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 March 31,September 30, 2002

/ / 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)

MARYLANDMaryland 04-2648081
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6 DESTA DRIVE, MIDLAND TXDesta Drive, Midland, Texas 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 May 14, 2002: 109,774,213

1November 12, 2002 - 128,288,527

KEY ENERGY SERVICES, INC.

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31,September 30, 2002 (unaudited) and June 30, 2001...............................32002................ 3

Unaudited Consolidated Statements of
Operations for the Three and Nine Months Ended
March 31,September 30, 2002 and 2001....................................................42001..................................... 4

Unaudited Consolidated Statements of
Cash Flows for the Three and Nine Months Ended
March 31,September 30, 2002 and 2001....................................................52001..................................... 5

Unaudited Consolidated Statements of Comprehensive
Income (Loss) for the Three and Nine Months Ended
March 31,September 30, 2002 and 2001....................................................62001..................................... 6

Notes to Consolidated Financial Statements.................................7Statements...................... 7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................22Operations...................... 18

Item 3. Quantitative and Qualitative Disclosures about Market Risk....................30Risk.......... 23

Item 4. Controls and Procedures............................................. 26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.............................................................33Proceedings................................................... 27

Item 2. Changes in Securities and Use of Proceeds.....................................33Proceeds........................... 27

Item 3. Defaults Upon Senior Securities...............................................33Securities..................................... 27

Item 4. Submission of Matters to a Vote of Security Holders...........................33Holders................. 27

Item 5. Other Information.............................................................33Information................................................... 27

Item 6. Exhibits and Reports on Form 8-K..............................................33

Signatures................................................................................368-K.................................... 27

Signatures ..................................................................... 28

KEY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

MARCH 31,SEPTEMBER 30,
2002 JUNE 30, 2001
--------------2002
------------- -------------
(UNAUDITED)
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS

ASSETS
Current assets:
Cash and cash equivalents ................................................................equivalents............................................................... $ 42,9673,828 $ 2,09854,147
Accounts receivable, net of allowance for doubtful accounts of $4,307$3,986 and $4,082,
at March 31, 2002 and June 30, 2001, respectively ...................................... 122,734 177,016
Inventories ............................................................................... 8,712 16,547$3,969,
respectively........................................................................... 140,511 117,907
Inventories............................................................................. 8,969 7,776
Prepaid expenses and other current assets ................................................. 11,959 10,489assets............................................... 18,114 12,243
----------- -----------
Total current assets ........................................................................ 186,372 206,150assets...................................................................... 171,422 192,073
----------- -----------
Property and equipment:
Well servicing equipment .................................................................. 761,629 723,724equipment................................................................ 922,159 776,271
Contract drilling equipment ............................................................... 120,456 119,122equipment............................................................. 123,568 124,191
Motor vehicles ............................................................................ 69,202 64,907vehicles.......................................................................... 78,253 68,977
Oil and natural gas properties and other related equipment, successful efforts method ................................................................................. 44,616 44,245method... 44,479 44,439
Furniture and equipment ................................................................... 32,511 24,865equipment................................................................. 44,835 38,979
Buildings and land ........................................................................ 38,809 37,812land...................................................................... 49,060 40,247
----------- -----------
Total property and equipment ................................................................ 1,067,223 1,014,675equipment.............................................................. 1,262,354 1,093,104
Accumulated depreciation and depletion ...................................................... (266,027) (220,959)depletion.................................................... (311,169) (284,204)
----------- -----------
Net property and equipment .................................................................. 801,196 793,716equipment................................................................ 951,185 808,900
----------- -----------
Goodwill, net of accumulated amortization of $27,819 at March 31, 2002 and
$28,168 at June 30, 2001 .................................................................. 200,287 189,875net........................................................................... 320,550 201,069
Deferred costs, net ......................................................................... 12,990 17,624net..................................................................... 13,993 12,580
Notes and accounts receivable - related parties ............................................. 521 6,050parties........................................ 712 274
Other assets ................................................................................ 30,541 14,869assets............................................................................ 33,328 28,099
----------- -----------
Total assets ................................................................................assets.............................................................................. $ 1,231,9071,491,190 $ 1,228,2841,242,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..........................................................................payable........................................................................ $ 20,52121,090 $ 42,54424,625
Other accrued liabilities ................................................................. 42,299 48,923liabilities............................................................... 57,452 49,465
Accrued interest .......................................................................... 5,099 16,140interest........................................................................ 5,310 14,864
Current portion of long-term debt and capital lease obligations ........................... 8,370 7,946obligations......................... 7,311 7,674
----------- -----------
Total current liabilities ................................................................... 76,289 115,553liabilities................................................................. 91,163 96,628
----------- -----------
Long-term debt, less current portion ........................................................ 421,338 470,578portion...................................................... 482,520 420,717
Capital lease obligations, less current portion ............................................. 16,011 15,383portion........................................... 14,621 15,219
Deferred revenue ............................................................................ 10,651 14,104revenue.......................................................................... 9,223 10,001
Non-current accrued expenses ................................................................ 10,206 8,388expenses.............................................................. 40,922 13,574
Deferred tax liability ...................................................................... 151,197 127,400liability.................................................................... 160,630 149,990
Commitments and contingencies ...............................................................contingencies............................................................. - -
Stockholders' equity:
Common stock, $.10 par value:value; 200,000,000 shares authorized, 110,067,514128,525,250 and
101,440,166110,308,463 shares issued at March 31,September 30, 2002 and June 30, 2001, respectively ....................... 11,007 10,1442002, respectively........ 12,853 11,031
Additional paid-in capital ............................................................... 513,378 444,768capital.............................................................. 671,874 514,752
Treasury stock, at cost; 416,666 shares at March 31,September 30, 2002 and June 30, 2001 ..............2002......... (9,682) (9,682)
Accumulated other comprehensive income (loss) ............................................ (44,083) 62loss.................................................... (47,156) (48,967)
Retained earnings ........................................................................ 75,595 31,586earnings....................................................................... 64,222 69,732
----------- -----------
Total stockholders' equity .................................................................. 546,215 476,878equity................................................................ 692,111 536,866
----------- -----------
Total liabilities and stockholders' equity ..................................................equity................................................ $ 1,231,9071,491,190 $ 1,228,2841,242,995
=========== ===========

SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED
NINE MONTHS ENDED
MARCH 31, MARCH 31,SEPTEMBER 30,
-------------------------
2002 2001
2002 2001
--------------------------------------------------------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)

REVENUES:
Well servicing ..............................................................servicing.......................................................................... $ 154,062184,887 $ 198,059 $ 552,901 $ 543,274212,501
Contract drilling ........................................................... 14,334 28,259 73,624 74,582
Other ....................................................................... 1,845 1,052 6,290 5,104
---------------------- ----------------------
170,241 227,370 632,815 622,960
---------------------- ----------------------well drilling.................................................................. 15,479 33,636
Other................................................................................... 1,701 3,100
--------- ---------
Total revenues............................................................................ 202,067 249,237
--------- ---------
COSTS AND EXPENSES:
Well servicing .............................................................. 113,032 128,803 368,932 362,814servicing.......................................................................... 131,271 135,761
Contract drilling ........................................................... 11,392 19,730 49,920 55,548drilling....................................................................... 10,957 21,188
Depreciation, depletion and amortization .................................... 19,889 19,703 57,482 56,160amortization................................................ 25,802 17,869
General and administrative .................................................. 13,694 16,594 42,613 42,926
Interest .................................................................... 9,875 13,453 32,921 44,145administrative.............................................................. 26,008 15,147
Interest................................................................................ 11,262 11,949
Other expenses .............................................................. 951 1,175 3,286 3,163
Foreign currency transaction loss, Argentina (see Note 10) .................. - - 1,844 -
---------------------- ----------------------
168,833 199,458 556,998 564,756
---------------------- ----------------------
Income before income taxes .................................................. 1,408 27,912 75,817 58,204
Income tax expense .......................................................... (773) (10,325) (28,818) (22,013)
---------------------- ----------------------
Income before extraordinary gain (loss) ..................................... 635 17,587 46,999 36,191
Extraordinary gain (loss)expenses.......................................................................... 1,030 1,185
Gain on retirement of debt,debt.............................................................. (10) (287)
--------- ---------
Total costs and expenses.................................................................. 206,320 202,812
--------- ---------
Income (loss) before income taxes......................................................... (4,253) 46,425
Income tax benefit (expense).............................................................. 1,616 (17,249)
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................ (2,637) 29,176
Cumulative effect on prior years of a change in accounting principle, less applicable
income tax benefittaxes of $3,207 and $1,833 for the three and nine months ended
March 31, 2002, respectively, and income tax benefit of $98 and income tax
expense of $651, for the three and nine
months ended March 31, 2001, respectively ................................. (5,261) (167) (2,990) 1,098
---------------------- ----------------------$1,761................................................................... (2,873) -
--------- ---------
NET INCOME (LOSS) ....................................................................................................................................... $ (4,626)(5,510) $ 17,420 $ 44,009 $ 37,289
========= =========29,176
========= =========

EARNINGS (LOSS) PER SHARE:
Basic - before extraordinary gain (loss) ....................................cumulative effect of a change in accounting principle.................... $ 0.01(0.02) $ 0.18 $ 0.45 $ 0.37
Extraordinary gain (loss),0.29
Cumulative effect of a change in accounting principle, net of tax ....................................... (0.05)tax....................... (0.02) -
(0.03) 0.01
---------------------- ------------------------------- ---------
Basic - after extraordinary gain (loss) .....................................cumulative effect of a change in accounting principle..................... $ (0.04) $ 0.18 $ 0.42 $ 0.38
========= =========0.29
========= =========

