the remaining $148.6 million principal amount (plus
accrued interest) owed under the Company's bridge loan facility arranged in
connection with the acquisition of Dawson Production Services, Inc. ("Dawson").

    On and after January 15, 2004, the Company may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before January 15, 2002, the Company
may redeem up to 35% of the aggregate principal amount of the 14% Senior
Subordinated Notes with the proceeds of certain sales of equity at 114% of par
plus accrued interest. On June 11, 2001 the Company exercised its right of
redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes
at a price of 114% of the principal amount plus accrued interest, leaving
$139,687,000 principal amount outstanding as of June 30, 2001.

    The Unit Warrants have separated from the 14% Senior Subordinated Notes and
became exercisable on January 25, 2000. On the date of issuance, the value of
the Unit Warrants was estimated at $7,434,000 and is classified as a discount to
the 14% Senior Subordinated Notes on the Company's consolidated balance sheet.
The discount is being amortized to interest expense over the term of the 14%
Senior Subordinated Notes. The 14% Senior Subordinated Notes mature and the Unit
Warrants expire on January 15, 2009. The 14% Senior Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8%
Senior Notes.

    At June 30, 2001, $139,687,000 principal amount of the 14% Senior
Subordinated Notes remained outstanding. The 14% Senior Subordinated Notes pay
interest semi-annually on January 15 and July 15 of each year. Interest payments
of approximately $10,500,000 were made on July 15, 2000 and January 15, 2001,
respectively. As of June 30, 2001, 62,500 Unit Warrants had been exercised,
producing approximately $4,173,000 of proceeds to the Company and leaving 87,500
Unit Warrants outstanding. Since June 30, 2001, the Company repurchased (and
canceled) an additional $6,784,000 principal amount of the 14% Senior
Subordinated Notes, leaving $132,903,000 outstanding as of September 25, 2001.

5% CONVERTIBLE SUBORDINATED NOTES

    In late September and early October 1997, the Company completed a private
placement of $216 million of 5% Convertible Subordinated Notes due 2004 (the "5%
Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson
9 3/8% Senior Notes and the 8 3/8% Senior Notes. The 5% Convertible Subordinated
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $38.50 per share, subject to certain
adjustments.

    The 5% Convertible Subordinated Notes are redeemable, at the Company's
option, on and after September 15, 2000, in whole or part, together with accrued
and unpaid interest. The initial redemption price is 102.86% for the year
beginning September 15, 2000 and declines ratably thereafter on an annual basis.

    During fiscal 2001, the Company repurchased (and canceled) $47,384,000
principal amount of the 5% Convertible Subordinated Notes, leaving $158,426,000
principal amount of the 5% Convertible Subordinated Notes outstanding at
June 30, 2001. Since June 30, 2001, the Company repurchased (and

                                       18

canceled) an additional $46,493,000 principal amount of the 5% Convertible
Subordinated Notes, leaving $111,933,000 outstanding as of September 25, 2001.

    Interest on the 5% Convertible Subordinated Notes is payable on March 15 and
September 15. Interest of approximately $4,890,000 and $4,815,000 million was
paid on September 15, 2000 and March 15, 2001, respectively.

DAWSON 9 3/8% SENIOR NOTES

    As a result of the Dawson acquisition, the Company, its subsidiaries and
U.S. Trust Company of Texas, N.A., as trustee ("U.S. Trust"), entered into a
Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"),
pursuant to which the Company assumed the obligations of Dawson under the
Indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and
U.S. Trust. The senior notes due 2007 (the "Dawson 9 3/8% Senior Notes") issued
pursuant to the Dawson Indenture were equally and ratably secured with the
obligations under the Senior Credit Facility. As a result of a mandatory tender
offer made in connection with the Dawson acquisition and subsequent repurchases,
only $1,106,000 principal amount of Dawson 9 3/8% Senior Notes remained
outstanding at June 30, 2000.

    During the quarter ended September 30, 2000, the Company repurchased (and
canceled) $800,000 principal amount of Dawson 9 3/8% Senior Notes. During the
quarter ended June 30, 2001, the Company repurchased an additional $60,000
principal amount of the Dawson 9 3/8% Senior Notes, leaving $246,000 principal
amount of the Dawson 9 3/8% Senior Notes outstanding at June 30, 2001. Interest
on the Dawson 9 3/8% Senior Notes is payable on February 1 and August 1 of each
year. Interest of approximately $52,000 and $14,000 was paid on August 1, 2000
and February 1, 2001, respectively.

7% CONVERTIBLE SUBORDINATED DEBENTURES

    In July 1996, the Company completed a private placement of $52,000,000
principal amount of 7% Convertible Subordinated Debentures due 2003 (the "7%
Convertible Subordinated Debentures"). During the quarter ended September 30,
2000, $985,000 principal amount of the 7% Convertible Subordinated Debentures
were surrendered for conversion by the holders thereof and 101,025 shares of
common stock were issued on September 1, 2000 in connection with the conversion.
On September 1, 2000, the remaining $15,000 principal amount of the outstanding
7% Convertible Subordinated Debentures was redeemed at 103% of the principal
amount plus accrued interest, leaving none outstanding. Interest on the 7%
Convertible Subordinated Debentures is payable on January 1 and July 1 of each
year. Interest of approximately $35,000 was paid on July 1, 2000.

                 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

    The FASB recently issued Statements of Financial Accounting Standards
No. 141 "Business Combinations", No.142 "Goodwill and Other Intangible Assets"
and No. 143 "Accounting for Asset Retirement Obligations". Statement 141
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. Statement 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment. The
standard is effective for fiscal years beginning after December 15, 2001. Early
adoption is permitted for entities with fiscal years beginning after March 15,
2001, provided the first interim financial statements have not previously been
issued. Statement 143 establishes requirements for the accounting of
removal-type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company is currently assessing the impact of these statements on
its consolidated financial statements and whether to early adopt Statement 142
in the first quarter of fiscal 2002.

                       IMPACT OF INFLATION ON OPERATIONS

    Management is of the opinion that inflation has not had a significant impact
on Key's business.

                                       19

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements". See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.

    The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about Key's potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in foreign currency exchange risk, interest rates
and oil and natural gas prices. The disclosures are not meant to be precise
indicators of expected future losses, but rather indicators of reasonably
possible losses. This forward-looking information provides indicators of how Key
views and manages its ongoing market risk exposures.

                               INTEREST RATE RISK

    At June 30, 2001, Key had long-term debt outstanding of $493,907,000. Of
this amount, $468,943,000 or 94.9%, bears interest at fixed rates as follows:



                                                              BALANCE AT
                                                                6/30/01
                                                              -----------
                                                              (THOUSANDS)
                                                           
8 3/8% Senior Notes Due 2008................................   $175,000
5% Convertible Subordinated Notes Due 2004..................    158,426
14% Senior Subordinated Notes Due 2009......................    134,466
Dawson 9 3/8% Senior Notes Due 2007.........................        246
Other (rates generally ranging from 8.0% to 8.5%)...........        805
                                                               --------
                                                               $468,943
                                                               ========


    The remaining $24,964,000 of debt outstanding as of June 30, 2001 bears
interest at floating rates which averaged approximately 9.34% at June 30, 2001.
A 10% increase in short-term interest rates on the floating-rate debt
outstanding at June 30, 2001 would equal approximately 93 basis points. Such an
increase in interest rates would increase Key's fiscal 2002 interest expense by
approximately $200,000 assuming borrowed amounts remain outstanding.

    The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments.

                             FOREIGN CURRENCY RISK

    Key's net assets, net earnings and cash flows from its Argentina
subsidiaries are currently not exposed to foreign currency risk, as Argentina's
currency is tied to the U.S. dollar. Key's net assets, net earnings and cash
flows from its Canadian subsidiary is based on the U.S. dollar equivalent of
such amounts measured in Canadian dollars. Assets and liabilities of the
Canadian operations are translated to U.S. dollars using the applicable exchange
rate as of the end of a reporting period. Revenues, expenses and cash flow are
translated using the average exchange rate during the reporting period.

    A 10% change in the Canadian-to-U.S. Dollar exchange rate would not be
material to the net assets, net earnings or cash flows of Key.

                                       20

                              COMMODITY PRICE RISK

    Key's major market risk exposure for its oil and natural gas production
operations is in the pricing applicable to its oil and natural gas sales.
Realized pricing is primarily driven by the prevailing worldwide price for crude
oil and spot market prices for natural gas. Pricing for oil and natural gas
production has been volatile and unpredictable for several years.

    The Company periodically hedges a portion of its oil and natural gas
production through collar and option agreements. The purpose of the hedges is to
provide a measure of stability in the volatile environment of oil and natural
gas prices and to manage exposure to commodity price risk under existing sales
commitments. The Company's risk management objective is to lock in a range of
pricing for expected production volumes. This allows the Company to forecast
future earnings within a predictable range. The Company meets this objective by
entering into collar and option arrangements which allow for acceptable cap and
floor prices.

    As of June 30, 2001, Key had oil and natural gas price collars and put
options in place, as detailed in the following table. The total fiscal 2001
hedged oil and natural gas volumes represent approximately 32% and 20%,
respectively, of expected calendar year total production. A 10% variation in the
market price of oil or natural gas from their levels at June 30, 2001 would have
no material impact on the Company's net assets, net earnings or cash flows (as
derived from commodity option contracts).

    The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at June 30, 2001 and 2000:



                            MONTHLY INCOME                                   STRIKE PRICE
                        ----------------------                               PER BBL/MMBTU
                          OIL      NATURAL GAS                            -------------------
                         (BBLS)      (MMBTU)              TERM             FLOOR       CAP      FAIR VALUE
                        --------   -----------   ----------------------   --------   --------   ----------
                                                                              
At June 30, 2001
  Oil Collar..........   5,000            --      Mar 2001 - Feb 2002      $19.70    $  23.70   $(115,000)
  Oil Put.............   5,000            --      Mar 2002 - Feb 2003       22.00          --     141,000
  Gas Collar..........      --        40,000      Mar 2001 - Feb 2002        2.40        2.91    (229,000)
  Gas Put.............      --        75,000      Mar 2002 - Feb 2003        3.00          --     894,000

At June 30, 2000
  Oil Collars.........   4,000            --      May 2000 - Feb 2001      $22.20    $  26.50   $(118,000)
                         5,000            --      Mar 2001 - Feb 2002       19.70       23.70    (140,000)
  Gas Collars.........      --        30,000      May 2000 - Feb 2001        2.60        3.19    (272,000)
                            --        40,000      Mar 2001 - Feb 2002        2.40        2.91    (248,000)


(The strike prices for the oil collars and put are based on the NYMEX spot price
for West Texas Intermediate; the strike prices for the natural gas collars are
based on the Inside FERC-West Texas Waha spot price; the strike price for the
natural gas put is based on the Inside FERC-El Paso Permian spot price.)

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    Presented herein are the consolidated financial statements of Key Energy
Services, Inc. as of June 30, 2001 and 2000 and the years ended June 30, 2001,
2000 and 1999.

    Also included is the report of KPMG LLP, independent certified public
accountants, on such consolidated financial statements as of June 30, 2001 and
2000 and for the years ended June 30, 2001, 2000 and 1999.

                                       21

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                              PAGE
                                                              ----
                                                           
Consolidated Balance Sheets.................................     23

Consolidated Statements of Operations.......................     24

Consolidated Statements of Comprehensive Income.............     25

Consolidated Statements of Cash Flows.......................     26

Consolidated Statements of Stockholders' Equity.............     27

Notes to Consolidated Financial Statements..................     28

Independent Auditors' Report................................     59


                                       22

                           KEY ENERGY SERVICES, INC.

                          CONSOLIDATED BALANCE SHEETS



                                                              JUNE 30, 2001       JUNE 30, 2000
                                                              -------------       -------------
                                                               (THOUSANDS, EXCEPT SHARE DATA)
                                                                            
                                  ASSETS
Current assets:
  Cash and cash equivalents.................................    $    2,098          $  109,873
  Accounts receivable, net of allowance for doubtful
    accounts ($4,082--2001, $3,189--2000)...................       177,016             123,203
  Inventories...............................................        16,547              10,028
  Income taxes receivable...................................            --               5,588
  Prepaid expenses and other current assets.................        10,489               4,897
                                                                ----------          ----------
Total current assets........................................       206,150             253,589
                                                                ----------          ----------
Property and equipment:
  Well servicing equipment..................................       723,724             668,107
  Contract drilling equipment...............................       119,122             105,454
  Motor vehicles............................................        64,907              55,042
  Oil and gas properties and other related equipment,
    successful efforts method...............................        44,245              43,855
  Furniture and equipment...................................        24,865              11,013
  Buildings and land........................................        37,812              36,966
                                                                ----------          ----------
Total property and equipment................................     1,014,675             920,437
Accumulated depreciation & depletion........................      (220,959)           (159,876)
                                                                ----------          ----------
Net property and equipment..................................       793,716             760,561
                                                                ----------          ----------
  Goodwill, net of accumulated amortization ($28,168--2001,
    $18,849--2000)..........................................       189,875             198,633
  Deferred costs, net.......................................        17,624              18,855
  Notes receivable--related parties.........................         6,050               5,150
  Other assets..............................................        14,869               9,477
                                                                ----------          ----------
Total assets................................................    $1,228,284          $1,246,265
                                                                ==========          ==========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $   42,544          $   35,801
  Other accrued liabilities.................................        48,923              26,398
  Accrued interest..........................................        16,140              15,994
  Current portion of long-term debt.........................         7,946              14,655
                                                                ----------          ----------
Total current liabilities...................................       115,553              92,848
                                                                ----------          ----------
Long-term debt, less current portion........................       485,961             651,945
Deferred revenue............................................        14,104              17,031
Non-current accrued expenses................................         8,388               1,847
Deferred tax liability......................................       127,400              99,707
Commitments and contingencies...............................            --                  --
Stockholders' equity:
  Common stock, $0.10 par value; 200,000,000 shares
    authorized, 101,440,166 and 97,209,504 shares issued,
    respectively at June 30, 2001 and June 30, 2000,
    respectively............................................        10,144               9,723
  Additional paid-in capital................................       444,768             413,962
  Treasury stock, at cost; 416,666 shares at June 30, 2001
    and June 30, 2000.......................................        (9,682)             (9,682)
  Accumulated other comprehensive income....................            62                   8
  Retained earnings (deficit)...............................        31,586             (31,124)
                                                                ----------          ----------
Total stockholders' equity..................................       476,878             382,887
                                                                ----------          ----------
Total liabilities and stockholders' equity..................    $1,228,284          $1,246,265
                                                                ==========          ==========


  SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                       23

                           KEY ENERGY SERVICES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                      YEAR ENDED JUNE 30,
                                                              ------------------------------------
                                                                 2001         2000         1999
                                                              ----------   ----------   ----------
                                                               (THOUSANDS, EXCEPT PER SHARE DATA)
                                                                               
REVENUES:
  Well servicing............................................   $758,273     $559,492     $433,657
  Contract drilling.........................................    107,639       68,428       50,613
  Other.....................................................      7,350        9,812        7,547
                                                               --------     --------     --------
Total revenues..............................................    873,262      637,732      491,817
                                                               --------     --------     --------
COSTS AND EXPENSES:
  Well servicing............................................    493,108      399,940      324,965
  Contract drilling.........................................     77,366       58,299       43,556
  Depreciation, depletion and amortization..................     75,147       70,972       62,074
  General and administrative................................     66,071       58,772       53,108
  Bad debt expense..........................................      1,263        1,648        5,928
  Debt issuance costs.......................................         --           --        6,307
  Interest..................................................     56,560       71,930       67,401
  Other expenses............................................      4,464        4,147        2,907
  Corporate restructuring...................................         --           --        4,504
                                                               --------     --------     --------
Total costs and expenses....................................    773,979      665,708      570,750
                                                               --------     --------     --------
Income (loss) before income taxes...........................     99,283      (27,976)     (78,933)
Income tax benefit (expense)................................    (37,002)       7,406       25,675
                                                               --------     --------     --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS)..............   $ 62,281     $(20,570)    $(53,258)
Extraordinary gain (loss) on retirement of debt, less
  applicable income taxes of $255--2001 and $580--2000......        429        1,611           --
                                                               --------     --------     --------
NET INCOME (LOSS)...........................................   $ 62,710     $(18,959)    $(53,258)
                                                               ========     ========     ========
EARNINGS (LOSS) PER SHARE:
  Basic--before extraordinary gain (loss)...................   $   0.63     $  (0.25)    $  (1.94)
  Extraordinary gain (loss) on retirement of debt, net of
    tax.....................................................         --         0.02           --
                                                               --------     --------     --------
  Basic--after extraordinary gain...........................   $   0.63     $  (0.23)    $  (1.94)
                                                               ========     ========     ========
  Diluted--before extraordinary gain........................   $   0.61     $  (0.25)    $  (1.94)
  Extraordinary gain on retirement of debt, net of tax......         --         0.02           --
                                                               --------     --------     --------
  Diluted--after extraordinary gain.........................   $   0.61     $  (0.23)    $  (1.94)
                                                               ========     ========     ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic.....................................................     98,195       83,815       27,501
  Diluted...................................................    102,271       83,815       27,501


  SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                       24

                           KEY ENERGY SERVICES, INC.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



                                                                   YEAR ENDED JUNE 30,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                       (THOUSANDS)
                                                                           
NET INCOME (LOSS)...........................................  $62,710    $(18,959)  $(53,258)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
  Derivative transition adjustment (See Note 8).............     (778)         --         --
  Oil and natural gas derivatives adjustment (See Note 8)...      306          --         --
  Amortization of oil and natural gas derivatives (See Note
    8)......................................................      558          --         --
  Reversal of unrealized gains on available-for-sale
    securities..............................................       --          --     (1,525)
  Currency translation gain(loss)...........................      (32)         (1)         9
                                                              -------    --------   --------
COMPREHENSIVE INCOME (LOSS), NET OF TAX.....................  $62,764    $(18,960)  $(54,774)
                                                              =======    ========   ========


  SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                       25

                           KEY ENERGY SERVICES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                    YEAR ENDED JUNE 30,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              ---------   ---------   --------
                                                                        (THOUSANDS)
                                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $  62,710   $ (18,959)  $(53,258)
  ADJUSTMENTS TO RECONCILE INCOME FROM OPERATIONS TO NET
    CASH PROVIDED BY (USED IN) OPERATIONS:
  Depreciation, depletion and amortization..................     75,147      70,972     62,074
  Bad debt expense..........................................      1,263       1,648      5,928
  Amortization of deferred debt issuance costs..............      4,317       5,919      5,216
  Restructuring charge......................................         --          --        233
  Deferred income taxes.....................................     34,698      (1,818)   (25,675)
  (Gain) loss on sale of assets.............................        173          25        111
  Extraordinary (gain) loss, net of tax.....................       (429)     (1,611)        --
  Other non-cash items......................................         --          --         13
  CHANGE IN ASSETS AND LIABILITIES NET OF EFFECTS FROM THE
    ACQUISITIONS:
    (Increase) decrease in accounts receivable..............    (55,076)    (32,853)     9,741
    (Increase) decrease in other current assets.............     (4,485)     (5,483)      (432)
    Increase (decrease) in accounts payable, accrued
      interest and accrued expenses.........................     29,414      18,875    (17,378)
    Other assets and liabilities............................     (5,015)     (1,855)        --
                                                              ---------   ---------   --------
  Net cash provided by (used in) operating activities.......    142,717      34,860    (13,427)
                                                              ---------   ---------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures--well servicing......................    (50,799)    (26,469)   (26,776)
  Capital expenditures--contract drilling...................    (15,884)     (8,282)    (1,063)
  Capital expenditures--other...............................    (15,437)     (3,422)    (3,468)
  Proceeds from sale of fixed assets........................      3,415       2,722      7,110
  Notes receivable from related parties.....................     (1,500)     (2,315)    (2,835)
  Cash received in acquisitions.............................         --          --     27,008
  Acquisitions--well servicing..............................     (2,345)         --   (292,638)
  Acquisitions--contract drilling...........................       (800)         --         --
  Other assets and liabilities..............................         --          --     (1,992)
                                                              ---------   ---------   --------
  Net cash provided by (used in) investing activities.......    (83,350)    (37,766)  (294,654)
                                                              ---------   ---------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of long-term debt and capital lease
    obligations.............................................   (382,540)    (51,077)  (487,376)
  Borrowings under line-of-credit...........................     30,000      12,000    328,411
  Proceeds from equity offerings, net of expenses...........         --     100,571    180,441
  Proceeds from long-term debt..............................    175,210          --    142,566
  Proceeds paid for debt issuance costs.....................     (4,958)         --    (15,274)
  Proceeds from other long-term debt........................         --          --    150,000
  Proceeds from forward sale, net of expenses...............         --      18,236         --
  Proceeds from issuance of warrants........................         --          --      7,434
  Proceeds from exercise of warrants........................        847       8,473         --
  Proceeds from exercise of stock options...................     14,617       1,098         92
  Other.....................................................       (318)         --         --
                                                              ---------   ---------   --------
  Net cash provided by (used in) financing activities.......   (167,142)     89,301    306,294
                                                              ---------   ---------   --------
  Net increase (decrease) in cash...........................   (107,775)     86,395     (1,787)
  Cash and cash equivalents at beginning of period..........    109,873      23,478     25,265
                                                              ---------   ---------   --------
  Cash and cash equivalents at end of period................  $   2,098   $ 109,873   $ 23,478
                                                              =========   =========   ========


  SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                       26

                            KEY ENERGY SERVICES INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                  (THOUSANDS)



                                               COMMON STOCK                                             ACCUMULATED
                                          -----------------------   ADDITIONAL                             OTHER
                                          NUMBER OF    AMOUNT AT     PAID-IN     TREASURY   RETAINED   COMPREHENSIVE
                                            SHARES        PAR        CAPITAL      STOCK     EARNINGS       INCOME        TOTAL
                                          ----------   ----------   ----------   --------   --------   --------------   --------
                                                                                                   
BALANCE AT JUNE 30, 1998................    18,685      $ 1,868      $119,303    $(9,682)   $41,093       $ 1,525       $154,107
                                           -------      -------      --------    -------    --------      -------       --------
Reversal of unrealized gain on available
  for sale securities...................        --           --            --         --         --        (1,525)        (1,525)
Foreign currency translation adjustment,
  net of tax............................        --           --            --         --         --             9              9
Issuance of warrants with 14% Notes.....        --           --         7,434         --         --            --          7,434
Issuance of common stock in equity
  offering, net of offering costs.......    64,245        6,425       174,016         --         --            --        180,441
Issued to lender in lieu of fee.........       200           20           980         --         --            --          1,000
Exercise of options.....................        15            2            92         --         --            --             94
Other...................................        10            2          (210)        --         --            --           (208)
Net income (loss).......................        --           --            --         --    (53,258)           --        (53,258)
                                           -------      -------      --------    -------    --------      -------       --------
BALANCE AT JUNE 30, 1999................    83,155      $ 8,317      $301,615    $(9,682)   $(12,165)     $     9       $288,094
                                           -------      -------      --------    -------    --------      -------       --------
Foreign currency transition adjustment,
  net of tax............................        --           --            --         --         --            (1)            (1)
Exercise of warrants....................     2,431          243         8,230         --         --            --          8,473
Exercise of options.....................       241           24         1,074         --         --            --          1,098
Conversion of 7% Debentures.............       380           38         3,568         --         --            --          3,606
Issuance of common stock in equity
  offering, net of offering costs.......    11,000        1,100        99,471         --         --            --        100,571
Other...................................         3            1             4         --         --            --              5
Net income (loss).......................        --           --            --         --    (18,959)           --        (18,959)
                                           -------      -------      --------    -------    --------      -------       --------
BALANCE AT JUNE 30, 2000................    97,210      $ 9,723      $413,962    $(9,682)   $(31,124)     $     8       $382,887
                                           -------      -------      --------    -------    --------      -------       --------
Derivative transition adjustment (see
  Note 8)...............................        --           --            --         --         --          (778)          (778)
Oil and natural gas derivatives
  adjustment, net of tax (See Note 8)...        --           --            --         --         --           306            306
Amortization of oil and natural gas
  derivatives (see Note 8)..............        --           --            --         --         --           558            558
Foreign currency translation adjustment,
  net of tax............................        --           --            --         --         --           (32)           (32)
Exercise of warrants....................       185           19           828         --         --            --            847
Exercise of options.....................     3,106          308        14,309         --         --            --         14,617
Conversion of 7% Debentures.............       101           10           947         --         --            --            957
Issuance of common stock for
  acquisitions..........................       838           84         8,036         --         --            --          8,120
Deferred tax benefit--compensation
  expense...............................        --           --         7,004         --         --            --          7,004
Other...................................        --           --          (318)        --         --            --           (318)
Net income (loss).......................        --           --            --         --     62,710            --         62,710
                                           -------      -------      --------    -------    --------      -------       --------
BALANCE AT JUNE 30, 2001................   101,440      $10,144      $444,768    $(9,682)   $31,586       $    62       $476,878
                                           =======      =======      ========    =======    ========      =======       ========


  SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                       27

                            KEY ENERGY SERVICES INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          JUNE 30, 2001, 2000 AND 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

    Key Energy Services, Inc. (the "Company" or "Key"), is the largest onshore,
rig-based well servicing contractor in the world, with approximately 1,477 well
service rigs and 1,455 oilfield service vehicles as of June 30, 2001. The
Company provides a complete range of well services to major oil companies and
independent oil and natural gas production companies, including: rig-based well
maintenance, workover, completion, and recompletion services (including
horizontal recompletions); oilfield trucking services; and ancillary oilfield
services. Key conducts well servicing operations onshore the continental United
States in the following regions: Gulf Coast (including South Texas, Central Gulf
Coast of Texas, and South Louisiana), Permian Basin of West Texas and Eastern
New Mexico, Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins,
and the ArkLaTex region), Four Corners (including the San Juan, Piceance, Uinta,
and Paradox Basins), Eastern (including the Appalachian, Michigan and Illinois
Basins), Rocky Mountains (including the Denver-Julesberg, Powder River, Wind
River, Green River and Williston Basins), and California (the San Joaquin
Basin), and internationally in Argentina and Ontario, Canada. The Company is
also a leading onshore drilling contractor, with 79 land drilling rigs as of
June 30, 2001. Key conducts land drilling operations in a number of major
domestic producing basins, as well as in Argentina and in Ontario, Canada. Key
also produces and develops oil and natural gas reserves in the Permian Basin
region and Texas Panhandle.

BASIS OF PRESENTATION

    The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. The accounting policies
presented below have been followed in preparing the accompanying consolidated
financial statements.

ESTIMATES AND UNCERTAINTIES

    Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

INVENTORIES

    Inventories, which consist primarily of oilfield service parts and supplies
held for consumption and parts and supplies held for sale at the Company's
various retail supply stores, are valued at the lower of average cost or market.

                                       28

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

    The Company provides for depreciation and amortization of oilfield service
and related equipment using the straight-line method, excluding its drilling
rigs, over the following estimated useful lives of the assets:



DESCRIPTION                                                    YEARS
-----------                                                   --------
                                                           
Well service rigs...........................................      25
Motor vehicles..............................................       5
Furniture and equipment.....................................     3-7
Buildings and improvements..................................   10-40
Gas processing facilities...................................      10
Disposal wells..............................................   15-30
Trucks, trailers and related equipment......................    7-15


    The components of a well service rig that generally require replacement
during the rig's life are depreciated over their estimated useful lives, which
range from three to 15 years. The basic rigs, excluding components, have
estimated useful lives from date of original manufacture ranging from 25 to
35 years. Salvage values are assigned to the rigs based on an estimate of 10%.

    Effective July 1, 1998, the Company made certain changes in the estimated
useful lives of its well service rigs, increasing the lives from 17 years to
25 years. This change decreased the net loss for the twelve months ended
June 30, 1999 by approximately $3,100,000 ($0.11 per share-basic). This change
was made to better reflect the expected utilization of these assets over time,
to better provide matching of revenues and expenses and to better reflect the
industry standard in regards to estimated useful lives of workover rigs.

    The Company uses the units-of-production method to depreciate its drilling
rigs. This method takes into consideration the number of days the rigs are
actually in service each month and depreciation is recorded for at least
15 days each month for each rig that is available for service. The Company
believes that this method appropriately reflects its financial results by
matching revenues with expenses and appropriately reflects how the assets are to
be used over time.

    The Company uses the successful efforts method of accounting for its oil and
gas properties. Under this method, all costs associated with productive wells
and nonproductive development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any), are expensed.
Capitalized costs relating to proved properties are depleted using the
units-of-production method.

    The Company follows the provisions of FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets including certain identifiable
intangibles, held and used by the Company, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of applying this statement, the Company
groups its long-lived assets, including goodwill, on a yard-by-yard basis and
compares the estimated future cash flows of each yard to the yard's net carrying
value including allocable goodwill. The Company would record an impairment
charge, reducing the yard's net carrying value to an estimated fair value, if
the estimated future cash flows

                                       29

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
were less than the yard's net carrying value. Since adoption of this statement
no impairment charges have been required.

HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

    The Company uses derivative financial instruments, primarily commodity
option contracts to reduce the exposure of its oil and gas producing operations
to changes in the market price of natural gas and crude oil and to fix the price
for natural gas and crude oil independently of the physical sale.

    The financial instruments that the Company accounts for as hedging contracts
must meet the following criteria: the underlying asset or liability must expose
the Company to price risk that is not offset in another asset or liability, the
hedging contract must reduce that price risk, and the instrument must be
designated as a hedge at the inception of the contract and throughout the
contract period. In order to qualify as a hedge, there must be clear correlation
between changes in the fair value of the financial instrument and the fair value
of the underlying asset or liability such that changes in the market value of
the financial instrument will be offset by the effect of price rate changes on
the exposed items.

    Prior to the adoption of SFAS 133, premiums paid for commodity option
contracts, which qualify as hedges, are amortized to oil and natural gas sales
over the terms of the contracts. Unamortized premiums are included in other
assets in the consolidated balance sheet. Amounts receivable under the commodity
option contracts are accrued as an increase in oil and natural gas sales for the
applicable periods.

    Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS
No. 137 and No. 138 ("SFAS 138"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. It requires the recognition
of all derivative instruments as assets and liabilities in the Company's balance
sheet and measurement of those instruments at fair value. The accounting
treatment of changes in fair value is dependent upon whether or not a derivative
instrument is designated as a hedge and if so, the type of hedge. For
derivatives designated as cash flow hedges, changes in fair value are recognized
in other comprehensive income until the hedged item is recognized in earnings.
See Note 8.

COMPREHENSIVE INCOME

    The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and presentation of comprehensive income and
its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In accordance with the provisions of SFAS 130, the
Company has presented the components of comprehensive income in its Consolidated
Statements of Comprehensive Income.

ENVIRONMENTAL

    The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the adverse environmental effects of the disposal or

                                       30

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated.

GOODWILL

    Net goodwill, totaling $189.9 million and $198.6 million at June 30, 2001
and 2000, respectively, represents the cost in excess of fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed in
purchase transactions. Goodwill is being amortized on a straight-line basis over
periods ranging from ten to 25 years. Amortization of goodwill for fiscal 2001,
2000 and 1999 was approximately $9,322,000, $9,840,000 and $9,202,000,
respectively. The carrying amount of unamortized goodwill is reviewed for
potential impairment loss whenever events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable (see Property and
Equipment above, for further discussion).

DEFERRED COSTS

    Deferred costs totaling $31,052,000 and $30,998,000 at June 30, 2001 and
2000, respectively, represent debt issuance costs and are recorded net of
accumulated amortization of $13,428,000 and $12,143,000 at June 30, 2001 and
2000, respectively. Deferred costs are amortized to interest expense using the
straight-line method over the life of each applicable debt instrument or to
extraordinary loss as related debt is retired early. This method approximates
the amortization which would be recorded using the effective interest method.
Amortization of deferred costs totaled approximately $3,578,000, $5,176,000 and
$4,664,000 for fiscal 2001, 2000 and 1999, respectively. Unamortized debt
issuance costs included in the determination of the extraordinary gain (loss) on
retirement of debt, net of tax, totaled approximately $1,620,000 for fiscal
2001.

INCOME TAXES

    The Company accounts for income taxes based upon Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using statutory 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 on deferred tax
assets and liabilities of a change in tax rate is recognized in income in the
period that includes the statutory enactment date. A valuation allowance for
deferred tax assets is recognized when it is more likely than not that the
benefit of deferred tax assets will not be realized.

                                       31

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    The Company and its eligible subsidiaries file a consolidated U. S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U. S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.

EARNINGS PER SHARE

    The Company presents earnings per share information in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are
determined by dividing net earnings applicable to common stock by the weighted
average number of common shares actually outstanding during the year. 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 "as if converted" method.



                                                                      YEAR ENDED JUNE 30,
                                                              ------------------------------------
                                                                 2001         2000         1999
                                                              ----------   ----------   ----------
                                                               (THOUSANDS, EXCEPT PER SHARE DATA)
                                                                               
BASIC EPS COMPUTATION:
NUMERATOR
  Net income (loss) before extraordinary gain (loss)........   $ 62,281     $(20,570)    $(53,258)
  Extraordinary gain (loss), net of tax.....................        429        1,611           --
                                                               --------     --------     --------
  Net income (loss).........................................   $ 62,710     $(18,959)    $(53,258)
                                                               ========     ========     ========
DENOMINATOR
  Weighted average common shares outstanding................     98,195       83,815       27,501
                                                               --------     --------     --------
BASIC EPS:
  Before extraordinary gain (loss)..........................   $   0.63     $  (0.25)    $  (1.94)
  Extraordinary gain (loss), net of tax.....................         --         0.02           --
                                                               --------     --------     --------
  Net income (loss).........................................   $   0.63     $  (0.23)    $  (1.94)
                                                               ========     ========     ========
DILUTED EPS COMPUTATION:
NUMERATOR
  Net income (loss) before extraordinary gain (loss) and
    effect of dilutive securities, tax effected.............   $ 62,281     $(20,570)    $(53,258)
  Convertible securities....................................          5           --           --
                                                               --------     --------     --------
    Net income (loss) before extraordinary gain (loss)......   $ 62,286     $(20,570)    $(53,258)
    Extraordinary gain (loss), net of tax...................        429        1,611           --
                                                               --------     --------     --------
    Net income (loss).......................................   $ 62,715     $(18,959)    $(53,258)
                                                               ========     ========     ========
DENOMINATOR
  Weighted average common shares outstanding................     98,195       83,815       27,501
  Warrants..................................................        205           --           --
  Stock options.............................................      3,853           --           --
  7% Convertible Debentures.................................         18           --           --
                                                               --------     --------     --------
                                                                102,271       83,815       27,501


                                       32

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



                                                                      YEAR ENDED JUNE 30,
                                                              ------------------------------------
                                                                 2001         2000         1999
                                                              ----------   ----------   ----------
                                                               (THOUSANDS, EXCEPT PER SHARE DATA)
                                                                               
DILUTED EPS:
  Before extraordinary gain (loss)..........................   $   0.61     $  (0.25)    $  (1.94)
  Extraordinary gain (loss), net of tax.....................         --         0.02           --
                                                               --------     --------     --------
  Net income (loss).........................................   $   0.61     $  (0.23)    $  (1.94)
                                                               ========     ========     ========


    The diluted earnings per share calculation for the year ended June 30, 2001
excludes the effect of the exercise of 360,000 stock options and the conversion
of the Company's 5% Convertible Subordinated Notes because the effects of such
instruments on earnings per share would be anti-dilutive.

    The diluted earnings per share calculation for the years ended June 30, 2000
and 1999 excludes the effect of the conversion of all of the Company's then
outstanding convertible debt and the exercise of all of the Company's then
outstanding warrants and stock options because the effects of such instruments
on loss per share would be anti-dilutive.

CONCENTRATION OF CREDIT RISK

    Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of temporary cash investments
and trade receivables. The Company restricts investment of temporary cash
investments to financial institutions with high credit standing and, by policy,
limits the amount of credit exposure to any one financial institution. The
Company's customer base consists primarily of multi-national and independent oil
and natural gas producers. This may affect the Company's overall exposure to
credit risk either positively or negatively in as much as its customers are
affected by economic conditions in the oil and gas industry, which have
historically been cyclical. However, account receivables are well diversified
among many customers and a significant portion of the receivables are from major
oil companies, which management believes minimizes potential credit risk.
Historically, credit losses have been insignificant. Receivables are generally
not collateralized, although the Company may generally secure a receivable at
any time by filing a mechanic's or material-man's lien on the well serviced. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.

    The Company did not have any one customer who represented 10% or more of
consolidated revenues for the fiscal year ended June 30, 2001, 2000 or 1999.

STOCK-BASED COMPENSATION

    The Company accounts for stock option grants to employees using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Under the Company's stock
incentive plans, the price of the stock on the grant date is the same as the
amount an employee must pay to exercise the option to acquire the stock;
accordingly, the options have no intrinsic value at grant date, and in
accordance with the provisions of APB 25, no compensation cost is recognized.

                                       33

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," sets forth alternative accounting and
disclosure requirements for stock-based compensation arrangements. Companies may
continue to follow the provisions of APB 25 to measure and recognize employee
stock-based compensation; however, SFAS 123 requires disclosure of pro forma net
income and earnings per share that would have been reported under the fair value
based recognition provisions of SFAS 123. The Company has disclosed in Note 10
the pro forma information required under SFAS 123.

FOREIGN CURRENCY GAINS AND LOSSES

    The local currency is the functional currency for all of the Company's
foreign operations (Argentina and Canada). The cumulative translation gains and
losses, resulting from translating each foreign subsidiary's financial
statements from the functional currency to U.S. dollars, is included in other
comprehensive income and accumulated in stockholders' equity until a partial or
complete sale or liquidation of the Company's net investment in the foreign
entity.

CASH AND CASH EQUIVALENTS

    The Company considers all unrestricted highly liquid investments with less
than a three-month maturity when purchased, as cash equivalents.

RECLASSIFICATIONS

    Certain reclassifications have been made to the fiscal 2000 and 1999
consolidated financial statements to conform to the fiscal 2001 presentation.
The reclassifications consist primarily of reclassifying oil and natural gas
productions revenues and expenses. Oil and natural gas production revenues and
related expenses have been reclassified to other revenues and other expenses
because the Company does not believe this business segment is material to the
Company's consolidated financial statements.

2.  RESTRUCTURING CHARGE

    In response to an industry downturn caused by historically low oil and gas
prices and the resulting slowdown in business, on December 7, 1998, the Company
announced a company-wide restructuring plan to reduce operating costs beyond
those achieved through the Company's consolidation efforts. The plan involved a
reduction in the size of management and on-site work force, salary reductions
averaging 21% for senior management, the combination of previously separate
operating divisions and the elimination of redundant overhead and facilities.
The restructuring plan resulted in pretax charges to earnings of approximately
$6.7 million in the second quarter ending December 31, 1998 and $1.5 million in
the third quarter ending March 31, 1999. However, due to an increase in oil and
gas prices beginning during the quarter ended March 31,1999, the Company amended
its restructuring plan to decrease the number of planned employee terminations.
Increased demand for the Company's services made such terminations unnecessary
and would have, in management's opinion, restricted the Company's ability to
provide services to its customers. Consequently, the Company did not utilize
approximately $3.7 million of the pretax charges. Essentially all of the
unutilized portion of the restructuring charge was reversed in the fourth
quarter ending June 30, 1999 resulting in a total pretax charge for the fiscal
year ended June 30, 1999 of approximately $4.5 million. The charges included
severance payments and other termination benefits for

                                       34

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

2.  RESTRUCTURING CHARGE (CONTINUED)
approximately 97 employees, lease commitments related to closed facilities and
environmental studies performed on closed leased yard locations.

    The Company completed the plan at June 30, 2000. There remained
approximately $180,000 for COBRA benefits to terminated employees and $53,000
for contractual payments to an employee at June 30, 1999. The major components
of the restructuring charge and costs incurred through June 30, 1999 were as
follows:



                                    RESTRUCTURING       COST INCURRED        BALANCE AS OF
DESCRIPTION                            CHARGE       THROUGH JUNE 30, 1999    JUNE 30, 1999
-----------                         -------------   ----------------------   --------------
                                                        (IN THOUSANDS)
                                                                    
Severance/employee costs..........     $4,457               $(4,224)              $233
Lease commitments.................         27                   (27)                --
Environmental clean-up............         20                   (20)                --
                                       ------               -------               ----
Total.............................     $4,504               $(4,271)              $233
                                       ======               =======               ====


3.  BUSINESS AND PROPERTY ACQUISITIONS

ACQUISITIONS COMPLETED IN FISCAL 2001 AND 2000

    There were no acquisitions completed by the Company during fiscal 2000.
During fiscal 2001, the Company completed several small acquisitions for a total
consideration of $11,965,000, which was paid using a combination of cash, notes
and shares of the Company's common stock. Through these acquisitions, the
Company acquired 34 well service rigs, 8 trucking vehicles, ancillary equipment
and five salt water disposal facilities. Each of the acquisitions was accounted
for using the purchase method and the results of the operations generated from
the acquired assets are included in the Company's results of operations as of
the completion date of each acquisition.

DAWSON PRODUCTIONS SERVICES, INC.

    In September 1998, the Company completed the acquisition of all of the
capital stock of Dawson Production Services, Inc. (Dawson) for an aggregate
consideration of approximately $382.6 million, including approximately
$207.1 million of cash paid for the Dawson stock and for transactional fees and
approximately $175.5 million of net liabilities assumed.

                                       35

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

3. BUSINESS AND PROPERTY ACQUISITIONS (CONTINUED)

    Expenditures for the Dawson acquisition, including acquisition costs, less
cash acquired were as follows (in thousands):


                                                           
Fair value of assets acquired, including goodwill...........  $409,722
Liabilities assumed.........................................  (199,439)
Liabilities for employee termination costs and lease
  termination costs.........................................    (3,162)
                                                              --------
Cash paid, including acquisition related expenditures and
  the cost of Dawson common stock previously held...........   207,121
Less: Cash acquired.........................................   (27,008)
                                                              --------
Net cash used for the acquisition...........................  $180,113
                                                              ========


    At the time of the closing, Dawson owned approximately 527 well service
rigs, 200 oilfield trucks, and 21 production testing units in South Texas and
the Gulf Coast, East Texas and Louisiana, the Permian Basin of West Texas and
New Mexico, the Anadarko Basin of Texas and Oklahoma, California, and in the
inland waters of the Gulf of Mexico.

    In connection with the Dawson acquisition, the Company recognized
liabilities for the estimated costs to involuntarily terminate employees of
Dawson and to exit certain activities of Dawson, primarily Dawson's lease
liability for its corporate offices. As of June 30, 1999, the Company had
completed its severance plan, terminating 44 former Dawson employees. At
June 30, 1999, the Company had $592,000 accrued, representing the estimated
lease termination costs of Dawson's former corporate offices.

OTHER FISCAL 1999 ACQUISITIONS

    In addition to its acquisition of Dawson, the Company acquired the assets
and/or capital stock of six well servicing and contract drilling businesses
during fiscal 1999, increasing its rig and truck fleet by a total of
approximately 93 well service rigs, 4 drilling rigs and 185 oilfield trucks (and
related equipment) for an aggregate purchase price of approximately
$93.7 million in cash. Each of the acquisitions was accounted for using the
purchase method and the results of the operations, generated from the acquired
assets, are included in the Company's results of operations as of the completion
date of each acquisition.

PRO FORMA RESULTS OF OPERATIONS--(UNAUDITED)

    The following unaudited pro forma results of operations have been prepared
as though the Dawson acquisition had been acquired on July 1, 1998 with
adjustments to record specifically identifiable decreases in direct costs and
general and administrative expenses related to the termination of individual
employees. Pro forma amounts are not necessarily indicative of the results that
may be reported in the future.



                                                               YEAR ENDED
                                                             JUNE 30, 1999
                                                   ----------------------------------
                                                   (THOUSANDS, EXCEPT PER SHARE DATA)
                                                
Revenues.........................................               $524,924
Net income (loss)................................                (58,211)
Basic earnings (loss) per share..................                  (2.12)


                                       36

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

4. COMMITMENTS AND CONTINGENCIES

    Various suits and claims arising in the ordinary course of business are
pending against the Company. Management does not believe that the disposition of
any of these items will result in a material adverse impact to the consolidated
financial position, results of operations or cash flows of the Company.

    In order to retain qualified senior management, the Company enters into
employment agreements with its executive officers. These employment agreements
run for periods ranging from three to five years, but can be automatically
extended on a yearly basis unless terminated by the Company or the executive
officer. In addition to providing a base salary for each executive officer, the
employment agreements provide for severance payments for each executive officer
varying from 1 to 3 years of the executive officer's base salary. At June 30,
2001 the annual base salaries for the executive officers covered under such
employment agreements totaled $1,125,000. The Company also enters into
employment agreements with other key employees as it deems necessary in order to
retain qualified personnel.

5. LONG-TERM DEBT

    The components of the Company's long-term debt are as follows:



                                                               JUNE 30,
                                                          -------------------
                                                            2001       2000
                                                          --------   --------
                                                              (THOUSANDS)
                                                               
Senior Credit Facility (i)
  Revolving Loans.......................................  $  2,000   $ 93,000
  Tranche A Term Loan...................................        --     22,987
  Tranche B Term Loan...................................        --    175,961
8 3/8% Senior Notes Due 2008 (ii).......................   175,000         --
14% Senior Subordinated Notes Due 2009 (iii)............   134,466    143,650
5% Convertible Subordinated Notes Due 2004 (iv).........   158,426    205,810
Dawson 9 3/8% Senior Notes Due 2007 (v).................       246      1,106
7% Convertible Subordinated Debentures Due 2003 (vi)....        --      1,000
Capital Leases..........................................    22,964     21,911
Other notes payable.....................................       805      1,175
                                                          --------   --------
                                                           493,907    666,600
Less current portion....................................     7,946     14,655
                                                          --------   --------
Total long-term debt....................................  $485,961   $651,945
                                                          ========   ========


(I) SENIOR CREDIT FACILITY

    At June 30, 2001, the Company's senior credit facility (the "Senior Credit
Facility") consisted of a $125 million revolving credit facility. In addition,
up to $20 million of letters of credit can be issued under the Senior Credit
Facility, but any outstanding letters of credit reduces borrowing availability
under the revolver. The commitment to make revolving loans reduced to
$100 million, on September 14, 2001 and will reduce to $75 million on
September 14, 2002. The revolving commitment will terminate on September 14,
2003, and all the revolving loans must be paid on or before that date.

                                       37

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

5. LONG-TERM DEBT (CONTINUED)
    The revolving loans bear interest at rates based upon, at the Company's
option, either the prime rate plus a margin ranging from 0.75% to 2.00% or a
Eurodollar rate plus a margin ranging from 2.25% to 3.50%, in each case
depending upon the ratio of the Company's total debt (less cash on hand over
$5 million) to the Company's trailing 12-month EBITDA, as adjusted. The Company
pays commitment fees on the unused portion of the revolving loan at a varying
rate (depending upon the pricing ratio) of between 0.25% and 0.50%.

    The Senior Credit Facility contains various financial covenants, including:
(i) consolidated debt-to-capitalization ratio at generally decreasing levels
varying between 79% and 65%, (ii) consolidated interest coverage ratio at
generally increasing levels varying between 2.00-to-1.00 and 3.50-to-1.00,
(iii) consolidated senior leverage ratio at generally decreasing levels varying
between 2.50-to-1.00 and 2.00-to-1.00, and (iv) trailing 12-month EBITDA, as
adjusted, at generally increasing levels varying between $50 million and
$150 million. In addition, the Company must maintain a consolidated fixed charge
coverage ratio at generally decreasing levels varying between 1.25-to-1.00 and
1.00 to 1.00. The covenants for consolidated senior leverage ratio and
consolidated interest coverage ratio are not imposed until the quarter ending
March 31, 2001, and the covenant levels for consolidated debt-to-capitalization
and trailing 12-month EBITDA, as adjusted, will remain fixed at 79% and
$50 million, respectively, for the same period. The Company is also required to
maintain a consolidated liquidity level of at least $30 million.

    The Senior Credit Facility subjects the Company to other restrictions,
including restrictions upon the Company's ability to incur additional debt,
liens and guarantee obligations, to merge or consolidate with other persons, to
sell assets, to make dividends, purchases of our stock or subordinated debt, to
make capital expenditures in excess of levels ranging from $37.5 million in
fiscal 1999 to $65 million in fiscal 2004, or to make investments, loans and
advances or changes to debt instruments and organizational documents. The
Company will not be permitted to make acquisitions unless (i) its consolidated
debt to capitalization ratio is not more than 60% or (ii) its consolidated debt
to capitalization ratio is not increased and the acquisition is funded solely
with capital stock. The Company must also maintain consolidated net worth not
less than, $195 million plus (i) 75% of consolidated net income for each fiscal
quarter beginning with the period ending December 31, 1998, (ii) 75% of the net
cash proceeds from issuance of capital stock after September 14, 1998 and
(iii) 75% of the increase in consolidated net worth resulting from the
conversion of the 5% Convertible Subordinated Notes or other convertible debt
issued after September 14, 1998. All obligations under the Senior Credit
Facility are guaranteed by most of the Company's subsidiaries and are secured by
substantially all the Company's assets, including the Company's accounts
receivable, inventory and equipment.

    During fiscal 2001, a portion of the net proceeds from the Equity Offering
(see Note 10) was used to repay the entire outstanding balance of the Tranche A
term loan then outstanding under the Senior Credit Facility and $2.3 million of
the Tranche B term loan then outstanding under the Senior Credit Facility. In
addition, $65 million of the net proceeds from the Equity Offering were used to
reduce the principal amount outstanding under the revolver. The remainder of the
net proceeds of the Equity Offering was used to retire other long-term debt. A
portion of the proceeds from the Company's 8 3/8% Senior Note offering in fiscal
2001 was used to repay the entire outstanding balance of the Tranche B term loan
then outstanding under the Senior Credit Facility and approximately
$59.1 million under the revolver.

                                       38

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

5. LONG-TERM DEBT (CONTINUED)
    At June 30, 2001, there was approximately $2,000,000 outstanding under the
revolving loans. Additionally, the Company had outstanding letters of credit of
$11,995,000 and $15,132,000 as of June 30, 2001 and 2000, respectively, related
to its workers compensation insurance.

(II) 8 3/8% SENIOR NOTES

    On March 6, 2001 the Company completed a private placement of $175,000,000
of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The net cash
proceeds from the private placement were used to repay all of the remaining
balance of the original term loans under the Senior Credit Facility and a
portion of the revolving loan facility under the Senior Credit Facility. The
8 3/8% Senior Notes are senior unsecured obligations, ranking equally with the
Company's senior unsecured indebtedness. The 8 3/8% Senior Notes are effectively
subordinated to Key's secured indebtedness which includes borrowings under the
Senior Credit Facility and the Dawson 9 3/8% Senior Notes.

    On and after March 1, 2005, the Company may redeem some or all of the 8 3/8%
Senior Notes at any time at varying redemption prices in excess of par, plus
accrued interest. In addition, before March 1, 2004, the Company may redeem up
to 35% of the aggregate principal amount of the 8 3/8% Senior Notes with the
proceeds of certain sales of equity at 108.375% of par plus accrued interest.

    At June 30, 2001, $175,000,000 principal amount of the 8 3/8% Senior Notes
remained outstanding. The 8 3/8% Senior Notes pay interest semi-annually on
March 1 and September 1 of each year.

(III) 14% SENIOR SUBORDINATED NOTES

    On January 22, 1999, the Company completed the private placement of 150,000
units ("the Units") consisting of $150,000,000 of 14% Senior Subordinated Notes
due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase
2,173,433 shares of common stock at an exercise price of $4.88125 per share (the
"Unit Warrants"). The net cash proceeds from the private placement were used to
repay substantially all of the remaining $148.6 million principal amount (plus
accrued interest) owed under the Company's bridge loan facility arranged in
connection with the acquisition of Dawson Production Services, Inc. ("Dawson").

    On and after January 15, 2004, the Company may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before January 15, 2002, the Company
may redeem up to 35% of the aggregate principal amount of the 14% Senior
Subordinated Notes with the proceeds of certain sales of equity at 114% of par,
plus accrued interest. On June 11, 2001, the Company exercised its right of
redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes
at a price of 114% of the principal amount plus accrued interest, leaving
$139,687,000 principal amount outstanding as of June 30, 2001.

    The Unit Warrants have separated from the 14% Senior Subordinated Notes and
became exercisable on January 25, 2000. On the date of issuance, the value of
the Unit Warrants was estimated

                                       39

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

5. LONG-TERM DEBT (CONTINUED)

at $7,434,000 and is classified as a discount to the 14% Senior Subordinated
Notes on the Company's consolidated balance sheet. The discount is being
amortized to interest expense over the term of the 14% Senior Subordinated
Notes. The 14% Senior Subordinated Notes mature and the Unit Warrants expire on
January 15, 2009. The 14% Senior Subordinated Notes are subordinate to the
Company's senior indebtedness, which includes borrowings under the Current
Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8% Senior
Notes.

    In the event of a change in control of the Company, as defined in the
indenture under which the 14% Senior Subordinated Notes were issued, each holder
of 14% Senior Subordinated Notes will have the right, at the holder's option, to
require the Company to repurchase all or any part of the holder's 14% Senior
Subordinated Notes, within 60 days of such event, at a price equal to 100% of
the principal amount thereof, together with accrued and unpaid interest thereon.

    During fiscal 2001, the Company repurchased (and cancelled) $10,313,000
principal amount of the 14% Senior Subordinated Notes and paid a premium of
approximately $1,444,000. At June 30, 2001, $139,687,000 principal amount of the
14% Senior Subordinated Notes remained outstanding. The 14% Senior Subordinated
Notes pay interest semi-annually on January 15 and July 15 of each year,
beginning July 15, 1999. Interest of approximately $10,500,000 was paid on
July 15, 2000 and January 15, 2001. As of June 30, 2001, 62,500 Unit Warrants
had been exercised, producing approximately $4,173,000 of proceeds to the
Company and leaving 87,500 Unit Warrants outstanding.

(IV) 5% CONVERTIBLE SUBORDINATED NOTES

    In late September and early October 1997, the Company completed a private
placement of $216 million of 5% Convertible Subordinated Notes due 2004 (the "5%
Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson
9 3/8% Senior Notes and the 8 3/8% Senior Notes. The 5% Convertible Subordinated
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $38.50 per share, subject to certain
adjustments.

    The 5% Convertible Subordinated Notes are redeemable, at the Company's
option, on and after September 15, 2000, in whole or part, together with accrued
and unpaid interest. The initial redemption price is 102.86% for the year
beginning September 15, 2000 and declines ratably thereafter on an annual basis.

    During fiscal 2001, the Company repurchased (and cancelled) $47,384,000
principal amount of the 5% Convertible Subordinated Notes, leaving $158,426,000
principal amount of the 5% Convertible Subordinated Notes outstanding at
June 30, 2001. These repurchases resulted in an after tax gain of approximately
$3.2 million. Interest on the 5% Convertible Subordinated Notes is payable on
March 15 and September 15. Interest of approximately $4,890,000 was paid on
September 15, 2000 and $4,815,000 was paid on March 15, 2001, respectively.

(V) DAWSON 9 3/8% SENIOR NOTES

    As a result of the Dawson acquisition (see Note 3), the Company, its
subsidiaries and U.S. Trust Company of Texas, N.A., as trustee ("U.S. Trust"),
entered into a Supplemental Indenture dated

                                       40

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

5. LONG-TERM DEBT (CONTINUED)
September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company
assumed the obligations of Dawson under the Indenture dated February 20, 1997
(the "Dawson Indenture") between Dawson and U.S. Trust. The senior notes due
2007 (the "Dawson 9 3/8% Senior Notes") issued pursuant to the Dawson Indenture
were equally and ratably secured with the obligations under the Senior Credit
Facility. As a result of a mandatory tender offer made in connection with the
Dawson acquisition and subsequent repurchases, only $1,106,000 principal amount
of Dawson 9 3/8% Senior Notes remained outstanding at June 30, 2000.

    During fiscal 2001, the Company repurchased $860,000 principal amount of the
Dawson 9 3/8% Senior Notes, leaving $246,000 principal amount outstanding as of
June 30, 2001. Interest on the Dawson 9 3/8% Senior Notes is payable on
February 1 and August 1 of each year. Interest of approximately $52,000 and
approximately $14,000 was paid on August 1, 2000 and February 1, 2001,
respectively.

(vi) 7% CONVERTIBLE SUBORDINATED DEBENTURES

    In July 1996, the Company completed a private placement of $52,000,000
principal amount of 7% Convertible Subordinated Debentures due 2003 (the "7%
Convertible Subordinated Debentures"). During the quarter ended September 30,
2000, $985,000 principal amount of the 7% Convertible Subordinated Debentures
were surrendered for conversion by the holders thereof and 101,025 shares of
common stock were issued on September 1, 2000 in connection with the conversion.
On September 1, 2000, the remaining $15,000 principal amount of the outstanding
7% Convertible Subordinated Debentures was redeemed at 103% of the principal
amount plus accrued interest, leaving none outstanding. Interest on the 7%
Convertible Subordinated Debentures was payable on January 1 and July 1 of each
year. Interest of approximately $35,000 was paid on July 1, 2000.

CAPITALIZED DEBT ISSUANCE COSTS, REPAYMENT SCHEDULE AND INTEREST EXPENSE

    The Company capitalized a total of approximately $4,958,000 and $16,370,000
in fees and costs in connection with its various financings during fiscal 2001
and 1999 respectively. The Company did not incure any fees or costs in
connection with financing activities in fiscal 2000.

    Presented below is a schedule of the repayment requirements of long-term
debt for each of the next five years and thereafter as of June 30, 2001:



                                                                PRINCIPAL
FISCAL YEAR ENDED JUNE 30,                                        AMOUNT
--------------------------                                    --------------
                                                              (IN THOUSANDS)
                                                           
2002........................................................     $  7,946
2003........................................................        7,912
2004........................................................        9,911
2005........................................................      158,426
2006........................................................           --
Thereafter..................................................      309,712
                                                                 --------
                                                                 $493,907
                                                                 ========


                                       41

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

5. LONG-TERM DEBT (CONTINUED)
    The Company's interest expense for the years ended June 30, 2001, 2000, and
1999 consisted of the following:



                                                          2001       2000       1999
                                                        --------   --------   --------
                                                                (IN THOUSANDS)
                                                                     
Cash payments for interest............................  $51,524    $61,956    $52,397
Commitment and agency fees paid.......................    1,203      1,139        527
Accretion of discount on notes........................      739        743        552
Amortization of debt issuance costs...................    3,578      5,176      4,664
Net change in accrued interest........................      146      2,916      9,261
Other.................................................     (630)        --         --
                                                        -------    -------    -------
                                                        $56,560    $71,930    $67,401
                                                        =======    =======    =======


6. DEBT ISSUANCE COSTS

   During fiscal 1999, the Company recorded an expense item of $6,307,000 which
represented the write-off of debt issuance costs. The debt issuance costs were
associated with a bridge loan incurred in connection with the Dawson
acquisition, which was subsequently paid primarily with the proceeds from the
Company's private placement of 14% Senior Subordinated Notes (see Note 5).
During fiscal 2000, the Company expensed $338,000 of debt issuance costs related
to the conversion of 7% Convertible Subordinated Debentures and other
prepayments of debt.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at June 30, 2001 and 2000. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments", defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties.



                                                   2001                  2000
                                            -------------------   -------------------
                                            CARRYING     FAIR     CARRYING     FAIR
                                             VALUE      VALUE      VALUE      VALUE
                                            --------   --------   --------   --------
                                                                 
Financial Assets:
  Cash and cash equivalents...............  $  2,098   $  2,098   $109,873   $109,873
  Accounts receivable, net................   177,016    177,016    123,203    123,203
  Notes receivable--related parties.......     6,050      6,600      5,150      5,150
  Commodity option contracts..............     1,035      1,035         --         --
Financial Liabilities:
  Accounts payable........................    42,544     42,544     34,091     34,091
  Commodity option contracts..............       344        344         --        778
  Long-term debt
    Senior Credit Facility................     2,000      2,000    291,948    291,948
    8 3/8% Senior Notes...................   175,000    176,094         --         --
    5% Convertible Subordinated Notes.....   158,426    141,989    205,810    160,532
    7% Convertible Subordinated
      Debentures..........................        --         --      1,000      1,130
    14% Senior Subordinated Notes.........   134,466    153,498    143,650    162,325
    Dawson 9 3/8% Senior Notes............       246        246      1,106      1,029
    Capital lease liabilities.............    22,964     22,964     21,911     21,911
    Other debt............................       805        805      1,175      1,175


                                       42

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

    Cash, trade receivables and trade payables: The carrying amounts approximate
fair value because of the short maturity of those instruments.

