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S-4/A
KEY ENERGY SERVICES INC filed this Form S-4/A on 03/08/1996
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      As filed with the Securities and Exchange Commission on March 8, 1996
                                                  Registration No.  333-369
    

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                              --------------------

   
                               AMENDMENT NO. 2 TO
                                    FORM S-4
    

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                              --------------------
                             KEY ENERGY GROUP, INC.
             (Exact name of registrant as specified in its charter)
                              --------------------


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



             255 Livingston Avenue, New Brunswick, New Jersey 08901
                                 (908) 247-4822

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

                                 FRANCIS D. JOHN
                             KEY ENERGY GROUP, INC.

                              255 Livingston Avenue
                         New Brunswick, New Jersey 08901

                                 (908) 247-4822
            (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)
                              --------------------
                                    Copy to:

                             KAREN L. LINSLEY, ESQ.
                            SULLIVAN & WORCESTER LLP

                             One Post Office Square
                                Boston, MA 02109
                                 (617) 338-2800

         Approximate  date of  commencement  of proposed sale to the public:  As
soon as practicable after this Registration  Statement becomes effective and all
other conditions to the merger of WellTech, Inc. with and into Key Energy Group,
Inc.  pursuant to the Agreement and Plan of Merger described in the accompanying
Proxy Statement--Prospectus have been satisfied or waived.

         If the  securities  being  registered on this Form are being offered in
connection  with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|

         If any of the  securities  being  registered  on  this  Form  are to be
offered  on a  delayed  or  continuous  basis  pursuant  to Rule 415  under  the
Securities Act of 1933,  other than  securities  offered only in connection with
dividend or interest reimbursement plans, check the following box. |X|

The Registrant hereby amends this  Registration  Statement on such date or dates
as may be necessary to delay its effective date until the Registrant will file a
further amendment which  specifically  states that this  Registration  Statement
will  thereafter  become  effective  in  accordance  with  Section  8(a)  of the
Securities  Act of 1933,  or  until  this  Registration  Statement  will  become
effective  on such  date  as the  Securities  and  Exchange  Commission,  acting
pursuant to Section 8(a), may determine.




<PAGE>


<TABLE>
<CAPTION>

                                              KEY ENERGY GROUP, INC.

                                               CROSS REFERENCE SHEET

                                Showing Location in the Proxy Statement--Prospectus
                                   of Information Required by Items in Form S-4


                       Items in Form S-4                                     Caption in Proxy Statement--Prospectus
<S>                                                              <C> 

A.  Information About the Transaction

Item 1.    Forepart of the Registration Statement and Outside     Cover Page of Registration Statement; Cross Reference
           Front Cover Page of Prospectus.......................  Sheet; Outside Front Cover Page of Proxy
                                                                  Statement--Prospectus

Item 2.    Inside Front and Outside Back Cover Pages of           Inside Front and Outside Back Cover Pages of Proxy
           Prospectus...........................................  Statement--Prospectus; Table of Contents; Available
                                                                  Information

Item 3.    Risk Factors, Ratio of Earnings to Fixed Charges and   Summary; Risk Factors
           Other Information....................................

Item 4.    Terms of the Transaction.............................  Summary; Certain Considerations Relating to the
                                                                  Transaction; Proposals to be Voted upon at the Key
                                                                  Special Meeting -- Item 1:  The Merger; Description of Key
                                                                  Common Stock; Comparison of Rights of Stockholders of
                                                                  Key and WellTech; Certain Federal Income Tax
                                                                  Considerations; Experts


Item 5.    Pro Forma Financial Information......................  Summary; Key Energy Group, Inc. Unaudited Pro Forma
                                                                  Combined Financial Statements

Item 6.    Material Contacts with the Company Being               The Merger; Business and Properties of Key - Recent
           Acquired.............................................  Developments

Item 7.    Additional Information Required for Reoffering by      
           Persons and Parties Deemed to Be Underwriters........  Resales of Securities

Item 8.    Interests of Named Experts and Counsel...............  *

Item 9.    Disclosure of Commission Position on                   
           Indemnification for Securities Act Liabilities.......  Undertakings


B.  Information About the Registrant

Item 10.   Information With Respect to S-3 Registrants..........  *

Item 11.   Incorporation of Certain Information by Reference....  *

Item 12.   Information With Respect to S-2 or S-3 Registrants...  *

Item 13.   Incorporation of Certain Information by Reference....  *


Item 14.   Information With Respect to Registrants Other Than     Proxy Statement---Prospectus Cover Page; Summary;
           S-3 or S-2 Registrants...............................  The Special Meeting - Ownership of Key Securities;
                                                                  Business and Properties  of Key; Price Range of Key
                                                                  Common Stock; Selected Financial Data of Key;
                                                                  Consolidated Financial Statements of Key; Management's
                                                                  Discussion and Analysis of Results of Operations and
                                                                  Financial Condition of Key

C.  Information About the Company Being Acquired

Item 15.   Information With Respect to S-3 Companies............  *




<PAGE>



                       Items in Form S-4                                     Caption in Proxy Statement--Prospectus

Item 16.   Information With Respect to S-2 or S-3 Companies.....  *


Item 17.   Information with Respect to Companies Other Than       Proxy Statement--Prospectus Cover Page; The Special
           S-3 or S-2 Companies.................................  Meeting -- Ownership of WellTech Securities; Summary;
                                                                  Business and Properties of WellTech; Selected Financial
                                                                  Data of WellTech; Consolidated Financial Statements of
                                                                  WellTech; Management's Discussion and Analysis of
                                                                  Results of Operations and Financial Condition of WellTech


D.  Voting and Management Information

Item 18.   Information if Proxies, Consents or Authorizations     Proxy Statement--Prospectus Cover Page; Summary; The
           Are to Be Solicited..................................  Special Meeting; Certain Considerations Relating to the
                                                                  Transaction; Proposals   to be Voted  upon at   the   Key
                                                                  Special Meeting --Item  1: The Merger; --Item 3: Election
                                                                  of Board of Directors; --Item 4: Adoption and Approval of the Key
                                                                  1995 Stock Option Plan; --Item 5: Adoption and Approval of 
                                                                  Outside Directors Stock Option Plan; Certain Relationships and 
                                                                  Related Transactions of Key; Business and Properties of WellTech;
                                                                  Business   and Properties  of Key; Rights of Dissenting
                                                                  Stockholders of WellTech


Item 19.   Information if Proxies, Consents or Authorizations     *
           Are Not to be Solicited in an Exchange Offer.........
</TABLE>


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

    *    Omitted because inapplicable or answer is in the negative.

                         


<PAGE>

                             KEY ENERGY GROUP, INC.
   
                                                            March  13, 1996
    

Dear Stockholder:


         You are  cordially  invited to attend a Special  Meeting in Lieu of the
Annual Meeting of Stockholders  (the "Key Special Meeting") of Key Energy Group,
Inc.  ("Key") to be held on March 26,  1996 at 11:00 a.m.,  local  time,  at the
Hyatt Regency, Two Albany Street, New Brunswick, New Jersey.


         At the Key Special Meeting,  stockholders  will be asked to approve and
adopt an Agreement and Plan of Merger (the "Merger  Agreement")  entered into on
November 18, 1995 providing for the merger of WellTech,  Inc.  ("WellTech") with
and into Key (the "Merger").


         As a result of the Merger,  all  outstanding  shares of common stock of
WellTech  will be  converted  into  shares of Key  Common  Stock  and  five-year
warrants  to  purchase  shares of Key  Common  Stock  (the "New Key  Warrants").
WellTech  currently owns 1,635,000  shares (23.6%) of Key Common Stock and holds
warrants (the "Existing Key Warrants") to purchase an additional  250,000 shares
of Key Common Stock at $5.00 per share. As part of the Merger,  1,429,962 of the
1,635,000  shares of Key Common Stock and the  Existing  Key Warrants  currently
owned by  WellTech  will be  canceled.  Assuming  that no  appraisal  rights are
asserted by the WellTech  stockholders in the Merger, Key will issue to WellTech
stockholders  an aggregate  of 4,929,962  shares of Key Common Stock and New Key
Warrants  to  purchase  750,000  shares of Key Common  Stock at $6.75 per share.
Taking into account the cancellation of the 1,429,962 shares of Key Common Stock
and  the  Existing  Key  Warrants   currently  held  by  WellTech,   net  Merger
consideration  will consist of 3,500,000 shares of Key Common Stock and warrants
to purchase 500,000 additional shares of Key Common Stock.