Diluted - before extraordinary gain (loss) ..................................cumulative effect of a change in accounting principle.................. $ 0.01 $ 0.17 $ 0.44 $ 0.36
Extraordinary gain (loss),(0.02) $0.28
Cumulative effect of a change in accounting principle, net of tax ....................................... (0.05)tax....................... (0.02) -
(0.03) 0.01
---------------------- ------------------------------- ---------
Diluted - after extraordinary gain (loss) ...................................cumulative effect of a change in accounting principle................... $ (0.04) $ 0.17 $ 0.41 $ 0.37
========= =========0.28
========= =========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ....................................................................... 108,551 98,211 104,435 97,537
Diluted ..................................................................... 110,059 103,524 105,781 101,969Basic................................................................................... 122,475 101,727
Diluted................................................................................. 122,475 103,829

SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.STATEMENTS

KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED
NINE MONTHS ENDED
MARCH 31, MARCH 31,SEPTEMBER 30,
---------------------------
2002 2001
2002 2001
------------------------------------------------------------- ---------
(THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................................................................................. $ (4,626)(5,510) $ 17,420 $ 44,009 $ 37,28929,176
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN)
OPERATING
ACTIVITIES:............................................................................
Depreciation, depletion and amortization .................................. 19,889 19,703 57,482 56,160amortization................................................ 25,802 17,869
Amortization of deferred debt issuance costs, discount and other deferred
costs ................................................................... 277 928 1,266 3,344premium...................... 967 905
Deferred income taxes ..................................................... 3,076 10,325 25,407 22,013taxes................................................................... (1,616) 14,707
(Gain) loss on sale of assets ............................................. 146 50 (684) 10
Foreign currency transaction loss, Argentina .............................. - - 1,844 -
Extraordinary (gain) loss,assets........................................................... 145 (1,062)
Gain on retirement of debt.............................................................. (10) (287)
Cumulative effect on prior years of a change in accounting principle, net of tax ..................................... 5,261 167 2,990 (1,098)tax........ 2,873 -
CHANGE IN ASSETS AND LIABILITIES:
(Increase) decreaseLIABILITIES, NET OF EFFECTS FROM ACQUISITIONS:
Increase in accounts receivable ................................ 23,848 (18,018) 47,059 (39,628)receivable...................................................... (1,290) (7,900)
(Increase) decrease in other current assets ............................... 69 (4,284) (2,428) (2,446)
Increase (decrease)assets.......................................... 5,035 (170)
Decrease in accounts payable, accrued interest and accrued expenses ........................................................ (14,963) 11,583 (34,429) 8,267expenses.................. (21,246) (1,988)
Other assets and liabilities .............................................. (3,091) (1,189) (9,813) (1,761)
---------------------- ----------------------liabilities......................................................... 2,727 (5,705)
---------- ---------
Net cash provided by (used in) operating activities ......................... 29,886 36,685 132,703 82,150
---------------------- ----------------------activities............................................... 7,877 45,545
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - well servicing ....................................... (13,323) (13,492) (41,635) (30,587)servicing................................................... (12,115) (11,911)
Capital expenditures - contract drilling .................................... (3,126) (4,913) (14,203) (12,087)drilling................................................ (191) (8,154)
Capital expenditures - other ................................................ (2,064) (5,123) (7,603) (11,215)other............................................................ (4,286) (3,424)
Proceeds from sale of fixed assets .......................................... 307 478 3,962 1,430assets...................................................... 82 3,416
Acquisitions - well servicing, ............................................... (8,202) (270) (16,877) (1,970)
Acquisitions - contract drilling ............................................ - - - (800)
---------------------- ----------------------net of cash acquired..................................... (98,093) (2,673)
Net cash provided by (used in)used in investing activities ......................... (26,408) (23,320) (76,356) (55,229)
---------------------- ----------------------activities................................................... (114,603) (22,746)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................................................. (123,782) (207,241) (308,713) (329,838)debt............................................................. (1,211) (66,490)
Repayment of capital lease obligations ...................................... (2,732) (1,519) (7,731) (5,868)obligations.................................................. (2,387) (2,455)
Proceeds from long-term debt ................................................ 159,500 199,000 258,500 203,000
Proceeds from equity offering, net of expenses ..............................debt............................................................ 63,000 46,000
Debt issuance costs..................................................................... (2,355) - - 42,590 -
Proceeds paid for debt issuance costs ....................................... (1,585) (4,372) (1,585) (4,372)
Proceeds from exercise of warrants .......................................... - - - 265
Proceeds from exercise of stock options ..................................... 194 1,275 1,814 2,632
Other ....................................................................... 5 (132) (84) (318)
---------------------- ----------------------options................................................. 447 541
Other................................................................................... (38) -
---------- ---------
Net cash provided by (used in) financing activities ......................... 31,600 (12,989) (15,209) (134,499)
---------------------- ----------------------activities..................................... 57,456 (22,404)
---------- ---------
Effect of exchange rates on cash ............................................ (77) - (269)cash........................................................ (1,049) -
Net increase (decrease) in cash and cash equivalents ........................ 35,001 376 40,869 (107,578)equivalents.................................... (50,319) 395
Cash and cash equivalents at beginning of period ............................ 7,966 1,919period........................................ 54,147 2,098
109,873
---------------------- -------------------------------- ---------
Cash and cash equivalents at end of period ..................................period.............................................. $ 42,9673,828 $ 2,295 $ 42,967 $ 2,295
====================== ======================2,493
========== =========

SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE MONTHS ENDED
NINE MONTHS ENDED
MARCH 31, MARCH 31,SEPTEMBER 30,
---------------------------
2002 2001
2002 2001
--------------------------------------------------------- ---------
(THOUSANDS)

NET INCOME (LOSS) ....................................................................................................................................... $ (4,626)(5,510) $ 17,420 $ 44,009 $ 37,28929,176
OTHER COMPREHENSIVE INCOME (LOSS):
Derivative transition adjustment (see Note 7) ............................... - - - (778), NET OF TAX:
Oil and natural gas derivatives adjustment, net of tax (see(See Note 7) ......... (459) (29) (102) (81)..................... (344) 176
Amortization of oil and natural gas derivatives, net of tax (see(See Note 7) ................................................................... (323) 153 (511) 445................ 210 (33)
Foreign currency translation loss,gain (loss), net of tax (see Note 10) ................. (19,308) (61) (43,533) (57)
--------------------- ---------------------tax.................................... 1,945 (23)
---------- ---------

COMPREHENSIVE INCOME (LOSS) .................................................... $(24,716), NET OF TAX................................................... $ 17,483(3,699) $ (137) $ 36,818
===================== =====================29,296
========== =========

SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,SEPTEMBER 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANTSIGNFICANT 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 March 31,September 30, 2002
and for the three and nine month periods ended March 31,September 30, 2002 and 2001 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, 2001.2002. The results
of operations for the three and nine month periodsperiod ended March 31,September 30, 2002 are not
necessarily indicative of the results of operations for the full fiscal year
ending June 30, 2002.2003.

RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements for the three and nine month periodsmonths ended March 31,September 30, 2001 to conform to the
presentation for the three and nine month periodsmonths ended March 31,September 30, 2002. The
reclassifications consist primarily of reclassifying certain items from
general and administrative expense considered to be direct expenses, and reclassifying
gains (losses) on the retirement of debt as operating expenses rather than
extraordinary items in nature.accordance with SFAS 145, which the Company adopted on
July 1, 2002 (See Note 11).

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

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
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------
2002 2001
--------- ----------
(THOUSANDS, EXCEPT
PER SHARE DATA)

BASIC EPS COMPUTATION:
NUMERATOR
Net income (loss) before cumulative effect of a change in
accounting principle.......................................... $ (2,637) $ 29,176
Cumulative effect of a change in accounting principle, net of
tax........................................................... (2,873) -
--------- ----------
Net income (loss).............................................. $ (5,510) $ 29,176
========= ==========

DENOMINATOR
Weighted average common shares outstanding..................... 122,475 101,727
--------- ----------

BASIC EPS:
Net income (loss) before cumulative effect of a change in
accounting principle.......................................... $ (0.02) $ 0.29
Cumulative effect of a change in accounting principle, net of
tax........................................................... (0.02) -
--------- ----------
Net income (loss).............................................. $ (0.04) $ 0.29
========= ==========

DILUTED EPS COMPUTATION:
NUMERATOR
Net income (loss) before cumulative effect of a change in
accounting principle.......................................... $ (2,637) $ 29,176
Cumulative effect of a change in accounting principle, net of
tax........................................................... (2,873) -
--------- ----------
Net income (loss).............................................. $ (5,510) $ 29,176
========= ==========

DENOMINATOR
Weighted average common shares outstanding:.................... 122,475 101,727
Warrants....................................................... - 577
Stock options.................................................. - 1,525
--------- ----------
122,475 103,829
--------- ----------

DILUTED EPS:
Net income (loss) before cumulative effect of a change in
accounting principle.......................................... $ (0.02) $ 0.28
Cumulative effect of a change in accounting principle, net of
tax........................................................... (0.02) -
--------- ----------
Net income (loss).............................................. $ (0.04) $ 0.28
========= ==========

The diluted earnings per share calculations for the three months ended
September 30, 2001 excludes the effect of the potential exercise of stock
options of 1,463,000 and the potential

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,SEPTEMBER 30, 2002 AND 2001
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
--------- --------- --------- ---------
(THOUSANDS, EXCEPT PER (THOUSANDS, EXCEPT PER
SHARE DATA) SHARE DATA)