    Commodity option contracts: For fiscal 2001, under SFAS 133, the carrying
amount of the commodity option contracts approximate fair value. For fiscal
2000, the carrying value is comprised of the unamortized premiums paid for the
option contracts. The fair value of the commodity option contracts is estimated
using the discounted forward prices of each options index price, for the term of
each option contract.

    Notes receivable-related parties: The amounts reported relate to notes
receivable from officers of the Company.

    Long-term debt: The fair value of the Company's long-term debt is based upon
the quoted market prices for the various notes and debentures at June 30, 2001
and 2000, and the carrying amounts outstanding under the Company's senior credit
facility.

8. DERIVATIVE FINANCIAL INSTRUMENTS

    The Company utilizes derivative financial instruments to manage well defined
commodity price risks. The Company is exposed to credit losses in the event of
nonperformance by the counter-parties to its commodity hedges. The Company only
deals with reputable financial institutions as counter-parties and anticipates
that such counter-parties will be able to fully satisfy their obligations under
the contracts. The Company does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of the counter-parties.

    The Company periodically hedges a portion of its oil and natural gas
production through collar and option agreements. The purpose of the hedges is to
provide a measure of stability in the volatile environment of oil and natural
gas prices and to manage exposure to commodity price risk under existing sales
commitments. The Company's risk management objective is to lock in a range of
pricing for expected production volumes. This allows the Company to forecast
future earnings within a predictable range. The Company meets this objective by
entering into collar and option arrangements which allow for acceptable cap and
floor prices.

    The Company does not enter into derivative instruments for any purpose other
than for economic hedging. The Company does not speculate using derivative
instruments. The Company has identified the following derivative instruments:

    FREESTANDING DERIVATIVES.  On March 30, 2000 the Company entered into a
collar arrangement for a 22-month period whereby the Company will pay if the
specified price is above the cap index and the counter-party will pay if the
price should fall below the floor index. The hedge defines a range of cash flows
bounded by the cap and floor prices. On May 25, 2001 the Company entered into an
option arrangement for a 12-month period beginning March 2002. whereby the
counter-party will pay if the price should fall below the floor index. The
Company desires a measure of stability to ensure that cash flows do not fall
below a certain level.

    Prior to the adoption of SFAS 133 as discussed in Note 1, these collars and
options were accounted for as cash flow type hedges. Accordingly, the transition
adjustment resulted in recording a $778,000 liability

                                       43

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
for the fair value of the collars to accumulated other comprehensive income, of
which $520,000 was recognized in earnings during fiscal 2001. It is estimated
that the remaining $258,000 of this transition adjustment will be recognized in
earnings over the next fiscal year. While this arrangement was intended to be an
economic hedge, as of July 1, 2000, the Company had not documented the
March 30, 2000 oil and natural gas collars as cash flow hedges and therefore
reported a charge to operations of $565,000 for the increase in fair value of
the liability as of September 30, 2000 in other income. As of October 1, 2000,
the Company documented these collars as cash flow hedges. As of May 25, 2001,
the Company had not documented the May 25, 2001 oil and natural gas options as
cash flow hedges and therefore has included income of $768,000 for the increase
in fair value of the asset as of June 30, 2001 in other income. As of July 1,
2001, the Company documented these options as cash flow hedges. During fiscal
2001, the Company recorded a net increase of $999,000 in derivative assets, net
of derivative liabilities, of which $132,000 represented ineffectiveness and was
credited to earnings.

    EMBEDDED DERIVATIVES.  The Company is party to a volumetric production
payment that meets the definition of an embedded derivative under SFAS 133.
Effective July 1, 2000, the Company determined and documented that the
volumetric production payment is excluded from the scope of SFAS 133 under the
normal purchases/sales exclusion as set forth in SFAS 138.

    For fiscal 2000 and 1999, gains and amortization of premiums paid on option
contracts are recognized as an adjustment to sales revenue when the related
transactions being hedged are finalized.

    The net effect of the Company's commodity hedging activities decreased oil
and natural gas revenues for the year ended June 30, 2000 by $822,270 and
increased oil and natural gas revenues for the year ended June 30, 1999 by
$158,500.

    The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at June 30, 2001 and 2000:



                                    MONTHLY INCOME                                   STRIKE PRICE
                                ----------------------                               PER BBL/MMBTU
                                  OIL      NATURAL GAS                            -------------------
                                 (BBLS)      (MMBTU)              TERM             FLOOR       CAP      FAIR VALUE
                                --------   -----------   ----------------------   --------   --------   ----------
                                                                                      
At June 30, 2001
  Oil Collars.................   5,000           --       Mar 2001 - Feb 2002      $19.70     $23.70    $(115,000)
  Oil Put.....................   5,000           --       Mar 2002 - Feb 2003       22.00         --      141,000
  Natural Gas Collars.........      --       40,000       Mar 2001 - Feb 2002        2.40       2.91     (229,000)
  Natural Gas Put.............      --       75,000       Mar 2002 - Feb 2003        3.00         --      894,000

At June 30, 2000
  Oil Collars.................   4,000           --       May 2000 - Feb 2001      $22.20     $26.50    $(118,000)
                                 5,000           --       Mar 2001 - Feb 2002       19.70      23.70     (140,000)
  Natural Gas Collars.........      --       30,000       May 2000 - Feb 2001        2.60       3.19     (272,000)
                                    --       40,000       Mar 2001 - Feb 2002        2.40       2.91     (248,000)


    (The strike prices for the oil options are based on the NYMEX spot price for
West Texas Intermediate; the strike prices for the natural gas collars are based
on the Inside FERC-West Texas Waha spot price; the strike price for the natural
gas put is based on the Inside FERC-El Paso Permian spot price.)

                                       44

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

9. OTHER ACCRUED LIABILITIES

    Other accrued liabilities consist of the following:



                                                                 JUNE 30,
                                                            -------------------
                                                              2001       2000
                                                            --------   --------
                                                                (THOUSANDS)
                                                                 
Accrued payroll, taxes and employee benefits..............  $31,242    $15,261
State sales, use and other taxes..........................    5,825      2,465
Oil and gas revenue distribution..........................    1,606      1,714
Other.....................................................   10,250      6,958
                                                            -------    -------
Total.....................................................  $48,923    $26,398
                                                            =======    =======


10. STOCKHOLDERS' EQUITY

EQUITY OFFERINGS

    On June 30, 2000, the Company closed the public offering of 11,000,000
shares of common stock at $9.625 per share, or approximately $106 million (the
"Equity Offering"). Net proceeds from the Equity Offering of approximately
$101 million were used to repay a portion of the Company's term loan borrowings
and revolving line of credit under its senior credit facility and retire other
long-term debt.

    On May 7, 1999, the Company closed the public offering of 55,300,000 shares
of common stock (300,000 shares of which were sold pursuant to the underwriters'
over-allotment option discussed below) at $3.00 per share, or $166 million (the
"Prior Public Offering"). Concurrently therewith, the Company closed the
offering of 3,508,772 shares of common stock at $2.85 per share, or $10 million
(the "Prior Concurrent Offering" and together with the Prior Public Offering,
the "Prior Equity Offerings"). In addition, on June 7, 1999, the underwriters of
the Prior Public Offering exercised an over-allotment option to purchase an
additional 5,436,000 million shares to cover over-allotments. Net proceeds from
the Prior Equity Offerings of approximately $180.4 million were used to repay a
portion of the Company's term loan borrowings under its senior credit facility.

STOCK INCENTIVE PLANS

    On January 13, 1998 the Company's shareholders approved the Key Energy
Group, Inc. 1997 Incentive Plan, as amended (the "1997 Incentive Plan"). The
1997 Incentive Plan is an amendment and restatement of the plans formerly known
as the "Key Energy Group, Inc. 1995 Stock Option Plan" (the "1995 Option Plan")
and the "Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan" (the
"1995 Directors Plan") (collectively, the "Prior Plans").

    All options previously granted under the Prior Plans and outstanding as of
November 17, 1997 (the date on which the Company's board of directors adopted
the plan) were assumed and continued, without modification, under the 1997
Incentive Plan.

    Under the 1997 Incentive Plan, the Company may grant the following awards to
key employees, directors who are not employees ("Outside Directors") and
consultants of the Company, its controlled subsidiaries, and its parent
corporation, if any: (i) incentive stock options ("ISOs") as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
(ii) "nonstatutory" stock

                                       45

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

10. STOCKHOLDERS' EQUITY (CONTINUED)
options ("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of the
restricted stock, (v) performance shares and performance units, (vi) other
stock-based awards and (vii) supplemental tax bonuses (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options".

    The Company may grant Incentive Awards covering an aggregate of the greater
of (i) 3,000,000 shares of the Company's common stock and (ii) 10% of the shares
of the Company's common stock issued and outstanding on the last day of each
calendar quarter, provided, however, that a decrease in the number of issued and
outstanding shares of the Company's common stock from the previous calendar
quarter shall not result in a decrease in the number of shares available for
issuance under the 1997 Incentive Plan. As a result of the Company's equity
offering discussed above, as of June 30, 2001, the number of shares of the
Company's common stock that may be covered by Incentive Awards has increased to
approximately 10.1 million.

    Any shares of the Company's common stock that are issued and are forfeited
or are subject to Incentive Awards under the 1997 Incentive Plan that expire or
terminate for any reason will remain available for issuance with respect to the
granting of Incentive Awards during the term of the 1997 Incentive Plan, except
as may otherwise be provided by applicable law. Shares of the Company's common
stock issued under the 1997 Incentive Plan may be either newly issued or
treasury shares, including shares of the Company's common stock that the Company
receives in connection with the exercise of an Incentive Award. The number and
kind of securities that may be issued under the 1997 Incentive Plan and pursuant
to then outstanding Incentive Awards are subject to adjustments to prevent
enlargement or dilution of rights resulting from stock dividends, stock splits,
recapitalizations, reorganization or similar transactions.

    The maximum number of shares of the Company's common stock subject to
Incentive Awards that may be granted or that may vest, as applicable, to any one
Covered Employee (defined below) during any calendar year shall be 500,000
shares, subject to adjustment under the provisions of the 1997 Incentive Plan.

    The maximum aggregate cash payout subject to Incentive Awards (including
SARs, performance units and performance shares payable in cash, or other
stock-based awards payable in cash) that may be granted to any one Covered
Employee during any calendar year is $2,500,000. For purposes of the 1997
Incentive Plan, "Covered Employees" means a named executive officer who is one
of the group covered employees as defined in Section 162(m) of the Code and the
regulation promulgated thereunder (i.e., generally the chief executive officer
and the other four most highly compensated executive officers for a given year.)

    The 1997 Incentive Plan is administrated by the Compensation Committee
appointed by the Board of Directors (the "Committee") consisting of not less
than two directors each of whom is (i) an "outside director" under
Section 162(m) of the Code and (ii) a "non-employee director" under Rule 16b-3
of the Securities Exchange Act of 1934. In addition, subject to applicable
shareholder approval requirements, the Company may issue NSOs outside the 1997
Incentive Plan.

    The exercise price of options granted under the 1997 Incentive Plan and
outside the 1997 Incentive Plan is at or above the fair market value per share
on the date the options are granted. The exercise of NSOs results in a U. S. tax
deduction to the Company equal to the income tax effect of the difference

                                       46

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

10. STOCKHOLDERS' EQUITY (CONTINUED)
between the exercise price and the market price at the exercise date. The
following table summarizes the stock option activity related to the Company's
plans (shares in thousands):



                                                      FISCAL YEAR ENDING JUNE 30,
                                    ---------------------------------------------------------------
                                           2001                  2000                  1999
                                    -------------------   -------------------   -------------------
                                               WEIGHTED              WEIGHTED              WEIGHTED
                                               AVERAGE               AVERAGE               AVERAGE
                                               EXERCISE              EXERCISE              EXERCISE
                                     SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                    --------   --------   --------   --------   --------   --------
                                                                         
Outstanding--beginning of fiscal
  year............................    9,470     $6.37      6,920      $5.55      2,292      $10.33
  Granted.........................    2,533      8.08      3,688       8.61      5,443        4.32
  Exercised.......................   (3,107)     4.70       (241)      4.56        (15)       6.36
  Forfeited.......................     (193)     4.92       (897)      9.80       (800)      10.87
                                    -------                -----                 -----
Outstanding--end of fiscal year...    8,703      7.49      9,470       6.37      6,920        5.55
                                    =======                =====                 =====
Exercisable--end of fiscal year...    5,820                4,370                 1,020
                                    =======                =====                 =====


STOCK INCENTIVE PLANS

    The foregoing stock option activity summary reflects that effective as of
September 4, 1998, the Committee authorized the cancellation and reissue of
stock options for employees that were not executive officers for the purpose of
changing the exercise price and vesting schedule of such options. A total of
473,556 stock options were cancelled, with a weighted average price of
approximately $13.09 per share, and reissued with an exercise price of $7.125
per share. The vesting of the new options is ratable over a three-year period
from the date of grant.

    The following table summarizes information about the stock options
outstanding at June 30, 2001 (shares in thousands):



                                                OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                             ---------------------------------------------------------   -----------------------------------
                             NUMBER OF SHARES     WEIGHTED-AVERAGE        WEIGHTED-      NUMBER OF SHARES      WEIGHTED-
                              OUTSTANDING AT    REMAINING CONTRACTUAL      AVERAGE        OUTSTANDING AT    AVERAGE EXERCISE
  RANGE OF EXERCISE PRICES    JUNE 30, 2001             LIFE            EXERCISE PRICE    JUNE 30, 2001          PRICE
  ------------------------   ----------------   ---------------------   --------------   ----------------   ----------------
                                                                                             
     $3.00 - $6.8125              1,921                  6.49                $3.65            1,802               $3.51
     $7.125 - $7.4375             1,252                  7.82                 7.25              439                7.13
     $8.125 - $8.3125             2,135                  8.67                 8.25            1,635                8.26
      $8.50 - $13.25              3,395                  7.69                 9.27            1,943                9.68


    The Company applies the intrinsic value method of APB 25 in accounting for
its employee stock incentive plans. Accordingly, no compensation expense has
been recognized for any stock options issued under the employee plans. Had
compensation expense for stock options granted to employees been recognized
based on the fair value at the grant dates, using the methodology prescribed by
SFAS 123, the

                                       47

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

10. STOCKHOLDERS' EQUITY (CONTINUED)
Company's net income (loss) and earnings per share would have been reduced to
pro forma amounts indicated below:



                                                   2001       2000       1999
                                                 --------   --------   --------
                                                  (THOUSANDS, EXCEPT PER SHARE
                                                            AMOUNTS)
                                                              
Net income (loss):
  As reported..................................  $62,710    $(18,959)  $(53,258)
  Pro forma....................................   52,338     (25,684)   (57,057)
Basic earnings per share of common stock:
  As reported..................................  $  0.63    $  (0.23)  $  (1.94)
  Pro forma....................................     0.53       (0.31)     (2.07)
Diluted earnings per share of common stock:
  As reported..................................  $  0.61    $  (0.23)  $  (1.94)
  Pro forma....................................     0.51       (0.31)     (2.07)


    SFAS 123 does not apply to options granted prior to January 1, 1995;
therefore, the pro forma effect disclosed above may not be representative of pro
forma amounts in future years.

    The total fair value of stock options granted during fiscal 2001, 2000 and
1999 was approximately $11,217,000, $19,541,000 and $15,695,000, respectively.
The fair value of each stock option grant was estimated on the date of grant
using the Black-Sholes option-pricing model, based on the following
weighted-average assumptions.



                                                         FISCAL YEAR OF GRANT
                                                    ------------------------------
                                                      2001       2000       1999
                                                    --------   --------   --------
                                                                 
Risk-free interest rate...........................    4.30%      6.40%      5.09%
Expected life of options..........................  5 years    5 years    5 years
Expected volatility of the Company's stock
  price...........................................      59%        67%        98%
Expected dividends................................     none       none       none


11. INCOME TAXES

    Components of income tax expense (benefit) are as follows:



                                                  FISCAL YEAR ENDED JUNE 30,
                                                -------------------------------
                                                  2001       2000        1999
                                                --------   ---------   --------
                                                          (THOUSANDS)
                                                              
Federal and State:
  Current.....................................  $ 2,304     $(5,588)   $     --
  Deferred
    U.S.......................................   34,698      (1,818)    (25,560)
    Foreign...................................       --          --        (115)
                                                -------     -------    --------
                                                $37,002     $(7,406)   $(25,675)
                                                =======     =======    ========


                                       48

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

11. INCOME TAXES (CONTINUED)
    No income tax payments were made for fiscal 2001, 2000 or 1999. Additionally
a deferred tax benefit of $7,004,000 has been allocated to stockholders' equity
in fiscal 2001 for compensation expense for income tax purposes in excess of
amounts recognized for financial reporting purposes.

    Income tax expense (benefit) differs from amounts computed by applying the
statutory federal rate as follows:



                                                              FISCAL YEAR ENDED JUNE 30,
                                                         ------------------------------------
                                                           2001          2000          1999
                                                         --------      --------      --------
                                                                            
Income tax computed at statutory rate..............        35.0%        (35.0)%       (35.0)%
Amortization of goodwill disallowance..............         2.2           7.0           2.0
State taxes........................................         1.4            --            --
Change in valuation allowance and other............        (1.4)          1.5           0.5
                                                           ----         -----         -----
                                                           37.2%        (26.5)%       (32.5)%
                                                           ====         =====         =====


    Deferred tax assets (liabilities) are comprised of the following:



                                                          FISCAL YEAR ENDED JUNE 30,
                                                          --------------------------
                                                             2001            2000
                                                          ----------      ----------
                                                                 (THOUSANDS)
                                                                    
Net operating loss and tax credit carry forwards....      $  69,376       $  88,491
Property and equipment..............................       (182,442)       (175,511)
Self insurance reserves.............................            405           1,616
Allowance for bad debts.............................          1,542           1,129
Acquisition expenses, expensed for tax..............           (626)           (626)
Other...............................................            148             862
                                                          ---------       ---------
Net deferred tax liability..........................       (111,597)        (84,039)
Valuation allowance of deferred tax assets..........        (15,803)        (15,668)
                                                          ---------       ---------
Net deferred tax liability, net of valuation
  allowance.........................................      $(127,400)      $ (99,707)
                                                          =========       =========


                                       49

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

11. INCOME TAXES (CONTINUED)

    A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. As described below, due
to annual limitations on certain net operating loss carryforwards, it does not
appear more likely than not that the Company will be able to utilize all
available carryforwards prior to their ultimate expiration.

    The Company estimates that as of June 30, 2001, the Company will have
available approximately $185,474,305 of net operating loss carryforwards (which
will continue to expire in fiscal 2002). Approximately $53,570,522 of the net
operating loss carryforwards are subject to an annual limitation of
approximately $1,012,000, under Sections 382 and 383 of the Internal Revenue
Code.

12. LEASING ARRANGEMENTS

    The Company leases certain property and equipment under non-cancelable
operating leases that generally expire at various dates through fiscal 2006. The
term of the operating leases generally run from 24 to 60 months with varying
payment dates throughout each month.

    As of June 30, 2001, the future minimum lease payments under non-cancelable
operating leases are as follows (in thousands):



                                                               LEASE
FISCAL YEAR ENDING JUNE 30,                                   PAYMENTS
---------------------------                                   --------
                                                           
2002........................................................  $ 4,689
2003........................................................    4,587
2004........................................................    4,493
2005........................................................    4,426
2006........................................................    2,626
                                                              -------
                                                              $20,821
                                                              =======


    Operating lease expense was approximately $6,072,000, $6,460,000 and
$7,313,000 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.

13. EMPLOYEE BENEFIT PLANS

    In order to retain quality personnel, the Company maintains 401(k) plans as
part of its employee benefits package. From July 1, 1998 through December 31,
1998, the Company matched 100% of employee contributions into its 401(k) plan up
to a maximum of $1,000 per participant per year. From January 1, 1999 through
March 31, 2000, the Company elected not to match employee contributions.
Commencing April 1, 2000, the Company matches, 100% of employee contributions
into its 401(k) plan up to a maximum of $250 per participant per year. The
maximum limit was increased to $500 effective October 1, 2000, $750 effective
January 1, 2001 and $1,000 effective July 1, 2001. The Company's matching
contributions for fiscal 2001, 2000 and 1999 were approximately $1,857,000,
$77,000 and $908,000, respectively.

                                       50

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

14. TRANSACTIONS WITH RELATED PARTIES

    In connection with the negotiation of the terms of a five-year employment
agreement with Mr. Francis D. John, Chairman of the Board, President and Chief
Executive Officer of the Company, and as an inducement to Mr. John to enter into
such employment agreement, the Company entered into a separate agreement with
Mr. John, dated as of August 2, 1999, which as amended through June 30, 2001,
provides that $6.5 million in loans previously made by the Company to Mr. John,
together with the accrued interest payable thereon, will be forgiven, ratably
during the ten year period commencing on July 1, 2001 and ending on June 30,
2010. The agreement provides that the foregoing forgiveness of indebtedness is
predicated and conditioned upon Mr. John remaining employed by the Company
during such period. In addition, in the event that Mr. John is terminated by the
Company for Cause (as defined in the agreement), or in the event that Mr. John
voluntarily terminates his employment with the Company, the agreement further
provides that the entire remaining principal balance of these loans, together
with accrued interest payable thereon, will become immediately due and payable
by Mr. John. However, in the event that Mr. John's employment is terminated for
"Good Reason", or as a result of Mr. John's death or "Disability", or as a
result of a "Change in Control" (all as defined in that agreement), the
agreement stipulates that the remaining principal balance outstanding on the
loans, together with accrued interest thereon will be forgiven.

    In connection with the negotiation of an employment agreement with Thomas K.
Grundman, the Company's Executive Vice President, Chief Financial Officer and
Chief Accounting Officer, the Company made a $240,000 short-term loan and a
$150,000 relocation loan to assist Mr. Grundman's relocation to the Company's
executive offices. Interest on these loans accrues at a rate of 6.125% per
annum. The short-term loan has been repaid. The relocation loan together with
accrued interest will be forgiven in three installments of $50,000 each on
July 1, 2000, 2001 and 2002; provided, however, that if Mr. Grundman's
employment is terminated during such period in a way that (i) triggers severance
obligations, all amounts owed shall be immediately forgiven or (ii) does not
trigger severance obligations, all amounts owed shall be immediately due and
payable.

15. BUSINESS SEGMENT INFORMATION

    The Company's reportable business segments are well servicing and contract
drilling. Oil and natural gas production operations previously were presented
separately as a reportable business segment and are now included in
"corporate/other."

    WELL SERVICING:  the Company's operations provide well servicing (ongoing
maintenance of existing oil and natural gas wells), workover (major repairs or
modifications necessary to optimize the level of production from existing oil
and natural gas wells) and production services (fluid hauling and fluid storage
tank rental).

    CONTRACT DRILLING:  the Company provides contract drilling services for
major and independent oil companies onshore the continental United States,
Argentina and Ontario, Canada.

    The Company's management evaluates the performance of its operating segments
based on net income and operating profits (revenues less direct operating
expenses). Corporate expenses include general corporate expenses associated with
managing all reportable operating segments. Corporate assets

                                       51

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

15. BUSINESS SEGMENT INFORMATION (CONTINUED)
consist principally of cash and cash equivalents, deferred debt financing costs
and deferred income tax assets.



                                                       WELL      CONTRACT   CORPORATE
                                                     SERVICING   DRILLING    /OTHER       TOTAL
                                                     ---------   --------   ---------   ----------
                                                                            
TWELVE MONTHS ENDED JUNE 30, 2001
Operating revenues.................................  $758,273    $107,639   $  7,350    $  873,262
Operating profit...................................   265,165      30,273      2,886       298,324
Depreciation, depletion and amortization...........    63,578       7,947      3,622        75,147
Interest expense...................................     1,831          --     54,729        56,560
Net income (loss) before extraordinary gain
(loss)*............................................   109,159       9,466    (56,344)       62,281
Identifiable assets................................   664,611      95,473    278,325     1,038,409
Capital expenditures (excluding acquisitions)......    50,799      15,884     15,437        82,120

TWELVE MONTHS ENDED JUNE 30, 2000
Operating revenues.................................  $559,492    $ 68,428   $  9,812    $  637,732
Operating profit...................................   159,552      10,129      5,665       175,346
Depreciation, depletion and amortization...........    62,680       6,105      2,187        70,972
Interest expense...................................     2,300          --     69,630        71,930
Net income (loss) before extraordinary gain (loss)
*..................................................    48,062      (1,664)   (56,968)      (20,570)
Identifiable assets................................   635,304      89,574    322,754     1,047,632
Capital expenditures (excluding acquisitions)......    30,098       8,282      3,422        41,802

TWELVE MONTHS ENDED JUNE 30, 1999
Operating revenues.................................  $433,657    $ 50,613   $  7,547    $  491,817
Operating profit...................................   108,692       7,057      4,640       120,389
Depreciation, depletion and amortization...........    52,638       6,586      2,850        62,074
Interest expense...................................     1,659          18     65,724        67,401
Net income (loss) before extraordinary gain
(loss)*............................................    15,447      (4,093)   (64,612)      (53,258)
Identifiable assets................................   651,781      81,074    209,860       942,715
Capital expenditures (excluding acquisitions)......    26,776       1,063      3,468        31,307


------------------------

*   Net income (loss) before extraordinary gain (loss) for the contract drilling
    segment includes a portion of well servicing general and administrative
    expenses allocated on a percentage of revenue basis.

    Operating revenues and operating profit for the Company's foreign
operations, which includes Argentina and Canada, were $54.5 million and
$13.4 million, respectively, for the year ended June 30, 2001. Operating
revenues and operating profit for the Company's foreign operations, which
includes Argentina and Canada, were $37.7 million and $7.3 million,
respectively, for the year ended June 30, 2000. Operating revenues and operating
profit for the Company's foreign operations, which includes Argentina and
Canada, were $26.9 million and $5.4 million, respectively, for the year ended
June 30, 1999.

    The Company had $84.1 million and $66.9 million of identifiable assets as of
June 30, 2001 and 2000, respectively, related to its foreign operations.

                                       52

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

16. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES



                                                                   YEAR ENDED JUNE 30,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
                                                                           
Fair value of common stock issued in purchase
transactions................................................   $8,120    $    --    $    --
Fair value of common stock issued to lender in lieu of
fees........................................................       --         --          1
Fair value of common stock issued upon conversion of
long-term debt..............................................      957      3,606         --
Capital lease obligations...................................    9,595     10,758     17,120


17. UNAUDITED SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS

    Summarized quarterly financial data for fiscal 2001, 2000 and 1999 are as
follows:



                                                       FIRST      SECOND     THIRD      FOURTH
                                                      QUARTER    QUARTER    QUARTER    QUARTER
                                                      --------   --------   --------   --------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                           
2001
Revenues............................................  $191,679   $203,911   $227,370   $250,302
Income (loss) from operations.......................    12,229     18,063     27,912     41,079
Net income (loss) before extraordinary gain
(loss)..............................................     7,510     11,094     17,587     26,090
Extraordinary gain (loss), net of tax...............     1,197         68       (167)      (669)
                                                      --------   --------   --------   --------
Net income (loss)...................................     8,707     11,162     17,420     25,421
                                                      ========   ========   ========   ========
Earnings (loss) per share:
  Basic--before extraordinary gain (loss)...........      0.08       0.11       0.18       0.26
  Extraordinary gain (loss), net of tax.............      0.01         --         --      (0.01)
                                                      --------   --------   --------   --------
  Basic--after extraordinary gain (loss)............      0.09       0.11       0.18       0.25
                                                      ========   ========   ========   ========
  Diluted--before extraordinary gain (loss).........      0.08       0.11       0.17       0.25
  Extraordinary gain (loss),........................      0.01         --         --      (0.01)
                                                      --------   --------   --------   --------
  Diluted--after extraordinary gain (loss)..........      0.09       0.11       0.17       0.24
                                                      ========   ========   ========   ========
Weighted average shares outstanding:
  Basic.............................................    96,880     97,534     98,211    100,179
  Diluted...........................................   100,472    100,534    103,524    104,401

2000
Revenues............................................  $149,892   $159,389   $158,551   $169,900
Income (loss) from operations.......................   (13,191)    (7,953)    (5,730)    (1,102)
Net income (loss) before extraordinary gain
(loss)..............................................    (9,451)    (5,693)    (4,150)    (1,276)
Extraordinary gain (loss), net of tax...............        --         --         --      1,611
                                                      --------   --------   --------   --------
Net income (loss)...................................    (9,451)    (5,693)    (4,150)       335
                                                      ========   ========   ========   ========


                                       53

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

17. UNAUDITED SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS
(CONTINUED)



                                                       FIRST      SECOND     THIRD      FOURTH
                                                      QUARTER    QUARTER    QUARTER    QUARTER
                                                      --------   --------   --------   --------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                           
Earnings (loss) per share:
  Basic--before extraordinary gain (loss)...........     (0.11)     (0.07)     (0.05)     (0.01)
  Extraordinary gain (loss), net of tax.............        --         --         --       0.02
                                                      --------   --------   --------   --------
  Basic--after extraordinary gain (loss)............     (0.11)     (0.07)     (0.05       0.01
                                                      ========   ========   ========   ========
  Diluted--before extraordinary gain (loss).........     (0.11)     (0.07)     (0.05)     (0.01)
  Extraordinary gain (loss), net of tax.............        --         --         --       0.02
                                                      --------   --------   --------   --------
  Diluted--after extraordinary gain (loss)..........     (0.11)     (0.07)     (0.05       0.01
                                                      ========   ========   ========   ========
Weighted average shares outstanding:
  Basic.............................................    82,738     82,738     84,633     85,567
  Diluted...........................................    82,738     82,738     84,633     85,567


18. VOLUMETRIC PRODUCTION PAYMENT

    In March 2000, Key sold a portion of its future oil and natural gas
production from Odessa Exploration Incorporated, its wholly owned subsidiary,
for gross proceeds of $20 million pursuant to an agreement under which the
purchaser is entitled to receive a share of the production from certain oil and
natural gas properties in amounts ranging from 3,500 to 10,000 barrels of oil
and 58,800 to 122,100 Mmbtus of natural gas per month over a six year period
ending February 2006. The total volume of the forward sale is approximately
486,000 barrels of oil and 6.135 million Mmbtus of natural gas.