         The Merger is subject to various  conditions,  described  in this Proxy
Statement--Prospectus.  It is expected that the Merger will be completed  during
the first quarter of 1996.

         Your  Board of  Directors  has  carefully  considered  the terms of the
proposed  Merger  and  believes  that the Merger and  related  transactions  are
advisable and in the best interests of Key and its  stockholders.  The Board has
unanimously approved the Merger and the related transactions and recommends that
stockholders vote FOR that proposal.


         In order to  permit  Key to issue  shares  of Key  Common  Stock to the
WellTech stockholders as provided in the Merger Agreement, to provide for future
equity  financings or acquisitions and to simplify the Company's  organizational
documents   which,   as  a  result  of  various   corporate   transactions   and
restructurings,  have become overly complex, Key stockholders will also be asked
to approve  and adopt an  amendment  to the  Articles  of  Incorporation  of Key
amending  and  restating  those  Articles in their  entirety  (the "Key  Charter
Amendment"),  which,  among other  things,  will  increase  the total  number of
authorized  shares of Key Common Stock from  10,000,000 to 25,000,000 and permit
the Board to  classify  and  reclassify  unissued  shares of Common  Stock  into
preferred or preference  stock,  subject to certain  limitations.  The Board has
unanimously  approved the Key Charter Amendment and recommends that stockholders
vote FOR that proposal.

         The  stockholders  will also be asked to elect  the Board of  Directors
which, assuming the Merger is consummated, will include two nominees of WellTech
and to approve  the  adoption of the Key 1995 Stock  Option  Plan for  officers,
directors and other employees  covering an aggregate of 1,150,000  shares of Key
Common  Stock and the  adoption of the Key Outside  Directors  Stock Option Plan
covering an aggregate of 300,000 shares of Key Common Stock.


         We hope you will be able to attend the  meeting.  However,  even if you
anticipate  attending in person, we urge you to complete,  sign, date and return
the enclosed  proxy card promptly to ensure that your shares will be represented
at the Key Special Meeting.  If you do attend,  you will, of course, be entitled
to vote in person.

         Thank you and I look forward to seeing you at the meeting.

                                      Sincerely,



                                      Francis D. John
                                      President and Chief Executive Officer



<PAGE>


                             KEY ENERGY GROUP, INC.
                            NOTICE OF SPECIAL MEETING
                  IN LIEU OF THE ANNUAL MEETING OF STOCKHOLDERS


                          To Be Held On March 26, 1996


TO THE STOCKHOLDERS OF KEY ENERGY GROUP, INC.:


         NOTICE IS HEREBY  GIVEN  that a Special  Meeting  in Lieu of the Annual
Meeting of Stockholders  (the "Key Special  Meeting") of Key Energy Group,  Inc.
("Key") will be held on March 26, 1996 at 11:00 a.m.,  local time,  at the Hyatt
Regency,  Two Albany  Street,  New  Brunswick,  New  Jersey,  for the purpose of
considering  and  voting  upon the  following  matters  (collectively,  the "Key
Proposals"):


         o A proposal  to approve  and adopt the  Agreement  and Plan of Merger,
dated as of November 18, 1995, as heretofore  amended (the "Merger  Agreement"),
by and between Key and WellTech, Inc. ("WellTech"), and each of the transactions
contemplated  thereby,  including the merger (the "Merger") of WellTech with and
into Key, upon the terms and subject to the  conditions  set forth in the Merger
Agreement,    as   more   fully    described   in   the    accompanying    Proxy
Statement--Prospectus.  A copy of the Merger Agreement is attached as Annex I to
the accompanying Proxy  Statement--Prospectus  and certain related documents are
attached as exhibits thereto;

         o A proposal  to approve  and adopt an  amendment  to the  Articles  of
Incorporation  of Key amending and restating  those  Articles in their  entirety
(the "Key Charter  Amendment"),  including,  among other things, to increase the
total number of authorized shares of Common Stock, par value $.10 per share (the
"Key Common  Stock"),  from  10,000,000  to  25,000,000  and permit the Board to
classify and  reclassify  unissued  shares of capital  stock  subject to certain
limitations;

         o  Assuming  the  Merger is  consummated,  the  election  of a Board of
Directors,   including,   two  nominees  of  WellTech;  if  the  Merger  is  not
consummated,  the election of a Board of Directors not including any nominees of
WellTech;

         o The adoption and approval of the Key 1995 Stock Option Plan  covering
an aggregate of 1,150,000 shares of Key Common Stock;

         o The adoption and approval of the Key Outside  Directors  Stock Option
Plan covering an aggregate of 300,000 shares of Key Common Stock; and

         o Such other  business  as may  properly  come  before the Key  Special
Meeting or any adjournments or postponements thereof.


         The Key Board of Directors  has fixed the close of business on March 1,
1996 as the record date for the determination of stockholders entitled to notice
of and to vote at the Key Special Meeting and any  adjournments or postponements
thereof.  Only  stockholders of record at the close of business on such date are
entitled to notice of and to vote at such  meeting.  A list of Key  stockholders
entitled to vote at the Key Special Meeting or any adjournments or postponements
thereof will be available  for  examination  for any purpose  germane to the Key
Special  Meeting,  for ten days prior to the Key Special Meeting during ordinary
business  hours,  at the  principal  executive  offices  of Key  located  at 255
Livingston Avenue, New Brunswick, New Jersey.



<PAGE>

         Shares of the Key  Common  Stock are the only  securities  of Key whose
holders are  entitled to vote upon the Key  Proposals to be presented at the Key
Special Meeting.

         Each Key Proposal will be voted upon separately by the Key stockholders
entitled to vote at the Key Special Meeting; however, failure of either proposal
1 or 2 described  above to be approved  by the  stockholders  will result in the
abandonment  by Key of the Merger,  and failure of proposal 1 will result in the
election of a Board of Directors of five persons not  including  any nominees of
WellTech.


         Your vote is  important  regardless  of the  number of shares  you own.
Approval  of the  Merger  and  the  Key  Charter  Amendment  each  requires  the
affirmative  vote of the  holders of not less than a majority  of the issued and
outstanding shares of Key Common Stock. The proposal relating to the election of
the Board of Directors  will be determined by a plurality of the votes  entitled
to be cast by the holders of the Key Common Stock.  All other  proposals must be
approved by the  affirmative  vote of a majority of the  outstanding  Key Common
Stock  present in person or by proxy and entitled to vote at the  meeting.  Each
stockholder,  even though he or she now plans to attend the Key Special Meeting,
is requested to sign,  date and return the enclosed  Proxy  without delay in the
enclosed  postage-paid  return  envelope.  You may revoke your Proxy at any time
prior to its exercise.  Any stockholder present at the Key Special Meeting or at
any adjournments or  postponements  thereof may revoke his or her Proxy and vote
personally on each matter brought before the Key Special Meeting.


                                       By Order of the Board of Directors,

                                       Diane Mack, Secretary
   
 March 13, 1996
    


         THE BOARD OF  DIRECTORS  RECOMMENDS  THAT YOU VOTE FOR THE  PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED
THEREBY,  FOR THE PROPOSAL TO APPROVE AND ADOPT THE KEY CHARTER  AMENDMENT;  FOR
THE ELECTION OF  DIRECTORS  OF KEY;  AND FOR THE  PROPOSALS TO ADOPT AND APPROVE
EACH OF THE KEY STOCK OPTION PLANS.

         PLEASE  DATE AND SIGN THE  ENCLOSED  PROXY AND MAIL IT  PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.