BASIC EPS COMPUTATION:
NUMERATOR
Net income before extraordinary gain (loss)........ $ 635 $ 17,587 $ 46,999 $ 36,191
Extraordinary gain (loss), net of tax.............. (5,261) (167) (2,990) 1,098
--------- --------- --------- ---------
Net income (loss).................................. $ (4,626) $ 17,420 $ 44,009 $ 37,289
========= ========= ========= =========
DENOMINATOR
Weighted average common shares outstanding......... 108,551 98,211 104,435 97,537
--------- --------- --------- ---------
BASIC EPS:
Before extraordinary gain (loss)................... $0.01 $0.18 $0.45 $0.37
Extraordinary gain (loss), net of tax.............. (0.05) - (0.03) 0.01
--------- --------- --------- ---------
After extraordinary gain (loss).................... $ (0.04) $ 0.18 $ 0.42 $ 0.38
========= ========= ========= =========
DILUTED EPS COMPUTATION:
NUMERATOR
Net income before extraordinary gain (loss)........ $ 635 $ 17,587 $ 46,999 $ 36,191
Effect of dilutive convertible securities, tax
effected......................................... - - - 8
Extraordinary gain (loss), net of tax.............. (5,261) (167) (2,990) 1,098
--------- --------- --------- ---------
Net income (loss).................................. $ (4,626) $ 17,420 $ 44,009 $ 37,297
========= ========= ========= =========
DENOMINATOR
Weighted average common shares outstanding......... 108,551 98,211 104,435 97,537
Warrants........................................... 388 869 368 781
Stock options...................................... 1,120 4,444 978 3,627
7% Convertible Debentures.......................... - - - 24
--------- --------- --------- ---------
110,059 103,524 105,781 101,969
--------- --------- --------- ---------
DILUTED EPS:
Before extraordinary gain (loss)................... $ 0.01 $ 0.17 $ 0.44 $ 0.36
Extraordinary gain (loss), net of tax.............. (0.05) - (0.03) 0.01
--------- --------- --------- ---------
After extraordinary gain (loss).................... $ (0.04) $ 0.17 $ 0.41 $ 0.37
========= ========= ========= =========

The diluted earnings per share calculation (i) for the three month period ended
March 31, 2002 excludes the effects of 1,178,000 stock options and (ii) for the
nine month period ended March 31, 2002 excludes the effects of 1,678,000 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 nine month periods
ended March 31, 2001 excludes the effects of 375,000 stock options and the
effects of the

conversion of the Company's 5% Convertible Subordinated Notes because the
effects of such options and convertible notesinstruments on earnings per share would be anti-dilutive.

83. ACQUISITIONS

ACQUISITION OF Q SERVICES, INC.

On July 19, 2002, Key acquired Q Services, Inc. ("QSI") pursuant to an
Agreement and Plan of Merger dated May 13, 2002, as amended, by and among
Key, Key Merger Sub, Inc. and QSI. As consideration for the merger, the
Company issued approximately 17.1 million shares of its common stock to the
QSI shareholders and paid approximately $94.2 million in cash at the closing
to retire debt and preferred stock of QSI and to satisfy certain other
obligations of QSI. In addition to assuming the positive working capital of
QSI, the Comany incurred other direct acquisition costs and assumed certain
other liabilities of QSI, resulting in the Company recording an aggregate
purchase price of approximately $248 million. The value of those shares was
based on the closing price of the Key common stock on the closing date of
$8.75 per share. The results of QSI's operations have been included in the
consolidated financial statements since the closing date. Prior to the
acquisition, QSI was a privately held corporation conducting field
production, pressure pumping and other service operations in Louisiana, New
Mexico, Oklahoma, Texas and the Gulf of Mexico. The Company and QSI operate
in adjacent and/or overlapping locations and expect to realize future cost
savings and synergies in connection with the merger. The combination of the
companies formed the largest oil field trucking fleet in the United States
complementing the Company's well service rig fleet, which is the largest in
the world.

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The Company is
in the process of obtaining third-party valuations of certain non-current
accrued liabilities; thus, the allocation of the purchase price is subject to
refinement.

AT JULY 19,
2002
-----------
(THOUSANDS)

Current assets....................................... $ 37,734
Property and equipment............................... 138,898
Intangible assets.................................... 3,243
Other assets......................................... 342
Goodwill............................................. 117,060
---------
Total assets acquired............................. 297,277
---------
Current liabilities.................................. 16,787
Capital lease obligations............................ 77
Non-current accrued expenses......................... 17,908
Deferred tax liability............................... 14,347
---------
Total liabilities assumed......................... 49,119
---------
Net assets acquired.................................. $ 248,158
=========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,SEPTEMBER 30, 2002 AND 2001

3. STOCKHOLDERS' EQUITY

EQUITY OFFERING

On December 19, 2001,The $3,243,000 of intangible assets consists of noncompete agreements
which have a weighted-average useful life of approximately three years. The
$117,060,000 of goodwill was allocated to the well servicing reporting
segment. Of that amount, $11,645,000 is expected to be deductible for income
taxes.

The following unaudited pro forma results of operations have been prepared
as though QSI had been acquired on July 1, 2001. Pro forma amounts are not
necessarily indicative of the results that may be reported in the future.

THREE MONTHS ENDED
-----------------------
9/30/02 9/30/01
--------- ---------
(THOUSANDS, EXCEPT PER
SHARE AMOUNT)

Revenues.......................................................... $ 209,770 $ 307,391
Income (loss) before cumulative effect of a change in accounting
principle, net of tax............................................ (4,296) 34,488
Cumulative effect of a change in accounting principle, net of tax. (2,873) -
Net income (loss)................................................. (7,169) 34,488
Basic earnings (loss) per share................................... $ (0.06) $ 0.29

In addition to the acquisition of QSI, during the three months ended
September 30, 2002, Key completed several small acquisitions for a total of
approximately $12,065,000, which consisted of a combination of cash and shares
of Key common stock. Each of the acquisitions made during such three-month
period was accounted for using the purchase method and the results of the
operations generated from the acquired assets are included in the Key's results
of operations as of the completion date of each acquisition. There were no
acquisitions by the Company closed a public offering of 5,400,000 shares
of common stock, yielding approximately $43.2 million or $8.00 per share toduring the Company, (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 ultimately 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 issued.three months ended September 30, 2001.

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.

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 and well intervention
services (fluid hauling and fluid storage tank rental)rental and fishing and rental
tools).

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

CONTRACT DRILLING: The Company provides contract drilling services for
major and independent oil companies onshore the continental United States,
Argentina and Ontario, Canada.

WELL CONTRACT CORPORATE /
SERVICING DRILLING /OTHEROTHER TOTAL
--------- -------- ------ -----
(THOUSANDS)--------- ----------- -----------

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2002
Operating revenues...................................revenues...................................... $ 154,062184,887 $ 14,33415,479 $ 1,8451,701 $ 170,241202,067
Operating profit..................................... 41,030 2,942 894 44,866profit ....................................... 53,616 4,522 671 58,809
Depreciation, depletion and amortization............. 16,453 2,351 1,085 19,889amortization................ 22,069 2,392 1,341 25,802
Interest expense..................................... 256expense........................................ 276 - 9,619 9,87510,986 11,262
Net income (loss) before extraordinary gain (loss)*.. 11,406 (804) (9,967) 635cumulative effect of a change
in accounting principle*............................... 8,962 262 (11,861) (2,637)
Identifiable assets.................................. 679,256 89,795 262,569 1,031,620assets..................................... 828,845 88,742 253,053 1,170,640
Capital expenditures (excluding acquisitions)........ 13,323 3,126 2,064 18,513........... 12,115 191 4,286 16,592

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2001
Operating revenues...................................revenues...................................... $ 198,059212,501 $ 28,25933,636 $ 1,0523,100 $ 227,370249,237
Operating profit..................................... 69,256 8,529 (123) 77,662profit ....................................... 76,740 12,448 1,915 91,103
Depreciation, depletion and amortization............. 16,496 2,009 1,198 19,703amortization................ 14,557 2,380 932 17,869
Interest expense..................................... 393expense........................................ 548 - 13,060 13,45311,401 11,949
Net income (loss) before extraordinary gain (loss)*.. 28,919 3,174 (14,506) 17,587cumulative effect of a change
in accounting principle*............................... 34,259 5,735 (10,818) 29,176
Identifiable assets.................................. 648,019 93,926 256,974 998,919assets..................................... 676,410 101,161 290,112 1,067,683
Capital expenditures (excluding acquisitions)........ 13,492 4,913 5,123 23,528........... 11,911 8,154 3,424 23,489

*Net* Net income (loss) before cumulative effect of a change in accounting
principle for the contract drilling segment includes a portion of well
servicing general and administrative expenses allocated on a percentage of
revenue basis.

Operating revenues for the Company's foreign operations for the three
months ended March 31,September 30, 2002 and 2001 were $4.0$6.1 million and $13.5$12.1 million,
respectively. Operating profits for the Company's foreign operations for the
three months ended March 31,September 30, 2002 and 2001 were $0.7$1.4 million and $3.5$2.6
million, respectively. The Company had $31.6$41.1 million and $84.1$82.6 million of
identifiable assets as of March 31, 2002 and 2001, respectively, related to foreign operations.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

WELL CONTRACT CORPORATE
SERVICING DRILLING /OTHER TOTAL
--------- -------- ------ -----
(THOUSANDS)

NINE MONTHS ENDED MARCH 31, 2002
Operating revenues.................................... $ 552,901 $ 73,624 $ 6,290 $ 632,815
Operating profit...................................... 183,969 23,704 3,004 210,677
Depreciation, depletion and amortization.............. 47,480 6,935 3,067 57,482
Interest expense...................................... 1,209 - 31,712 32,921
Net income (loss) before extraordinary gain (loss)*... 71,673 7,827 (32,501) 46,999
Identifiable assets................................... 679,256 89,795 262,569 1,031,620
Capital expenditures (excluding acquisitions)......... 41,635 14,203 7,603 63,441

NINE MONTHS ENDED MARCH 31, 2001
Operating revenues.................................... $ 543,274 $ 74,582 $ 5,104 $ 622,960
Operating profit...................................... 180,460 19,034 1,941 201,435
Depreciation, depletion and amortization.............. 47,446 5,705 3,009 56,160
Interest expense...................................... 1,496 - 42,649 44,145
Net income (loss) before extraordinary gain (loss)*... 74,885 5,529 (44,223) 36,191
Identifiable assets................................... 648,019 93,926 256,974 998,919
Capital expenditures (excluding acquisitions)......... 30,587 12,087 11,215 53,889

*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 nine months
ended March 31, 2002 and 2001 were $28.0 million and $40.0 million,
respectively. Operating profits for the Company's foreign operations for the
nine months ended March 31, 2002 and 2001 were $5.4 million and $9.8 million,
respectively. The Company had $31.6 million and $84.1 million of identifiable
assets as of March 31,September 30, 2002 and 2001, 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 MmbtuMmbtus of natural gas per month
and declining to 58,800 MmbtuMmbtus of natural gas per month. The total volume of the
forward sale is approximately 486,000 barrels of oil and 6,135,000 MmbtuMmbtus of
natural gas.