19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

    The Company's senior notes are guaranteed by all of the Company's
subsidiaries (except for the foreign subsidiaries), all of which are
wholly-owned. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to tranfer funds to the parent company.

    The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
Statements of Guarantors and Issuers of Guaranteed Securities Registered or
Being Registered." The information is not intended to present the financial
position, results of operations and cash flows of the individual companies or
groups of companies in accordance with generally accepted accounting principles.

                                       54

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

19.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                     CONDENSED CONSOLIDATING BALANCE SHEETS



                                                                  JUNE 30, 2001
                                       -------------------------------------------------------------------
                                                                    NON-
                                        PARENT     GUARANTOR      GUARANTOR
                                       COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       --------   ------------   -----------   ------------   ------------
                                                                 (IN THOUSANDS)
                                                                               
Assets:
  Current assets.....................  $ 10,680    $  165,653      $29,817      $      --      $  206,150
  Net property and equipment.........    21,418       717,989       54,309             --         793,716
  Goodwill, net......................     3,374       184,379        2,122             --         189,875
  Deferred costs, net................    17,624            --           --             --          17,624
  Intercompany receivables...........   664,592            --           --       (664,592)             --
  Other assets.......................    15,303         5,616           --             --          20,919
                                       --------    ----------      -------      ---------      ----------
Total assets.........................  $732,991     1,073,637      $86,248      $(664,592)     $1,228,284
                                       ========    ==========      =======      =========      ==========
Liabilities and equity:
  Current liabilities................  $ 35,671    $   64,679      $15,203      $      --      $  115,553
  Long-term debt.....................   470,668        15,331          (38)            --         485,961
  Intercompany paybles...............        --       608,764       55,828       (664,592)             --
  Deferred tax liability.............   127,400            --           --             --         127,400
  Other long-term liabilities........     8,240        14,252           --             --          22,492
  Stockholders' equity...............    91,012       370,611       15,255             --         476,878
                                       --------    ----------      -------      ---------      ----------
Total liabilities and stockholders'
  equity.............................  $732,991    $1,073,637      $86,248      $(664,592)     $1,228,284
                                       ========    ==========      =======      =========      ==========




                                                                  JUNE 30, 2000
                                       -------------------------------------------------------------------
                                                                    NON-
                                        PARENT     GUARANTOR      GUARANTOR
                                       COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       --------   ------------   -----------   ------------   ------------
                                                                 (IN THOUSANDS)
                                                                               
Assets:
  Current assets.....................  $120,216    $  115,178      $18,195      $      --      $  253,589
  Net property and equipment.........     7,308       704,531       48,722             --         760,561
  Goodwill, net......................     3,606       192,641        2,386             --         198,633
  Deferred costs, net................    18,855            --           --             --          18,855
  Intercompany receivables...........   788,166            --           --       (788,166)             --
  Other assets.......................     9,062         5,565           --             --          14,627
                                       --------    ----------      -------      ---------      ----------
Total assets.........................  $947,213    $1,017,915      $69,303      $(788,166)     $1,246,265
                                       ========    ==========      =======      =========      ==========
Liabilities and equity:
  Current liabilities................  $ 33,637    $   47,736      $11,475      $      --      $   92,848
  Long-term debt.....................   637,438        14,486           21             --         651,945
  Intercompany paybles...............        --       740,268       47,898       (788,166)             --
  Deferred tax liability.............    99,707            --           --             --          99,707
  Other long-term liabilities........     1,751        17,127           --             --          18,878
  Stockholders' equity...............   174,680       198,298        9,909             --         382,887
                                       --------    ----------      -------      ---------      ----------
Total liabilities and stockholders'
  equity.............................  $947,213    $1,017,915      $69,303      $(788,166)     $1,246,265
                                       ========    ==========      =======      =========      ==========


                                       55

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

19.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



                                                                  JUNE 30, 2001
                                       -------------------------------------------------------------------
                                                                    NON-
                                        PARENT     GUARANTOR      GUARANTOR
                                       COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       --------   ------------   -----------   ------------   ------------
                                                                 (IN THOUSANDS)
                                                                               
Revenues.............................  $  2,018     $816,724       $54,520       $    --        $873,262
Costs and expenses:..................
  Direct expenses....................        --      533,807        41,131            --         574,938
  Depreciation, depletion and
    amortization expense.............     1,353       69,714         4,080            --          75,147
  General and administrative
    expense..........................    18,991       43,644         3,436            --          66,071
  Interest...........................    54,464        1,275           821            --          56,560
  Other..............................       318          943             2            --           1,263
                                       --------     --------       -------       -------        --------
Total costs and expenses.............    75,126      649,383        49,470            --         773,979
                                       --------     --------       -------       -------        --------
Income (loss) before income taxes....   (73,108)     167,341         5,050            --          99,283
Income tax (expense) benefit.........    27,247      (62,367)       (1,882)           --         (37,002)
                                       --------     --------       -------       -------        --------
Net income (loss) before
  extraordinary items................   (45,861)     104,974         3,168            --          62,281
Extraordinary items, net of tax......       429           --            --            --             429
                                       --------     --------       -------       -------        --------
Net income (loss)....................  $(45,432)    $104,974       $ 3,168       $    --        $ 62,710
                                       ========     ========       =======       =======        ========




                                                                   JUNE 30, 2000
                                        -------------------------------------------------------------------
                                                                     NON-
                                         PARENT     GUARANTOR      GUARANTOR
                                        COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                        --------   ------------   -----------   ------------   ------------
                                                                  (IN THOUSANDS)
                                                                                
Revenues..............................  $    790     $599,225       $37,717       $    --        $637,732

Costs and expenses:
  Direct expenses.....................        --      431,997        30,389            --         462,386
  Depreciation, depletion and
    amortization expense..............     1,162       66,453         3,357            --          70,972
  General and administrative
    expense...........................    11,101       44,473         3,198            --          58,772
  Interest............................    69,802        1,527           601            --          71,930
  Other...............................        --        1,648            --            --           1,648
                                        --------     --------       -------       -------        --------
Total costs and expenses..............    82,065      546,098        37,545            --         665,708
                                        --------     --------       -------       -------        --------
Income (loss) before income taxes.....   (81,275)      53,127           172            --         (27,976)
Income tax (expense) benefit..........    21,516      (14,064)          (46)           --           7,406
                                        --------     --------       -------       -------        --------
Net income (loss) before extraordinary
  items...............................   (59,759)      39,063           126            --         (20,570)
Extraordinary items, net of tax.......     1,611           --            --            --           1,611
                                        --------     --------       -------       -------        --------
Net income (loss).....................  $(58,148)    $ 39,063       $   126       $    --        $(18,959)
                                        ========     ========       =======       =======        ========


                                       56

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

19.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                                   JUNE 30, 1999
                                        -------------------------------------------------------------------
                                                                     NON-
                                         PARENT     GUARANTOR      GUARANTOR
                                        COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                        --------   ------------   -----------   ------------   ------------
                                                                  (IN THOUSANDS)
                                                                                
Revenues..............................  $  1,086     $463,813       $26,918       $    --        $491,817
Costs and expenses:
  Direct expenses.....................        --      349,936        21,492            --         371,428
  Depreciation, depletion and
    amortization expense..............       428       58,403         3,243            --          62,074
  General and administrative
    expense...........................    14,962       34,490         3,656            --          53,108
  Interest............................    65,724        1,559           118            --          67,401
  Other...............................    10,811        5,928            --            --          16,739
                                        --------     --------       -------       -------        --------
Total costs and expenses..............    91,925      450,316        28,509            --         570,750
                                        --------     --------       -------       -------        --------
Income (loss) before income taxes.....   (90,839)      13,497        (1,591)           --         (78,933)
Income tax (expense) benefit..........    29,547       (4,390)          518            --          25,675
                                        --------     --------       -------       -------        --------
Net income (loss) before extraordinary
  items...............................   (61,292)       9,107        (1,073)           --        $(53,258)
Extraordinary items, net of tax.......        --           --            --            --              --
                                        --------     --------       -------       -------        --------
Net income (loss).....................  $(61,292)    $  9,107       $(1,073)      $    --        $(53,258)
                                        ========     ========       =======       =======        ========




                                                         FISCAL YEAR ENDED JUNE 30, 2001
                                       --------------------------------------------------------------------
                                                                     NON-
                                        PARENT      GUARANTOR      GUARANTOR
                                        COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       ---------   ------------   -----------   ------------   ------------
                                                                  (IN THOUSANDS)
                                                                                
Net cash provided by (used in)
  operating activities...............  $  68,567     $ 64,408       $ 9,742       $    --        $ 142,717
Net cash provided by (used in)
  investing activities...............    (19,459)     (56,711)       (7,180)           --          (83,350)
Net cash provided by (used in)
  financing activities...............   (158,627)      (8,456)          (59)           --         (167,142)
                                       ---------     --------       -------       -------        ---------
Net increase (decrease) in cash......   (109,519)        (759)        2,503            --         (107,775)
Cash and cash equivalents at
  beginning of period................    111,166       (1,246)          (47)           --          109,873
                                       ---------     --------       -------       -------        ---------
Cash and cash equivalents at end of
  period.............................  $   1,647     $ (2,005)      $ 2,456       $    --        $   2,098
                                       =========     ========       =======       =======        =========


                                       57

                            KEY ENERGY SERVICES INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          JUNE 30, 2001, 2000 AND 1999

19.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                         FISCAL YEAR ENDED JUNE 30, 2000
                                       -------------------------------------------------------------------
                                                                    NON-
                                        PARENT     GUARANTOR      GUARANTOR
                                       COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       --------   ------------   -----------   ------------   ------------
                                                                 (IN THOUSANDS)
                                                                               
Net cash provided by (used in)
  operating activities...............  $ 18,962     $ 10,434       $ 5,464       $    --        $ 34,860
Net cash provided by (used in)
  investing activities...............    (4,468)     (26,671)       (6,627)           --         (37,766)
Net cash provided by (used in)
  financing activities...............    80,070        9,287           (56)           --          89,301
                                       --------     --------       -------       -------        --------
Net increase (decrease) in cash......    94,564       (6,950)       (1,219)           --          86,395
Cash and cash equivalents at
  beginning of period................    16,602        5,704         1,172            --          23,478
                                       --------     --------       -------       -------        --------
Cash and cash equivalents at end of
  period.............................  $111,166     $ (1,246)      $   (47)      $    --        $109,873
                                       ========     ========       =======       =======        ========




                                                         FISCAL YEAR ENDED JUNE 30, 1999
                                       --------------------------------------------------------------------
                                                                     NON-
                                        PARENT      GUARANTOR      GUARANTOR
                                        COMPANY    SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                       ---------   ------------   -----------   ------------   ------------
                                                                  (IN THOUSANDS)
                                                                                
Net cash provided by (used in)
  operating activities...............  $ (49,167)    $ 26,508       $ 9,232       $    --        $ (13,427)
Net cash provided by (used in)
  investing activities...............   (272,620)     (13,986)       (8,048)           --         (294,654)
Net cash provided by (used in)
  financing activities...............    313,526       (7,196)          (36)           --          306,294
                                       ---------     --------       -------       -------        ---------
Net increase (decrease) in cash......     (8,261)       5,326         1,148            --           (1,787)
Cash and cash equivalents at
  beginning of period................     24,863          378            24            --           25,265
                                       ---------     --------       -------       -------        ---------
Cash and cash equivalents at end of
  period.............................  $  16,602     $  5,704       $ 1,172       $    --        $  23,478
                                       =========     ========       =======       =======        =========


                                       58

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Stockholders
Key Energy Services, Inc.:

    We have audited the accompanying consolidated balance sheets of Key Energy
Services, Inc., and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income, cash flows and
stockholders' equity for each of the years in the three-year period ended
June 30, 2001. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Key Energy Services, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

    As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.

                                          KPMG LLP
Midland, Texas
August 16, 2001

                                       59

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

    The following table sets forth the names and ages, as of October 25, 2001,
of each of the Company's executive officers and directors and includes their
current positions.



NAME                                          AGE                       POSITION
----                                        --------                    --------
                                                 
Francis D. John...........................     47      Chairman of the Board, President, Chief
                                                       Executive Officer and Chief Operating
                                                       Officer
David J. Breazzano........................     45      Director
Kevin P. Collins..........................     51      Director
William D. Fertig.........................     45      Director
William D. Manly..........................     78      Director
W. Phillip Marcum.........................     57      Director
Morton Wolkowitz..........................     73      Director
Thomas K. Grundman........................     41      Executive Vice President of International
                                                       Operations, Chief Financial Officer and
                                                       Chief Accounting Officer
James J. Byerlotzer.......................     55      Executive Vice President of Domestic
                                                       Operations


    Francis D. John has been the President and Chief Executive Officer since
October 1989. In addition, Mr. John has been Chairman of the Board since August
1996. Mr. John re-assumed the duties of Chief Operating Officer in April 1999.
He has been a Director and President since June 1988 and served as the Chief
Financial Officer from October 1989 through July 1997. Before joining the
Company, he was Executive Vice President of Finance and Manufacturing of
Fresenius U.S.A., Inc. Mr. John previously held operational and financial
positions with Unisys, Mack Trucks and Arthur Andersen. He received a BS from
Seton Hall University and an MBA from Fairleigh Dickinson University.

    David J. Breazzano has been a Director since October 1997. Mr. Breazzano is
one of the founding principals at DDJ Capital Management, LLC, an investment
management firm established in 1996. Mr. Breazzano previously served as a Vice
President and Portfolio Manager at Fidelity Investments ("Fidelity") from 1990
to 1996. Prior to joining Fidelity, Mr. Breazzano was President and Chief
Investment Officer of the T. Rowe Price Recovery Fund. He is also a director of
Waste Systems International, Inc. and Samuels Jewelers, Inc. He holds a BA from
Union College and an MBA from Cornell University.

    Kevin P. Collins has been a Director since March 1996. Mr. Collins has been
a managing member of the Old Hill Company LLC since 1997. From 1992 to 1997, he
served as a principal of JHP Enterprises, Ltd., and from 1985 to 1992, as Senior
Vice President of DG Investment Bank, Ltd., both of which were engaged in
providing corporate finance and advisory services. Mr. Collins was a director of
WellTech, Inc. ("WellTech") from January 1994 until March 1996 when WellTech was
merged into the Company. Mr. Collins is also a director of The Penn Traffic
Company, Metretek Technologies, Inc. and London Fog Industries, Inc. He holds a
BS and an MBA from the University of Minnesota.

    William D. Fertig has been a Director since April 2000. Mr. Fertig has been
a Principal, Manager of Sales and Training at McMahan Securities Co. L.P. since
1990. Mr. Fertig previously served as a Senior Vice President and Manager of
Convertible Sales at Drexel Burnham Lambert prior to joining McMahan

                                       60

Securities in 1990, and from 1979 to 1989, served as Vice President and
Convertible Securities Sales Manager at Credit Suisse First Boston. He holds a
BS from Allegheny College and an MBA from NYU Graduate Business School.

    William D. Manly has been a Director since December 1989. He retired from
his position as an Executive Vice President of Cabot Corporation in 1986, a
position he had held since 1978. Mr. Manly is a director of Metallamics, Inc.
and CitiSteel, Inc. He holds a BS and an MS from the University of Notre Dame.

    W. Phillip Marcum has been a Director since March 1996. Mr. Marcum was a
director of WellTech from January 1994 until March 1996 when WellTech was merged
into the Company. From October 1995 until March 1996, Mr. Marcum was the acting
Chairman of the Board of Directors of WellTech. He has been Chairman of the
Board, President and Chief Executive Officer of Metretek Technologies, Inc.,
formerly known as Marcum Natural Gas Services, Inc. ("Metretek Technologies"),
since January 1991 and is a director of TestAmerica, Inc. He holds a BBA from
Texas Tech University.

    Morton Wolkowitz has been a Director since December 1989. Mr. Wolkowitz
served as President and Chief Executive Officer of Wolkow Braker Roofing
Corporation, a company that provided a variety of roofing services, from 1958
through 1989. Mr. Wolkowitz has been a private investor since 1989. He holds a
BS from Syracuse University.

    Thomas K. Grundman has been an Executive Vice President and the Chief
Financial Officer since July 1999 and the Chief Accounting Officer since
November 1999. Effective December 1999, Mr. Grundman became Executive Vice
President of International Operations. Mr. Grundman also served as Treasurer
from July 1999 through August 2000. He joined the Company in April 1999 as Sr.
Vice President of Strategic and Business Development. From late 1996 through
April 1999, Mr. Grundman was Senior Vice President at PNC Bank, N.A. where he
ran the Oil and Gas Corporate Finance Group and was responsible for providing
financing and advisory services in all sectors of the energy industry. From 1984
through 1996, Mr. Grundman held several positions at Chase Manhattan Bank and
its predecessor institutions, most recently as a Managing Director in the oil
and gas group. Mr. Grundman holds a BS in Finance from Syracuse University.

    James J. Byerlotzer has been Executive Vice President of Domestic Well
Service and Drilling Operations since July 1999. Effective December 1999,
Mr. Byerlotzer's title was changed to Executive Vice President of Domestic
Operations. He joined the Company in September 1998 as Vice President--Permian
Basin Operations after the Company's acquisition of Dawson Production
Services, Inc. ("Dawson"). From February 1997 to September 1998, he served as
the Senior Vice President and Chief Operating Officer of Dawson. From 1981 to
1997, Mr. Byerlotzer was employed by Pride Petroleum Services, Inc. ("Pride").
Beginning in February 1996, Mr. Byerlotzer served as the Vice President--
Domestic Operations of Pride. Prior to that time, he served as Vice
President--Permian Basin of Pride and in various other operating positions in
Pride's Gulf Coast and California operations. Mr. Byerlotzer holds a BA from the
University of Missouri in St. Louis.

    Directors are elected at the Company's annual meeting of stockholders and
serve until the next annual meeting of stockholders and until their successors
are elected and qualified. Each executive officer holds office until the first
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor has been duly elected and qualified.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

    Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who beneficially own
more than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership on Form 3 and changes in ownership on Forms 4 or 5
with the Securities and Exchange Commission (the "Commission"). Such officers,
directors and 10%

                                       61

stockholders also are required by Commission rules to furnish the Company with
copies of all Section 16(a) reports they file. Based solely on its review of the
copies of such forms furnished to the Company, the Company believes that its
directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements during the fiscal year ended June 30, 2001.

ITEM 11. EXECUTIVE COMPENSATION.

    SUMMARY COMPENSATION TABLE.  The following table reflects the compensation
for services to the Company for the years ended June 30, 2001, 2000 and 1999 for
(i) the Chief Executive Officer of the Company and (ii) the other two executive
officers of the Company other than the Chief Executive Officer who were serving
as executive officers at June 30, 2001 (the "Named Executive Officers").



                                                                                     LONG TERM
                                                                                    COMPENSATION
                                                                                       AWARDS
                                                  ANNUAL                            ------------
                                               COMPENSATION                            SHARES        ALL OTHER
                                 FISCAL    --------------------    OTHER ANNUAL      UNDERLYING    COMPENSATION
NAME AND PRINCIPAL POSITION       YEAR     SALARY($)   BONUS($)   COMPENSATION($)    OPTIONS(1)         ($)
---------------------------     --------   ---------   --------   ---------------   ------------   -------------
                                                                                 
Francis D. John ..............    2001       594,885   835,000          67,211(2)     1,460,000          74,998(3)
  President, Chief Executive      2000       589,519   307,776              --        2,000,000              --
  Officer and Chief Operating     1999       429,000        --              --        1,200,000              --
  Officer

Thomas K. Grundman ...........    2001       274,966   315,000              --          135,000          78,519(4)
  Executive Vice President of     2000       203,845   100,000              --          500,000          24,975(5)
  International Operations,       1999        35,259(6)      --             --          300,000              --
  Chief Financial Officer, and
  Chief Accounting Officer

James J. Byerlotzer ..........    2001       249,324   275,000              --          115,000         101,000(7)
  Executive Vice President of     2000       185,000    89,000              --          300,000         100,250(8)
  Domestic Operations             1999       121,153(9)      --             --          260,000          75,000(10)


------------------------

(1) Represents the number of shares issuable pursuant to vested and non-vested
    stock options granted during the applicable fiscal year.

(2) Represents reimbursement of (i) medical expenses of $12,186,
    (ii) professional fees of $45,025, and (iii) other miscellaneous personal
    expenses of $10,000.

(3) Represents premium payments by the Company for life and health insurance.

(4) Represents (i) forgiveness of relocation loan indebtedness and interest to
    Mr. Grundman of $52,794, (ii) premium payments made by the Company for life
    insurance of $24,725 and (iii) contributions by the Company on behalf of
    Mr. Grundman to the Key Energy Services, Inc. 401(k) Savings & Retirement
    Plan of $1,000.

(5) Represents (i) premium payments by the Company for life insurance of $24,725
    and (ii) contributions by the Company on behalf of Mr. Grundman to the Key
    Energy Services, Inc. 401(k) Savings & Retirement Plan of $250.

(6) Mr. Grundman joined the Company as an executive officer in April 1999.

(7) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
    agreement entered into in connection with the Company's acquisition of
    Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
    Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
    Savings & Retirement Plan of $1,000.

                                       62

(8) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
    agreement entered into in connection with the Company's acquisition of
    Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
    Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
    Savings & Retirement Plan of $250.

(9) Mr. Byerlotzer joined the Company as an executive officer in
    September 1998.

(10) Represents payments to Mr. Byerlotzer pursuant to a non-competition
    agreement entered into in connection with the Company's acquisition of
    Dawson Production Services, Inc.

OPTION GRANTS IN LAST FISCAL YEAR

    The following table sets forth certain information relating to options
granted under the Key Energy Group, Inc. 1997 Incentive Plan (the "Plan") and
outside the Plan to the Named Executive Officers during fiscal 2001. The Company
did not grant any stock appreciation rights during fiscal 2001.



                                             NUMBER OF     INDIVIDUAL GRANTS
                                           SECURITIES OF      % OF TOTAL
                                            UNDERLYING      OPTIONS GRANTED    EXERCISE                 GRANT DATE
                                              OPTIONS       TO EMPLOYEES IN    PRICE PER   EXPIRATION    PRESENT
NAME                                          GRANTED       FISCAL YEAR(1)       SHARE        DATE      VALUE (2)
----                                       -------------   -----------------   ---------   ----------   ----------
                                                                                         
Francis D. John..........................      960,000(3)         37.9%          $8.25      08/07/10    $4,339,000
                                               500,000(4)         19.7%          $8.25      12/11/10     2,260,000
Thomas K. Grundman.......................      135,000(5)          5.3%          $8.25      12/11/10       620,000
James J. Byerlotzer......................      115,000(6)          4.5%          $8.25      12/11/10       520,000


------------------------

(1) Based on options to purchase a total of 2,533,000 of Common Stock granted
    during fiscal 2001.

(2) The grant date value of stock options was estimated using the Black-Scholes
    option pricing model with the following assumptions: expected
    volatility--59%; risk-free interest rate--4.3%; time of exercise--5 years;
    and no dividend yield.

(3) These options were granted on August 7, 2000, and vested immediately on the
    date of grant.

(4) These options were granted on December 11, 2000 and vested immediately on
    the date of grant.

(5) These options were granted on December 11, 2000 and vest in three equal
    annual installments commencing on July 1, 2001 as follows: 45,000 on
    July 1, 2001; 45,000 on July 1, 2002; and 45,000 on July 1, 2003.

(6) These options were granted on December 11, 2000 and vest in three equal
    annual installments commencing on July 1, 2001 as follows: 38,333 on
    July 1, 2001; 38,333 on July 1, 2002; and 38,334 on July 1, 2003.

                                       63

AGGREGATED OPTION EXERCISES AND VALUES AS OF FISCAL YEAR END

    The following table sets forth certain information as of June 30, 2001
relating to the number and value of (i) options exercised by the Named Executive
Officers and (ii) unexercised options held by the Named Executive Officers.



                                                                                                 VALUE OF UNEXERCISED
                                  SHARES                           NUMBER OF UNEXERCISED         IN-THE MONEY-OPTIONS
                                 ACQUIRED                        OPTIONS AT JUNE 30, 2001        AT JUNE 30, 2001 (2)
                                    ON             VALUE        ---------------------------   ---------------------------
NAME                           EXERCISE (#)   REALIZED ($)(1)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                           ------------   ---------------   -----------   -------------   -----------   -------------
                                                                                          
Francis D. John..............   1,825,000        12,850,875      2,418,333       791,667      $5,148,066     $1,732,709

Thomas K. Grundman...........     200,000         1,934,000        250,000       485,000      $  585,000     $1,718,650

James J. Byerlotzer..........     165,000         1,595,550        159,167       350,833      $  391,931     $1,311,469


------------------------

(1) The dollar values in this column are calculated by determining the
    difference between the fair market value of the Company's common stock on
    the date of exercise of the relevant options and the exercise price of such
    options. The fair market value on the date of exercise is based on the last
    sale price of the Company's common stock on the NYSE on such date.

(2) The dollar values in this column are calculated by determining the
    difference between the fair market value of the Common Stock for which the
    relevant options are exercisable as of the end of the fiscal year and the
    exercise price of the options. The fair market value is based on the last
    sale price of the Common Stock on the NYSE on June 29, 2001 which was
    $10.84.

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

    Effective as of July 1, 2001, the Company entered into an amended and
restated employment agreement with Mr. John, which provides that Mr. John will
serve as Chairman of the Board, President and Chief Executive Officer of the
Company for a five-year term commencing July 1, 2001 and continuing until
June 30, 2006, with an automatic one-year renewal on each June 30, commencing on
June 30, 2006, unless terminated by the Company or by Mr. John with proper
notice. Under this employment agreement, Mr. John's annual base salary is
$595,000 per year until December 31, 2002 and $695,000 per year thereafter, in
each case subject to increase after annual reviews by the Board of Directors.
This employment agreement also provides that Mr. John will be entitled to
(i) participate in the Company's Performance Compensation Plan, with performance
criteria to be approved by the Compensation Committee, (ii) receive additional
bonuses at the discretion of the Compensation Committee, and (iii) participate
in stock option grants made to the Company's executives. In addition to salary
and bonus, Mr. John is entitled to medical, dental, accident and life insurance,
reimbursement of expenses and various other benefits. To the extent Mr. John is
taxed on any such reimbursement or benefit, the Company will pay Mr. John an
amount which, on an after-tax basis, equals the amount of these taxes.

    In the event that Mr. John's employment is terminated by the Company
voluntarily or by nonrenewal, or by Mr. John for "Good Reason," or by either the
Company or Mr. John following a "Change in Control" (in each case as defined in
the employment agreement), Mr. John will be entitled to receive: (i) his accrued
but unpaid salary and bonuses to the date of termination, and a PRO RATA bonus
for the year in which termination occurs; (ii) a severance payment in an amount
equal to five times his average total annual compensation (I.E., salary plus
bonus) for the preceding three years; (iii) immediate vesting and exercisability
of all stock options held by him (to the extent not already vested and
exercisable) for the remainder of the original terms of the options; (iv) any
other amounts or benefits earned, accruing or owing to him, but not yet paid;
and (v) continued participation in medical, dental and life insurance coverage,
as well as the receipt of other benefits to which he was entitled, until the
first to occur of the third year anniversary of the date his employment was
terminated or the date on which he receives

                                       64

equivalent coverage and benefits under the plans and programs of a subsequent
employer (or, in the event of a "Change in Control," an amount in cash equal to
the reasonable expenses that the Company would incur if it were to provide these
benefits for three years). In the event that Mr. John's employment is terminated
as a result of Mr. John's disability, Mr. John will be entitled to receive
(i) through (v) above, except that his severance compensation will be an amount
equal to three times his average total annual compensation for the preceding
three years, reduced by the amount of any Company-paid disability insurance
proceeds paid to Mr. John. In the event that Mr. John's employment is terminated
by the Company for "Cause," as defined in the employment agreement, or by
Mr. John voluntarily or by nonrenewal, he will be entitled to receive only
(i) and (v) above and will forfeit any restricted stock or options not
previously vested. In the event Mr. John's employment is terminated by reason of
his death, he will be entitled to receive (i), (iii), (iv) and (v) above, except
that his family will be entitled to receive the medical and dental insurance
coverage provided in (v) above until the death of Mr. John's spouse. In
addition, if any of the above benefits are subject to the tax imposed by
Section 4999 of the Internal Revenue Code, the Company will reimburse Mr. John
for such tax on an after-tax basis.

    The employment agreement specifies that Mr. John may not engage in any
activities that are competitive with the Company for a period of three years
after the termination of his employment.

    Pursuant to the employment agreement, the Company will pay to Mr. John, on
or prior to December 31, 2001, a one-time retention incentive bonus equal to the
aggregate amount of all principal and interest on loans previously made by the
Company to Mr. John that were to be forgiven over a ten year period beginning
July 1, 2001, as well as the amount, on an after-tax basis, required to pay the
taxes incurred Mr. John in connection with such payment. The after-tax proceeds
of the bonus will be used to repay such loans. The employment agreement goes on
to provide that if, prior to June 30, 2011, Mr. John is terminated by the
Company for Cause, or by Mr. John voluntarily or by nonrenewal, Mr. John will
repay to the Company a percentage of the retention incentive bonus beginning at
100% during the first year and declining at the rate of 10% each year to 0% on
and after June 30, 2011.