                                       -2-


<PAGE>
   


                             KEY ENERGY GROUP, INC.
                                 Proxy Statement
                      For Special Meetings of Stockholders
                            To Be Held March 26, 1996
    
                             KEY ENERGY GROUP, INC.
                                   PROSPECTUS
           5,679,962 Shares of Common Stock, $.10 Par Value Per Share
                Five-Year Warrants to Purchase 750,000 Shares of
                     Common Stock, $.10 Par Value Per Share

   
         This Proxy  Statement--Prospectus (this "Proxy Statement-- Prospectus")
is being  furnished  to  stockholders  of Key  Energy  Group,  Inc.,  a Maryland
corporation ("Key", which term includes its consolidated subsidiaries unless the
context indicates otherwise),  in connection with the solicitation of proxies by
the Board of Directors  of Key for use at its Special  Meeting in lieu of Annual
Meeting of  Stockholders  (the "Key Special  Meeting" or the "Special  Meeting")
(including  any  adjournments  or  postponements  of such meeting) to be held on
March  26,  1996 at the time and  place and for the  purposes  specified  in the
accompanying  Notice of Special Meeting and at any adjournments or postponements
of the Special Meeting. This Proxy  Statement--Prospectus  and form of Proxy for
the Special Meeting will be mailed to the  stockholders of Key on or about March
13,  1995.   This  Proxy   Statement-Prospectus   is  also  being  furnished  to
stockholders of WellTech,  Inc., a Delaware corporation  ("WellTech," which term
includes its consolidated  subsidiaries unless the context indicates  otherwise)
in connection  with the offering of shares of Common  Stock,  $.10 par value per
share ("Key Common  Stock") and  five-year  warrants to purchase an aggregate of
750,000  shares of Key  Common  Stock at an  exercise  price of $6.75 per share,
subject  to  certain  anti-dilution  provisions  (the  "New  Key  Warrants")  to
stockholders  of WellTech in connection  with the proposed merger (the "Merger")
of WellTech with and into Key.


         The  above   matters   are   discussed   in   detail   in  this   Proxy
Statement--Prospectus.  The proposed Merger and related  transactions  described
herein are complex transactions.  Stockholders of Key are strongly urged to read
carefully  and  consider  this Proxy  Statement--Prospectus  in its entirety and
should carefully  consider the "Risk Factors" set forth herein beginning on page
28.
    
                           ---------------------------

         THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
           SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
       COMMISSION NOR HAS THE SECURITIES EXCHANGE COMMISSION OR ANY STATE
       SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
        PROXY STATEMENT--PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.
                           ---------------------------


          The date of this Proxy Statement--Prospectus is March , 1996


<PAGE>

         This Proxy  Statement--Prospectus  relates to the Agreement and Plan of
Merger,  dated as of November  18,  1995,  as  heretofore  amended  (the "Merger
Agreement"), by and between Key and WellTech, a copy of which is attached hereto
as Annex I, and certain related transactions.  Pursuant to the Merger Agreement,
WellTech  will  merge  with  and  into  Key,  and  Key  will  be  the  surviving
corporation.


         At the Key Special Meeting,  Key stockholders will be asked to consider
and vote upon the  following  proposals  (the "Key  Proposals"):  (i) the Merger
Agreement;  (ii) the restatement and amendment of the Articles of  Incorporation
of Key (the "Key Charter Amendment") to, among other things,  increase the total
number of  authorized  shares of Key Common Stock from  10,000,000 to 25,000,000
and permit the Board to classify and reclassify  unissued shares of Common Stock
into preferred or preference stock,  subject to certain  limitations;  (iii) the
election of a Board of Directors of six persons, including,  assuming the Merger
is consummated,  two nominees of WellTech, or, if the Merger is not consummated,
the election of a Board of Directors of five persons, not including any nominees
of  WellTech;  (iv) the  adoption and approval of the Key 1995 Stock Option Plan
covering an  aggregate  of  1,150,000  shares of Key Common  Stock;  and (v) the
approval and adoption of the Key Outside Directors Stock Option Plan covering an
aggregate of 300,000 shares of Key Common Stock.

         Each of the Key Proposals will be voted upon  separately by the holders
of Key Common Stock; however,  failure of either the Merger Agreement or the Key
Charter  Amendment  to be  approved by the Key  stockholders  will result in the
abandonment  by Key of the Merger (even if the Merger is  separately  approved).
Moreover,  it is a condition of WellTech's  obligation to consummate  the Merger
that two of its nominees be elected as directors of Key. The proposals  relating
to  the  approval  and  adoption  of  the  Merger  Agreement  and  each  of  the
transactions  contemplated  thereby  and the  approval  and  adoption of the Key
Charter  Amendment  must be  approved  by the holders of a majority of the votes
entitled to be cast by holders of the Key Common Stock. The proposal relating to
the election of the Board of Directors  will be determined by a plurality of the
votes  entitled  to be cast by the  holders of the Key Common  Stock.  All other
proposals  must  be  approved  by the  affirmative  vote  of a  majority  of the
outstanding  Key Common Stock present in person or by proxy and entitled to vote
at the meeting.

         Pursuant to the Merger, Key will issue an aggregate of 4,929,962 shares
of Key Common  Stock and New Key  Warrants to purchase an  aggregate  of 750,000
shares of Key Common Stock at an exercise  price of $6.75 per share,  subject to
certain anti-dilution  provisions. As a condition to consummation of the Merger,
however,  1,429,962 of the 1,635,000  shares of Key Common Stock (the  "Existing
Key Shares") and the existing  five-year  warrants (the "Existing Key Warrants")
to  purchase an  aggregate  of 250,000  shares of Key Common  Stock at $5.00 per
share presently owned by WellTech will be canceled. The remaining 205,038 shares
have been  distributed by WellTech to its directors . Accordingly,  based solely
on the  securities  to be issued to the  WellTech  stockholders  pursuant to the
Merger, such stockholders would own in the aggregate  approximately 47.3% of the
shares of Key Common  Stock before  giving  effect to the exercise of any of the
New Key Warrants (or any other  outstanding  options or warrants).  Assuming the
exercise in their entirety of the New Key Warrants (but not of any other options
or warrants), such holders would own in the aggregate approximately 50.9% of the
shares of Key Common Stock.  (See "Proposals to be Voted upon at the Key Special
Meeting--Item 1: The Merger.)

                                      (ii)

<PAGE>

         The Board of Directors of Key recommends that  stockholders of Key vote
FOR each of the Key Proposals.


         At the effective time of the Merger (the "Effective  Time"), the shares
of Key Common Stock issued in connection with the Merger and the shares issuable
upon exercise of the New Key Warrants will be listed for trading on the American
Stock Exchange upon official notice of issuance.


         All information contained in this Proxy Statement--Prospectus  relating
to Key and its  subsidiaries  has  been  supplied  by Key,  and all  information
contained  in this Proxy  Statement--Prospectus  relating  to  WellTech  and its
subsidiaries has been supplied by WellTech.  The pro forma financial information
contained  herein  relating  to  Key  has  been  prepared  by Key  and  includes
historical financial  information regarding WellTech that was supplied to Key by
WellTech.


   
         This Proxy Statement--Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Key on or about March 13, 1996.
    

                                 ______________



         No  person  is  authorized  to give  any  information  or to  make  any
representation   with   respect  to  the   matters   described   in  this  Proxy
Statement--Prospectus  other than those contained herein, in connection with the
solicitation  of proxies or the offering of securities made hereby and, if given
or made, such information or  representations  must not be relied upon as having
been authorized by Key. This Proxy  Statement--Prospectus does not constitute an
offer to sell,  or a  solicitation  of an offer to buy, any  securities,  or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
unlawful to make such offer or  solicitation in such  jurisdiction.  Neither the
delivery of this Proxy  Statement--Prospectus nor any distribution of securities
made hereunder will, under any circumstances,  create any implication that there
has  been no  change  in the  affairs  of Key  since  the  date  of  this  Proxy
Statement--Prospectus  or that  information  herein  is  correct  as of any time
subsequent to its date.