7. DERIVATIVE INSTRUMENTS

The Company utilizes derivative financial instruments to manage well-definedwell
defined commodity price risks. The Company is exposed to credit losses in the
event of nonperformance by the counter-counter-parties to its commodity hedges. The
Company only deals with reputable financial

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,SEPTEMBER 30, 2002 AND 2001

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 earningscash flows 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.DERIVATIVES. 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 shouldif the price should fall below the floor index. On May 2,
2002 the Company entered into an option arrangement for a 12-month period
beginning March 2003 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 toAs of May 25, 2001, the adoption of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative InstrumentsCompany had not documented the May 25, 2001 oil and
Hedging Activities, ("SFAS No. 133"),
as amended by SFAS No. 137 and 138, these collars were accounted fornatural gas options as cash flow type hedges. Accordingly,hedges and therefore has included income of
$768,000 for the July 1, 2000 transition adjustment resultedincrease in recording a $778,000 liability for the fair value of the collars to
accumulatedasset as of June 30, 2001 in
other comprehensive income. Approximately $64,000 of the transition
adjustment was recognized in earnings during the three months ended March 31,
2002. The transition adjustment has been completely recognized in earnings. As
of October 1, 2000, the Company has documented the March 30, 2000 collars as
cash flow hedges. As of July 1, 2001, the Company has documented the May 25,
2001these options as cash
flow hedges. DuringAs of May 2, 2002, the quarter ended March 31,Company had documented the May 2, 2002 theoil
and natural gas options as cash flow hedges. The Company recorded a net decrease
in net derivative assets of approximately $749,000, which reduced$163,000 during the balance of net derivative assets to $179,000 and
which included an earnings charge of approximately $2,000 from ineffectiveness.three months ended
September 30, 2002.

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 volumetric production payment is excluded from the scope of SFAS No. 133
under the normal purchases/sales exclusion as set forth in SFAS No. 138.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

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"Financial
Statements of Guarantors and

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

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.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

CONDENSED CONSOLIDATING BALANCE SHEETS

MARCH 31,SEPTEMBER 30, 2002
--------------------------------------------------------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Assets:
Current assets....................assets................ $ 50,4028,625 $ 126,529150,435 $ 9,44112,362 $ - $ 186,372171,422
Net property and equipment........ 31,147 747,851 22,198equipment.... 37,776 884,694 28,715 - 801,196951,185
Goodwill, net..................... 3,374 196,192 721net................. 3,431 316,551 568 - 200,287320,550
Deferred costs, net............... 12,990net........... 13,993 - - - 12,990
Intercompany receivables.......... 565,07513,993
Inter-company receivables..... 786,580 - - (565,075)(786,580) -
Other assets...................... 22,517 8,545assets.................. 19,779 14,260 1 - - 31,06234,040
--------- ----------- --------- ---------- -----------
-----------
Total assets..........................assets.................... $ 685,505870,184 $ 1,079,1171,365,940 $ 32,36041,646 $ (565,075)(786,580) $ 1,231,9071,491,190
========= =========== ========= ========== =========== ===========

Liabilities and equity:
Current liabilities...............liabilities........... $ 32,34035,507 $ 40,95452,547 $ 2,9943,109 $ - $ 76,28891,163
Long-term debt.................... 421,338debt................ 482,520 - - - 421,338482,520
Capital lease obligations......... 1,160 14,851obligations..... 1,421 13,200 - - 16,011
Intercompany payables.............14,621
Inter-company payables........ - 541,503 23,572 (565,075)752,813 33,767 (786,580) -
Deferred tax liability............ 151,197liability ....... 160,630 - - - 151,197160,630
Other long-term liabilities....... 10,106 10,751liabilities... 14,283 35,862 - - 20,85750,145
Stockholders' equity.............. 69,364 471,058 5,794equity.......... 175,823 511,518 4,770 - 546,216692,111
--------- ----------- --------- ---------- ----------- -----------
Total liabilities and
stockholders' equity..............equity........... $ 685,505870,184 $ 1,079,1171,365,940 $ 32,36041,646 $ (565,075)(786,580) $ 1,231,9071,491,190
========= =========== ========= ========== =========== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

JUNE 30, 2001
------------------------------------------------------------------------2002
--------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Assets:
Current assets....................assets................ $ 10,68064,814 $ 165,653117,140 $ 29,81710,119 $ - $ 206,150192,073
Net property and equipment........ 21,418 717,989 54,309equipment.... 43,003 748,158 17,739 - 793,716808,900
Goodwill, net.....................net................. 3,374 184,379 2,122197,144 551 - 189,875201,069
Deferred costs, net............... 17,624net........... 12,580 - - - 17,624
Intercompany receivables.......... 664,59212,580
Inter-company receivables..... 537,416 - - (664,592)(537,416) -
Other assets...................... 15,303 5,616assets.................. 21,593 6,780 - - 20,91928,373
--------- ----------- --------- ---------- -----------
-----------
Total assets..........................assets.................... $ 732,991682,780 $ 1,073,6371,069,222 $ 86,24828,409 $ (664,592)(537,416) $ 1,228,2841,242,995
========= =========== ========= ========== =========== ===========

Liabilities and equity:
Current liabilities...............liabilities........... $ 35,67148,388 $45,427 $ 64,679 $ 15,2032,813 $ - $ 115,55396,628
Long-term debt.................... 470,578debt................ 420,717 - - - 470,578420,717
Capital lease obligations......... 90 15,331 (38)obligations..... 1,457 13,762 - 15,383
Intercompany payables............. - 608,764 55,828 (664,592)15,219
Inter-company payables........ - 516,761 20,655 (537,416) -
Deferred tax liability............ 127,400liability ....... 149,990 - - - 127,400149,990
Other long-term liabilities....... 8,240 14,252liabilities... 13,474 10,101 - - 22,49223,575
Stockholders' equity.............. 91,012 370,611 15,255equity.......... 48,754 483,171 4,941 - 476,878536,866
--------- ----------- --------- ---------- ----------- -----------
Total liabilities and
stockholders' equity..............equity........... $ 732,991682,780 $ 1,073,6371,069,222 $ 86,24828,409 $ (664,592)(537,416) $ 1,228,2841,242,995
========= =========== ========= ========== =========== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2002
--------------------------------------------------------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Revenues..............................Revenues........................ $ 31046 $ 165,899195,952 $ 4,0326,069 $ - $ 170,241202,067
Costs and expenses:
Direct expenses...................expenses............... - 122,005 3,370138,598 4,660 - 125,375143,258
Depreciation, depletion and
amortization..................... 464 18,811 614amortization expense......... 793 24,622 387 - 19,88925,802
General and administrative........ 5,526 7,725 443administrative
expense...................... 11,104 14,540 364 - 13,694
Interest.......................... 9,619 276 (20)26,008
Interest...................... 10,986 259 17 - 9,875
Argentine foreign currency
transaction loss.................11,262
Gain on retirement of debt... (10) - - - - -
Other expenses.................... - - - - -(10)
--------- ----------- --------- ---------- ---- -----------
Total costs and expenses.............. 15,609 148,817 4,407expenses........ 22,873 178,019 5,428 - 168,833206,320
--------- ----------- --------- ---------- ---- -----------
Income (loss) before income
taxes..... (15,299) 17,082 (375)taxes.......................... (22,827) 17,933 641 - 1,408(4,253)
Income tax (expense) benefit.......... 8,399 (9,378) 206benefit.... 8,674 (6,814) (244) - (773)1,616
--------- ----------- ---------- ---- -----------
Income (loss) before
extraordinary items.................. (6,900) 7,704 (169) - 635
Extraordinary loss, net of tax........ (5,261) - - - (5,261)
--------- ----------- ---------- ---- -----------
Net income (loss)..................... before
cumulative effect of a change
in accounting principle........ (14,153) 11,119 397 - (2,637)
Cumulative effect of a change
in accounting principle, net
of tax......................... - (2,873) - - (2,873)
--------- ----------- --------- ---------- -----------
Net income (loss)............... $ (12,161)(14,153) $ 7,7048,246 $ (169)397 $ - $ (4,626)(5,510)
========= =========== ========= ========== ==== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2001
--------------------------------------------------------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Revenues..............................Revenues........................ $ 246493 $ 213,650236,641 $ 13,47412,103 $ - $ 227,370249,237
Costs and expenses:
Direct expenses...................expenses............... - 139,707 10,001148,631 9,503 - 149,708158,134
Depreciation, depletion
and amortization..................... 686 17,973 1,044amortization expense..... 311 16,508 1,050 - 19,70317,869
General and administrative........ 5,333 10,368 893administrative
expense...................... 5,328 9,015 804 - 16,594
Interest.......................... 13,060 183 21015,147
Interest...................... 11,401 205 343 - 13,453
Other expenses....................11,949
Gain on retirement of debt.... (287) - - (287)
--------- ----------- --------- ---------- -----------
Total costs and expenses........ 16,753 174,359 11,700 - 202,812
--------- ----------- --------- ---------- -----------
Income (loss) before income
taxes.......................... (16,260) 62,282 403 - 46,425
Income tax (expense) benefit.... 6,041 (23,140) (150) - (17,249)
--------- ----------- --------- ---------- -----------
Net income (loss) before
cumulative effect of a change
in accounting principle........ (10,219) 39,142 253 - 29,176
Cumulative effect of a change
in accounting principle, net
of tax......................... - - - - -
--------- ----------- ---------- ---- -----------
Total costs and expenses.............. 19,079 168,231 12,148 - 199,458
--------- ----------- ---------- ---- -----------
Income (loss) before income taxes..... (18,833) 45,419 1,326 - 27,912
Income tax (expense) benefit.......... 6,966 (16,801) (490) - (10,325)
--------- ----------- ---------- ---- -----------
Income (loss) before
extraordinary items.................. (11,867) 28,618 836 - 17,587
Extraordinary loss, net of tax........ (167) - - - (167)
--------- ----------- ---------- ---- -----------
Net income (loss).................................... $ (12,034)(10,219) $ 28,61839,142 $ 836253 $ - $ 17,42029,176
========= =========== ========= ========== ==== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 2002
------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Revenues........................... $ 1,134 $ 603,656 $ 28,025 $ - $ 632,815
Costs and expenses:
Direct expenses................ - 399,486 22,652 - 422,138
Depreciation, depletion and
amortization.................. 1,204 53,534 2,744 - 57,482
General and administrative..... 15,448 25,213 1,952 - 42,613
Interest....................... 31,711 622 588 - 32,921
Argentine foreign currency
transaction loss.............. - - 1,844 - 1,844
Other expenses................. - - - - -
--------- ----------- ---------- ---- -----------
Total costs and expenses........... 48,363 478,855 29,780 - 556,998
--------- ----------- ---------- ---- -----------
Income (loss) before income taxes.. (47,229) 124,801 (1,755) - 75,817
Income tax (expense) benefit....... 17,951 (47,436) 667 - (28,818)
--------- ----------- ---------- ---- -----------
Income (loss) before
extraordinary items............... (29,278) 77,365 (1,088) - 46,999
Extraordinary loss, net of tax..... (2,990) - - - (2,990)
--------- ----------- ---------- ---- -----------
Net income (loss).................. $ (32,268) $ 77,365 $ (1,088) $ - $ 44,009
========= =========== ========== ==== ===========