    Mr. Grundman entered into an employment agreement with the Company effective
as of July 1, 1999, which was amended effective July 1, 2000. This agreement is
for a three-year term and thereafter for successive one-year terms unless
terminated 60 days prior to the commencement of an extension term. Under this
agreement, Mr. Grundman initially receives an annual base compensation of
$200,000, which can be increased but not decreased, and is eligible for
additional annual incentive bonuses. If, during the term of his employment
agreement, Mr. Grundman is terminated by the Company for any reason other than
for cause, or if he terminates his employment because of a material breach by
the Company or following a change of control of the Company, he will be entitled
to severance compensation equal to his base compensation in effect at the time
of termination payable in equal installments over a 36-month period following
termination; PROVIDED, HOWEVER, that if termination results from a change of
control of the Company, severance compensation will be payable in a lump sum on
the date of termination. Also, if Mr. Grundman is subject to the tax imposed by
Section 4999 of the Internal Revenue code, the Company has agreed to reimburse
him for such tax on an after-tax basis.

    Mr. Byerlotzer entered into an employment agreement with the Company
effective as of July 1, 1999 for a three-year term and thereafter for successive
one-year terms unless terminated 30 days prior to the commencement of an
extension term. Under the agreement, Mr. Byerlotzer receives an annual base
compensation of $185,000 and is eligible for additional annual incentive
bonuses. If during the term of his employment agreement Mr. Byerlotzer is
terminated by the Company for any reason other than for "Cause", or if he
terminates his employment because of a material breach by the Company or
following a change of control of the Company, he will be entitled to severance
compensation equal to his base compensation in effect at the time of termination
payable in equal installments over a 24-month period following termination;
PROVIDED, HOWEVER, that if termination results from a change of control of the
Company, severance compensation will be payable in a lump sum on the date of
termination.

                                       65

DIRECTOR COMPENSATION

    No director who is also an employee of the Company or any of its
subsidiaries received any fees from the Company for his services as a Director
or as a member of any committee of the Board. During the fiscal year ended
June 30, 2001 all other Directors ("Non-employee Directors") received a fee
equal to $3,000 per month for each month of service and are reimbursed for
travel and other expenses directly associated with Company business.
Additionally, during fiscal 2001 the Company paid the premiums with respect to
life insurance for the benefit of Messrs. Collins and Marcum in the amount of
$2,906 and $5,389, respectively.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

MANAGEMENT

    The following table sets forth as of October 25, 2001, the number of shares
of Common Stock beneficially owned by each (i) each Director, (ii) each Named
Executive Officer, and (iii) all Directors and executive officers of the Company
as a group. Except as noted below, each holder has sole voting and investment
power with respect to all shares of Common Stock listed as owned by such person.



                                                                     PERCENTAGE OF
                                                        NUMBER OF     OUTSTANDING
NAME OF BENEFICIAL OWNER                                SHARES (1)    SHARES (2)
------------------------                                ----------   -------------
                                                               
Francis D. John (3)...................................  2,613,833         2.5%
Kevin P. Collins (4)..................................    223,405           *
William D. Fertig (5).................................     30,000           *
William D. Manly (6)..................................    221,042           *
W. Phillip Marcum (7).................................    223,405           *
David J. Breazzano (8)................................    208,333           *
Morton Wolkowitz (9)..................................    608,302           *
Thomas K. Grundman (10)...............................    355,000           *
James J. Byerlotzer (11)..............................    263,667           *

Directors and Executive Officers as a group (9
  persons)............................................  4,716,987         4.4%


------------------------

*   Less than 1%

(1) Includes all shares with respect to which each Director or executive officer
    directly or indirectly, through any contract, arrangement, understanding,
    relationship or otherwise, has or shares the power to vote or to direct
    voting of such shares and/or to dispose or to direct the disposition of such
    shares. Includes shares that may be purchased under currently exercisable
    stock options and warrants.

(2) Based on 102,357,547 shares of Common stock outstanding at October 25, 2001,
    plus, for each beneficial owner, those number of shares underlying currently
    exercisable options held by each executive officer or Director.

(3) Includes 2,543,333 shares issuable upon exercise of vested options. Does not
    include 666,667 shares issuable pursuant to options that have not vested.

(4) Includes 218,333 shares issuable upon the exercise of vested options. Does
    not include 51,667 shares issuable pursuant to options that have not vested.

(5) Includes 25,000 shares issuable upon the exercise of vested options. Does
    not include 25,000 shares issuable pursuant to options that have not vested.

(6) Includes 218,333 shares issuable upon the exercise of vested options. Does
    not include 51,667 shares issuable pursuant to options that have not vested.

                                       66

(7) Includes 218,333 shares issuable upon the exercise of vested options. Does
    not include 51,667 shares issuable pursuant to options that have not vested.

(8) Includes 148,333 shares issuable upon the exercise of vested options. Does
    not include 51,667 shares issuable pursuant to options that have not vested.

(9) Includes 118,000 shares issuable upon the exercise of vested options. Does
    not include 57,000 shares issuable pursuant to options that have not vested.

(10) Includes 345,000 shares issuable upon the exercise of vested options. Does
    not include 390,000 shares issuable pursuant to options that have not
    vested.

(11) Includes 241,667 shares issuable upon the exercise of vested options. Does
    not include 268,333 shares issuable pursuant to options that have not
    vested.

CERTAIN BENEFICIAL OWNERS

    The following table sets forth, as of October 25, 2001, certain information
regarding the beneficial ownership of Common Stock by each person, other than
the Company's directors or executive officers, who is known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock.



                                                              SHARES BENEFICIALLY OWNED
                                                                 AT OCTOBER 19, 2001
NAME AND ADDRESS OF BENEFICIAL                                --------------------------
OWNER, IDENTITY OF GROUP                                          NUMBER        PERCENT
------------------------                                      --------------   ---------
                                                                         
Perkins, Wolf, McDonnell & Co. (1)..........................   11,036,014(2)     10.8%
  53 W. Jackson Blvd., Suite 722
  Chicago, IL 60604

Berger, L.L.C. (3)..........................................    9,810,240(2)      9.6%
  210 University Boulevard
  Suite 900
  Denver, CO 80206

Mellon Financial Corporation (4)............................      6,183,414       6.0%
  One Mellon Center
  Pittsburgh, PA 15258

T. Rowe Price Associates, Inc. (5)..........................      6,735,600       6.6%
  100 E. Pratt Street
  Baltimore, MD 21202


------------------------

(1) As reported on Schedule 13G filed with the Commission on October 11, 2001.

(2) The Company believes that Perkins, Wolf, McDonell & Co. shares voting power
    with respect to 9,810,240 of its shares with Berger, LLC and that,
    therefore, the 9,810,240 shares shown as being beneficially owned by Berger,
    LLC are the same securities shown as being beneficially owned by Perkins,
    Wolf, McDonnell & Co.

(3) As reported on Schedule 13F filed with the Commission on August 14, 2001.

(4) As reported on Schedule 13G filed with the Commission on January 26, 2001.

(5) As reported on Schedule 13G (Amendment No. 1) filed with the Commission on

    February 8, 2001.

                                       67

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    In connection with the negotiation of the terms of a five-year employment
agreement with Mr. Francis D. John, Chairman of the Board, President and Chief
Executive Officer of the Company, and as an inducement to Mr. John to enter into
such employment agreement, the Company entered into a separate agreement with
Mr. John dated as of August 2, 1999, which as amended through June 30, 2001,
provides that $6.5 million in loans previously made by the Company to Mr. John,
together with the accrued interest payable thereon (accruing at a rate equal to
125 basis points above LIBOR, adjusted monthly) will be forgiven ratably during
the ten year period commencing on July 1, 2001 and ending on June 30, 2011. The
agreement provides that the foregoing forgiveness of indebtedness is predicated
and conditioned upon Mr. John remaining employed by the Company during such
period. In addition, in the event that Mr. John is terminated by the Company for
"Cause" (as defined in the agreement), or in the event that Mr, John voluntarily
terminates his employment with the Company, the agreement further provides that
the entire remaining principal balance of these loans, together with accrued
interest payable thereon, will become immediately due and payable by Mr. John.
However, in the event that Mr. John's employment is terminated for "Good
Reason", or as a result of Mr. John's death or "Disability", or as a result of a
"Change in Control" (all as defined in that agreement), the agreement stipulates
that the remaining principal balance outstanding on the loans, together with
accrued interest thereon will be forgiven. This agreement further provides that
with respect to any forgiveness of the payment of principal and interest on the
loans, Mr. John will be entitled to receive a "gross-up" payment in an amount
sufficient for him to pay any federal, state, or local income taxes that may be
due and payable by him with respect to the forgiveness of such indebtedness
(principal and interest). The agreement has been effectively superseded by
Mr. John's new employment agreement that provides for a one-time retention
incentive bonus used to repay all amounts owed under the agreement (See Item
11--Executive Compensation--Employment Agreements with Executive Officers).

    In connection with the negotiation of an employment agreement with Thomas K.
Grundman, the Company's Executive Vice President of International Operations,
Chief Financial Officer and Chief Accounting Officer, the Company made a
$240,000 short-term loan and a $150,000 relocation loan to assist
Mr. Grundman's relocation to the Company's executive offices. Interest on these
loans accrues at a rate of 6.125% per annum. The short-term loan has been
repaid. The relocation loan together with accrued interest will be forgiven in
three installments of $50,000 each on July 1, 2000, 2001 and 2002; PROVIDED,
HOWEVER, that if Mr. Grundman's employment is terminated during such period in a
way that (i) triggers severance obligations, all amounts owed shall be
immediately forgiven or (ii) does not trigger severance obligations, all amounts
owed shall be immediately due and payable. This agreement further provides that
with respect to any forgiveness of the payment of principal and interest on the
loans, Mr. Grundman will be entitled to receive a "gross-up" payment in an
amount sufficient for him to pay any federal, state, or local income taxes that
may be due and payable by him with respect to the forgiveness of such
indebtedness (principal and interest).

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.

    (a) Index to Exhibits

       The following documents are filed as part of this report:

       (1) See Index to Financial Statements set forth in Item 8.

       (2) Financial Statements Schedules:

           Key Energy Services, Inc.:
           Consolidated Supplementary Financial Statement Schedule As of and for
           Each of the

                                       68

             Three Years Ended June 30, 2001:
                Schedule II-Consolidated Valuation and Qualifying
           Accounts.......S-1

           The supplemental schedules other than the one listed above are
       omitted because of the absence of the conditions under which they are
       required or because the required information is included in the
       Consolidated Financial Statements or Notes thereto.

       (3) Exhibits:


                       
                 3.1      Amended and Restated Articles of Incorporation of the
                          Company. (Incorporated by reference to the Company's
                          Registration Statement on Form S-4, Registration
                          No. 333-369).

                 3.2      Amended and Restated By-Laws of the Company. (Incorporated
                          by reference to the Company's Registration Statement on
                          Form S-4 dated March 8, 1996, Registration No. 333-369).

                 3.3      Amendment to the Amended and Restated Articles of
                          Incorporation of the Company. (Incorporated by reference to
                          Exhibit 3.1 of the Company's Current Report on Form 8-K
                          dated February 2, 1998, File No. 1-8038).

                 3.4      Amendment to the Amended and Restated Articles of
                          Incorporation of the Company. (Incorporated by reference to
                          Exhibit A of the definitive proxy statement on Schedule 14A
                          filed by the Company on November 17, 1998, File
                          No. 1-8038).

                 3.5      Articles of Amendment to Amended and Restated Articles of
                          Incorporation of the Company (Incorporated by reference to
                          Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
                          for the quarter ended March 31, 2000, File No. 1-8038).

                 3.6      Unanimous Consent of the Board of Directors of the Company
                          dated January 11, 2000, limiting the designation of the
                          additional authorized shares to common stock (Incorporated
                          by reference to Exhibit 3.2 of the Company's Quarterly
                          Report on Form 10-Q for the quarter ended March 31, 2000,
                          File No. 1-8038).

                 4.1      7% Convertible Subordinated Debenture of the Company due
                          July 1, 2003. (Incorporated by reference to Exhibit 4.1 of
                          the Company's Annual Report on Form 10-K dated June 30,
                          1996, File No. 1-8038).

                 4.2      Indenture for the 7% Convertible Subordinated Debentures of
                          the Company due July 1, 2003. (Incorporated by reference to
                          Exhibit 4.2 of the Company's Annual Report on Form 10-K
                          dated June 30, 1996, File No. 1-8038).

                 4.3      First Supplemental Indenture dated as of November 20, 1996
                          by and between Key Energy Group, Inc. and American Stock
                          Transfer & Trust Company, as Trustee. (Incorporated by
                          reference to Exhibit 10(i) to the Company's Quarterly Report
                          on Form 10-Q dated December 31, 1996, File No. 1-8038).

                 4.4      Registration Rights Agreement among the Company, McMahan
                          Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated
                          as of July 3, 1996. (Incorporated by reference to Exhibit
                          4.3 of the Company's Annual Report on Form 10-K dated
                          June 30, 1996, File No. 1-8038).

                 4.5      Registration Rights Agreement dated as of March 2, 1996
                          among the Company and certain of its stockholders.
                          (Incorporated by reference to Exhibit 4.3 of the Company's
                          Registration Statement on Form S-4, Registration
                          No. 333-369).

                 4.6      Form of Common Stock Purchase Warrant to Purchase Key Common
                          Stock issued in connection with the WellTech Merger.
                          (Incorporated by reference to Exhibit 4.1 of the Company's
                          Registration Statement on Form S-4, Registration
                          No. 333-369).


                                       69


                       
                 4.7      Indenture dated as of September 25, 1997, among Key Energy
                          Group, Inc. and American Stock Transfer and Trust Company.
                          (Incorporated by reference to Exhibit 10(a) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          September 30, 1997, File No. 1-8038).

                 4.8      Registration Rights Agreement among Key Energy Group, Inc.,
                          Lehman Brothers Inc., and McMahan Securities Co. L.P. dated
                          as of September 25, 1997. (Incorporated by reference to
                          Exhibit 10(a) of the Company's Quarterly Report on
                          Form 10-Q for the quarter ended September 30, 1997, File
                          No. 1-8038).

                 4.9      Indenture dated February 20, 1997 between Dawson Production
                          Services, Inc. and U.S. Trust Company of Texas, N.A.
                          (Incorporated by reference to Exhibit 99.10 of the Company's
                          Current Report on Form 8-K dated September 28, 1998, File
                          No. 1-8038).

                4.10      Supplemental Indenture dated September 21, 1998, among Key
                          Energy Group, Inc., its Subsidiaries and U.S. Trust Company
                          of Texas, N.A. (Incorporated by reference to Exhibit 99.11
                          of the Company's Current Report on Form 8-K dated September
                          28, 1998, File No. 1-8038).

                4.11      Warrant Agreement dated as of January 22, 1999 between the
                          Company and The Bank of New York, a New York banking
                          corporation as warrant agent. (Incorporated by reference to
                          Exhibit 99(b) of the Company's Form 8-K filed on February 3,
                          1999, File No. 1-8038).

                4.12      Indenture dated as of January 22, 1999 between the Company
                          and The Bank of New York as trustee. (Incorporated by
                          reference to Exhibit 99(c) of the Company's Form 8-K filed
                          on February 3, 1999, File No. 1-8038).

                4.13      Registration Rights Agreement dated January 22, 1999 by and
                          among the Registrant, certain of its subsidiaries, and
                          Lehman Brothers, Inc., Bear, Stearns & Co. Inc.,
                          F.A.C./Equities, a division of First Albany Corporation, and
                          Dain Rauscher Wessels, a division of Dain Rauscher
                          Incorporated. (Incorporated by reference to Exhibit 99(d) of
                          the Company's Form 8-K filed on February 3, 1999, File
                          No. 1-8038).

                4.14      Warrant Registration Rights Agreement dated January 22,
                          1999, by and among the Company and Lehman Brothers Inc.,
                          Bear, Stearns & Co. Inc., F.A.C./Equities, a division of
                          First Albany Corporation, and Dain Rauscher Wessels, a
                          division of Dain Rauscher Incorporated. (Incorporated by
                          reference to Exhibit 99(e) of the Company's Form 8-K filed
                          on February 3, 1999, File No. 1-8038).

                4.15      Indenture dated March 6, 2001 between the Company and The
                          Chase Manhattan Bank, a New York banking corporation, as
                          Trustee (Incorporated by reference to Exhibit 4.1 of the
                          Company's Form 8-K filed on March 20, 2001, File
                          No. 1-8038)

                4.16      Registration Rights Agreement dated March 6, 2001 among the
                          Company, certain of its subsidiaries, Lehman Brothers, Inc.,
                          and Bear Stearns & Co., Inc. (Incorporated by reference to
                          Exhibit 99.2 of the Company's Current Report of Form 8-K
                          dated March 20, 2001 File No. 1-8038)

                10.1      Employment Agreement between the Company and D. Kirk
                          Edwards, dated as of July 1, 1996. (Incorporated by
                          reference to Exhibit 10.1 of the Company's Annual Report on
                          Form 10-K for the year ended June 30, 1997, File
                          No. 1-8038).


                                       70


                       
                10.2      Amended and Restated Senior Credit Facility among Key Energy
                          Group, Inc. and several other financial institutions dated
                          as of June 6, 1997 as amended and restated through November
                          6, 1997. (Incorporated by reference to Exhibit 10(s) of the
                          Company's Quarterly Report on Form 10-Q for the quarter
                          ended December 31, 1997, File No. 1-8038).

                10.3      First Amendment to the Amended and Restated Credit Agreement
                          dated as of June 6, 1997, as amended and restated through
                          November 6, 1997 dated December 3, 1997. (Incorporated by
                          reference to Exhibit 10(t) of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended December 31, 1997, File
                          No. 1-8038).

                10.4      Escrow Agreement among Key Energy Group, Inc., Lehman
                          Brothers Inc., Lehman Commercial Paper Inc. and The Bank of
                          New York, dated as of September 14, 1998 (Incorporated by
                          reference to Exhibit 99.6 of the Company's Current Report on
                          Form 8-K dated September 28, 1998, File No. 1-8038).

                10.5      $550,000,000 Second Amended and Restated Senior Credit
                          Facility, among Key Energy Group, Inc., PNC Bank, National
                          Association, Norwest Bank Texas, N.A., PNC Capital Markets,
                          Inc. and the several lenders from time to time parties
                          thereto, dated as of June 6, 1997, as amended and restated
                          through September 14, 1998 (Incorporated by reference to
                          Exhibit 99.7 of the Company's Current Report on Form 8-K
                          dated September 28, 1998, File No. 1-8038).

                10.6      Amended and Restated Master Guarantee and Collateral
                          Agreement made by Key Energy Group, Inc. and certain of its
                          subsidiaries in favor of Norwest Bank Texas, N.A., dated as
                          of June 6, 1998, as amended and restated through September
                          14, 1998 (Incorporated by reference to Exhibit 99.8 of the
                          Company's Current Report on Form 8-K dated September 28,
                          1998, File No. 1-8038).

                10.7      Intercreditor and Collateral Agency Agreement, dated as of
                          September 14, 1998. (Incorporated by reference to Exhibit
                          99.9 of the Company's Current Report on Form 8-K dated
                          September 28, 1998, File No. 1-8038).

                10.8      Consulting Agreement, dated as of October 7, 1998, by and
                          among Key Energy Group, Inc. and Michael E. Little.
                          (Incorporated by reference to Exhibit 10(a) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).

                10.9      Employment Agreement, dated November 13, 1998, by and
                          between Key Energy Group, Inc. and James J. Byerlotzer.
                          (Incorporated by reference to Exhibit 10(b) the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).

                10.10     Non-Compete Agreement, dated November 13, 1998, by and
                          between Key Energy Group, Inc. and James J. Byerlotzer.
                          (Incorporated by reference to Exhibit 10(c) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).

                10.11     Non-Compete Agreement, dated October 20, 1998, by and
                          between Key Energy Group, Inc. and Joseph B. Eustace.
                          (Incorporated by reference to Exhibit 10(e) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).

                10.12     Consulting Agreement, dated as of November 12, 1998, by and
                          among Key Energy Group, Inc. and C. Ron Laidley.
                          (Incorporated by reference to Exhibit 10(f) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).


                                       71


                       
                10.13     Key Energy Group, Inc. Performance Compensation Plan.
                          (Incorporated by reference to Exhibit 10(g) of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          December 31, 1998, File No. 1-8038).

                10.14     First Amendment, dated as of December 3, 1997, to the Second
                          Amended and Restated Senior Credit Facility, dated as of
                          June 6, 1997, as amended and restated through November 6,
                          1997. (Incorporated by reference to Exhibit 10(h) of the
                          Company's Quarterly Report on Form 10-Q for the quarter
                          ended December 31, 1998, File No. 1-8038).

                10.15     Second Amendment, dated as of December 29, 1998, to the
                          Second Amended and Restated Senior Credit Facility, dated as
                          of June 6, 1997, as amended and restated through September
                          14, 1998, and as amended by the First Amendment dated as of
                          November 19, 1998. (Incorporated by reference to Exhibit
                          10(i) of the Company's Quarterly Report on Form 10-Q for the
                          quarter ended December 31, 1998, File No. 1-8038).

                10.16     Purchase Agreement dated January 19, 1999 by and among the
                          Registrant, certain of its subsidiaries, Lehman Brothers,
                          Inc., Bear, Stearns & Co. Inc., First Albany Corporation,
                          Dain Rauscher Wessels, a division of Dain Rauscher
                          Incorporated. (Incorporated by reference to Exhibit 99(a) of
                          the Company's Form 8-K filed on February 3, 1999, File
                          No. 1-8038).

                10.17     Employment Agreement between the Company and William C.
                          McCurdy dated as of January 4, 1999. (Incorporated by
                          reference to Exhibit 10(f) of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended December 31, 1998, File
                          No. 1-8038).

                10.18     Employment Agreement between the Company and Michael R.
                          Furrow dated as of January 4, 1999. (Incorporated by
                          reference to Exhibit 10(g) of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended December 31, 1998, File
                          No. 1-8038).

                10.19     Purchase Agreement, among the Company, Green-Cohn Group,
                          LLC, ZPG Securities L.L.C. and DFG Corporation, dated as of
                          April 15, 1999. (Incorporated by reference to Exhibit 99.2
                          of the Company's Current Report on Form 8-K dated April 8,
                          1999, File No. 1-8038).

                10.20     Commitment Letter, between the Company and PNC Investment
                          Corp., dated April 15, 1999. (Incorporated by reference to
                          Exhibit 99.3 of the Company's Current Report on Form 8-K
                          dated April 8, 1999, File No. 1-8038).

                10.21     Fee letter, between the Company and PNC Capital Markets,
                          Inc., dated April 15, 1999. (Incorporated by reference to
                          Exhibit 99.4 of the Company's Current Report on Form 8-K
                          dated April 8, 1999, File No. 1-8038).

                10.22     Third Amendment, dated as of April 8, 1999, to the Second
                          Amended and Restated Senior Credit Facility, among the
                          Company, the several lenders from time to time parties
                          thereto, PNC Bank, National Association, as Administrative
                          Agent, Norwest Bank Texas, N.A., as Collateral Agent and PNC
                          Capital Markets, Inc., as Arranger. (Incorporated by
                          reference to Exhibit 99.5 of the Company's Current Report on
                          Form 10-K dated April 8, 1999, File No. 1-8038).


                                       72


                       
                10.23     Fourth Amendment, dated as of April 15, 1999, to the Second
                          Amended and Restated Senior Credit Facility, among the
                          Company, the several lenders from time to time parties
                          thereto, PNC Bank, National Association, as Administrative
                          Agent, Norwest Bank Texas, N.A., as Collateral Agent and PNC
                          Capital Markets, Inc., as Arranger. (Incorporated by
                          reference to Exhibit 99.6 of the Company's Current Report on
                          Form 10-K dated April 8, 1999, File No. 1-8038).

                10.24     Underwriting Agreement, dated May 4, 1999, among the
                          Company, and Friedman, Billings, Ramsey & Co., Inc., for
                          itself and as representative for the other underwriter named
                          in Schedule I thereto. (Incorporated by reference to Exhibit
                          1.1 of the Company's Current Report on Form 8-K dated May 4,
                          1999, File No. 1-8038).

                10.25     Letter Agreement, dated May 4, 1999, among the Company, PNC
                          Capital Markets, Inc. and PNC Investment Corp. (Incorporated
                          by reference to Exhibit 99.1 of the Company's Current Report
                          on Form 8-K dated May 4, 1999, File No 1-8038).

                10.26     Fifth Amendment, dated as of May 10, 1999, to the Second
                          Amended and Restated Senior Credit Facility, among the
                          Company, the several lenders from time to time parties
                          thereto, PNC Bank, National Association, as Administrative
                          Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
                          PNC Capital Markets, Inc., as Arranger. (Incorporated by
                          reference to Exhibit 10.91 of the Company's Annual Report on
                          Form 10-K dated June 30, 1999, File No. 1-8038).

                10.27     Consulting Agreement between Key Energy Group, Inc. and The
                          Old Hill Company LLC dated as of December 2, 1998.
                          (Incorporated by reference to Exhibit 10.92 of the Company's
                          Annual Report on Form 10-K dated June 30, 1999, File
                          No. 1-8038).

                10.28     Amended and Restated Employment Agreement dated July 1,
                          1999, between Francis D. John and Key Energy Services, Inc.
                          (Incorporated by reference to Exhibit 10.1 of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          September 30, 1999, File No. 1-8038).

                10.29     Employment Agreement dated August 5, 1999, between Thomas K.
                          Grundman and Key Energy Services, Inc. (Incorporated by
                          reference to Exhibit 10.2 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).

                10.30     Employment Agreement dated July 1, 1999, between Danny R.
                          Evatt and Key Energy Services, Inc.(Incorporated by
                          reference to Exhibit 10.3 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).

                10.31     Employment Agreement dated July 1, 1999, between James J.
                          Byerlotzer and Key Energy Services, Inc. (Incorporated by
                          reference to Exhibit 10.4 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).

                10.32     Agreement dated as of August 2, 1999, between Francis D.
                          John and Key Energy Services, Inc. (Incorporated by
                          reference to Exhibit 10.5 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).


                                       73


                       
                10.33     Promissory Note dated August 3, 1999, made by Thomas K.
                          Grundman in favor of Key Energy Services, Inc. (Incorporated
                          by reference to Exhibit 10.6 of the Quarterly Report on
                          Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).

                10.34     Demand Note dated August 3, 1999, made by Thomas K. Grundman
                          in favor of Key Energy Services, Inc. (Incorporated by
                          reference to Exhibit 10.7 of the Quarterly Report on
                          Form 10-Q for the quarter ended September 30, 1999, File
                          No. 1-8038).

                10.35     Confidential Separation and Release Agreement dated as of
                          July 1, 1999, between Key Energy Services, Inc. and Stephen
                          E. McGregor (Incorporated by reference to Exhibit 10.8 of
                          the Company's Quarterly Report on Form 10-Q for the quarter
                          ended September 30, 1999, File No. 1-8038).

                10.36     Amendment No. 1 dated as of December 1, 1999, to Agreement
                          dated as of August 2, 1999, between Francis D. John and Key
                          Energy Services, Inc. (Incorporated by reference to Exhibit
                          10.1 of the Company's Quarterly Report on Form 10-Q for the
                          quarter ended December 31, 1999, File No. 1-8038).

                10.37     Amendment No. 1 dated as of November 24, 1999, to the
                          Confidential Separation and Release Agreement dated as of
                          July 1, 1999, between Key Energy Services, Inc. and Stephen
                          E. McGregor (Incorporated by reference to Exhibit 10.2 of
                          the Company's Quarterly Report on Form 10-Q for the quarter
                          ended December 31, 1999, File No. 1-8038).

                10.38     Sixth Amendment, dated as of July 14, 1999, to the Second
                          Amended and Restated Senior Credit Facility, among the
                          Company, the several lenders from time to time parties
                          thereto, PNC Bank, National Association, as Administrative
                          Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
                          PNC Capital Markets, Inc., as Arranger (Incorporated by
                          reference to Exhibit 10.1 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended March 31, 2000, File
                          No. 1-8038).

                10.39     Seventh Amendment, dated as of March 1, 2000, to the Second
                          Amended and Restated Senior Credit Facility, among the
                          Company, the several lenders from time to time parties
                          thereto, PNC Bank, National Association, as Administrative
                          Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
                          PNC Capital Markets, Inc., as Arranger (Incorporated by
                          reference to Exhibit 10.2 of the Company's Quarterly Report
                          on Form 10-Q for the quarter ended March 31, 2000, File
                          No. 1-8038).

                10.40     Production and Delivery Agreement dated March 31, 2000,
                          among Odessa Exploration Incorporated and Norwest Energy
                          Capital, Inc., (Incorporated by reference to Exhibit 10.3 of
                          the Company's Quarterly Report on Form 10-Q for the quarter
                          ended March 31, 2000, File No. 1-8038).

                10.41     Agreement dated March 31, 2000, among Odessa Exploration
                          Incorporated, Norwest Energy Capital, Inc. and the Company
                          (Incorporated by reference to Exhibit 10.4 of the Company's
                          Quarterly Report on Form 10-Q for the quarter ended
                          March 31, 2000, File No. 1-8038).

                10.42     Underwriting Agreement dated June 27, 2000, among the
                          Company and Lehman Brothers Inc. for itself and as
                          Representative of the several underwriters named in Schedule
                          I thereto (Incorporated by reference to Exhibit 1.1 of the
                          Company's Current Report on Form 8-K dated June 29, 2000,
                          File No. 1-8038).


                                       74


                       
                10.43     Membership Interest Exchange Agreement dated April 5, 2000
                          by and between Tetra Services, Inc. and Brooks Well
                          Servicing, Inc. (Incorporated by reference to Exhibit 10.82
                          of the Company's Annual Report on Form 10-K dated June 30,
                          2000, File No. 1-8038).

                10.44     Amendment No. 2 dated as of June 16, 2000 to Agreement dated
                          as of August 2, 1999, as amended between Francis D. John
                          and Key Energy Services, Inc. (Incorporated by reference to
                          Exhibit 10.83 of the Company's Annual Report on Form 10-K
                          dated June 20, 2000, File No. 1-8038).