                                  _______________

                                       (iii)


<PAGE>



                                TABLE OF CONTENTS

                                                                         Page


SUMMARY  ................................................................. 2
         The Companies.................................................... 2
                  Key..................................................... 2
                  WellTech................................................ 2
         The Special Meeting.............................................. 2
         The Merger Agreement............................................. 3
         The Key Charter Amendment ....................................... 4
         Security Ownership of Key Management............................. 4
         Merger Related Arrangements...................................... 4
                  Interim Operations Agreement............................ 4
                  New Indebtedness........................................ 4
                  Dawson WellTech Arrangements.  ......................... 5
         Delivery of Key Securities....................................... 5
         Ownership of Key Common Stock after the Merger................... 5
   
         Recommendation of the Key Board 
           of Directors................................................... 6
         
         Opinion of Financial Advisor..................................... 7
         Effective Time of Merger......................................... 7
         Conditions to the Merger......................................... 7
         Acquisition Proposals............................................ 7
         Registration Rights.............................................. 8
         Termination of the Merger Agreement.............................. 8
         Corporate Governance............................................. 8
         Certain Federal Income Tax Considerations; Tax Opinion............8 
         Accounting Treatment............................................. 9
         Rights of Dissenting Stockholders................................ 9
                  Key..................................................... 9
                  WellTech................................................ 9
         Comparison of Rights of Stockholders............................. 9
         Market Prices and Dividend Data..................................10 
                  Key.....................................................10 
                  WellTech................................................10 
         Key Summary Consolidated Historical Information................. 11
         WellTech Summary Financial Data................................. 13
         Key Selected Pro Forma Financial Data........................... 14

THE SPECIAL MEETING...................................................... 15
         Matters to Be Discussed at the Special Meeting.................. 15
         Record Dates; Stock Entitled to Vote; Quorum.................... 15
         Required Vote................................................... 16
         Solicitation and Voting of Proxies.............................. 16
         Ownership of Key Securities..................................... 17
         Ownership of WellTech Securities................................ 20

                                      (iv)

<PAGE>
CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTION....................... 22
         Reasons for the Transaction; Recommendation of 
           Key Board of Directors........................................ 22

    
   
         Advantages and Disadvantages of the Merger.......................22
    
         Opinion of Financial Advisor to Key............................. 22
         Comparative Per Share Information............................... 27

 RISK FACTORS............................................................ 28
         Cautionary Statement for Purposes of the "Safe Harbor" 
           Provisions of the Private Securities Litigation 
           Reform Act of 1995............................................ 28
         Substantial Leverage and History of Losses...................... 29
         Cross-Guaranty and Cross-Collateralization of the
           New Indebtedness.............................................. 29
         Potential Obstacles to Integration of WellTech.................. 30
         Customer Response to the Transaction............................ 30
         WellTech Shareholder Ownership of Key Common Stock.............. 30
         Possible Volatility of Stock Price.............................. 30
         No Intention to Pay Dividends................................... 31
         Regulation and Competition in the Well 
           Servicing Industry............................................ 31
         International Investments....................................... 31
         Anti-Takeover Effect of Certain Provisions of 
          Key's Articles and By-Laws..................................... 31

BUSINESS AND PROPERTIES OF KEY .......................................... 32
         General  ....................................................... 32
         Recent Developments ............................................ 32
                  The Merger and the Interim Operations Agreement........ 32
                  New Indebtedness....................................... 33
                  Acquisition of Clint Hurt Assets....................... 34
                  Acquisition of WellTech West Texas..................... 34
         Business ....................................................... 34
                  Oil Field Services..................................... 34
                  Oil and Gas Production................................. 35
                  Oil and Gas Drilling................................... 37
         Competition and Other External Factors.......................... 38
         Property ....................................................... 38
         Employees....................................................... 39
         Regulation...................................................... 39
         Legal Proceedings............................................... 39

PRICE RANGE OF KEY COMMON STOCK.......................................... 40

BUSINESS AND PROPERTIES OF WELLTECH...................................... 41
         General  ....................................................... 41
         Recent Developments............................................. 42
                  The Merger and the Interim Operations Agreement........ 42
                  Dawson WellTech........................................ 42
         Domestic Operations............................................. 42
         Foreign Operations.............................................. 42
         Employees....................................................... 43
         Legal Proceedings............................................... 43
         Competition and Other External Factors.......................... 43
         Regulation...................................................... 44

                                      (v)

<PAGE>

MANAGEMENT OF KEY ....................................................... 45
         Executive Compensation.......................................... 46
                  Stock Grant Plan....................................... 47
                  1995 Stock Option Plan................................. 48
                  Outside Directors Stock Option Plan.................... 49
                  Yale E. Key Plan.  .................................... 49
                  Employment Agreements with Executive Officers.......... 49
                  Other Compensation..................................... 51
                  Compensation Committee Interlocks and Insider 
                    Participation........................................ 51
                  Compensation Committee Report.......................... 51
                  Shareholder Return Performance Presentation............ 53

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF KEY.................... 54

SELECTED FINANCIAL DATA OF KEY........................................... 55


MANAGEMENT'S DISCUSSION AND ANALYSIS OF

          RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF KEY........... 57
          
         
SELECTED FINANCIAL DATA OF WELLTECH...................................... 66


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF

          OPERATIONS AND FINANCIAL CONDITION OF WELLTECH................. 67
      

PROPOSALS TO BE VOTED  UPON
         AT THE KEY SPECIAL MEETING...................................... 73

ITEM 1.  THE MERGER...................................................... 73
         General Provisions.............................................. 73
         Share Exchange.................................................. 73
         Articles of Incorporation and By-Laws; Directors................ 75
         Effective Time of Merger........................................ 76
         Conditions Precedent............................................ 76
                  Conditions to the Obligations of Key and WellTech...... 76
         Conditions to Obligations of WellTech............................77
         Conditions to Obligations of Key................................ 78
         Certain Covenants............................................... 78
         Certain Rights with Respect to Key's Board of Directors......... 78
         Commission Filings.............................................. 79
         Registration Rights............................................. 79
         Acquisition Proposals........................................... 79
         Representations and Warranties.................................. 80
         Termination..................................................... 80
         Fees and Expenses .............................................. 82
         Regulatory and Other Third Party Approvals...................... 82
         Amendment; Waiver............................................... 82
         Ownership of Key Stock after the Merger......................... 82
         Description of Key Common Stock................................. 82
         Description of the New Key Warrants............................. 83
         Exercise of Warrant............................................. 83
         Dividends....................................................... 83

                                     (vi)

<PAGE>

         Adjustment of Exercise Price.................................... 83
         Voting and Information Rights................................... 84
         Notice of Certain Actions....................................... 84
         Transfers....................................................... 84
         Amendment.  .................................................... 84
         Comparison of Rights of Stockholders of Key and WellTech........ 85
         Required Vote for Certain Business Combinations................. 85
         Charter Amendments.............................................. 85
         By-Law Amendments............................................... 86
         Voting Rights................................................... 86
         Preemptive Rights............................................... 86
         Transferability of Shares....................................... 87
         Special Meetings................................................ 87
         Corporate Action Without A Meeting.............................. 87
         Dividends....................................................... 87
         Appraisal or Dissenters' Rights................................. 88
         Provisions Relating to Directors and Officers................... 88
         Removal of Directors............................................ 89
         Derivative Suits................................................ 89
         Anti-Takeover Provisions........................................ 90
         Rights Of Dissenting Stockholders Of WellTech................... 90
         Certain Federal Income Tax Considerations....................... 93
         Federal Income Tax Consequences of Certain Transactions......... 93
         Backup Withholding.............................................. 94


ITEM 2:  KEY CHARTER AMENDMENT........................................... 94

ITEM 3:  ELECTION OF BOARD OF DIRECTORS.................................. 96
         Committees of the Board......................................... 96
         Compensation of Directors....................................... 97
         Biographical Information.........................................97
         Compliance with Section 16(a) of the Securities Exchange 
            Act of 1934.................................................. 98


                                     (vii)

<PAGE>

ITEM 4:  ADOPTION AND APPROVAL OF THE KEY 1995 STOCK OPTION PLAN.........  98
         Adoption and Duration of the Key 1995 Stock Option Plan.........  98
         Administration................................................... 99
         Options. ........................................................ 99
         Eligibility.....................................................  99
         Method of Granting Options......................................  99
         Option Price....................................................  100
         Duration of Options.............................................  100
         Exercise of Options.............................................  100
         Restrictions on Exercise of Options.............................  101
         Transferability of Options......................................  101
         Effect of Certain Corporate Transactions on Options.............  101
         Other Terms and Conditions of Options...........................  102
         Termination of Employment.......................................  102
         Forfeiture as a Result of Termination for Cause.................  103
         Amendments of the 1995 Plan.....................................  103
         Tax Status of the 1995 Plan.....................................  103
         Tax Treatment of NSOs...........................................  103
         Tax Treatment of ISOs...........................................  104
         Alternative Minimum Tax Treatment of ISOs.......................  105
         Exercise by Delivery of Stock...................................  105
         Restrictions on Resale Imposed by Securities Law................  105

ITEM 5:  ADOPTION AND APPROVAL OF OUTSIDE DIRECTORS STOCK OPTION 
                  PLAN  .................................................  107
         Eligibility.....................................................  107
         Options  .......................................................  107
         Shares Available................................................  107
         Grants of Options...............................................  107
         Cessation of Service, Retirement or Death.......................  108
         Administration, Amendment and Termination of the
             Directors Plan..............................................  108
         Other Terms.....................................................  108

RESALES OF SECURITIES....................................................  109

MISCELLANEOUS ...........................................................  112

LEGAL MATTERS............................................................. 112

EXPERTS  ................................................................. 112

INDEX TO FINANCIAL STATEMENTS..................................................