NINE MONTHS ENDED MARCH 31, 2001
------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(THOUSANDS)

Revenues........................... $ 1,821 $ 581,126 $ 40,013 $ - $ 622,960
Costs and expenses:
Direct expenses................ - 391,239 30,286 - 421,525
Depreciation, depletion and
amortization.................. 1,463 51,668 3,029 - 56,160
General and administrative..... 12,538 27,798 2,590 - 42,926
Interest....................... 42,649 977 519 - 44,145
Other expenses................. - - - - -
--------- ----------- ---------- ---- -----------
Total costs and expenses........... 56,650 471,682 36,424 - 564,756
--------- ----------- ---------- ---- -----------
Income (loss) before income taxes.. (54,829) 109,444 3,589 - 58,204
Income tax (expense) benefit....... 20,736 (41,392) (1,357) - (22,013)
--------- ----------- ---------- ---- -----------
Income (loss) before
extraordinary items............... (34,093) 68,052 2,232 - 36,191
Extraordinary gain, net of tax..... 1,098 - - - 1,098
--------- ----------- ---------- ---- -----------
Net income (loss).................. $ (32,995) $ 68,052 $ 2,232 $ - $ 37,289
========= =========== ========== ==== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------- ------------ ------------
(THOUSANDS)

Net cash provided (used) by
operating activities........................activities........... $ 11,408(11,098) $ 16,17915,043 $ 2,2993,932 $ - $ 29,886
Net cash used in investing
activities........................ (11,062) (12,781) (2,565) - (26,408)7,877
Net cash provided by (used in)(used) in
investing activities........... (101,843) (10,813) (1,947) - (114,603)
Net cash provided (used) in
financing activities.............. 34,111 (2,511)activities........... 59,671 (2,215) - - 31,60057,456
Effect of exchange rate
changes on cash..............................cash................ - - (77)(1,049) - (77)(1,049)
---------- ----------- --------- ----------- ---------- ----- -----------
Net increase (decrease) in cash...... 34,457 887 (343)cash (53,270) 2,015 936 - 35,001(50,319)
Cash at beginning of period.......... 2,507 3,776 1,683period..... 52,742 (157) 1,562 - 7,96654,147
---------- ----------- --------- ----------- ---------- ----- -----------
Cash at end of period................period........... $ 36,964(528) $ 4,6631,858 $ 1,3402,498 $ - $ 42,9673,828
========== =========== ========= =========== ========== ===== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2001
---------------------------------------------------------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ---------------------------- ------------ ------------
(THOUSANDS)

Net cash provided (used) by
operating activities........................activities........... $ 10,81920,909 $ 22,17325,818 $ 3,693(1,182) $ - $ 36,68545,545
Net cash usedprovided (used) in
investing activities........................ (5,226) (15,678) (2,416)activities........... (5,247) (17,383) (116) - (23,320)(22,746)
Net cash usedprovided (used) in
financing activities........................ (11,462) (1,513) (14)activities........... (19,957) (2,434) (13) - (12,989)(22,404)
---------- ----------- --------- ----------- ---------- ----- -----------
Net increase (decrease) in cash...... (5,869) 4,982 1,263cash. (4,295) 6,001 (1,311) - 376395
Cash at beginning of period.......... 7,477 (6,387) 829period.... 1,647 (2,005) 2,456 - 1,9192,098
---------- ----------- --------- ----------- ---------- ----- -----------
Cash at end of period................period........... $ 1,608(2,648) $ (1,405)3,996 $ 2,0921,145 $ - $ 2,2952,493
========== =========== ========= =========== ========== ===== ===========

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Net cash provided by operating
activities........................ $ 66,569 $ 63,064 $ 3,070 $ - $ 132,703
Net cash used in investing
activities........................ (23,443) (49,009) (3,904) - (76,356)
Net cash used in financing
activities........................ (7,809) (7,387) (13) - (15,209)
Effect of exchange rate changes on
cash.............................. - - (269) - (269)
--------- ----------- ---------- ----- -----------
Net increase (decrease) in cash...... 35,317 6,668 (1,116) - 40,869
Cash at beginning of period.......... 1,647 (2,005) 2,456 - 2,098
--------- ----------- ---------- ----- -----------
Cash at end of period................ $ 36,964 $ 4,663 $ 1,340 $ - $ 42,967
========= =========== ========== ===== ===========

Net cash provided by operating
activities........................ $ 32,208 $ 42,097 $ 7,845 $ - $ 82,150
Net cash used in investing
activities........................ (13,132) (36,432) (5,665) - (55,229)
Net cash used in financing
activities........................ (128,634) (5,824) (41) - (134,499)
--------- ----------- ---------- ----- -----------
Net increase (decrease) in cash...... (109,558) (159) 2,139 - (107,578)
Cash at beginning of period.......... 111,166 (1,246) (47) - 109,873
--------- ----------- ---------- ----- -----------
Cash at end of period................ $ 1,608 $ (1,405) $ 2,092 $ - $ 2,295
========= =========== ========== ===== ===========

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 is measured as the excess
of its carrying value over its fair value. The Company completed its
assessment of goodwill impairment as of the date of adoption during the three
months ended December 31, 2001, as allowed by SFAS 142. The assessment did
not result in an indication of goodwill impairment.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

Intangible assets subject to amortization under SFAS 142 consist of
noncompete agreements.agreements and patents. Amortization expense for noncompete
agreements is calculated using the straight-line method over the period of
the agreement, ranging from 3three to 5seven years. Amortization expense for
patents is calculated using the straight-line method over the useful life of
the patent, ranging from five to seven years.

The gross carrying amount of noncompete agreements subject to amortization
totaled approximately $11,163,000$17,999,000 and $8,099,000$11,727,000 at March 31,September 30, 2002 and June
30, 2001,2002, respectively. Accumulated amortization related to these intangible
assets totaled approximately $5,404,000$7,351,000 and $4,953,000$6,130,000 at March 31,September 30, 2002 and
June 30, 2001,2002, respectively. Amortization expense for the three months ended
March 31,September 30, 2002 and 2001 was approximately $415,000$1,261,000 and $379,000, respectively.
Amortization expense for the nine months ended March 31, 2002 and 2001 was
approximately $1,185,000 and $1,107,000,$400,000,
respectively. Amortization expense for the next five succeeding fiscal years is
estimated to be $1,990,000, $1,048,000,
$841,000, $793,000$3,727,000, $2,698,000, $1,986,000, $1,456,000 and $443,000.$747,000,
respectively.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

The gross carrying amount of patents subject to amortization totaled
approximately $2,213,000 at September 30, 2002. The Company acquired the
patents on July 16, 2002. Accumulated amortization related to these
intangible assets totaled approximately $72,000 at September 30, 2002.
Amortization expense for the three months ended September 30, 2002 was
approximately $72,000. Amortization expense for the next five succeeding
years is estimated to be $348,000, $348,000, $348,000, $348,000 and $325,000,
respectively.

The Company has identified its reporting segments to be well servicing
and contract drilling. Goodwill allocated to such reporting segments at
March 31,September 30, 2002 is $186,175,000$306,293,000 and $14,112,000,$14,257,000, respectively. The change
in the carrying amount of goodwill for the three and nine months ended March 31,September 30,
2002 of $7,070,000 and $10,412,000,$119,481,000, respectively, relates principally to goodwill fromacquired
in connection with the acquisition of QSI and other well servicing assets
acquired during the period and the translation adjustment for Argentina.

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,10. ASSET RETIREMENT OBLIGATIONS - ADOPTION OF SFAS 143

On July 1, 2002, AND 2001the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143").
Adoption of SFAS 143 is required for all companies with fiscal years beginning
after June 15, 2002. The effectnew standard requires the Company to recognize a
liability for the present value of all legal obligations associated with the
retirement of tangible long-lived assets and capitalize an equal amount as a
cost of the adoptionasset depreciating the additional cost over the estimated useful
life of the asset. The Company recorded additional costs, net of accumulated
depreciation, of approximately $4,372,000, a non-current liability of
approximately $9,005,000 and an after-tax charge of approximately $2,873,000 for
the cumulative effect on prior years for depreciation of the additional costs
and accretion expense on the liability related to expected abandonment costs of
its oil and natural gas producing properties and salt water disposal wells.