                10.45     Amendment dated July 1, 2000 to Employment Agreement dated
                          August 5, 1999 between Thomas K. Grundman and Key Energy
                          Services, Inc. (Incorporated by reference to Exhibit 10.1 of
                          the Company's Quarterly report on Form 10-Q for the quarter
                          ended September 30, 2000, File No. 1-8038).

                10.46     Letter Agreement Amendment dated July 1, 2000 to the Demand
                          Note dated August 3, 1999 made by Thomas K. Grundman in
                          favor of Key Energy Services, Inc. (Incorporated by
                          reference to Exhibit 10.2of the Company's Quarterly Report
                          of Form 10-Q for the quarter ended September 30, 2000, File
                          No. 1-8038).

                10.47     Purchase Agreement dated March 1, 2001 among the Company,
                          certain of its subsidiaries, Lehman Brothers, Inc., and Bear
                          Stearns & Co., Inc. (Incorporated by reference to Exhibit
                          1.1 of the Company's Form 8-K filed on March 20, 2001, File
                          No. 1-8038)

                10.48     Eighth Amendment to the Second Amended and Restated Senior
                          Credit Facility, dated as of June 6, 1997, as amended and
                          restated through September 14, 1998 and as further amended,
                          among Key Energy Group, Inc. (now known as Key Energy
                          Services, Inc.), the several Lenders from time to time
                          parties thereto, PNC Bank, National association, as
                          Administrative Agent, Norwest Bank Texas, N.A., as
                          Collateral Agent and PNC Capital markets, Inc., as Arranger.
                          (Incorporated by reference to Exhibit 99.3 of the Company's
                          Form 8-K filed on March 20, 2001, File No. 1-8038)

                10.49     Amendment No. 3 dated as of May 14, 2001 to Agreement dated
                          as of August 2, 1999, as amended, between Francis D. John
                          and Key Energy Services, Inc.

               *10.50     Second Amended and Restated Employment Agreement dated
                          October 16, 2001 between Francis D. John and Key Energy
                          Services, Inc.

                 21       Significant Subsidiaries of the Company.

                 23       Consent of KPMG LLP.


------------------------

    *  Filed herewith.

(b) Reports on Form 8-K

    The Company did not file any reports on Form 8-K during the quarter ended
    June 30, 2001.

                                       75

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                                      
                                                       KEY ENERGY SERVICES, INC.
                                                       (Registrant)

Dated: October 26, 2001                                By:             /s/ FRANCIS D. JOHN
                                                            -----------------------------------------
                                                                         Francis D. John
                                                                CHAIRMAN OF THE BOARD, PRESIDENT,
                                                                   AND CHIEF EXECUTIVE OFFICER


    Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


                                                      
Dated: October 26, 2001                                By:             /s/ FRANCIS D. JOHN
                                                            -----------------------------------------
                                                                         Francis D. John
                                                                CHAIRMAN OF THE BOARD, PRESIDENT,
                                                                   AND CHIEF EXECUTIVE OFFICER

Dated: October 26, 2001                                By:            /s/ THOMAS K. GRUNDMAN
                                                            -----------------------------------------
                                                                        Thomas K. Grundman
                                                                     CHIEF FINANCIAL OFFICER
                                                                   AND CHIEF ACCOUNTING OFFICER

Dated: October 26, 2001                                By:             /s/ MORTON WOLKOWITZ
                                                            -----------------------------------------
                                                                         Morton Wolkowitz
                                                                             DIRECTOR

Dated: October 26, 2001                                By:            /s/ DAVID J. BREAZZANO
                                                            -----------------------------------------
                                                                        David J. Breazzano
                                                                             DIRECTOR

Dated: October 26, 2001                                By:              /s/ WILLIAM MANLY
                                                            -----------------------------------------
                                                                          William Manly
                                                                             DIRECTOR

Dated: October 26, 2001                                By:             /s/ KEVIN P. COLLINS
                                                            -----------------------------------------
                                                                         Kevin P. Collins
                                                                             DIRECTOR

Dated: October 26, 2001                                By:            /s/ W. PHILLIP MARCUM
                                                            -----------------------------------------
                                                                        W. Phillip Marcum
                                                                             DIRECTOR

Dated: October 26, 2001                                By:            /s/ WILLIAM D. FERTIG
                                                            -----------------------------------------
                                                                        William D. Fertig
                                                                             DIRECTOR


                                       76

                                                                     SCHEDULE II

                           KEY ENERGY SERVICES, INC.
                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                                 AS OF JUNE 30,



                                                                    ADDITIONS
                                                          ------------------------------
                                         BALANCE AT       CHARGED TO      CHARGED TO                    BALANCE AT
                                      BEGINNING OF YEAR    EXPENSES    OTHER ACCOUNTS(A)   DEDUCTIONS   END OF YEAR
                                      -----------------   ----------   -----------------   ----------   -----------
                                                                     (IN THOUSANDS)
                                                                                         
Allowance for doubtful accounts:
  2001..............................        $3,189          $1,263           $   --          $  370       $4,082
  2000..............................         6,790           1,648               --           5,249        3,189
  1999..............................         2,843           5,928            3,112           5,093        6,790


------------------------

(a) Additions to allowance for doubtful accounts established through purchase
    accounting.

                                      S-1











                                  EXHIBIT E





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

                                    FORM 10-Q

            [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2001

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from _____ to _____


                          Commission file number 1-8038
                                                 ------


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


                   MARYLAND                        04-2648081
                   --------                        ----------
       (State or other jurisdiction of          (I.R.S. Employer
        incorporation or organization)         Identification No.)


                6 DESTA DRIVE, MIDLAND TX                 79705
                -------------------------                 -----
   (Address of principal executive offices)            (ZIP Code)

        Registrant's telephone number including area code: (915) 620-0300
                                                            --------------



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  X   No
                                                    -


         Common Shares outstanding at February 7, 2002: 108,080,196


                                       1



                          KEY ENERGY SERVICES, INC.

                                    INDEX

--------------------------------------------------------------------------------




                                                                           
PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

                Consolidated Balance Sheets as of
                December 31, 2001 (unaudited) and June 30, 2001...............3

                Unaudited Consolidated Statements of
                Operations for the Three and Six Months Ended
                December 31, 2001 and 2000....................................4

                Unaudited Consolidated Statements of
                Cash Flows for the Three and Six Months Ended
                December 31, 2001 and 2000....................................5

                Unaudited Consolidated Statements of Comprehensive
                Income for the Three and Six Months Ended
                December 31, 2001 and 2000....................................6

                Notes to Consolidated Financial Statements....................7

Item 2.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations....................22

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.......30

PART  II. OTHER INFORMATION

Item 1.     Legal Proceedings................................................33

Item 2.     Changes in Securities and Use of Proceeds........................33

Item 3.     Defaults Upon Senior Securities..................................33

Item 4.     Submission of Matters to a Vote of Security Holders..............33

Item 5.     Other Information................................................33

Item 6.     Exhibits and Reports on Form 8-K.................................33

Signatures...................................................................35




                                       2



                                        KEY ENERGY SERVICES, INC.
                                       CONSOLIDATED BALANCE SHEETS





                                                                                                DECEMBER 31, 2001    JUNE 30, 2001
                                                                                                -----------------   ---------------
                                                                                                              
                                                                                                   (UNAUDITED)
                                                                                                  (THOUSANDS, EXCEPT SHARE DATA)
                                                ASSETS
Current assets:
  Cash and cash equivalents...............................................................           $   7,966        $    2,098
  Accounts receivable, net of allowance for doubtful accounts of $4,590
    and $4,082, at December 31, 2001 and June 30, 2001, respectively......................             149,312           177,016
  Inventories.............................................................................              12,249            16,547
  Prepaid expenses and other current assets...............................................              10,141            10,489
                                                                                                 ----------------   ---------------
Total current assets......................................................................             179,668           206,150
                                                                                                 ----------------   ---------------

Property and equipment:
  Well servicing equipment................................................................             747,848           723,724
  Contract drilling equipment.............................................................             123,022           119,122
  Motor vehicles..........................................................................              68,554            64,907
  Oil and natural gas properties and other related equipment, successful efforts method...              44,502            44,245
  Furniture and equipment.................................................................              29,396            24,865
  Buildings and land......................................................................              37,970            37,812
                                                                                                 ----------------   ---------------
Total property and equipment..............................................................           1,051,292         1,014,675
Accumulated depreciation and depletion....................................................            (250,790)         (220,959)
                                                                                                 ----------------   ---------------
Net property and equipment................................................................             800,502           793,716
                                                                                                 ----------------   ---------------
  Goodwill, net of accumulated amortization of $27,970 at December 31, 2001
  and $28,168 at June 30, 2001............................................................             193,217           189,875
  Deferred costs, net.....................................................................              14,257            17,624
  Notes and accounts receivable - related parties.........................................                 456             6,050
  Other assets............................................................................              28,253            14,869
                                                                                                 ----------------   ---------------
  Total assets............................................................................          $1,216,353        $1,228,284
                                                                                                 ================   ===============


                                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................................................................       $   28,675       $   42,544
  Other accrued liabilities...................................................................           40,786           48,923
  Accrued interest............................................................................           14,434           16,140
  Current portion of long-term debt and capital lease obligations.............................            8,215            7,946
                                                                                                  ----------------   --------------
Total current liabilities.....................................................................           92,110          115,553
                                                                                                  ----------------   --------------
Long-term debt, less current portion..........................................................          379,269          470,578
Capital lease obligations, less current portion...............................................           16,227           15,383
Deferred revenue..............................................................................           11,541           14,104
Non-current accrued expenses..................................................................            9,816            8,388
Deferred tax liability........................................................................          151,305          127,400
Commitments and contingencies.................................................................                -                -
Stockholders' equity:
   Common stock, $.10 par value:  200,000,000 shares authorized, 108,371,945
    and 101,440,166 shares issued, at December 31, 2001 and June 30, 2001, respectively.......           10,837           10,144
   Additional paid-in capital.................................................................          498,702          444,768
   Treasury stock, at cost; 416,666 shares at December 31, 2001 and June 30, 2001.............           (9,682)          (9,682)
   Accumulated other comprehensive income (loss)..............................................          (23,993)              62
   Retained earnings (deficit)................................................................           80,221           31,586
                                                                                                  ----------------   --------------
Total stockholders' equity....................................................................          556,085          476,878
                                                                                                  ----------------   --------------
Total liabilities and stockholders' equity....................................................       $1,216,353       $1,228,284
                                                                                                  ================   ==============


          SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



                                                      3



                                            KEY ENERGY SERVICES, INC.
                                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS





                                                                           THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                              DECEMBER 31,                      DECEMBER 31,
                                                                          2001            2000              2001            2000
                                                                     -------------------------------   -----------------------------
                                                                                                              
                                                                                    (THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
   Well servicing..................................................      $186,338        $178,650          $398,839       $345,215
   Contract drilling...............................................        25,654          24,178            59,290         46,323
   Other...........................................................         1,345           1,083             4,445          4,052
                                                                     -------------------------------   -----------------------------
                                                                          213,337         203,911           462,574        395,590
                                                                     -------------------------------   -----------------------------

COSTS AND EXPENSES:
   Well servicing..................................................       117,092         118,123           249,872        229,809
   Contract drilling...............................................        17,340          18,360            38,528         35,818
   Depreciation, depletion and amortization........................        19,724          18,146            37,593         36,457
   General and administrative......................................        16,755          15,264            34,639         29,631
   Bad debt expense................................................            64             709               308            903
   Interest........................................................        11,097          14,581            23,046         30,692
   Other expenses..................................................         1,150             665             2,335          1,988
   Foreign currency transaction loss, Argentina (see Note 10)......         1,844               -             1,844              -
                                                                     -------------------------------   -----------------------------
                                                                          185,066         185,848           388,165        365,298
                                                                     -------------------------------   -----------------------------
   Income (loss) before income taxes...............................        28,271          18,063            74,409         30,292
   Income tax (expense) benefit....................................       (10,903)         (6,969)          (28,045)       (11,688)
                                                                     -------------------------------   -----------------------------

   Income (loss) before extraordinary gain (loss)..................        17,368          11,094            46,364         18,604
   Extraordinary gain (loss) on retirement of debt, less
     applicable income taxes of $1,267 and $1,374 for the three
     and six months ended December 31, 2001, respectively, and
     income taxes of $41 and $793, for the three and six months
     ended December 31, 2000, respectively.........................         2,091              68             2,271          1,265
                                                                     -------------------------------   -----------------------------

NET INCOME (LOSS)..................................................     $  19,459        $ 11,162          $ 48,635       $ 19,869
                                                                     ===============================   =============================

EARNINGS (LOSS) PER SHARE:
   Basic -- before extraordinary gain (loss).......................      $   0.17        $   0.11          $   0.45       $   0.19
   Extraordinary gain (loss), net of tax...........................          0.02               -              0.02           0.01
                                                                     -------------------------------   -----------------------------
   Basic -- after extraordinary gain (loss)........................      $   0.19        $   0.11          $   0.47       $   0.20
                                                                     ===============================   =============================

   Diluted -- before extraordinary gain (loss).....................      $   0.17        $   0.11          $   0.44       $   0.19
   Extraordinary gain (loss), net of tax...........................          0.02               -              0.02           0.01
                                                                     -------------------------------   -----------------------------
   Diluted -- after extraordinary gain (loss)......................      $   0.19        $   0.11          $   0.46       $   0.20
                                                                     ===============================   =============================


WEIGHTED AVERAGE SHARES OUTSTANDING:
   Basic...........................................................       103,115          97,534           102,421         97,207
   Diluted.........................................................       104,811         100,496           104,357        100,336


          SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



                                                      4



                                            KEY ENERGY SERVICES, INC.
                                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS





                                                                         THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                             DECEMBER 31,                      DECEMBER 31,
                                                                        2001             2000              2001            2000
                                                                  ------------------------------------------------------------------
                                                                                                            
                                                                                              (THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)...........................................      $  19,459          $ 11,162        $  48,635       $  19,869
   ADJUSTMENTS TO RECONCILE INCOME FROM OPERATIONS TO
     NET CASH PROVIDED BY (USED IN) OPERATIONS:
     Depreciation, depletion and amortization..................         19,724            18,146           37,593          36,457
     Bad debt expense..........................................             64               709              308             903
     Amortization of deferred debt issuance costs
       and other deferred costs................................            398             1,008              989           2,416
     Deferred income taxes.....................................          7,731             6,969           22,331          11,688
     (Gain) loss on sale of assets.............................            232               (41)            (830)            (40)
     Foreign currency transaction loss, Argentina..............          1,844                 -            1,844               -
     Extraordinary (gain) loss, net of tax.....................         (2,091)              (68)          (2,271)         (1,265)
   CHANGE IN ASSETS AND LIABILITIES:
     (Increase) decrease in accounts receivable................         31,047            (7,062)          22,903         (22,513)
     (Increase) decrease in other current assets...............         (2,327)           (2,548)          (2,497)          1,838
     Increase (decrease) in accounts payable,
       accrued interest and accrued expenses...................        (17,478)            4,870          (19,466)         (3,316)
     Other assets and liabilities..............................         (1,017)              (38)          (6,722)           (572)
                                                                  ----------------------------------  ------------------------------
   Net cash provided by (used in) operating activities.........         57,586            33,107          102,817          45,465
                                                                  ----------------------------------  ------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures - well servicing.......................        (16,418)           (9,093)         (28,312)        (17,095)
   Capital expenditures - contract drilling....................         (2,923)           (4,041)         (11,077)         (7,174)
   Capital expenditures - other................................         (2,412)           (3,942)          (5,539)         (6,092)
   Proceeds from sale of fixed assets..........................            239               850            3,655             952
   Acquisitions - well servicing...............................         (6,002)           (1,700)          (8,675)         (1,700)
   Acquisitions - contract drilling............................              -              (800)               -            (800)
                                                                  ----------------------------------  ------------------------------
   Net cash provided by (used in) investing activities.........        (27,516)          (18,726)         (49,948)        (31,909)
                                                                  ----------------------------------  ------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of long-term debt.................................       (118,441)          (13,812)        (184,931)       (122,597)
   Repayment of capital lease obligations......................         (2,544)           (2,559)          (4,999)         (4,349)
   Borrowings under line-of-credit.............................         53,000                 -           99,000           4,000
   Proceeds from equity offering, net of expenses..............         42,590                 -           42,590               -
   Proceeds from exercise of warrants..........................              -               265                -             265
   Proceeds from exercise of stock options.....................          1,079             1,024            1,620           1,357
   Other.......................................................            (89)              (15)             (89)           (186)
                                                                  ----------------------------------  ------------------------------
   Net cash provided by (used in) financing activities.........        (24,405)          (15,097)         (46,809)       (121,510)
                                                                  ----------------------------------  ------------------------------
   Effect of exchange rate changes on cash.....................           (192)                -             (192)              -
                                                                  ----------------------------------  ------------------------------
   Net increase (decrease) in cash and cash equivalents........          5,473              (716)           5,868        (107,954)
   Cash and cash equivalents at beginning of period............          2,493             2,635            2,098         109,873
                                                                  ----------------------------------  ------------------------------
   Cash and cash equivalents at end of period..................      $   7,966          $  1,919        $   7,966       $   1,919
                                                                  ==================================  ==============================

          SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



                                                      5



                                     KEY ENERGY SERVICES, INC.
                       UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME





                                                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                                   DECEMBER 31,                  DECEMBER 31,
                                                                              2001             2000          2001            2000
                                                                           --------------------------------------------------------
                                                                                                               
                                                                                                 (THOUSANDS)

NET INCOME (LOSS).......................................................   $ 19,459          $11,162      $ 48,635         $19,869

OTHER COMPREHENSIVE INCOME (LOSS):
   Derivative transition adjustment (see Note 7)........................          -                -             -            (778)
   Oil and natural gas derivatives adjustment, net of tax (see Note 7)..        180              (52)          357             (52)
   Amortization of oil and natural gas derivatives, net of tax  (see
     Note 7)............................................................       (154)             146          (188)            292
   Foreign currency translation gain (loss), net of tax (see Note 10)...    (24,202)               -       (24,224)              4
                                                                           --------------------------  ----------------------------

COMPREHENSIVE INCOME (LOSS).............................................   $ (4,717)         $11,256      $ 24,580         $19,335
                                                                           ==========================  ============================

          SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



                                                      6




                        KEY ENERGY SERVICES, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 2001 AND 2000


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements of Key Energy Services, Inc. (the
"Company" or "Key") and its wholly-owned subsidiaries as of December 31, 2001
and for the three and six month periods ended December 31, 2001 and 2000 are
unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, in the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods
presented. These unaudited interim consolidated financial statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
The results of operations for the three and six month periods ended December 31,
2001 are not necessarily indicative of the results of operations for the full
fiscal year ending June 30, 2002.

RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements for the three and six month periods ended December 31, 2000 to
conform to the presentation for the three and six month periods ended December
31, 2001. The reclassifications consist primarily of reclassifying oil and
natural gas production revenues and expenses. Oil and natural gas production
revenues and related expenses have been reclassified to other revenues and other
expenses because the Company does not believe this business segment is material
to the Company's consolidated financial statements.

2. EARNINGS PER SHARE

The Company accounts for earnings per share based upon Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS
128, basic earnings per common share are 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
exercise of dilutive stock options and warrants and conversion of dilutive
outstanding convertible securities using the "as if converted" method.

                                       7



                                     KEY ENERGY SERVICES, INC.
                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    DECEMBER 31, 2001 AND 2000





                                                            THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                DECEMBER 31,                    DECEMBER 31,
                                                             2001          2000             2001           2000
                                                         ---------------------------     ---------------------------
                                                                                            
                                                           (THOUSANDS, EXCEPT PER          (THOUSANDS, EXCEPT PER
                                                                 SHARE DATA)                     SHARE DATA)
BASIC EPS COMPUTATION:
NUMERATOR
   Net income (loss) before extraordinary gain (loss).    $ 17,368       $ 11,094         $ 46,364      $ 18,604
   Extraordinary gain (loss), net of tax..............       2,091             68            2,271         1,265
                                                         ---------------------------     ---------------------------
   Net income (loss)..................................    $ 19,459       $ 11,162         $ 48,635      $ 19,869
                                                         ===========================     ===========================

DENOMINATOR
   Weighted average common shares outstanding.........     103,115         97,534          102,421        97,207
                                                         ---------------------------     ---------------------------

BASIC EPS:
   Before extraordinary gain (loss)...................    $   0.17       $   0.11         $   0.45      $   0.19
   Extraordinary gain (loss), net of tax..............        0.02              -             0.02          0.01
                                                         ---------------------------     ---------------------------
   After extraordinary gain (loss)....................    $   0.19       $   0.11         $   0.47      $   0.20
                                                         ===========================     ===========================

DILUTED EPS COMPUTATION:
NUMERATOR
   Net income (loss) before extraordinary gain (loss).    $ 17,368       $ 11,094         $ 46,364      $ 18,604
   Effect of dilutive convertible securities, tax
     effected.........................................           -              4                -            26
   Extraordinary gain (loss), net of tax..............       2,091             68            2,271         1,265
                                                         ---------------------------     ---------------------------
   Net income (loss)..................................    $ 19,459       $ 11,166         $ 48,635      $ 19,895
                                                         ===========================     ===========================

DENOMINATOR
   Weighted average common shares outstanding.........     103,115         97,534          102,421        97,207
   Warrants...........................................         526             80              552            91
   Stock options......................................       1,170          2,882            1,384         3,003
   7% Convertible Debentures..........................           -              -                -            35
                                                         ---------------------------     ---------------------------
                                                           104,811        100,496          104,357       100,336
                                                         ---------------------------     ---------------------------

DILUTED EPS:
   Before extraordinary gain (loss)...................    $   0.17       $   0.11         $   0.44      $   0.19
   Extraordinary gain (loss), net of tax..............        0.02              -             0.02          0.01
                                                         ---------------------------     ---------------------------
   After extraordinary gain (loss)....................    $   0.19       $   0.11         $   0.46      $   0.20
                                                         ===========================     ===========================



The diluted earnings per share calculation (i) for the three month period ended
December 31, 2001 excludes the effects of 3,588,000 stock options and (ii) for
the six month period ended December 31, 2000 excludes the effects of 1,463,000
stock options. Both calculations exclude the effects of the conversion of the
Company's 5% Convertible Subordinated Notes. The effects of such options and
convertible notes on earnings per share would be anti-dilutive.

The diluted earnings per share calculation for the three and six month
periods ended December 31, 2000 excludes the effects of 1,175,000 stock
options and the effects of the conversion of the Company's 5% Convertible
Subordinated Notes because the effects of such options and convertible notes
on earnings per share would be anti-dilutive.

                                       8



                        KEY ENERGY SERVICES, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 2001 AND 2000


3. STOCKHOLDERS' EQUITY

EQUITY OFFERING

On December 19, 2001, the Company closed an "at-the-market" public offering
of 5,400,000 shares of common stock, yielding net proceeds to the Company of
approximately $43.2 million or $8.00 per share (the "Equity Offering"). Net
proceeds from the Equity Offering of approximately $42.6 million were used to
temporarily reduce amounts outstanding under the Company's revolving line of
credit. The net proceeds of the Equity Offering were ultimiately used in
January, 2002 to redeem a portion of the Company's 14% Senior Subordinated
Notes fully utilizing the Company's equity "claw-back" rights for up to 35%
of the original $150 million in issue.

4. COMMITMENTS AND CONTINGENCIES

Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position, results of operations or cash flows of the Company.

5. INDUSTRY SEGMENT INFORMATION

The Company's reportable business segments are well servicing and contract
drilling. Oil and natural gas production operations were previously separately
presented as a reportable business segment and are now included in
"corporate/other".

WELL SERVICING: The Company's operations provide well servicing (ongoing
maintenance of existing oil and natural gas wells), completions, workover (major
repairs or modifications necessary to optimize the level of production from
existing oil and natural gas wells) and production services (fluid hauling and
fluid storage tank rental).

CONTRACT DRILLING: The Company provides contract drilling services for major and
independent oil companies onshore the continental United States, Argentina and
Ontario, Canada.



                                       9



                                         KEY ENERGY SERVICES, INC.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        DECEMBER 31, 2001 AND 2000





                                                               WELL         CONTRACT     CORPORATE
                                                             SERVICING      DRILLING       /OTHER         TOTAL
                                                             ---------      --------       ------         -----
                                                                                           
                                                                                 (THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 2001
   Operating revenues ..................................      $186,338       $25,654      $  1,345     $  213,337
   Operating profit ....................................        69,246         8,314           195         77,755
   Depreciation, depletion and amortization ............        16,470         2,204         1,050         19,724
   Interest expense ....................................           405             -        10,692         11,097
   Net income (loss) before extraordinary gain (loss)* .        26,546         2,555       (11,733)        17,368
   Identifiable assets .................................       673,162        94,693       255,281      1,023,136
   Capital expenditures (excluding acquisitions) .......        16,418         2,923         2,412         21,753

THREE MONTHS ENDED DECEMBER 31, 2000
   Operating revenues ..................................      $178,650       $24,178      $  1,083     $  203,911
   Operating profit ....................................        60,527         5,818           418         66,763
   Depreciation, depletion and amortization ............        15,261         1,890           995         18,146
   Interest expense ....................................           446             -        14,135         14,581
   Net income (loss) before extraordinary gain (loss)* .        24,720         1,208       (14,834)        11,094
   Identifiable assets .................................       639,979        91,066       233,019        964,064
   Capital expenditures (excluding acquisitions) .......         9,093         4,041         3,942         17,076



*Net income (loss) includes general and administrative
expenses allocated on a percentage of revenue basis.





Operating revenues for the Company's foreign operations for the three months
ended December 31, 2001 and 2000 were $11.9 million and $13.3 million,
respectively. Operating profits for the Company's foreign operations for the
three months ended December 31, 2001 and 2000 were $2.1 million and $3.2
million, respectively. The Company had $56.1 million and $75.3 million of
identifiable assets as of December 31, 2001 and 2000, respectively, related to
foreign operations.





                                      10



                                          KEY ENERGY SERVICES, INC.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                         DECEMBER 31, 2001 AND 2000





                                                            WELL         CONTRACT     CORPORATE
                                                          SERVICING      DRILLING       /OTHER         TOTAL
                                                          ---------      --------       ------         -----
                                                                                        
                                                                                 (THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 2001
  Operating revenues ................................      $398,839       $59,290      $  4,445     $  462,574
  Operating profit ..................................       148,967        20,762         2,110        171,839
  Depreciation, depletion and amortization ..........        31,027         4,584         1,982         37,593
  Interest expense ..................................           953             -        22,093         23,046
  Net income (loss) before extraordinary gain (loss)*        61,091         7,863       (22,590)        46,364
  Identifiable assets ...............................       673,162        94,693       255,281      1,023,136
  Capital expenditures (excluding acquisitions) .....        28,312        11,077         5,539         44,928

SIX MONTHS ENDED DECEMBER 31, 2000
  Operating revenues ................................      $345,215       $46,323      $  4,052     $  395,590
  Operating profit ..................................       115,406        10,505         2,064        127,975
  Depreciation, depletion and amortization ..........        30,950         3,696         1,811         36,457
  Interest expense ..................................         1,103             -        29,589         30,692
  Net income (loss) before extraordinary gain (loss)*        46,499         1,861       (29,756)        18,604
  Identifiable assets ...............................       639,979        91,066       233,019        964,064
  Capital expenditures (excluding acquisitions) .....        17,095         7,174         6,092         30,361



*Net income (loss) includes general and administrative
expenses allocated on a percentage of revenue basis.





Operating revenues for the Company's foreign operations for the six months ended
December 31, 2001 and 2000 were $23.9 million and $26.5 million, respectively.
Operating profits for the Company's foreign operations for the six months ended
December 31, 2001 and 2000 were $4.7 million and $6.2 million, respectively. The
Company had $56.1 million and $75.3 million of identifiable assets as of
December 31, 2001 and 2000, respectively, related to foreign operations.

6. VOLUMETRIC PRODUCTION PAYMENT

In March 2000, Key sold a portion of its future oil and natural gas production
from Odessa Exploration Incorporated, its wholly owned subsidiary, for gross
proceeds of $20 million pursuant to an agreement under which the purchaser is
entitled to receive a portion of the production from certain oil and natural gas
properties over the six year period ending February 28, 2006 in amounts starting
at 10,000 barrels of oil per month and declining to 3,500 barrels of oil per
month and starting at 122,100 Mmbtu of natural gas per month and declining to
58,800 Mmbtu of natural gas per month. The total volume of the forward sale is
approximately 486,000 barrels of oil and 6,135,000 Mmbtu of natural gas.

7. DERIVATIVE INSTRUMENTS

The Company utilizes derivative financial instruments to manage well-defined
commodity price risks. The Company is exposed to credit losses in the event of
nonperformance by the counter-

                                      11



                        KEY ENERGY SERVICES, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 2001 AND 2000

parties to its commodity hedges. The Company only deals with reputable
financial institutions as counter-parties and anticipates that such
counter-parties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing
of the counter-parties.

The Company periodically hedges a portion of its oil and natural gas production
through collar and option agreements. The purpose of the hedges is to provide a
measure of stability in the volatile environment of oil and natural gas prices
and to manage exposure to commodity price risk under existing sales commitments.
The Company's risk management objective is to lock in a range of pricing for
expected production volumes. This allows the Company to forecast future earnings
within a predictable range. The Company meets this objective by entering into
collar and option arrangements which allow for acceptable cap and floor prices.

The Company does not enter into derivative instruments for any purpose other
than for economic hedging. The Company does not speculate using derivative
instruments. The Company has identified the following derivative instruments:

FREESTANDING DERIVATIVES: On March 30, 2000 the Company entered into a collar
arrangement for a 22-month period whereby the Company will pay if the specified
price is above the cap index and the counter-party will pay if the price should
fall below the floor index. The hedge defines a range of cash flows bounded by
the cap and floor prices. On May 25, 2001 the Company entered into an option
arrangement for a 12-month period beginning March 2002 whereby the counter-party
will pay should the price fall below the floor index. The Company desires a
measure of stability to ensure that cash flows do not fall below a certain
level.