ANNEX I - THE MERGER AGREEMENT.............................................AI-1

ANNEX II - OPINION OF SIMMONS & COMPANY INTERNATIONAL.....................AII-1

ANNEX III - RIGHTS OF DISSENTING SHAREHOLDERS............................AIII-1

                                      (viii)



<PAGE>




                              AVAILABLE INFORMATION

       Key  has  filed  with  the  Securities  and  Exchange   Commission   (the
"Commission")   a  registration   statement  on  Form  S-4  (the   "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Key Common  Stock and New Key  Warrants  (and the Key Common
Stock    issuable   upon   exercise    thereof)    described   in   this   Proxy
Statement--Prospectus.  This Proxy Statement--Prospectus does not contain all of
the  information  set  forth  in the  Registration  Statement  and the  exhibits
thereto.  Such  additional  information  can be obtained  from the  Commission's
principal  office  in  Washington,  D.C.  Statements  contained  in  this  Proxy
Statement--Prospectus  as to the  contents  of any  contract  or other  document
referred to herein are not necessarily complete,  and in each instance reference
is made to the copy of such  contract or other  document  filed as an exhibit to
the Registration Statement,  each such statement being qualified in all respects
by such reference.

       Key is also  subject  to  informational  requirements  of the  Securities
Exchange  Act of  1934,  as  amended  (the  "Exchange  Act")  and in  accordance
therewith  files  reports,  proxies and other  information  statements  with the
Commission.  The Registration  Statement and exhibits  thereto,  and reports and
other  information  filed  by Key can be  inspected  and  copied  at the  public
reference facilities maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices  located at  Northwestern  Atrium  Center,  Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511,  and Seven World Trade Center, 13th Floor,
New York, New York 10048.  Copies of such materials can be obtained by mail from
the  Public  Reference  Section of the  Commission  at 450 Fifth  Street,  N.W.,
Washington,  D.C. 20549, at prescribed  rates. Key Common Stock is listed on the
American  Stock  Exchange  and  its  reports  and  proxy  statements  and  other
information concerning Key can be inspected at such exchange.


                                      


<PAGE>


                                     SUMMARY

       The following is a summary of certain information contained in this Proxy
Statement--Prospectus.  This  summary  is not  intended  to be  complete  and is
qualified  in its entirety by reference  to the more  detailed  information  set
forth  elsewhere in this Proxy  Statement--Prospectus  and its  Annexes,  all of
which should be reviewed carefully.

The Companies

         Key. Key is a holding company with diversified energy operations in the
Permian  Basin area of West Texas and New Mexico.  Through  its three  operating
entities,  each of which is a wholly-  owned  subsidiary,  Key (a)  operates oil
field services activities  primarily in the Permian Basin area of West Texas for
both major and  independent  oil companies  (Yale E. Key, Inc. ("Yale E. Key")),
(b) owns and operates  interests in various oil and gas properties in West Texas
(Odessa Exploration Incorporated ("Odessa Exploration")), and (c) drills oil and
gas wells in West Texas (Key Energy  Drilling,  Inc.,  d/b/a Clint Hurt Drilling
("Clint Hurt")).


       Key was  incorporated  in the State of Maryland in 1977.  Key's principal
offices are located at 255 Livingston Avenue,  New Brunswick,  New Jersey 08901,
and its  telephone  number is (908) 247-  4822.  Unless  the  context  otherwise
indicates, the term "Key" refers to Key and its consolidated subsidiaries.


       WellTech. WellTech is engaged in the oil and gas well service business in
Oklahoma, Texas, Michigan,  Pennsylvania and West Virginia and has operations in
Argentina.  WellTech had been engaged in the well service business in West Texas
prior  to  selling  that  business  to Key in 1994  and in  Russia  prior to the
completion of its contract in late 1995.

       WellTech was incorporated in the State of Delaware in 1973. Its principal
executive  offices  are located at 3535  Briarpark,  Suite 200,  Houston,  Texas
77042, and its telephone number is (713) 975- 1600. Unless the context otherwise
indicates,  the  term  "WellTech"  refers  to  WellTech  and its  consoli  dated
subsidiaries.

The Special Meeting


       The Key Special  Meeting  will be held at the Hyatt  Regency,  Two Albany
Street, New Brunswick,  New Jersey, on March 26, 1996,  beginning at 11:00 a.m.,
local time. The purpose of the Key Special  Meeting is to consider and vote upon
the Key  Proposals.  (See "The Special  Meeting--Matters  to Be Discussed at the
Special  Meeting" and "Proposals to be Voted upon at the Key Special  Meeting".)
The  record  date for the Key  Special  Meeting  is March 1, 1995  (the  "Record
Date"). Accordingly, holders of record of Key Common Stock as of the Record Date
will be  entitled  to notice of, and to vote at, the Key  Special  Meeting.  The
presence  in person  or by proxy of  shares  representing  a  majority  of votes
entitled to be cast by holders of the Key Common  Stock as of the Record Date is
required  to  constitute  a quorum for the  transaction  of  business at the Key
Special Meeting.

                                      -2-

<PAGE>

       The Merger Agreement and each of the transactions  contemplated  thereby,
including  the  Merger,  and the Key  Charter  Amendment,  must be approved by a
majority  of the votes  entitled  to be cast by the  holders  of the Key  Common
Stock.  The proposal  relating to the election of the Board of Directors will be
determined  by a plurality  of the votes  entitled to the cast by the holders of
the Key Common Stock.  All other  proposals must be approved by the  affirmative
vote of a majority of the  outstanding  Key Common Stock present in person or by
proxy and entitled to vote at the meeting.


The Merger Agreement

       The Merger Agreement  provides that, subject to the adoption and approval
by  WellTech's  stockholders  and Key's  stockholders  of the Merger and certain
related transactions and the satisfaction or waiver of certain other conditions,
at the Effective  Time,  WellTech will be merged with and into Key, the separate
existence  of  WellTech  will  cease  and Key  will  continue  as the  surviving
corporation. As a result of the Merger, Key will acquire all of the business and
property of  WellTech  and assume all of its  obligations  and  liabilities.  No
change in the  outstanding  shares of Key Common Stock will occur and, except as
noted below with respect to an aggregate of 1,429,962 shares of Key Common Stock
owned by  WellTech,  each share of Key  Common  Stock  outstanding  prior to the
Merger will continue to be outstanding following the Merger.


         In the Merger,  holders of shares of WellTech Common Stock  outstanding
immediately prior to the Merger will receive an aggregate of 4,929,962 shares of
Key Common Stock and New Key Warrants to purchase an aggregate of 750,000 shares
of Key Common Stock at $6.75 per share. As part of the Merger,  1,429,962 of the
1,635,000  shares of Key Common  Stock  owned by  WellTech  (the  "Existing  Key
Shares")  and the  warrants to purchase an  aggregate  of 250,000  shares of Key
Common Stock at $5.00 per share (the "Existing Key Warrants")  will be canceled.
The  remaining  205,038  shares  of Key  Common  Stock  will be  distributed  to
directors  of  WellTech  prior to the  Merger.  Based on the  352,941  shares of
WellTech Common Stock  outstanding,  each share of WellTech Common Stock will be
converted  into  13.9682  shares of Key  Common  Stock and New Key  Warrants  to
purchase 2.125 shares of Key Common Stock.  This conversion price was determined
as a result of arm's  length  negotiation  between  the  parties to the  Merger,
taking into  account the  earnings  power of Key and  WellTech,  the savings and
efficiencies to be realized as a result of the Merger and the total valuation of
the two companies. The conversion ratios were then calculated mathematically.


       The Merger  Agreement  provides that no  fractional  shares of Key Common
Stock  will be  issued  in  connection  with  the  Merger.  In lieu of any  such
fractional  interests,  each holder of WellTech Common Stock entitled to receive
Key Common Stock and New Key Warrants pursuant to the Merger will be entitled to
receive  an amount in cash  (without  interest),  rounded to the  nearest  cent,
determined by  multiplying  the closing price of the Key Common Stock on the day
prior to the consummation of the Merger by the fractional  interest in the share
of Key Common  Stock to which such holder  would  otherwise  be entitled  (after
taking into  account all shares of Key Common  Stock being issued to such holder
pursuant to the Merger Agreement).