11. GAINS (LOSSES) ON RETIREMENT OF DEBT - ADOPTION OF SFAS 145

On July 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The
provisions of SFAS 142 on net income and earnings per share is
as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
--------- --------- --------- ---------
(THOUSANDS, EXCEPT PER (THOUSANDS, EXCEPT PER
SHARE DATA) SHARE DATA)

Reported net income before extraordinary gain (loss).. $ 635 $ 17,587 $ 46,999 $ 36,191
Add back: goodwill amortization...................... - 2,333 - 6,989
--------- --------- --------- ---------
Adjusted net income before extraordinary gain (loss).. 635 19,920 46,999 43,180
Extraordinary gain (loss), net of tax................. (5,261) (167) (2,990) 1,098
--------- --------- --------- ---------
Adjusted net income (loss)............................ $ (4,626) $ 19,753 $ 44,009 $ 44,278
========= ========= ========= =========

BASIC EARNINGS (LOSS) PER SHARE:
Reported net income before extraordinary gain (loss).. $ 0.01 $ 0.18 $ 0.45 $ 0.37
Add back: goodwill amortization...................... - 0.02 - 0.07
--------- --------- --------- ---------
Adjusted net income before extraordinary gain (loss).. $ 0.01 $ 0.20 $ 0.45 $ 0.44
Extraordinary gain (loss), net of tax................. (0.05) - (0.03) 0.01
--------- --------- --------- ---------
Adjusted net income (loss)............................ $ (0.04) $ 0.20 $ 0.42 $ 0.45
========= ========= ========= =========

DILUTED EARNINGS (LOSS) PER SHARE:
Reported net income before extraordinary gain (loss).. $ 0.01 $ 0.17 $ 0.44 $ 0.36
Add back: goodwill amortization...................... - 0.02 - 0.07
--------- --------- --------- ---------
Adjusted net income before extraordinary gain (loss).. $ 0.01 $ 0.19 $ 0.44 $ 0.43
Extraordinary gain (loss), net of tax................. (0.05) - (0.03) 0.01
--------- --------- --------- ---------
Adjusted net income (loss)............................ $ (0.04) $ 0.19 $ 0.41 $ 0.44
========= ========= ========= =========

10. ARGENTINA FOREIGN CURRENCY TRANSACTION LOSS

The local currency is the functional currency for145 rescind Statement No. 4, which required all of the Company's foreign
operations (Argentina and Canada). The cumulative translation gains and
losses resulting from translating each foreign subsidiary'sextinguishment of debt to be aggregated and classified as an
extraordinary item, and instead requires that such gains and losses be
reported in operating income. The Company now records gains from the
extinguishment of debt in operating income and has reclassified such gains in
the financial statements fromfor the functional currencythree months ended September 30, 2001 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 tiedconform to the U.S. dollar at a conversion
ratio of 1:1. However, in December 2001,presentation for 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.three months ended September 30, 2002.

12. SUBSEQUENT EVENT - SALE OF PRESSURE PUMPING BUSINESS

On 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

KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001

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 was
indicative of the free floating conversion ratio when the currency market
re-opened on January 11, 2002. At MarchOctober 31, 2002, the Company usedentered into a conversion
ratioletter of 2.9:1intent to translatesell
its pressure pumping business to a privately held company for approximately
$40,000,000 in cash and notes. The Company expects the assets and liabilities of its Argentine
subsidiary. As a result, a foreign currency translation loss of approximately
$43.5 and $24.2 million is included in other comprehensive income, a component
of stockholders' equity, at Marchtransaction to close
by January 31, 2002 and December 31, 2001, respectively.
Since the 1:1 conversion ratio2003. This business was in existence prior to December 2001, income
statement and cash flows information has been translated using the historical
1:1 conversion ratio. After December 31, 2001, revenues and expenses are
translated using the average exchange rate during the reporting period.

Additionally, the Argentine government has indicated thatacquired 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 lossQ Services
acquisition in July 19, 2002. Detailed terms 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 whichsale are subject to re-denomination. These receivables are subject to additionalfinal
negotiation with
the Company's customers which may result in recovery of a portion of this loss.

21definitive purchase and sale agreement.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.OPERATIONS AND
FINANCIAL CONDITION

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. FutureFurther 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 the well servicing,
contract drilling and ancillary oilfield services; and

- general economic conditions, the existence of regulatory
uncertainties, and the possibility of political or currency instability in any of
the countries in which the CompanyKey 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

AsThe Company's results of operations for the more detailed discussions below illustrate,first quarter of fiscal 2003
reflect the impact of a decline in industry conditions resulting from decreased
commodity prices (and its customers' perception that commodity prices may
decrease further) which in turn caused a decline in demand for the Company's
revenues, net
incomeequipment and cash flow for the nine months ended March 31, 2002 were at levels
slightly 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 third 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
services.

THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2002 VERSUS THREE MONTHS ENDED MARCH 31,SEPTEMBER 30,
2001

The Company's revenue for the three monthsquarter ended March 31,September 30, 2002 decreased
$57,129,000,$47,170,000, or 25.1%19%, to $170,241,000$202,067,000 from $227,370,000$249,237,000 for the three monthsquarter ended
March 31,September 30, 2001 while net income for the quarter ended September 30, 2002
decreased $34,686,000, or 119%, to a net loss of $5,510,000, or ($0.04) per
share, from net income of $29,176,000, or $0.28

per diluted share for the quarter ended September 30, 2001. The decrease in
the current period reflects lower activity
levels despite improved rates. The Company's net loss for the third quarter of
fiscal 2002 totaled $4,626,000, or $0.04 per dilutive share, versus arevenues and net income is due to lower levels of $17,420,000, or $0.17 per dilutive share, foractivity and lower pricing
partially offset by the prior year period.acquisition of QSI. Net income in the quarter ended
September 30, 2002 was also adversely affected by the cumulative effect of
the Company's mandatory adoption of SFAS 143, costs associated with the
integration of QSI, unusually high general liability costs and start-up costs
associated with the Company's new Egypt project.

OPERATING REVENUES

WELL SERVICING. Well servicing revenues decreased $27,614,000, or 13%, to
$184,887,000 for the three months ended March 31,September 30, 2002 decreased $43,997,000, or 22.2%, to $154,062,000 from $198,059,000$212,501,000 for
the three months ended March 31,September 30, 2001. The decrease in revenues was
primarily due to lowera decline in activity levels despite higher rig and fluid hauling rates.oilfield service rates partially
offset by the acquisition of QSI.

CONTRACT DRILLING. Contract drilling revenues decreased $18,157,000, or
54%, to $15,479,000 for the three months ended March
31,September 30, 2002 decreased $13,925,000, or 49.3%, to $14,334,000 from
$28,259,000$33,636,000 for the three months ended March 31,September 30, 2001. The decrease in
revenues was primarily due to lowera decline in activity levels and slightly lowerdrilling rig rates.

OPERATING EXPENSES

WELL SERVICING. Well servicing expenses decreased $4,490,000, or 3%, to
$131,271,000 for the three months ended March 31,September 30, 2002 decreased $15,771,000, or 12.2%, to $113,032,000 from $128,803,000$135,761,000
for the three months ended March 31,September 30, 2001. The decrease was primarily due
to lower levels of activity partially offset by the acquisition of QSI,
higher insurance costs and start-up costs for the Company's new Egypt
project. Well servicing expenses, as a percentage of well servicing revenue,
increased to 71% for the three months ended September 30, 2002 from 64% for
the three months ended September 30, 2001

CONTRACT DRILLING. Contract drilling expenses decreased $10,231,000, or
48%, to $10,957,000 for the three months ended September 30, 2002 from
$21,188,000 for the three months ended September 30, 2001. The decrease was
primarily due lower levels of activity partially offset by higher insurance
costs. Well servicing expenses, as a percentage of well servicing revenue,
increased to 73.4%71% for the three months ended March 31,September 30, 2002 from 65.0%63% for
the three months ended March
31, 2001.

CONTRACT DRILLING. Contract drilling expenses for the three months ended March
31, 2002 decreased $8,338,000, or 42.3%, to $11,392,000 from $19,730,000 for the
three months ended March 31, 2001. The decrease was primarily due to lower
levels of activity. Contract drilling expenses, as a percentage of contract
drilling revenues, increased to 79.5% for the three months ended March 31, 2002
from 69.8% for the three months ended March 31, 2001.September 30, 2001

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

The Company's depreciation, depletion and amortization expense increased
$7,933,000, or 44%, to $25,802,000 for the three months ended March 31,September 30, 2002
increased $186,000, or 0.94%, to $19,889,000 from $19,703,000$17,869,000 for the three months ended March 31,September 30, 2001. The increase is
due to recent acquisitionsthe acquisition of QSI and increased capital expenditures during the past twelve
monthsprior year 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
and its continued investment in technology.

GENERAL AND ADMINISTRATIVE EXPENSES

The Company's general and administrative expenses increased $10,861,000, or
72%, to

$26,008,000 for the three months ended March 31,September 30, 2002 decreased $2,900,000, or 17.5%, to $13,694,000 from $16,594,000$15,147,000
for the three months ended March 31,September 30, 2001. The decreaseincrease was primarily due
to reductionsthe acquisition of QSI and costs associated with the integration of QSI,
higher general liability costs and increases in payroll expense.personnel supporting
information technology functions. General and administrative expenses, as a
percentage of revenues, increased to 8.0%13% for the three months ended March 31,September
30, 2002 from 7.3%6% for the three months ended March 31,September 30, 2001.

INTEREST EXPENSE

The Company's interest expense decreased $687,000, or 6%, to $11,262,000
for the three months ended March 31,September 30, 2002 decreased $3,578,000, or 26.6%, to $9,875,000, from $13,453,000$11,949,000 for the three
months ended March 31,September 30, 2001. The decrease was primarily due to a
significant
reduction in the Company's long-term debt using operating cash flow,in the prior year and to a
lesser extent, lower
interest rates. Included in the interest expense was the amortization of debt
issuance costs of $568,000$943,000 and $743,000$738,000 for the three months ended March 31,September
30, 2002 and 2001, respectively.