Prior to the adoption of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, ("SFAS No. 133"),
as amended by SFAS No. 137 and 138, these collars were accounted for as cash
flow type hedges. Accordingly, the July 1, 2000 transition adjustment resulted
in recording a $778,000 liability for the fair value of the collars to
accumulated other comprehensive income. Approximately $97,000 of the transition
adjustment was recognized in earnings during the three months ended December 31,
2001. The unamortized balance of the transition adjustment, approximately
$64,000, will be recognized in earnings over the next three months. As of July
1, 2001, the Company has documented the May 25, 2001 options as cash flow
hedges. During the quarter ended December 31, 2001, the Company recorded a net
decrease in net derivative assets of approximately $105,000, which included an
earnings charge of approximately $392,000 from ineffectiveness.

EMBEDDED DERIVATIVES. The Company is party to a volumetric production payment of
which certain terms meet the definition of an embedded derivative under SFAS No.
133. Effective July 1, 2000, the Company has determined and documented that the
production payment is excluded from the scope of SFAS No. 133 under the normal
purchases/sales exclusion as set forth in SFAS 138.


                                      12



                        KEY ENERGY SERVICES, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 2001 AND 2000

8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company's senior notes are guaranteed by all of the Company's subsidiaries
(except for the foreign subsidiaries), all of which are wholly-owned. The
guarantees are joint and several, full, complete and unconditional. There are
currently no restrictions on the ability of the subsidiary guarantors to
transfer funds to the parent company.

The accompanying condensed consolidating financial information has been prepared
and presented pursuant to SEC Regulation S-X Rule 3-10, Financial Statements of
Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
The information is not intended to present the financial position, results of
operations and cash flows of the individual companies or groups of companies in
accordance with generally accepted accounting principles.


























                                      13




                                       KEY ENERGY SERVICES, INC.
                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      DECEMBER 31, 2001 and 2000



                                   CONDENSED CONSOLIDATING BALANCE SHEETS

                                                                DECEMBER 31, 2001
                                      -----------------------------------------------------------------------
                                                                     NON-
                                      PARENT       GUARANTOR      GUARANTOR
                                     COMPANY     SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS   CONSOLIDATED
                                   ----------    ------------    -------------    ------------   ------------
                                                                      (THOUSANDS)
                                                                                  
Assets:
  Current assets ..............    $   13,689     $  145,963      $   20,422       $      --      $  180,074
  Net property and equipment...        25,716        739,181          35,605              --         800,502
  Goodwill, net ...............         3,502        188,389           1,326              --         193,217
  Deferred costs, net .........        14,257             --              --              --          14,257
  Intercompany receivables ....       578,459             --              --        (578,459)             --
  Other assets ................        21,470          6,772              61              --          28,303
                                   ----------     ----------      ----------       ---------      ----------
Total assets ..................    $  657,093     $1,080,305      $   57,414       $(578,459)     $1,216,353
                                   ==========     ==========      ==========       =========      ==========
Liabilities and equity:
  Current liabilities .........    $   31,603     $   52,910      $    7,592       $      --      $   92,105
  Long-term debt ..............       379,269             --              --              --         379,269
  Capital lease obligations....           352         15,875              --              --          16,227
  Intercompany payables .......            --        538,818          39,641        (578,459)             --
  Deferred tax liability ......       151,305             --              --              --         151,305
  Other long-term liabilities..         9,716         11,641              --              --          21,357
  Stockholders' equity ........        84,848        461,061          10,181              --         556,090
                                   ----------     ----------      ----------       ---------      ----------
Total liabilities and
  stockholders' equity.........    $  657,093     $1,080,305      $   57,414       $(578,459)     $1,216,353
                                   ==========     ==========      ==========       =========      ==========



                                                                     JUNE 30, 2001
                                      -----------------------------------------------------------------------
                                                                     NON-
                                      PARENT       GUARANTOR      GUARANTOR
                                     COMPANY     SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS   CONSOLIDATED
                                   ----------    ------------    -------------    ------------   ------------
                                                                      (THOUSANDS)
                                                                                  
Assets:
  Current assets ..............    $   10,680     $  165,653      $   29,817       $      --      $  206,150
  Net property and equipment...        21,418        717,989          54,309              --         793,716
  Goodwill, net ...............         3,374        184,379           2,122              --         189,875
  Deferred costs, net .........        17,624             --              --              --          17,624
  Intercompany receivables ....       664,592             --              --        (664,592)             --
  Other assets ................        15,303          5,616              --              --          20,919
                                   ----------     ----------      ----------       ---------      ----------
Total assets ..................    $  732,991     $1,073,637      $   86,248       $(664,592)     $1,228,284
                                   ==========     ==========      ==========       =========      ==========
Liabilities and equity:
  Current liabilities .........    $   35,671     $   64,679      $   15,203       $      --      $  115,553
  Long-term debt ..............       470,578            --               --              --         470,578
  Capital lease obligations ...            90         15,331             (38)             --          15,383
  Intercompany payables .......          --          608,764          55,828        (664,592)             --
  Deferred tax liability ......       127,400            --               --              --         127,400
  Other long-term liabilities..         8,240         14,252              --              --          22,492
  Stockholders' equity ........        91,012        370,611          15,255              --         476,878
                                   ----------     ----------      ----------       ---------      ----------
Total liabilities and
  stockholders' equity ........    $  732,991     $1,073,637      $   86,248       $(664,592)     $1,228,284
                                   ==========     ==========      ==========       =========      ==========


                                                       14


                                       KEY ENERGY SERVICES, INC.
                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      DECEMBER 31, 2001 and 2000




                              CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

                                                          THREE MONTHS ENDED DECEMBER 31, 2001
                                      -----------------------------------------------------------------------
                                                                             NON-
                                             PARENT       GUARANTOR       GUARANTOR
                                             COMPANY     SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS   CONSOLIDATED
                                             --------    ------------    ------------     ------------   ------------
                                                                           (THOUSANDS)
                                                                                          
Revenues..................................   $    329       $201,119         $11,889            $  -        $213,337
Costs and expenses:
  Direct expenses.........................          -        125,799           9,783               -         135,582
  Depreciation, depletion and
    amortization..........................        429         18,283           1,012               -          19,724
  General and administrative..............      5,137         10,854             764               -          16,755
  Interest................................     10,692            136             269               -          11,097
  Argentine foreign currency
  transaction loss........................          -              -           1,844               -           1,844
  Other expenses..........................          -             64               -               -              64
                                             --------       --------         -------            ----        --------
Total costs and expenses..................     16,258        155,136          13,672               -         185,066
                                             --------       --------         -------            ----        --------
Income (loss) before income taxes.........    (15,929)        45,983          (1,783)              -          28,271
Income tax (expense) benefit..............      6,145        (17,736)            688               -         (10,903)
                                             --------       --------         -------            ----        --------
Income (loss) before extraordinary items..     (9,784)        28,247          (1,095)              -          17,368
Extraordinary items, net of tax...........      2,091              -               -               -           2,091
                                             --------       --------         -------            ----        --------
Net income (loss).........................   $ (7,693)      $ 28,247         $(1,095)           $  -        $ 19,459
                                             ========       ========         =======            ====        ========



                                                          THREE MONTHS ENDED DECEMBER 31, 2000
                                      -----------------------------------------------------------------------
                                                                             NON-
                                             PARENT       GUARANTOR       GUARANTOR
                                             COMPANY     SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS   CONSOLIDATED
                                             --------    ------------    -------------    ------------   ------------
                                                                          (THOUSANDS)
                                                                                          
Revenues..................................   $    195       $190,404         $13,312            $  -        $203,911
Costs and expenses:
  Direct expenses.........................          -        127,013          10,135               -         137,148
  Depreciation, depletion and
  amortization............................        474         16,653           1,019               -          18,146
  General and administrative..............      3,230         11,152             882               -          15,264
  Interest................................     14,135            389              57               -          14,581
  Other expenses..........................        311            398               -               -             709
                                             --------       --------         -------            ----        --------
Total costs and expenses..................     18,150        155,605          12,093               -         185,848
                                             --------       --------         -------            ----        --------
Income (loss) before income taxes.........    (17,955)        34,799           1,219               -          18,063
Income tax (expense) benefit..............      6,927        (13,426)           (470)              -          (6,969)
                                             --------       --------         -------            ----        --------
Income (loss) before
  extraordinary items.....................    (11,028)        21,373             749               -          11,094
Extraordinary items, net of tax...........         68              -               -               -              68
                                             --------       --------         -------            ----        --------
Net income (loss).........................   $(10,960)      $ 21,373         $   749            $  -        $ 11,162
                                             ========       ========         =======            ====        ========


                                                       15



                                            KEY ENERGY SERVICES, INC.
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                           DECEMBER 31, 2001 AND 2000



                                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



                                                            SIX MONTHS ENDED DECEMBER 31, 2001
                                    -------------------------------------------------------------------------------
                                                                         NON-
                                        PARENT        GUARANTOR       GUARANTOR
                                        COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                    -------------- ---------------  -------------- --------------- ----------------
                                                                                    
                                                                     (THOUSANDS)

Revenues...........................    $    822         $437,760        $23,992          $ -            $462,574
Costs and expenses:
    Direct expenses................           -          271,449         19,286            -             290,735
    Depreciation, depletion and
    amortization...................         740           34,791          2,062            -              37,593
    General and administrative.....      10,465           22,606          1,568            -              34,639
    Interest.......................      22,093              341            612            -              23,046
    Argentine foreign currency
    transaction loss...............           -                -          1,844            -               1,844
    Other expenses.................           -              308              -            -                 308
                                    -------------- ---------------  -------------- --------------- ----------------
Total costs and expenses...........      33,298          329,495         25,372            -             388,165
                                    -------------- ---------------  -------------- --------------- ----------------
Income (loss) before income taxes..     (32,476)         108,265         (1,380)           -              74,409
Income tax (expense) benefit.......      12,292          (40,784)           537            -             (28,045)
                                    -------------- ---------------  -------------- --------------- ----------------
Income (loss) before                    (20,184)          67,391           (843)           -              46,364
  extraordinary items..............
Extraordinary items, net of tax....       2,271                -              -            -               2,271
                                    -------------- ---------------  -------------- --------------- ----------------
Net income (loss)..................    $(17,913)        $ 67,391        $  (843)         $ -            $ 48,635
                                    ============== ===============  ============== =============== ================


                                                            SIX MONTHS ENDED DECEMBER 31, 2000
                                    -------------------------------------------------------------------------------
                                                                         NON-
                                        PARENT        GUARANTOR       GUARANTOR
                                        COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                    -------------- ---------------  -------------- --------------- ----------------
                                                                    (THOUSANDS)

Revenues...........................    $  1,574         $367,477        $26,539          $ -            $395,590
Costs and expenses:
    Direct expenses................           -          247,299         20,316            -             267,615
    Depreciation, depletion and
    amortization...................         778           33,695          1,984            -              36,457
    General and administrative.....       6,985           20,932          1,714            -              29,631
    Interest.......................      29,589              793            310            -              30,692
    Other expenses.................         311              592              -            -                 903
                                    -------------- ---------------  -------------- --------------- ----------------
Total costs and expenses...........      37,663          303,311         24,324            -             365,298
                                    -------------- ---------------  -------------- --------------- ----------------
Income (loss) before income taxes..     (36,089)          64,166          2,215            -              30,292
Income tax (expense) benefit.......      13,925          (24,759)          (854)           -             (11,688)
                                    -------------- ---------------  -------------- --------------- ----------------
Income (loss) before                    (22,164)          39,407          1,361            -              18,604
  extraordinary items..............
Extraordinary items, net of tax....       1,265                -              -            -               1,265
                                    -------------- ---------------  -------------- --------------- ----------------
Net income (loss)..................    $(20,899)        $ 39,407        $ 1,361          $ -            $ 19,869
                                    ============== ===============  ============== =============== ================


                                                      16


                                            KEY ENERGY SERVICES, INC.
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                           DECEMBER 31, 2001 AND 2000


                                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS





                                                             THREE MONTHS ENDED DECEMBER 31, 2001
                                      -------------------------------------------------------------------------------
                                                                           NON-
                                          PARENT        GUARANTOR       GUARANTOR
                                          COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                      -------------- ---------------  -------------- --------------- ----------------
                                                                                      
                                                                       (THOUSANDS)

Net cash provided by (used in)
   operating activities..............    $ 34,549         $ 21,084        $ 1,953          $ -            $ 57,586
Net cash provided by (used in)
   investing activities..............      (7,431)         (18,862)        (1,223)           -             (27,516)
Net cash provided by (used in)
   financing activities..............     (21,963)          (2,442)             -            -             (24,405)
Effect of exchange rate changes on              -                -           (192)           -                (192)
   cash..............................
                                      -------------- ---------------  -------------- --------------- ----------------
Net increase (decrease) in cash......       5,155             (220)           538            -               5,473
Cash at beginning of period..........      (2,648)           3,996          1,145            -               2,493
                                      -------------- ---------------  -------------- --------------- ----------------
Cash at end of period................    $  2,507         $  3,776        $ 1,683          $ -            $  7,966
                                      ============== ===============  ============== =============== ================


                                                             THREE MONTHS ENDED DECEMBER 31, 2001
                                      -------------------------------------------------------------------------------
                                                                           NON-
                                          PARENT        GUARANTOR       GUARANTOR
                                          COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                      -------------- ---------------  -------------- --------------- ----------------
                                                                        (THOUSANDS)

Net cash provided by (used in)
   operating activities.............     $ 20,880         $ 10,175        $ 2,052          $ -            $ 33,107
Net cash provided by (used in)
   investing activities.............       (5,933)         (10,658)        (2,135)           -             (18,726)
Net cash provided by (used in) in
   financing activities.............      (12,544)          (2,540)           (13)           -             (15,097)
                                      -------------- ---------------  -------------- --------------- ----------------
Net increase (decrease) in cash.....        2,403           (3,023)           (96)           -                (716)
Cash at beginning of period.........        5,074           (3,364)           925            -               2,635
                                      -------------- ---------------  -------------- --------------- ----------------
Cash at end of period...............     $  7,477         $ (6,387)       $   829          $ -            $  1,919
                                      ============== ===============  ============== =============== ================




                                                      17





                                          KEY ENERGY SERVICES, INC.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                         DECEMBER 31, 2001 AND 2000



                               CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



                                                            SIX MONTHS ENDED DECEMBER 31, 2001
                                      -------------------------------------------------------------------------------
                                          PARENT        GUARANTOR      NON-GUARANTOR
                                          COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                      -------------- ---------------  -------------- --------------- ----------------
                                                                      (THOUSANDS)
                                                                                      

Net cash provided by (used in)
   operating activities..............     $ 55,161        $ 46,885        $   771          $ -            $102,817
Net cash provided by (used in)
   investing activities..............      (12,381)        (36,228)        (1,339)           -             (49,948)
Net cash provided by (used in)
   financing activities..............      (41,920)         (4,876)           (13)           -             (46,809)
Effect of exchange rate changes on               -               -           (192)           -                (192)
   cash..............................
                                      -------------- ---------------  -------------- --------------- ----------------
Net increase (decrease) in cash......          860           5,781           (773)           -               5,868
Cash at beginning of period..........        1,647          (2,005)         2,456            -               2,098
                                      -------------- ---------------  -------------- --------------- ----------------
Cash at end of period................     $  2,507        $  3,776        $ 1,683          $ -            $  7,966
                                      ============== ===============  ============== =============== ================




                                                            SIX MONTHS ENDED DECEMBER 31, 2000
                                      -------------------------------------------------------------------------------

                                          PARENT        GUARANTOR      NON-GUARANTOR
                                          COMPANY      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS     CONSOLIDATED
                                      -------------- ---------------  -------------- --------------- ----------------
                                                                      (THOUSANDS)
                                                                                      

Net cash provided by (used in)
   operating activities..............    $  21,389        $ 19,924        $ 4,152          $ -           $  45,465
Net cash provided by (used in)
   investing activities..............       (7,906)        (20,754)        (3,249)           -             (31,909)
Net cash provided by (used in)
   financing activities..............     (117,172)         (4,311)           (27)           -            (121,510)
                                      -------------- ---------------  -------------- --------------- ----------------
Net increase (decrease) in cash......     (103,689)         (5,141)           876            -            (107,954)
Cash at beginning of period..........      111,166          (1,246)           (47)           -             109,873
                                      -------------- ---------------  -------------- --------------- ----------------
Cash at end of period................    $   7,477        $ (6,387)       $   829          $ -           $   1,919
                                      ============== ===============  ============== =============== ================



9.  GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142

The Company has adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS 142") on July 1, 2001. SFAS 142
eliminates the amortization for goodwill and other intangible assets with
indefinite lives. Intangible assets with lives restricted by contractual,
legal, or other means will continue to be amortized over their useful lives.
Goodwill and other intangible assets not subject to amortization are tested
for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. SFAS 142 requires a
two-step process for testing impairment. First, the fair value of each
reporting unit is compared to its carrying value to determine whether an
indication of impairment exists. If impairment is indicated, then the fair
value of the reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill and other intangible
assets is measured as the excess of its carrying value over its fair value.
The Company completed its

                                      18



                           KEY ENERGY SERVICES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 2001 AND 2000

assessment of goodwill impairment during the three months ended December 31,
2001, as allowed by SFAS 142. The assessment did not result in an indication of
goodwill impairment.

Intangible assets subject to amortization under SFAS 142 consist of noncompete
agreements. Amortization expense is calculated using the straight-line method
over the period of the agreement, ranging from 3 to 5 years.

The gross carrying amount of noncompete agreements subject to amortization
totaled approximately $8,863,000 and $8,099,000 at December 31, 2001 and June
30, 2001, respectively. Accumulated amortization related to these intangible
assets totaled approximately $4,986,000 and $4,953,000 at December 31, 2001 and
June 30, 2001, respectively. Amortization expense for the three months ended
December 31, 2001 and 2000 was approximately $370,000 and $244,000,
respectively. Amortization expense for the six months ended December 31, 2001
and 2000 was approximately $770,000 and $729,000. Amortization expense for the
next five fiscal years is estimated to be $1,783,000, $1,054,000, $400,000,
$373,000 and $267,000.

The Company has identified its reporting segments to be well servicing and
contract drilling. Goodwill allocated to such reporting segments at December 31,
2001 is $178,952,000 and $14,265,000, respectively. The change in the carrying
amount of goodwill for the three and six months ended December 31, 2001 of
$2,238,000 and $3,144,000, respectively, relates principally to goodwill from
well servicing assets acquired during the period and the translation adjustment
for Argentina at December 31, 2001.
















                                      19



                                        KEY ENERGY SERVICES, INC.
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                       DECEMBER 31, 2001 AND 2000

The effect of the adoption of SFAS 142 on net income and earnings per share is
as follows:



                                                            THREE MONTHS ENDED               SIX MONTHS ENDED
                                                               DECEMBER 31,                    DECEMBER 31,
                                                             2001          2000             2001          2000
                                                         -------------- ------------     ------------ --------------
                                                           (THOUSANDS, EXCEPT PER          (THOUSANDS, EXCEPT PER
                                                                 SHARE DATA)                     SHARE DATA)
                                                                                          

Reported net income (loss) before extraordinary gain
  (loss)..............................................     $17,368        $11,094          $46,364       $18,604
Add back:  goodwill amortization......................           -          2,204                -         4,655
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss) before extraordinary gain
  (loss)..............................................      17,368         13,298           46,364        23,259
Extraordinary gain (loss), net of tax.................       2,091             68            2,271         1,265
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss)............................     $19,459        $13,366          $48,635       $24,524
                                                         ============== ============     ============= =============


BASIC EARNINGS (LOSS) PER SHARE:
Reported net income (loss) before extraordinary gain
  (loss)..............................................       $0.17          $0.11            $0.45         $0.19
Add back:  goodwill amortization......................           -           0.02                -          0.05
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss) before extraordinary gain
  (loss)..............................................       $0.17          $0.13            $0.45         $0.24
Extraordinary gain (loss), net of tax.................        0.02              -             0.02          0.01
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss)............................       $0.19          $0.13            $0.47         $0.25
                                                         ============== ============     ============= =============


DILUTED EARNINGS (LOSS) PER SHARE:
Reported net income (loss) before extraordinary gain
  (loss)..............................................       $0.17          $0.11            $0.45         $0.19
Add back:  goodwill amortization......................           -           0.02                -          0.05
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss) before extraordinary gain
  (loss)..............................................       $0.17          $0.13            $0.45         $0.24
Extraordinary gain (loss), net of tax.................        0.02              -             0.02          0.01
                                                         -------------- ------------     ------------- -------------
Adjusted net income (loss)............................       $0.19          $0.13            $0.47         $0.25
                                                         ============== ============     ============= =============



10.  ARGENTINA FOREIGN CURRENCY TRANSACTION LOSS

The local currency is the functional currency for all of the Company's foreign
operations (Argentina and Canada). The cumulative translation gains and losses,
resulting from translating each foreign subsidiary's financial statements from
the functional currency to U.S. dollars are included in other comprehensive
income and accumulated in stockholders' equity until a partial or complete sale
or liquidation of the Company's net investment in the foreign entity.

Since 1991, the Argentine peso has been tied to the U.S. dollar at a
conversion ratio of 1:1. However, in December 2001, the Government of
Argentina announced an exchange holiday and, as a result, Argentine pesos
could not be exchanged into other currencies at December 31, 2001. On



                                           20



                           KEY ENERGY SERVICES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 2001 AND 2000


January 5 and 6, 2002, the Argentine Congress and Senate gave the President
of Argentina emergency powers and the ability to suspend the law that created
the fixed conversion ratio of 1:1. The Government subsequently announced the
creation of a dual currency system in which certain qualifying transactions
will be settled at an expected fixed conversion ratio of 1.4:1 while all
other transactions will be settled using a free floating market conversion
ratio. Under existing guidance, dividends would not receive the fixed
conversion ratio. On January 11, 2002, the exchange holiday was lifted,
making it possible again to buy and sell Argentine pesos. Banks were legally
allowed to exchange currencies, but transactions were limited and generally
took place at exchange houses. These transactions were conducted primarily by
individuals as opposed to commercial transactions, and occurred at free
conversion ratios ranging between 1.6:1 and 1.7:1.

Due to the events described above, which resulted in the temporary lack of
exchangeability of the two currencies at December 31, 2001, the Company has
translated the assets and liabilities of its Argentine subsidiary at December
31, 2001 using a conversion ratio of 1.6:1, which management believes is
indicative of the free floating conversion ratio when the currency market
re-opened on January 11, 2002. As a result, a foreign currency translation
loss of approximately $24.2 million is included in other comprehensive
income, a component of stockholders' equity, in the accompanying December 31,
2001 consolidated balance sheet. Since the 1:1 conversion ratio was in
existence prior to December 2001, income statement and cash flows information
has been translated using the historical 1:1 conversion ratio.

Additionally, the Argentine government has indicated that as part of its
monetary policy changes, it will re-denominate certain consumer loans from U.S.
dollar-denominated to Argentine peso-denominated. As a result, the Company
recorded a foreign currency transaction loss of $1.8 million in the three months
ended December 31, 2001 related to accounts receivable subject to certain U.S.
dollar-denominated contracts held by its Argentine subsidiary which are subject
to re-denomination. These receivables are subject to additional negotiation with
the Company's customers which may result in recovery of a portion of this loss.














                                      21




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

                   NOTE REGARDING FORWARD - LOOKING STATEMENTS

The statements in this document that relate to matters that are not historical
facts are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
When used in this document and the documents incorporated by reference, words
such as "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may," "predict" and similar expressions are
intended to identify forward-looking statements. Future events and actual
results may differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a difference include:

     -   fluctuations in world-wide prices and demand for oil and natural gas;

     -   fluctuations in the level of oil and natural gas exploration and
         development activities;

     -   fluctuations in the demand for well servicing, contract drilling and
         ancillary oilfield services;

     -   the existence of competitors, technological changes and developments
         in the industry;

     -   the existence of operating risks inherent in well servicing, contract
         drilling and ancillary oilfield services; and

     -   general economic conditions, the existence of regulatory uncertainties,
         the possibility of political or currency instability in any of the
         countries in which the Company does business, in addition to the other
         matters discussed herein.

The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this report.

                              RESULTS OF OPERATIONS

As the more detailed discussions below illustrate, the Company's revenues, net
income and cash flow for the six months ended December 31, 2001 were at levels
significantly higher than for the same period in fiscal 2001. As oil and natural
gas prices have weakened, activity levels in both the well servicing and
drilling segments have declined as reflected in our second quarter results.
Results for the remainder of fiscal 2002 will clearly be influenced by the
demand for and pricing of natural gas and oil.



                                      22



THREE MONTHS ENDED DECEMBER 31, 2001 VERSUS THREE MONTHS ENDED DECEMBER 31, 2000

The Company's revenue for the three months ended December 31, 2001 increased
$9,426,000, or 4.6%, to $213,337,000 from $203,911,000 for the three months
ended December 31, 2000. The increase in the current period reflects improved
rates despite lower activity levels. The Company's net income for the second
quarter of fiscal 2002 totaled $19,459,000, or $0.19 per dilutive share, versus
a net income of $11,162,000, or $0.11 per dilutive share, for the prior year
period.

OPERATING REVENUES

WELL SERVICING. Well servicing revenues for the three months ended December 31,
2001 increased $7,688,000, or 4.3%, to $186,338,000 from $178,650,000 for the
three months ended December 31, 2000. The increase in revenues was primarily due
to higher rig and fluid hauling rates despite lower activity levels.

CONTRACT DRILLING. Contract drilling revenues for the three months ended
December 31, 2001 increased $1,476,000, or 6.1%, to $25,654,000 from $24,178,000
for the three months ended December 31, 2000. The increase in revenues was
primarily due to higher rig rates despite lower activity levels.

OPERATING EXPENSES

WELL SERVICING. Well servicing expenses for the three months ended December 31,
2001 decreased $1,031,000, or 0.87%, to $117,092,000 from $118,123,000 for the
three months ended December 31, 2000. The decrease was primarily due to
marginally lower levels of activity. Well servicing expenses, as a percentage of
well servicing revenue, decreased to 62.8% for the three months ended December
31, 2001 from 66.1% for the three months ended December 31, 2000.

CONTRACT DRILLING. Contract drilling expenses for the three months ended
December 31, 2001 decreased $1,020,000, or 5.6%, to $17,340,000 from $18,360,000
for the three months ended December 31, 2000. The decrease was primarily due to
lower levels of activity. Contract drilling expenses, as a percentage of
contract drilling revenues, decreased to 67.6% for the three months ended
December 31, 2001 from 75.9% for the three months ended December 31, 2000.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

The Company's depreciation, depletion and amortization expense for the three
months ended December 31, 2001 increased $1,578,000, or 8.7%, to $19,724,000
from $18,146,000 for the three months ended December 31, 2000. The increase is
due to recent acquisitions and increased capital expenditures during the past
twelve months as the Company continued major refurbishments of well servicing
and contract drilling equipment partially offset by discontinued amortization of
goodwill because of the Company's adoption of SFAS 142.


                                      23



GENERAL AND ADMINISTRATIVE EXPENSES

The Company's general and administrative expenses for the three months ended
December 31, 2001 increased $1,491,000, or 9.8%, to $16,755,000 from $15,264,000
for the three months ended December 31, 2000. The increase was due to higher
administrative costs related to growth of the Company's operations and reflects
additional resources in technology and internal control functions. General and
administrative expenses, as a percentage of revenues, increased to 7.9% for the
three months ended December 31, 2001 from 7.5% for the three months ended
December 31, 2000.

INTEREST EXPENSE

The Company's interest expense for the three months ended December 31, 2001
decreased $3,484,000, or 23.9%, to $11,097,000, from $14,581,000 for the three
months ended December 31, 2000. The decrease was primarily due to a significant
reduction in the Company's long-term debt using operating cash flow, and to a
lesser extent, lower interest rates. Included in the interest expense was the
amortization of debt issuance costs of $654,000 and $822,000 for the three
months ended December 31, 2001 and 2000, respectively.

BAD DEBT EXPENSE

The Company's bad debt expense for the three months ended December 31, 2001
decreased $645,000, or 91%, to $64,000 from $709,000 for the three months ended
December 31, 2000. The Company continues to carefully monitor credit risk
associated with our customers.

FOREIGN CURRENCY TRANSACTION LOSS

During the three months ended December 31, 2001, the Company recorded an
Argentine foreign currency transaction loss of approximately $1,844,000 related
to dollar-denominated receivables resulting from the recent devaluation of
Argentina's currency.

EXTRAORDINARY GAIN

During the three months ended December 31, 2001, the Company retired $61,581,000
of its long-term debt, and expensed the related unamortized debt issuance costs
which resulted in a net after-tax extraordinary gain of $2,091,000. During the
three months ended December 31, 2000, the Company retired $3,000,000 of its
long-term debt, and expensed the related unamortized debt issuance costs which
resulted in a net after-tax extraordinary gain of $68,000.

INCOME TAXES

The Company's income tax expense for the three months ended December 31, 2001
increased $3,934,000 to an expense of $10,903,000 from an expense of $6,969,000
for the three months ended December 31, 2000. The increase in income tax expense
is due to the increase in pretax income. The Company's effective tax rate for
the three months ended December 31, 2001 and


                                      24



December 31, 2000 was approximately 38%. The effective tax rates vary from the
statutory rate of 35% because of the disallowance of certain goodwill
amortization (for the three months ended December 31, 2000), and other
non-deductible expenses and the effects of state and local taxes.

SIX MONTHS ENDED DECEMBER 31, 2001 VERSUS SIX MONTHS ENDED DECEMBER 31, 2000

The Company's revenue for the six months ended December 31, 2001 increased
$66,984,000, or 16.9%, to $462,574,000 from $395,590,000 for the six months
ended December 31, 2000. The increase in the current period reflects higher
activity levels and improved rates. The Company's net income for the first six
months of fiscal 2002 totaled $48,635,000, or $0.46 per dilutive share, versus a
net income of $19,869,000, or $0.20 per dilutive share, for the prior year
period.

OPERATING REVENUES

WELL SERVICING. Well servicing revenues for the six months ended December 31,
2001 increased $53,624,000, or 15.5%, to $398,839,000 from $345,215,000 for the
six months ended December 31, 2000. The increase in revenues was primarily due
to higher levels of activity and higher rig and fluid hauling rates.