                                      -3-

<PAGE>


       The number of shares of Key Common Stock to be issued will be adjusted if
between  November 18, 1995 and the Effective Time the outstanding  shares of Key
Common  Stock or WellTech  Common  Stock will have been  further  changed into a
different  number  of  shares  or a  different  class,  by  reason  of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.  However,  the Merger Agreement  provides that,  without the
consent of the other  party,  neither Key nor  WellTech  may issue any shares of
capital stock,  convertible securities or rights, options or warrants to acquire
capital  stock  or  convertible  securities,  except,  in the  case of  Key,  in
connection  with its 1995 Stock Option Plan, its Outside  Directors Stock Option
Plan and the warrant to purchase  75,000  shares of Key Common  Stock  issued to
Key's senior lender in connection with the New Indebtedness.


The Key Charter Amendment

       The  Key  Charter   Amendment   restates   and  amends  the  Articles  of
Incorporation of Key in their entirety,  by, among other things,  increasing the
number of  authorized  shares of Key Common Stock from  10,000,000 to 25,000,000
and permitting the Board of Directors to classify and reclassify unissued shares
of  Common  Stock  into  preferred  or  preference   stock  subject  to  certain
limitations.

Security Ownership of Key Management


       As of January 1, 1996,  directors and executive officers of Key and their
respective  affiliates  may be deemed  to be the  beneficial  owners of  809,185
shares of the  outstanding  Key Common Stock which  constitute  in the aggregate
approximately 11.2% of the total votes entitled to be cast by the holders of Key
Common Stock. It is anticipated that each of such directors,  executive officers
and their  respective  affiliates will vote their shares in favor of each of the
Key Proposals. (See "The Special Meeting--Ownership of Key Securities.")


Merger Related Arrangements

       Prior  to and  as a  condition  to  the  Merger,  each  of the  following
transactions has been consummated.  (See "Business and Properties of Key--Recent
Developments" and "Business  Properties of WellTech--Recent  Developments" for a
more complete description of these transactions.)


       o Interim Operations Agreement.  Simultaneously with the execution of the
Merger Agreement,  Key and WellTech entered into an Interim Operations Agreement
pursuant  to which Key has  agreed to manage  and  operate,  subject  to certain
limitations,  and is currently operating and managing, all of WellTech's oil and
gas well  servicing  and other  businesses.  (See  "Business  and  Properties of
Key--Recent Development--The Merger and the Interim Operations Agreement".)

       o New  Indebtedness.  Key and  WellTech  have each  entered into a credit
agreement with the same lender to refinance certain existing indebtedness of Key
and WellTech  (collectively,  the "New  Indebtedness").  The aggregate principal
amount  available  under Key's new credit  agreement will be not less than $17.5

                                      -4-

<PAGE>

million (subject to certain advance formulas) and the aggregate principal amount
available  under  WellTech's  new credit  agreement  will be not less than $17.5
million  (subject to certain advance  formulas).  The New Indebtedness is in the
form of a three-year  revolving  credit  arrangement and a three-year term loan.
The initial three-year term is renewable for successive  two-year terms,  unless
either the lender or the  borrower  gives  notice of  termination.  After giving
effect to the  repayment  of all then  existing  debt of Key (other than that of
Odessa  Exploration) and WellTech (other than that of certain affiliates) out of
the  proceeds of such  borrowing,  Key has  available to it  approximately  $5.6
million of borrowing capacity, depending, in part, on the amount of its accounts
receivable  and  machinery  and  equipment  and  WellTech  has  available  to it
approximately $1.4 million of borrowing capacity,  depending,  in part, upon the
same factors.  The New  Indebtedness  is cross-  guaranteed by Key, Yale E. Key,
Clint Hurt and WellTech and  cross-collateralized  by their  respective  assets.
Upon consummation of the Merger,  the New Indebtedness will be the obligation of
Key, as survivor of the Merger,  and Key's  subsidiaries,  Yale E. Key and Clint
Hurt. The cross-guaranty and  cross-collateralization  arrangement could, if the
Merger is not  consummated,  create  contingent  liabilities for each of Key and
WellTech.  The  failure to  consummate  the Merger on or prior to April 30, 1996
will, at the option of the lender,  constitute an event of default under the New
Indebtedness  if WellTech  fails to refinance its credit  agreement on or before
July 31,  1996 or Key fails to  continue  to operate  WellTech  pursuant  to the
Interim  Operations  Agreement  until  such  refinancing.   (See  "Business  and
Properties of Key - Recent Developments - New Indebtedness".)

       o Dawson WellTech  Arrangements.  Dawson WellTech,  L.C., a Texas limited
liability company, was owned 61% by Dawson Production  Services,  Inc. (formerly
Dawson Well Servicing, Inc. ("Dawson")), and 39% by WellTech. Effective November
1, 1995,  WellTech  exchanged  its 39%  interest in Dawson  WellTech,  L.C.  for
309,186  shares of Dawson,  and effective  December 31, 1995 Dawson  WellTech,
L.C. was merged into Dawson.  WellTech has  directed  Dawson to  distribute  the
stock of  Dawson to the  WellTech  shareholders  and  directors  . In  addition,
WellTech  has agreed to  perform  consulting  services  for Dawson in return for
11.7% of Dawson's consolidated pre-tax earnings.  This consulting agreement will
terminate on the earliest of (i) March 31, 1996, (ii) the date Dawson closes and
funds an initial public offering of its securities, or (iii) the date upon which
Dawson shall engage in a business  combination or sell  substantially all of its
assets to another  party.  (See  "Business and  Properties  of  WellTech--Recent
Developments--Dawson WellTech.")


Delivery of Key Securities

       A description of the method of delivery of shares of Key Common Stock and
New Key Warrants to be issued to the WellTech stockholders in the Merger will be
furnished, along with the appropriate transmittal forms, prior to or immediately
following the consummation of the Merger.  WELLTECH STOCKHOLDERS SHOULD NOT SEND
IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.

Ownership of Key Common Stock after the Merger

         Based  solely  on  the   securities   to  be  issued  to  the  WellTech
stockholders  pursuant  to  the  Merger,  such  stockholders  would  own  in the
aggregate  approximately  47.3% of the  outstanding  shares of Key Common  Stock

                                      -5-

<PAGE>

before  giving  effect to the  exercise of any of the New Key  Warrants  (or any
other outstanding options or warrants).  Assuming the exercise in their entirety
of the New Key Warrants (but not of any other options or warrants), such holders
would own in the aggregate  approximately 50.9% of the outstanding shares of Key
Common Stock.  Such ownership  percentages do not include  205,038 shares of Key
Common  Stock  currently  owned by WellTech to be  distributed  to  directors of
WellTech prior to the  consummation  of the Merger or shares owned by affiliates
of certain stockholders of WellTech. (See "Ownership of WellTech Securities" and
"Proposals  to  be  Voted  upon  at  the  Key  Special   Meeting--Item   1:  The
Merger--Ownership of Key Stock after the Merger".)

   
Recommendation of the Key Board of Directors
    

       The Board of  Directors of Key has  unanimously  approved and adopted the
Merger Agreement, each of the transactions contemplated thereby relating to Key,
including  the Merger,  and the Key Charter  Amendment,  and believes  that such
actions are  advisable  and in the best  interests of Key and its  stockholders.
Accordingly,  the Key Board of Directors  recommends that Key stockholders  vote
for  each  of  these  proposals.  For a  detailed  description  of  the  factors
considered  by the Key Board of  Directors  and the reasons for its approval and
adoption of the Merger Agreement and the Key Charter Amendment,  and each of the
transactions   contemplated   thereby,   including  the  Merger,   see  "Certain
Considerations  Relating  to the  Transactions--Reasons  for  the  Transactions;
Recommendation of Key Board of Directors".