EXTRAORDINARY LOSSGAIN ON RETIREMENT OF DEBT

During the three months ended March 31,September 30, 2002, the Company retired $35,518,000 of
its long-term debt, at various discounts and premiums to par value and expensed
the related unamortized debt issuance costs which resulted in a net after-tax
extraordinary loss of $5,261,000. During the three months ended March 31, 2001,
the Company retired $20,000,000repurchased
$204,000 of its long-term debt at a discount and expensed the related unamortized debt issuance
costs which resulted in a netgain of $10,000. During the three months ended
September 30, 2001, the Company repurchased $53,277,000 of its long-term debt at
a discount and expensed related debt issuance costs which resulted in a gain of
$287,000. On July 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The new standard
rescinds Statement No. 4, which required all gains and losses from
extinguishment of debt to be recorded as extraordinary items.

CUMULATIVE EFFECT ON PRIOR YEARS OF A CHANGE IN ACCOUNTING PRINCIPLE

On July 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143").
Adoption of SFAS 143 is required for all companies with fiscal years beginning
after June 15, 2002. The new standard requires the Company to recognize a
liability for the present value of all legal obligations associated with the
retirement of tangible long-lived assets and capitalize an equal amount as a
cost of the asset depreciating the additional cost over the estimated useful
life of the asset. The Company recorded an after-tax extraordinary losscharge of $167,000.approximately
$2,873,000 for the cumulative effect on prior years for depreciation of the
additional costs and accretion expense on the liability related to expected
abandonment costs related to its oil and natural gas producing properties and
salt water disposal wells.

INCOME TAXES

The Company's income tax expensebenefit decreased $18,865,000 to a benefit of
$1,616,000 for the three months ended March 31,September 30, 2002
decreased $9,552,000 to an expense of $773,000 from an expense of
$10,325,000$17,249,000 for the three months ended March 31,September 30, 2001. The decrease in
income tax expensetaxes is due to the decrease in pretax income. The Company's effective
tax rate for the three months ended March 31,September 30, 2002 and March 31, 2001 was approximately 55%38% and 37%,
respectively. The effective tax rates varyare different from the statutory rate of
35% because of the disallowance of certain goodwill amortization (for the three
months ended March 31, 2001), and other non-deductible expenses, the effects of
state and local taxes, and revisions of the estimated annual effective tax rate.

NINE MONTHS ENDED MARCH 31, 2002 VERSUS NINE MONTHS ENDED MARCH 31, 2001

The Company's revenue for the nine months ended March 31, 2002 increased
$9,855,000, or 1.6%, to $632,815,000 from $622,960,000 for the nine months ended
March 31, 2001. The increase in the current period reflects improved rates.
The Company's net income for the first nine months of fiscal 2002 totaled
$44,009,000, or $0.41 per dilutive share, versus a net income of $37,289,000,
or $0.37 per dilutive share, for the prior year period.

OPERATING REVENUES

WELL SERVICING. Well servicing revenues for the nine months ended March 31, 2002
increased $9,627,000, or 1.8%, to $552,901,000 from $543,274,000 for the nine
months ended March 31, 2001. 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 nine months ended March
31, 2002 decreased $958,000, or 1.3%, to $73,624,000 from $74,582,000 for the
nine months ended March 31, 2001. The decrease in revenues was primarily due to
lower activity levels and slightly lower rig rates.

OPERATING EXPENSES

WELL SERVICING. Well servicing expenses for the nine months ended March 31, 2002
increased $6,118,000, or 1.7% to $368,932,000 from $362,814,000 for the nine
months ended March 31, 2001. The increase was primarily due to a higher level of
activity, increased wages and insurance costs. Well servicing expenses, as a
percentage of well servicing revenue, decreased to 66.7% for the nine months
ended March 31, 2002 from 66.8% for the nine months ended March 31, 2001.

CONTRACT DRILLING. Contract drilling expenses for the nine months ended March
31, 2002 decreased $5,628,000, or 10.1%, to $49,920,000 from $55,548,000 for the
nine months ended March 31, 2001. The decrease was primarily due to lower
activity levels. Contract drilling expenses, as a percentage of contract
drilling revenues, decreased to 67.8% for the nine months ended March 31, 2002
from 74.5% for the nine months ended March 31, 2001.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE

The Company's depreciation, depletion and amortization expense for the nine
months ended March 31, 2002 increased $1,322,000, or 2.4%, to $57,482,000 from
$56,160,000 for the nine months ended March 31, 2001. 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.

GENERAL AND ADMINISTRATIVE EXPENSES

The Company's general and administrative expenses for the nine months ended
March 31, 2002 increased $313,000, or .73%, to $42,613,000 from $42,926,000 for
the nine months ended March 31, 2001. 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 partially
offset by reductions in payroll expense. General and administrative expenses,

as a percentage of revenues, decreased 6.7% for the nine months ended March 31,
2002 from 6.9% for the nine months ended March 31, 2001.

INTEREST EXPENSE

The Company's interest expense for the nine months ended March 31, 2002
decreased $11,224,000 or 25.4%, to $32,921,000, from $44,145,000 for the nine
months ended March 31, 2001. 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 $1,961,000 and $2,787,000 for the nine
months ended March 31, 2002 and 2001, respectively.

FOREIGN CURRENCY TRANSACTION LOSS

During the nine months ended March 31, 2002, 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 / LOSS

During the nine months ended March 31, 2002, the Company retired $150,376,000 of
its long-term debt, at various discounts and premiums to par value and expensed
the related unamortized debt issuance costs which resulted in a net after-tax
extraordinary loss of $2,990,000. During the nine months ended March 31, 2001,
the Company retired $33,996,000 of its long-term debt at a discount, and
expensed the related unamortized debt issuance costs which resulted in a net
after-tax extraordinary gain of $1,098,000.

INCOME TAXES

The Company's income tax expense for the nine months ended March 31, 2002
increased $6,805,000 to an expense of $28,818,000 from an expense of $22,013,000
for the nine months ended March 31, 2001. The increase in income tax expense is
due to the increase in pretax income. The Company's effective tax rate for the
nine months ended March 31, 2002 and March 31, 2001 was 38%. The effective tax
rates vary from the statutory rate of 35% principally because of the
disallowance of certain goodwill amortization (for the nine months ended March
31, 2001), 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 usingfrom cash flow from operations,
bank borrowings and the issuance of equity and long-term debt. The Company
believes that theits current reserves of cash and cash equivalents, access to ourits
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 ourits current and future operations.

CAPITAL EXPENDITURES

Capital expenditures for fiscal 20022003 have been and will be directed
toward selectively refurbishing ourthe Company's 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 March 31,On July 15, 2002, the Company hadentered into a senior credit facilityThird Amended and Restated
Credit Agreement (the "Senior"New 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
$30,000,000 of letters of credit can be issued under the. The New Senior Credit
Facility but any outstandingconsists of a $150,000,000 revolving loan facility with a $40,000,000
sublimit for letters of credit reducecredit. The loans are secured by most of the borrowing availability undertangible
and intangible assets of the revolving loan facility. The commitment to make revolving loans will reduce
to $75,000,000 on September 14, 2002.Company. The revolving loan commitment will
terminate on September 14, 2003,July 15, 2005 and all revolving loans must be paid on or before
that date. As of March 31, 2002, no funds were outstanding under the
revolving loan facility and approximately $14,479,000 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 funds were repaid with the issuance of additional
8 3/8% Notes in March 2002.

The revolving loan bearsloans bear interest based upon, at the Company's
option, the prime rate plus a variable margin of 0.75%0.00% to 2.00%0.75% or a Eurodollar
rate plus a variable margin of 2.25%1.25% to 3.50%2.75%. The New 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 fixed charge coverage ratio and a minimum net worth, and minimum EBITDA as well as
limitations on liens and indebtedness and restrictions on capital
expenditures,dividends,
acquisitions and dispositions.

As of September 30, 2002, $62,000,000 was outstanding under the
revolving loan facility and approximately $30,797,000 of letters of credit
related to workers compensation insurance were outstanding. The Company
borrowed approximately $53,000,000 in July under the New Senior Credit
Facility in order to complete the acquisition of QSI. Since September 30,
2002, the Company has repaid $10,000,000 leaving $52,000,000 outstanding
under the revolving loan facility as of November 13, 2002.

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 Boriginal term loan under the
Senior Credit Facility,Company's previous senior credit facility, and a portion of the revolving
loan facility then outstanding under the Senior Credit Facility
then outstanding.Company's previous senior credit
facility. On March 1, 2002, the Company completed a private placementpublic offering of an
additional $100,000,000 of 8 3/8% Senior Notes due 2008 at 101.5% of par. The
cash proceeds from the private placement, net of fees and expenses,public offering were used to repay all of the
remaining balance of the revolving loan facility

21
under the Senior Credit Facility.Company's previous senior credit facility. The 8 3/8% Senior Notes
are senior unsecured obligations. The 8 3/8% Senior Notes are effectively
subordinate to the Company's senior

27
secured indebtedness which includes borrowings
under the New Senior Credit FacilityFacility.

On and after March 1, 2005, the Dawson 9Company may redeem some or all of the
8 3/8% Senior Notes.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 March 31,September 30, 2002, $275,000,000 principal amount of the 8 3/8% Senior
Notes remained outstanding.

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 New Senior Credit Facility the Dawson 9 3/8% Senior Notes and the 8 3/8 %8%
Senior Notes. The Unit Warrants have separated from the 14% Senior
Subordinated Notes and became exercisable on January 25, 2000. As of
March 31,September 30, 2002, 63,500 Unit Warrants had been exercised, producing
approximately $4,173,000 of proceeds to the Company and 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
was allowed to redeem up to 35% of the aggregate principal amount of the 14%
Senior Subordinated Notes at 114% of par plus accrued interest with the proceeds
of certain sales of equity. 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. This
transaction resulted in an extraordinary loss before taxes of approximately
$8,468,000. At March 31,September 30, 2002, $97,500,000 principal amount
of the 14% Senior SubordinatedSubordinate Notes remainedremain outstanding.

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 New 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.