CONTRACT DRILLING. Contract drilling revenues for the six months ended December
31, 2001 increased $12,967,000, or 28.0%, to $59,290,000 from $46,323,000 for
the six months ended December 31, 2000. The increase in revenues was primarily
due to higher rig rates despite lower activity levels.

OPERATING EXPENSES

WELL SERVICING. Well servicing expenses for the six months ended December 31,
2001 increased $20,063,000, or 8.7%, to $249,872,000 from $229,809,000 for the
six months ended December 31, 2000. The increase was primarily due to a higher
level of activity and increased wages. Well servicing expenses, as a percentage
of well servicing revenue, decreased to 62.6% for the six months ended December
31, 2001 from 66.6% for the six months ended December 31, 2000.

CONTRACT DRILLING. Contract drilling expenses for the six months ended December
31, 2001 increased $2,710,000, or 7.6%, to $38,528,000 from $35,818,000 for the
six months ended December 31, 2000. The increase was primarily due to higher
wages. Contract drilling expenses, as a percentage of contract drilling
revenues, decreased to 65.0% for the six months ended December 31, 2001 from
77.3% for the six months ended December 31, 2000.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

The Company's depreciation, depletion and amortization expense for the six
months ended December 31, 2001 increased $1,136,000, or 3.1%, to $37,593,000
from $36,457,000 for the six months ended December 31, 2000. The increase is due
to recent acquisitions and increased capital expenditures during the past twelve
months as the Company continued major


                                      25



refurbishments of well servicing and contract drilling equipment partially
offset by discontinued amortization of goodwill because of the Company's
adoption of SFAS 142.

GENERAL AND ADMINISTRATIVE EXPENSES

The Company's general and administrative expenses for the six months ended
December 31, 2001 increased $5,008,000, or 16.9%, to $34,639,000 from
$29,631,000 for the six months ended December 31, 2000. The increase was due
to higher administrative costs related to growth of the Company's operations
and reflects additional resources in technology and internal control
functions. General and administrative expenses, as a percentage of revenues,
remained constant at 7.5% for the six months ended December 31, 2001 and
December 31, 2000.

INTEREST EXPENSE

The Company's interest expense for the six months ended December 31, 2001
decreased $7,646,000, or 24.9%, to $23,046,000, from $30,692,000 for the six
months ended December 31, 2000. The decrease was primarily due to a significant
reduction in the Company's long-term debt using operating cash flow, and to a
lesser extent, lower interest rates. Included in the interest expense was the
amortization of debt issuance costs of $1,393,000 and $2,044,000 for the six
months ended December 31, 2001 and 2000, respectively.

BAD DEBT EXPENSE

The Company's bad debt expense for the six months ended December 31, 2001
decreased $595,000, or 65.9%, to $308,000 from $903,000 for the six months ended
December 31, 2000. The Company continues to carefully monitor credit risk
associated with our customers.

FOREIGN CURRENCY TRANSACTION LOSS

During the six months ended December 31, 2001, the Company recorded an Argentine
foreign currency transaction loss of approximately $1,844,000 related to
dollar-denominated receivables resulting from the recent devaluation of
Argentina's currency.

EXTRAORDINARY GAIN

During the six months ended December 31, 2001, the Company retired
$114,858,000 of its long-term debt, and expensed the related unamortized debt
issuance costs which resulted in a net after-tax extraordinary gain of
$2,271,000. During the six months ended December 31, 2000, the Company
retired $81,544,000 of its long-term debt, and expensed the related
unamortized debt issuance costs which resulted in a net after-tax
extraordinary gain of $1,265,000.

INCOME TAXES

The Company's income tax expense for the six months ended December 31, 2001
increased $16,357,000 to an expense of $28,045,000 from a expense of $11,688,000
for the six months


                                      26



ended December 31, 2000. The increase in income tax expense is due to the
increase in pretax income. The Company's effective tax rate for the six
months ended December 31, 2001 and December 31, 2000 was 38% and 39%,
respectively. The effective tax rates vary from the statutory rate of 35%
because of the disallowance of certain goodwill amortization (for the six
months ended December 31, 2000), and other non-deductible expenses and the
effects of state and local taxes.

                         LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements using cash flow from operations,
bank borrowings and the issuance of equity and long-term debt. The Company
believes that the current reserves of cash and cash equivalents, access to our
existing credit lines, access to capital markets and internally generated cash
flow from operations are and will be sufficient to finance the cash requirements
of our current and future operations.

CAPITAL EXPENDITURES

Capital expenditures for fiscal 2002 have been and will be directed toward
selectively refurbishing our assets as business conditions warrant. The Company
will continue to evaluate opportunities to acquire or divest assets or
businesses to enhance the Company's primary operations. Such capital
expenditures, acquisitions and divestitures are at the discretion of the Company
and will depend on management's view of market conditions as well as other
factors.

LONG-TERM DEBT

SENIOR CREDIT FACILITY

As of December 31, 2001, the Company had a senior credit facility (the "Senior
Credit Facility") with a syndicate of banks led by PNC Bank, N.A. which
consisted of a $100,000,000 revolving loan facility. In addition, up to
$20,000,000 of letters of credit can be issued under the Senior Credit Facility,
but any outstanding letters of credit reduce the borrowing availability under
the revolving loan facility. The commitment to make revolving loans will reduce
to $75,000,000 on September 14, 2002. The revolving loan commitment will
terminate on September 14, 2003, and all revolving loans must be paid on or
before that date. As of December 31, 2001, approximately $25,000,000 was drawn
under the revolving loan facility and approximately $12,000,000 of letters of
credit related to workman's compensation insurance were outstanding. The Company
drew down approximately $43 million on January 14, 2002 in order to redeem the
14% Senior Subordinated Notes.

The revolving loan bears interest based upon, at the Company's option, the prime
rate plus a variable margin of 0.75% to 2.00% or a Eurodollar rate plus a
variable margin of 2.25% to 3.50%. The Senior Credit Facility has customary
affirmative and negative covenants including a maximum debt to capitalization
ratio, a minimum interest coverage ratio, a maximum senior leverage ratio, a
minimum net worth and minimum EBITDA as well as restrictions on capital
expenditures, acquisitions and dispositions.


                                      27



8 3/8% SENIOR NOTES

On March 6, 2001, the Company completed a private placement of $175,000,000 of
8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The cash proceeds from
the private placement, net of fees and expenses, were used to repay all of the
remaining balance of the Tranche B term loan under the Senior Credit Facility,
and a portion of the revolving loan facility under the Senior Credit Facility.
The 8 3/8% Senior Notes are subordinate to the Company's senior indebtedness
which includes borrowings under the Senior Credit Facility and the Dawson 9 3/8%
Senior Notes.

14% SENIOR SUBORDINATED NOTES

On January 22, 1999, the Company completed the private placement of 150,000
units (the "Units") consisting of $150,000,000 of 14% Senior Subordinated Notes
due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase
(as subsequently adjusted) 2,173,433 shares of the Company's Common Stock at an
exercise price of $4.88125 per share (the "Unit Warrants"). The net cash
proceeds from the private placement were used to repay substantially all of the
remaining $148,600,000 principal amount (plus accrued interest) owed under the
Company's bridge loan facility arranged in connection with the acquisition of
Dawson Production Services, Inc. ("Dawson"). The 14% Senior Subordinated Notes
are subordinate to the Company's senior indebtedness which includes borrowings
under the Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8%
Senior Notes. The Unit Warrants have separated from the 14% Senior Subordinated
Notes and became exercisable on January 25, 2000. At December 31, 2001,
$132,903,000 principal amount of the 14% Senior Subordinated Notes remained
outstanding. As of December 31, 2001, 63,500 Unit Warrants had been exercised
leaving 86,500 Unit Warrants outstanding.

On and after January 15, 2004, the Company may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before January 15, 2002, the Company
may redeem up to 35% of the aggregate principal amount of the 14% Senior
Subordinated Notes with the proceeds of certain sales of equity at 114% of par
plus accrued interest. On January 14, 2002 the Company exercised its right of
redemption for $35,403,000 principal amount of the 14% Senior Subordinated Notes
at a price of 114% of the principal amount plus accrued interest, leaving
$97,500,000 principal amount outstanding as of January 15, 2002. This
transaction resulted in an extraordinary loss before taxes of approximately
$8,468,000.

5% CONVERTIBLE SUBORDINATED NOTES

In late September and early October 1997, the Company completed a private
placement of $216,000,000 of 5% Convertible Subordinated Notes due 2004 (the "5%
Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are
subordinate to the Company's senior indebtedness which includes borrowings under
the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson 9 3/8%
Senior Notes, and the 8 3/8% Senior Notes. The 5% Convertible Subordinated Notes
are convertible, at the holder's option, into shares of the


                                      28



Company's common stock at a conversion price of $38.50 per share, subject to
certain adjustments. During the quarter ended December 31, 2001, the Company
repurchased (and canceled) $61,581,000 principal amount of the 5% Convertible
Subordinated Notes, leaving $50,352,000 principal amount of the 5% Convertible
Subordinated Notes outstanding at December 31, 2001.

CRITICAL ACCOUNTING POLICIES

The Company follows certain significant accounting policies when preparing its
consolidated financial statements. A complete summary of these policies is
included in Note 1 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K.

Certain of the policies require management to make significant and subjective
estimates which are sensitive to deviations of actual results from
management's assumptions. In particular, management makes estimates regarding
the fair value of the Company's reporting units in assessing potential
impairment of goodwill. In addition, the Company makes estimates regarding
future undiscounted cash flows from the future use of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable.

In assessing impairment of goodwill, the Company has used estimates and
assumptions in estimating the fair value of its reporting units. Actual
future results could be different than the estimates and assumptions used.
Events or circumstances which might lead to an indication of impairment of
goodwill would include, but might not be limited to, prolonged decreases in
expectations of long-term well servicing and/or drilling activity or rates
brought about by prolonged decreases in oil or natural gas prices, changes in
government regulation of the oil and natural gas industry or other events
which could affect the level of activity of exploration and production
companies.

In assessing impairment of long-lived assets other than goodwill where there
has been a change in circumstances indicating that the carrying amount of a
long-lived asset may not be recoverable, the Company has estimated future
undiscounted net cash flows from use of the asset based on actual historical
results and expectations about future economic circumstances including oil
and natural gas prices and operating costs. The estimate of future net cash
flows from use of the asset could change if actual prices and costs differ
due to industry conditions or other factors affecting the Company's
performance.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

Recently the Financial Accounting Standards Board, ("FASB") issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), and Statement of Financial Accounting Standards No.
144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS
144"). SFAS 143 establishes requirements for the accounting for removal costs
associated with asset retirements and SFAS 144 addresses financial accounting
and reporting for the impairment of disposal of long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with earlier adoption
encouraged, and SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods


                                      29



within those fiscal years. The Company is currently assessing the impact of
these standards on its consolidated financial statements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements". See "Special Note Regarding Forward-Looking
Statements" for additional factors relating to such statements.

The primary objective of the following information is to provide forward-looking
quantitative and qualitative information about the Company's potential exposure
to market risk. The term "market risk" refers to the risk of loss arising from
adverse changes in foreign currency exchange, interest rates and oil and natural
gas prices. The disclosures are not meant to be precise indicators of expected
future losses, but rather indicators of reasonably possible losses. This
forward-looking information provides indicators of how the Company views and
manages its ongoing market risk exposures.

                               INTEREST RATE RISK

At December 31, 2001, the Company had long-term debt and capital lease
obligations outstanding of $403,711,000. Of this amount $354,634,000 or 88%,
bears interest at fixed rates as follows:



                                                                                   BALANCE AT DECEMBER 31,
                                                                                            2001
                                                                                  --------------------------
                                                                                         (THOUSANDS)
                                                                               
8 3/8% Senior Notes Due 2008.....................................................         $175,000
14% Senior Subordinated Notes Due 2009...........................................          128,263
5% Convertible Subordinated Notes Due 2004.......................................           50,352
Other (rates generally ranging from 8.0% to 8.5%)................................            1,019
                                                                                  --------------------------
                                                                                          $354,634
                                                                                  ==========================


The remaining $49,077,000 of long-term debt and capital lease obligations
outstanding as of December 31, 2001 bears interest at floating rates which
averaged approximately 5.9% at December 31, 2001. A 10% increase in short-term
interest rates on the floating-rate debt outstanding at December 31, 2001 would
equal approximately 59 basis points. Such an increase in interest rates would
increase Key's fiscal 2002 interest expense by approximately $300,000 assuming
borrowed amounts remain outstanding.

The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments.



                                      30


                              FOREIGN CURRENCY RISK

Recently, the Argentine government suspended the law tying the Argentine peso
to the U.S. dollar at the conversion ratio of 1:1 and created a dual currency
system in Argentina. Key's net assets from its Argentina subsidiaries are
based on the U.S. dollar equivalent of such amounts measured in Argentine
pesos as of December 31, 2001. Assets and liabilities of the Argentine
operations were translated to U.S. dollars at December 31, 2001, using the
applicable free market conversion ratio of 1.6:1. Key's net earnings and cash
flows from its Argentina subsidiaries were tied to the U.S. dollar for the
six months ended December 31, 2001 and will be based on the U.S. dollar
equivalent of such amounts measured in Argentine pesos for periods after
December 31, 2001. Revenues, expenses and cash flow will be translated using
the average exchange rates during the periods after December 31, 2001. See
Note 10 to the consolidated financial statements.

A 10% change in the Argentine peso to the U.S. dollar exchange rate would not be
material to the net assets, net earnings or cash flows of Key.

Key's net assets, net earnings and cash flows from its Canadian subsidiary are
based on the U.S. dollar equivalent of such amounts measured in Canadian
dollars. Assets and liabilities of the Canadian operations are translated to
U.S. dollars using the applicable exchange rate as of the end of a reporting
period. Revenues, expenses and cash flow are translated using the average
exchange rate during the reporting period.

A 10% change in the Canadian-to-U.S. Dollar exchange rate would not be material
to the net assets, net earnings or cash flows of Key.


                              COMMODITY PRICE RISK

Key's major market risk exposure for its oil and natural gas production
operations is in the pricing applicable to its oil and natural gas sales.
Realized pricing is primarily driven by the prevailing worldwide price for crude
oil and spot market for natural gas. Pricing for oil and natural gas production
has been volatile and unpredictable for several years.

The Company periodically hedges a portion of its oil and natural gas production
through collar and option agreements. The purpose of the hedges is to provide a
measure of stability in the volatile environment of oil and natural gas prices
and to manage exposure to commodity price risk under existing sales commitments.
The Company's risk management objective is to lock in a range of pricing for
expected production volumes. This allows the Company to forecast future earnings
within a predictable range. The Company meets this objective by entering into
collar and option arrangements which allow for acceptable cap and floor prices.

As of December 31, 2001, Key had oil and natural gas price collars and put
options in place, as detailed in the following table. The total fiscal 2002
hedged oil and natural gas volumes represent 37% and 30%, respectively, of 2001
calendar year total production. A 10% variation in the market price of oil or
natural gas from their levels at December 31, 2001 would have no material impact
on the Company's net assets, net earnings or cash flows (as derived from the
commodity option contracts).



                                      31





The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at December 31, 2001:




                                MONTHLY VOLUMES                               STRIKE PRICE
                                ---------------                               ------------
                                         NATURAL                              PER BBL/MMBTU
                                OIL        GAS                                -------------
                              (BBLS)     (MMBTUS)         TERM               FLOOR       CAP          FAIR VALUE
                              ------     --------         ----               -----       ---          ----------
                                                                                    
   At December 31, 2001
     Oil Collars........       5,000           -     Mar 2001-Feb 2002       $19.70     $23.70         $  7,000
     Oil Puts...........       5,000           -     Mar 2002-Feb 2003        22.00       -             169,000
     Natural Gas Collars           -      40,000     Mar 2001-Feb 2002         2.40       2.91            3,000
     Natural Gas Puts...           -      75,000     Mar 2002-Feb 2003         3.00       -             746,000


      (The strike prices for oil are based on the NYMEX spot price for West
      Texas Intermediate; the strike prices for the natural gas collars are
      based on the Inside FERC-West Texas Waha spot price; the strike prices
      for the natural gas puts are based on the Inside FERC-El Paso Permian
      spot price.)
























                                                      32




PART II - OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

              None.

ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS.

              None.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES.

              None.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

              None.

ITEM 5.       OTHER INFORMATION

              None.

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K.

              (a)  Exhibits

                         10.1  Tenth Amendment to the Second Amended and
                               Restated Credit Agreement, dated as of June 6,
                               1997, as amended and restated through September
                               14, 1998 and as further amended, among Key
                               Energy Group, Inc. (now known as Key Energy
                               Services, Inc.), the several Lenders from time
                               to time parties thereto, PNC Bank, National
                               Association, as Administrative Agent, Norwest
                               Bank Texas, N.A., as Collateral Agent and PNC
                               Capital Markets, Inc., as Arranger.
                               (Incorporated by reference to Exhibit 10.1 of
                               the Company's Form 8-K filed on December 19,
                               2001, File No. 1-8038.)

                         10.2  Underwriting Agreement, dated December 13, 2001,
                               between the Registrant and Lehman Brothers Inc.
                               (Incorporated by reference to Exhibit 1.1 of the
                               Company's Form 8-K filed on December 19, 2001,
                               File No. 1-8038.)

                        *10.3  Employment agreement between Key Energy Services,
                               Inc. and Royce W. Mitchell dated December 31,
                               2001.

                        *10.4  Employment agreement between Key Energy Services,
                               Inc. and James Byerlotzer dated December 31,
                               2001.


                                      33



                        *10.5  First Amendment to Second Amended and Restated
                               Employment Agreement between Francis D. John and
                               Key Energy Services, Inc. dated December 31, 2001

              (b) The Company filed the following reports on Form 8-K during the
                  quarter ended December 31, 2001:

                      (i)  Current report on Form 8-K dated November 26, 2001
                      filed to report the resignation of William D. Manly
                      from the Board of Directors and the appointment of
                      J. Robinson West to the Board of Directors.

                      (ii) Current report on Form 8-K dated December 19, 2001
                      filed to report the public offering of 5,400,000 shares of
                      the Company's common stock and also to report certain
                      management changes.


              ----------------------
              * Filed herewith.











                                      34





                                  SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                           KEY ENERGY SERVICES, INC.




Dated: February ___, 2002             By:  /s/ FRANCIS D. JOHN
                                           ----------------------------------
                                           Francis D. John
                                           President and Chief Executive Officer



Dated: February ___, 2002             By:  /s/ ROYCE W. MITCHELL
                                           -----------------------------
                                           Royce W. Mitchell
                                           Chief Financial Officer and
                                           Chief Accounting Officer
















                                      35

                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

    (a) Exhibits



       EXHIBIT
         NO.                                    DESCRIPTION
---------------------   ------------------------------------------------------------
                     
          2.1           --  Plan and Agreement of Merger dated May 13, 2002 among
                          Key Energy Services, Inc., Key Merger Sub, Inc. and Q
                            Services, Inc. (incorporated by reference to
                            Exhibit 2.1 filed in connection with Form 8-K of Key
                            Energy Services, Inc. and the Securities and Exchange
                            Act of 1934, dated May 13, 2002)
         *2.2           --  First Amendment to Plan and Agreement of Merger dated
                          May 30, 2002 among Key Energy Services, Inc., Key Merger
                            Sub, Inc. and Q Services, Inc.
        **4.1           --  Form of Senior Indenture
        **4.2           --  Form of Subordinated Indenture
         *5.1           --  Opinion of Porter & Hedges, L.L.P.
         *8.1           --  Opinion of Porter & Hedges, L.L.P. concerning tax
                          matters
       **12.1           --  Statement Regarding Computation of Ratio of Earnings to
                          Fixed Charges
        *23.1           --  Consent of Porter & Hedges, L.L.P. (included in Exhibit
                          5.1)
        *23.2           --  Consent of KPMG LLP
       **24.1           --  Power of Attorney for Key (included on signature page)
        *24.2           --  Power of Attorney for Guarantors (included on signature
                          page)
        +25.1           --  Statement of Eligibility of Trustee on Form T-1
        *99.1           --  Letter to the SEC regarding Arthur Andersen LLP
        *99.2           --  Proxy Card of Q Services, Inc.


------------------------

*   Filed herewith.

**  Previously filed.

+  The Company will file as an exhibit to a current report on Form 8-K any
    Statement of Eligibility and Qualification under the Trust Indenture Act of
    1939, as amended, of the applicable trustee.

                                      II-1

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act, Key Energy
Services, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New Hope, State of Pennsylvania on May 30, 2002.


                                                      
                                                       KEY ENERGY SERVICES, INC.

                                                       By:             /s/ FRANCIS D. JOHN
                                                            -----------------------------------------
                                                                         Francis D. John,
                                                                 Chairman of the Board, President
                                                                   and Chief Executive Officer




                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
                                                                                   
                 /s/ FRANCIS D. JOHN                   Chairman of the Board, President
     -------------------------------------------         and Chief Executive Officer     May 30, 2002
                   Francis D. John                       (Principal Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                 David J. Breazzano

                          *
     -------------------------------------------       Director                          May 30, 2002
                  Kevin P. Collins

                          *
     -------------------------------------------       Director                          May 30, 2002
                  William D. Fertig

                          *
     -------------------------------------------       Director                          May 30, 2002
                  W. Phillip Marcum

                          *
     -------------------------------------------       Director                          May 30, 2002
                  J. Robinson West

                          *
     -------------------------------------------       Director                          May 30, 2002
                  Morton Wolkowitz

                          *
     -------------------------------------------       Chief Financial Officer and       May 30, 2002
                  Royce W. Mitchell                      Chief Accounting Officer



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-2

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), this registration statement on Form S-4 has been signed below
by the following persons in the capacities and on the dates indicated; and each
of the undersigned officers and directors of the Guarantors hereby severally
constitutes and appoints Francis D. John and Jack D. Loftis, Jr., and each of
them, as true and lawful attorneys-in-fact and agents for the undersigned, with
full power of substitution, to do any and all acts and things in our name and on
our behalf in our capacities as directors and officers, and to execute any and
all instruments for us and in our names in the capacities indicated below, which
said attorneys-in-fact and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Act, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing of this registration statement, including
specifically without limitation, power and authority to sign for any of us, in
our names in the capacities indicated below, and any and all amendments thereto,
including without limitation any registration statements or post-effective
amendment thereof filed under and meeting the requirements of Rule 462(b) under
the Securities Act, hereby ratifying and confirming our signatures as they may
be signed by our attorneys to such Registration Statement and any and all
amendments thereto.

    Pursuant to the requirements of the Securities Act, each Guarantor certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-4 and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New Hope, State of Pennsylvania on May 30, 2002.


                                                      
                                                       BROOKS WELL SERVICING, INC., DAWSON PRODUCTION
                                                       ACQUISITION CORP., DAWSON PRODUCTION
                                                       MANAGEMENT, INC., DAWSON PRODUCTION
                                                       TAYLOR, INC., KALKASKA OILFIELD
                                                       SERVICES, INC., KEY ENERGY DRILLING, INC., KEY
                                                       ENERGY SERVICES-- CALIFORNIA, INC., KEY ENERGY
                                                       SERVICES--SOUTH TEXAS, INC., KEY FOUR
                                                       CORNERS, INC., KEY ROCKY MOUNTAIN, INC., ODESSA
                                                       EXPLORATION INCORPORATED, WATSON OILFIELD
                                                       SERVICE & SUPPLY, INC., WELL-CO OIL
                                                       SERVICE, INC., WELLTECH EASTERN, INC.,
                                                       WELLTECH MID-CONTINENT, INC., AND YALE E.
                                                       KEY, INC.

                                                       By:           /s/ JACK D. LOFTIS, JR.
                                                            -----------------------------------------
                                                               Jack D. Loftis, Jr., Vice President

                                                              DAWSON PRODUCTION PARTNERS, L.P.

                                                       By:  DAWSON PRODUCTION MANAGEMENT, INC. AS SOLE
                                                            GENERAL PARTNER

                                                       By:           /s/ JACK D. LOFTIS, JR.
                                                            -----------------------------------------
                                                               Jack D. Loftis, Jr., Vice President


                                      II-3

                          BROOKS WELL SERVICING, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal Executive    May 30, 2002
                     Joe Eustace                         Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-4

                      DAWSON PRODUCTION ACQUISITION CORP.


                                                                                   
                          *
     -------------------------------------------       President and Director            May 30, 2002
                 Joan L. Dobrzynski                      (Principal Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                 Victoria L. Garrett

                          *                            Vice President Treasurer and
     -------------------------------------------         Director (Principal Accounting  May 30, 2002
                Francis B. Jacobs, II                    Officer)

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-5

                       DAWSON PRODUCTION MANAGEMENT CORP.


                                                                                   
                          *
     -------------------------------------------       President and Director            May 30, 2002
                   Francis D. John                       (Principal Executive Officer)

                                                       Vice President and Treasurer
                          *                              (Principal Financial Officer
     -------------------------------------------         and Principal Accounting        May 30, 2002
                  Royce W. Mitchell                      Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-6

                        DAWSON PRODUCTION PARTNERS, L.P.
         BY: DAWSON PRODUCTION MANAGEMENT, INC. AS SOLE GENERAL PARTNER


                                                                                   
                          *
     -------------------------------------------       President and Director            May 30, 2002
                   Francis D. John                       (Principal Executive Officer)

                                                       Vice President and Treasurer
                          *                              (Principal Financial Officer
     -------------------------------------------         and Principal Accounting        May 30, 2002
                  Royce W. Mitchell                      Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-7

                         DAWSON PRODUCTION TAYLOR, INC.


                                                                                   
                          *
     -------------------------------------------       President and Director            May 30, 2002
                 Joan L. Dobrzynski                      (Principal Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                 Victoria L. Garrett

                          *                            Vice President, Treasurer and
     -------------------------------------------         Director (Principal Accounting  May 30, 2002
                Francis B. Jacobs, II                    Officer)

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-8

                        KALKASKA OILFIELD SERVICES, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal Executive    May 30, 2002
                     Phil Altman                         Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                      II-9

                           KEY ENERGY DRILLING, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal Executive    May 30, 2002
                 Steven A. Richards                      Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-10

                     KEY ENERGY SERVICES--CALIFORNIA, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal              May 30, 2002
                   James D. Flynt                        Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-11

                     KEY ENERGY SERVICES--SOUTH TEXAS, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal              May 30, 2002
                     Joe Eustace                         Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-12

                             KEY FOUR CORNERS, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal              May 30, 2002
                    Ron Fellabaum                        Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-13

                            KEY ROCKY MOUNTAIN, INC.


                                                                                   
                 /s/ JAMES D. FLYNT
     -------------------------------------------       President (Principal              May 30, 2002
                   James D. Flynt                        Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-14

                        ODESSA EXPLORATION INCORPORATED


                                                                                   
                                                       President and Treasurer
                          *                              (Principal Executive Officer
     -------------------------------------------         and Principal Accounting        May 30, 2002
                     Bruce Lowe                          Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-15

                     WATSON OILFIELD SERVICE & SUPPLY, INC.


                                                                                   
                 /s/ JAMES D. FLYNT
     -------------------------------------------       President (Principal              May 30, 2002
                   James D. Flynt                        Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *                            Vice President (Principal
     -------------------------------------------         Financial Officer) and          May 30, 2002
                  Royce W. Mitchell                      Director

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-16

                           WELL-CO OIL SERVICE, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal              May 30, 2002
                 James J. Byerlotzer                     Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Treasurer (Principal              May 30, 2002
                    Matt Simmons                         Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-17

                             WELLTECH EASTERN, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal Executive    May 30, 2002
                  Michael R. Furrow                      Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Vice President and Treasurer      May 30, 2002
                  Phillip M. Burch                       (Principal Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-18

                          WELLTECH MID-CONTINENT, INC.


                                                                                   
                          *
     -------------------------------------------       President (Principal              May 30, 2002
                  Michael R. Furrow                      Executive Officer)

                          *
     -------------------------------------------       Director                          May 30, 2002
                   Francis D. John

                          *
     -------------------------------------------       Vice President (Principal         May 30, 2002
                  Royce W. Mitchell                      Financial Officer)

                          *
     -------------------------------------------       Treasurer (Principal              May 30, 2002
                     James Burge                         Accounting Officer)



                                                                                 
*By:                 /s/ JACK D. LOFTIS, JR.
             --------------------------------------
                       Jack D. Loftis, Jr.
                        ATTORNEY-IN-FACT


                                     II-19

                                    EXHIBITS



       EXHIBIT
         NO.                                    DESCRIPTION
---------------------   ------------------------------------------------------------
                     
          2.1           --  Plan and Agreement of Merger dated May 13, 2002 among
                          Key Energy Services, Inc., Key Merger Sub, Inc. and Q
                            Services, Inc. (incorporated by reference to
                            Exhibit 2.1 filed in connection with Form 8-K of Key
                            Energy Services, Inc. and the Securities and Exchange
                            Act of 1934, dated May 13, 2002)
         *2.2           --  First Amendment to Plan and Agreement of Merger dated
                          May 30, 2002 among Key Energy Services, Inc., Key Merger
                            Sub, Inc. and Q Services, Inc.
        **4.1           --  Form of Senior Indenture
        **4.2           --  Form of Subordinated Indenture
         *5.1           --  Opinion of Porter & Hedges, L.L.P.
         *8.1           --  Opinion of Porter & Hedges, L.L.P. concerning tax
                          matters
       **12.1           --  Statement Regarding Computation of Ratio of Earnings to
                          Fixed Charges
        *23.1           --  Consent of Porter & Hedges, L.L.P. (included in Exhibit
                          5.1)
        *23.2           --  Consent of KPMG LLP
       **24.1           --  Power of Attorney for Key (included on signature page)
        *24.2           --  Power of Attorney for Guarantors (included on signature
                          page)
        +25.1           --  Statement of Eligibility of Trustee on Form T-1
        *99.1           --  Letter to the SEC regarding Arthur Andersen LLP
        *99.2           --  Proxy Card of Q Services, Inc.


------------------------

*   Filed herewith.

**  Previously filed.

+  The Company will file as an exhibit to a current report on Form 8-K any
    Statement of Eligibility and Qualification under the Trust Indenture Act of
    1939, as amended, of the applicable trustee.

                                     II-20