   
Advantages and Disadvantages of the Merger

         In reaching its determination  with respect to the Merger,  the members
of the Key  Board  considered  the  advice  and  opinion  of  Simmons  & Company
International  ("Simmons"),  its financial advisor. See "Certain  Considerations
Relating to the Transaction--Opinion of Financial Advisor to Key." The Key Board
also  considered  a number of other  positive and  negative  factors,  including
without  limitation,  the following:  (i) the Key Board's  familiarity  with and
review  of Key's  and  WellTech's  business,  operations,  financial  condition,
earnings and prospects; (ii) the business,  operations,  earnings and financial
condition of WellTech and the enhanced  opportunities for growth that the Merger
makes possible; (iii) a variety of factors affecting and relating to the overall
strategic  focus of Key,  including  without  limitation  growth in  assets  and
earnings;  (iv) other acquisition  opportunities available to Key; (v) the terms
of the Merger Agreement;  and (vi) the anticipated cost savings and efficiencies
available  as a result of the  Merger.  The Key  Board  reached  its  conclusion
notwithstanding certain negative aspects of the Merger, including (i) WellTech's
five-year history of operating losses;  (ii) the  discontinuation  of WellTech's
Russian  operations;  (iii)  the  risks and  uncertainties  associated  with the
integration of the WellTech  operations with those of Key and (iv) the fact that
Key has incurred  substantial  expense and devoted a  significant  amount of the
time  and  resources,  and  will  continue  to do so,  in  connection  with  the
consummation of the Merger. See "Risk Factors."
    

                                      -6-

<PAGE>

Opinion of Financial Advisor



       Simmons rendered to the Board of Directors of Key its oral opinion (which
was  subsequently  confirmed in writing) to the effect that,  as of November 18,
1995, the Merger was fair, from a financial  point of view, to the  stockholders
of Key. The full text of Simmons'  opinion dated  December 29, 1995,  which sets
forth  assumptions  made,  matters  considered  and  attendant  limitations,  is
attached  hereto  as Annex  II and is  incorporated  herein  by  reference.  Key
stockholders  are urged to,  and  should,  read such  opinion  carefully  in its
entirety. (See "Certain  Considerations Relating to the  Transaction--Opinion of
Financial Advisor to Key".)


Effective Time of Merger

       The Merger  will become  effective  upon the filing of a  certificate  of
merger  with the  Secretary  of State of the State of Delaware  and  articles of
merger with the Department of Assessments  and Taxation of the State of Maryland
in accordance  with  applicable law, or at such later date as the certificate of
merger and articles of merger may specify.

Conditions to the Merger

       Consummation  of the  Merger  and each of the  transactions  contemplated
thereby is  conditioned  on, among other things,  (i) approval of the Merger and
the Key Charter  Amendment  by the holders of Key Common Stock and the Merger by
the  holders  of  WellTech  Common  Stock,   (ii)  the  incurrence  of  the  New
Indebtedness,  (iii) no  injunction  or order or  certain  other  actions of any
governmental  authority which prohibits or makes illegal any of the transactions
contemplated  by the Merger  Agreement  or which  could  have an Adverse  Effect
(which,  as defined in the Merger  Agreement,  contemplates  a material  loss of
benefits) on Key, assuming consummation of the Merger, (iv) receipt, in the case
of Key,  of an  opinion  of its tax  counsel  as to the  tax-free  nature of the
Merger,  and (v) the  performance in all material  respects by each party to the
Merger Agreement of its respective obligations thereunder. (See "Proposals to be
Voted upon at the Key Special Meeting--Item 1: The Merger".)

Acquisition Proposals

         The  Merger  Agreement  prohibits  WellTech,  Key and their  respective
subsidiaries  and their  respective  officers,  directors,  representatives  and
agents  from,  directly  or  indirectly,  knowingly  soliciting,  initiating  or
participating  in any way in proposals,  discussions  or  negotiations  with, or
knowingly  providing any confidential  information to, any person (other than to
the other or any  affiliate  or  associate  of the  other  and their  respective
directors,  officers,  employees,  representatives  and agents)  concerning  any
merger, consolidation,  share exchange or similar transaction involving WellTech
or Key,  respectively.  However, each of WellTech's and Key's Board of Directors
may make such disclosure to its stockholders as, in the judgment of its Board of
Directors  with the written  advice of outside  counsel,  may be required  under
applicable law. Each of WellTech and Key has agreed to notify the other promptly
if any such  proposal  or  inquiry  is  received  by,  any such  information  is
requested  from,  or any such  negotiations  or  discussions  are  sought  to be

                                      -7-


<PAGE>

initiated with, WellTech or Key and to furnish the other with a copy of any such
proposal.  (See "Termination of the Merger Agreement" below for information with
respect  to  payments  required  to be made by  WellTech  or Key in the event it
terminates  the Merger  Agreement  and  consummates  an "Other  Transaction"  as
defined in the Merger Agreement within nine months of such termination.)

Registration Rights

   
        Simultaneously with the execution of the Merger Agreement, Key agreed to
enter into a registration rights agreement with certain stockholders of WellTech
relating to the Key Common Stock and New Key Warrants  (and the shares  issuable
upon exercise thereof) to be issued pursuant to the Merger.  This Prospectus has
been prepared for use by certain of such stockholders of WellTech for the resale
of the Key Common Stock and Warrants. See "Resales of Securities."
    

Termination of the Merger Agreement


       The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Key and WellTech, or by either Key or WellTech
individually under certain specified  circumstances.  If the Merger Agreement is
terminated  by either party  because the Board of  Directors of the  terminating
party shall have withdrawn, modified or changed its recommendation so that it is
no longer in favor of the Merger or shall have recommended an Other Transaction,
and if the terminating party consummates an Other Transaction within nine months
of such  termination,  it will be required  to pay to the other party  $500,000.
(See  "Proposals  to be  Voted  upon at the Key  Special  Meeting--Item  1:  The
Merger--Termination.")


Corporate Governance


       All  of the  officers  and  Directors  of Key  immediately  prior  to the
Effective  Time will  continue  as  officers  and,  except for D. Kirk  Edwards,
Directors after the Effective Time. Pursuant to the Merger Agreement two persons
nominated by WellTech to the Board of Directors of Key (the "WellTech Nominees")
shall have been elected, and it is anticipated that certain officers of WellTech
will  become  officers  of  Key  or  its  subsidiaries.  If  the  Merger  is not
consummated,  it is  anticipated  that Mr.  Edwards will  continue to serve as a
Director and that the Board of  Directors  will consist of five persons and will
not include any WellTech  nominees.  (See "Proposals to be Voted upon at the Key
Special  Meeting--Item  3: Election of Board of  Directors.")  Under an existing
agreement  between  WellTech  and Key which  would  survive if the Merger is not
consummated, WellTech has the right to designate one Director to the Key Board.

Certain Federal Income Tax Considerations; Tax Opinion

         Consummation of the Merger is  conditioned,  in the case of Key, on its
receipt of a favorable  tax opinion from Sullivan & Worcester  LLP,  special tax
counsel  to Key,  to the  effect  that the  Merger  will  qualify  as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code").
(See "Proposals to be Voted upon at the Key Special Meeting - Item 1: The Merger
- -Certain Federal Income Tax Considerations .")


                                      -8-


<PAGE>

Accounting Treatment


       The Merger will be accounted for using the purchase method of accounting.
Key will be treated as the acquiror of the WellTech  business  and, as a result,
the assets of WellTech  will be recorded at their  estimated  fair  values.  See
Key's Pro Forma Combined  Condensed  Balance Sheet as of December 31, 1995 for a
description of the adjustments  expected to be recorded to WellTech's  financial
statements.


Rights of Dissenting Stockholders

         Key.  Holders  of Key Common  Stock who object to or vote their  shares
against the Merger do not have appraisal rights pursuant to the Maryland General
Corporation Law ("MGCL" or "Maryland Law").


       WellTech.  Pursuant  to  Delaware  General  Corporation  Law  ("DGCL"  or
"Delaware  Law"), any holder of WellTech Common Stock (i) who files a demand for
appraisal in writing prior to the vote taken at the WellTech Special Meeting and
(ii) whose  shares are not voted in favor of the  Merger,  will be  entitled  to
appraisal rights under Section 262 of the DGCL ("Section 262").  (See "Proposals
to be Voted  upon at the Key  Special  Meeting - Item 1: The  Merger - Rights of
Dissenting Stockholders of WellTech.")