During the quarter ended March 31,September 30, 2002, the Company repurchased
(and canceled) $115,000an additional $204,000 principal amount of the 5% Convertible
Subordinated Notes, leaving $50,237,000 principal amount$49,747,000 outstanding as of the 5% Convertible Subordinated Notes
outstanding at March 31,September 30, 2002.
28These repurchases resulted in gains of approximately $10,000.

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. 143,146, Accounting for Asset Retirement
ObligationsCosts
Associated with Exit or Disposal Activities ("SFAS 143"), Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"), and
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"146"). SFAS 143146 establishes
requirements for the accounting
for removal costs associated with asset retirements. SFAS 144 addresses financial accounting and reporting for the impairment ofcosts associated with
exit or disposal of long-lived
assets.activities. SFAS 145 rescinds Statement No. 4, which required all gains and losses
from extinguishment of debt to be aggregated and classified as an extraordinary
item and amends Statement No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. SFAS 143146 is effective for 29

fiscal years beginning after June 15, 2002, with earlier adoption encouraged.
SFAS 144 is effective for fiscal years beginningexit or disposal
activities initiated after December 15, 2001 and
interim periods within those fiscal years. SFAS 145 is effective for fiscal
years beginning after May 15, 2002, with earlier adoption encouraged.31, 2002. The Company is currently assessing
the impact of these standardsthis standard 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"Note Regarding Forward-Looking
Statements" in Item 2 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 March 31,September 30, 2002, the Company had long-term debt and capital lease
obligations outstanding of $445,720,000.$504,452,000. Of this amount $421,638,000,$420,586,000, or 95%83%,
bears interest at fixed rates as follows:

BALANCE AT
MARCH 31,Balance at
September 30, 2002
--------------
(THOUSANDS)------------------
(Thousands)

8 3/8% Senior Notes Due 2008.....................................................2008..................................... $ 276,482276,383
14% Senior Subordinated Notes Due 2009........................................... 94,2162009........................... 94,333
5% Convertible Subordinated Notes Due 2004....................................... 50,2372004....................... 49,747
Other (rates generally ranging fromapproximate 8.0% to 9 3/8%).............................. 703
----------................................... 123
---------
$ 421,638
==========420,586
=========

The remaining $24,082,000$83,866,000 of long-term debt and capital lease obligations outstanding
as of March 31,September 30, 2002 bears interest at floating rates which averaged
approximately 4.8%4.32% at March 31,September 30, 2002. A 10% increase in short-term interest
rates on the floating-rate debt outstanding at March 31,September 30, 2002 would equal
approximately 4843 basis points. Such an increase in interest rates would increase
Key's fiscal 20022003 interest expense by approximately $100,000$400,000 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,During fiscal 2002, 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'sThe Company's net assets fromof its
Argentina subsidiaries aresubsidiary is 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 March 31,September 30,
2002 and December 31, 2001, using the applicable free market conversion ratio of 2.9:3.7:1 and 1.6:1, respectively.will be
translated at future dates using the applicable free market conversion ratio
on such dates. 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 beare 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%The change in the Argentine peso to the U.S. dollar exchange rate would not be
materialsince
December 31, 2001 has reduced stockholders' equity by $46,340,000, through a
charge to the net assets, net earnings or cash flows of Key.other comprehensive loss, through September 30, 2002.

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 and expenses 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.the Company.

Key's net assets, net earnings and cash flows from its subsidiary
operating in Egypt are based on the U.S. dollar. Foreign currency
transactions are included in determination of net income for the period.

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 March 31,September 30, 2002, Key had oil and natural gas price collars and put options
in place, as detailed in the following table. The total fiscal 20022003 hedged
oil and natural gas volumes represent 42%approximately 40% and 34%32%,
respectively, of estimated 2002expected 2003 calendar year total production. A 10%
variation in

31
the market price of oil or natural gas from their levels at
March 31,September 30, 2002 would not have ano material impact on the Company's net assets,
net earnings or cash flows (as derived from the 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 March 31,September 30, 2002:

MONTHLY VOLUMES
--------------- STRIKE PRICE
---------------
NATURAL PER BBL/MMBTU
OIL GAS -----------------------------
(BBLS) (MMBTUS)(MMBTU) TERM FLOOR CAP FAIR VALUE
----- ------ -------- ---- ---------------------- ------- --- ----------

At March 31,September 30, 2002
Oil Puts...........Put........... 5,000 - Mar 2002-Feb 2003 $22.00$ 22.00 - $ 46,000
Natural3,000
Oil Put........... 4,000 - Mar 2003-Feb 2004 $ 21.00 - $ 72,000
Gas Puts...Put........... - 75,000 Mar 2002-Feb 2003 $ 3.00 - $131,000$ 10,000

(The strike prices for the oil puts are based on the NYMEX spot price for West
Texas Intermediate; the strike pricesprice for the natural gas puts areput is based on the
Inside FERC-El Paso Permian spot price.)

3225

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 day period prior to the filing date of this Quarterly Report
on Form 10-Q, the Company, under the supervision, and with the
participation, of its management, including its principal executive officer
and principal financial officer, performed an evaluation of the design and
operation of the Company's disclosure controls and procedures (as defined
in Securities and Exchange Act Rule 13a-14(c)). Based on that evaluation,
the Company's principal executive officer and principal financial officer
concluded that such disclosure controls and procedures are effective to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is accumulated and communicated to the Company's
management and made known to the principal executive officer and principal
financial officer, particularly during the period for which this periodic
report was being prepared.

No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date the controls were evaluated as discussed above.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGSPROCEEDINGS.

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.

On January 31, 2002, a meeting of the holders of Common Stock was held
to elect the Company's Board of Directors. Only the holders of record as of the
close of business on December 28, 2001 (the "Record Date") were entitled to
notice of and to vote at the meeting and at any adjournment thereof. On the
Record Date, the outstanding number of shares entitled to vote consisted of
107,955,279 shares of the Company's common stock. The stockholders took the
following action at the meeting:

Elected the following seven Directors, with the votes indicated
opposite each director's name:

For Against
---------- ---------

Francis D. John 96,043,005 2,723,271
David J. Breazzano 98,128,160 638,116
Kevin P. Collins 98,120,919 645,357
William D. Fertig 94,574,643 4,191,633
W. Phillip Marcum 98,121,494 644,782
J. Robinson West 98,097,445 651,832
Morton Wolkowitz 98,121,435 644,841
None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

1.1 Underwriting Agreement, dated February 22, 2002, among
Registrant and Lehman Brothers Inc., Bear Stearns &
Co. Inc. and First Albany Corporation (Incorporated by
reference to Exhibit 1.1

of the Company's Current Report on Form 8-K dated
February 27, 2002, File No. 1-8038).

4.1 Indenture dated as of February 22, 2002 among the
Registrant and U.S. Bank National Association
(Incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K dated February
27, 2002, File No. 1-8038).

4.2 First Supplemental Indenture dated March 1, 2002 among
the Registrant, the Guarantors (as defined therein)
and U.S. Bank National Association (Incorporated by
reference to Exhibit 4.1 of the Company's Current
Report on Form 8-K dated March 1, 2002, File No.
1-8038).

10.1 Eleventh Amendment to the10.1* Second Amended and Restated Credit Agreement dated as of June 6, 1997, as amended
and restated through September 14, 1998 and as further
amended,July 15,
2002, among the Registrant, the several Lenderslenders 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., and Wells Fargo
Bank (Texas), as Arranger. (Incorporated by reference
to Exhibit 10.1Co-Lead Arrangers and Credit Lyonnais New York
Bank, Lehman Commercial Paper, Inc., and Royal Bank of Canada, as
the Company's Current Report on
Form 8-K dated February 27, 2002, File No. 1-8038).

10.2 TwelfthDocumentation Agents.

10.2* Second Amendment to the Second Amended and Restated CreditEmployment
Agreement dated October 28, 2002 between the Registrant and
Francis D. John.

99.1* Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as of June 6, 1997, as amended
and restated through September 14, 1998 and as further
amended, among Registrant, the several Lenders from
timeadopted pursuant 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 10.2Section 906 of the Company's Current ReportSarbanes-Oxley Act of
2002.

- ----------
* Filed herewith.

(b) Reports on Form 8-K dated February 27, 2002, File No. 1-8038).

*10.3 Employment Agreement between Key Energy Services, Inc.
and Thomas K. Grundman dated February 15, 2002.

25.1 Statement of Eligibility of Trustee, U.S. Bank
National Association, a national banking association,
on Form T-1 (Incorporated by reference to Exhibit 25.1
of the Company's Current Report on Form 8-K dated
February 27, 2002, File No. 1-8038).

(b)

The Company filed the following reports on Form 8-K during the quarter
ended March 31,June 30, 2002:

(i) Current reportReport on Form 8-K dated February 20, 2002 filed to
report recent developments regarding the Company's Argentina
operations.

(ii) Current report on Form 8-K dated February 27,July 16, 2002 filed to report the offering of up to $100,000 ofnew
senior credit facility and updated guidance on the Company's 8 3/8%
Series C Notes due 2008.

(iii)quarter and fiscal
year ended June 30, 2002.

(ii) Current reportReport on Form 8-K dated March 1,August 2, 2002 filed to report the
Supplemental Indenture for the 8 3/8% Series C Notesacquisition of the Company.

- ----------
* Filed herewith.

35Q Services, Inc.

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: May 15,November 14, 2002 By:By /s/ FRANCIS D. JOHN
-------------------------------------- Francis D. John
---------------------
President and Chief Executive Officer

Dated: May 15,November 14, 2002 By:By /s/ ROYCERoyce W. MITCHELL
--------------------------------------Mitchell
---------------------
Chief Financial Officer

I, Francis D. John, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Key Energy Services,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Dated: November 14, 2002 By /s/ Francis D. John
-------------------
Francis D. John
Chief Executive Officer

I, Royce W. Mitchell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Key Energy Services,
Inc.;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
this quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

Dated: November 14, 2002 By /s/ Royce W. Mitchell
---------------------
Royce W. Mitchell
Chief Financial Officer

and
Chief Accounting Officer

3632