Comparison of Rights of Stockholders


       The rights of holders of WellTech  Common Stock currently are governed by
Delaware Law and the  Certificate  of  Incorporation,  as amended (the "WellTech
Charter")  and  By-Laws  (the   "WellTech   By-Laws")  of  WellTech.   Upon  the
consummation  of the  Merger,  WellTech  stockholders  who do not  exercise  and
perfect their appraisal  rights will become Key  stockholders,  and their rights
will be governed by the MGCL and the Key Articles of  Incorporation,  as amended
(the "Key Articles") and the Key By-Laws,  as amended (the "Key By-Laws").  (See
"Proposals  to be Voted upon at the Key  Special  Meeting - Item 1: The Merger -
Comparison of Rights of Stockholders of WellTech and Key.")



                                      -9-


<PAGE>

Market Prices and Dividend Data

         Key. The following table sets forth for the periods  indicated the high
and low closing prices of Key's Common Stock on the American Stock Exchange,  as
derived from published sources.

         Fiscal Year and Quarter                High             Low

         1996:

         First Quarter                          5 1/2            4 7/8
         Second Quarter                         6 1/2            4 15/16
         Third Quarter                          6 7/8            5 7/8
         (through   February 26, 1996)


         1995:
         First Quarter                          5 1/2            5
         Second Quarter                         5 1/2            4 3/4
         Third Quarter                          4 5/8            4 1/4
         Fourth Quarter                         5 1/2            4 3/4


The closing price of the Key Common Stock on August 30, 1995,  immediately prior
to the  announcement of the Merger was 4 15/16,  and on February 26, 1996 was 6.
(See "Price Range of Key Common Stock" for additional  information  with respect
to the prices of the Key Common  Stock in earlier  years.) The New Key  Warrants
are a new issue and there  exists no trading  market for them.  Key has not paid
cash dividends on the Key Common Stock and has no present  intention of so doing
after the Merger. The payment of future dividends, if any, will be determined by
the Key Board of  Directors  in light of  conditions  then  existing,  including
earnings,  financial  condition  and  requirements,  restrictions  in  financing
agreements, business conditions and other factors. The New Indebtedness contains
provisions  that prohibit  cash  dividends  and stock  repurchases  by Key. (See
"Business and Properties of Key- Recent Developments- New Indebtedness.")

       As of February 26, 1996 there were  6,913,513  shares of Key Common Stock
outstanding, held by approximately 541 holders of record. After giving effect to
the Merger there will be 10,413,513 shares of Key Common Stock outstanding.

       WellTech.  No  established  public trading market exists for the WellTech
Common Stock,  and accordingly no high and low bid information or quotations are
available  with respect to the WellTech  Common Stock.  As of February 28, 1996,
there were 24 holders of record of  WellTech  Common  Stock,  holding a total of
352,941 shares. The most recent transaction  involving WellTech Common Stock was
the transfer of 1,152 shares from a single  holder to designees of an insider at
$55.50 per share.  WellTech has not  declared  any cash  dividends on its common
stock for the past two years.



                                       -10-


<PAGE>


<TABLE>
<CAPTION>
                                           Key Summary Consolidated Historical Information
                                         (In thousands, except per share amounts and ratios)


                                          Six Months        Year        Year   Seven Months  Five Months  Year     Year
                                            Ended           Ended        Ended     Ended        Ended     Ended     Ended
                                         December 31,      June 30,     June 30,  June 30,     Nov. 30,  June 30,  June 30, 
                                        1995     1994        1995        1994       1993       1992(3)    1992(3)   1991(3)
                                         (unaudited)

<S>                                 <C>        <C>        <C>       <C>         <C>       <C>         <C>         <C>

Statement of Operations Data:
Revenues:                            $ 24,792   $ 21,962   $ 44,689   $ 34,621   $ 14,256   $ 10,433   $ 21,535    $ 24,223
Costs and expenses:                    22,568     20,475     41,361     32,326     13,132     10,033     21,452      22,507
Income from continuing
  operations before reorganization
  items, income taxes and
  extraordinary item                    2,224      1,487      3,328      2,295      1,124        400         83       1,716
Reorganization items                     --         --         --         --         --        1,718       --          --
Income from continuing operations
  before income taxes and
  extraordinary item                    2,224      1,487      3,328      2,295      1,124      2,118         83       1,716
Income tax expense (benefit)              730        476      1,150        950        413       --         (474)        705
Income before extraordinary item        1,494      1,011      2,178      1,345        711      2,118        557       1,011
Extraordinary gain on discharge of
  pre-petition liabilities               --         --         --         --         --        2,868       --          --
Net income (loss)                       1,494      1,011      2,178      1,345        711      4,986       (596)     (5,571)
Net Income (loss) per share from
  continuing operations before
  reorganization items income
  taxes and extraordinary item       $   0.32       0.23   $   0.50   $   0.44   $   0.21   $   0.02   $   0.02    $   0.05
Net income (loss) per share:
  Primary                            $   0.22   $   0.16   $   0.33   $   0.26   $   0.14   $   0.28   $  (0.04)   $  (0.44)
  Assuming full dilution             $   0.22   $   0.16   $   0.33   $   0.25   $   0.14   $   0.03   $  (0.02)   $  (0.14)

</TABLE>


                                  As of  December 31   As of June 30,
                                    1995     1994          1995

                                     (unaudited)
Balance Sheet Data:

Total assets:                       $47,511  $39,379     $45,243
Long-term debt, including current
  portion                            16,827   14,291      15,949
Stockholders' equity                 21,605   18,861      20,111
   

<TABLE>
<CAPTION>

                                          Six Months        Year        Year   Seven Months  Five Months  Year       Year
                                            Ended           Ended        Ended     Ended        Ended     Ended      Ended
                                         December 31,      June 30,     June 30,  June 30,     Nov. 30,  June 30,   June 30,  
                                       1995     1994         1995        1994       1993         1992      1992       1991
                                     
Financial Ratios and Other Data:     (unaudited)
<S>                               <C>       <C>         <C>         <C>         <C>         <C>         <C>         <C>

EBITDA(1)                          $ 4,895   $ 3,359     $ 7,544     $ 4,496     $ 1,806     $ 1,369     $ 2,539     $ 3,977
EBITDA as a % of revenues(1)          19.7%     15.3%       16.9%       13.0%       12.7%       13.1%       11.8%       16.4%
Total debt as a % of EBITDA(1)         n/a       n/a       211.4%      255.8%        n/a         n/a       504.8%      304.9%
EBITDA to fixed charges(11)(2)          4.2       3.6         3.6         3.3         4.0         2.3         1.6         2.6
Net cash (used) provided by:
  Operating activities               3,046       121       3,258       1,842        (123)        441       1,109         756
  Investing activities              (4,244)   (3,117)     (7,154)     (5,608)     (1,284)       (537)     (1,689)     (2,319)
  Financing activities                 878     2,790       3,998       4,316         (73)      1,991         501       1,678
Capital expenditures                 4,244     3,177       5,805       5,648       1,033         537       1,302       1,987
Book value per share               $  3.12   $  2.73     $  2.91     $  1.76     $  1.42         n/a     $ (0.26)    $ (0.27)

</TABLE>


                                      -11-

<PAGE>

- ---------------------------------------------
n/a - Not applicable to interim periods.
                                   (continued)

          (1)  Income before extraordinary item, reorganization items, interest,
               taxes,  depreciation  and  amortization.  EBITDA  should  not  be
               considered  as an  alternative  to operating  or net income,  (as
               determined  in  accordance  with GAAP),  as an indicator of Key's
               performance  or as an  alternative  to cash flows from  operating
               activities  (as  determined  in  accordance  with  GAAP)  or as a
               measure of liquidity.  (See "Management's Discussion and Analysis
               of Financial Condition and Results of Operations of Key .")

          (2)  Fixed  charges are the sum of (i) interest  costs,  (ii) interest
               component of rent expenses,  and (iii)  amortization  of deferred
               financing costs.

          (3)  Earnings  per common  share for the five  months  ended  November
               30,1992 and prior period,  reflect the previous capital structure
               of Key Energy Group,  Inc.  (previously  "National  Environmental
               Group,  Inc.") prior to the 1992  Reorganization Plan and are not
               comparable   to   subsequent   periods.   See  Note  3  to  Key's
               Consolidated  Financial  Statements  for the years ended June 30,
               1995 and 1994 and for the seven  months  ended June 30,  1993 and
               five months ended November 30, 1992.


                                       -12-


<PAGE>

<TABLE>
<CAPTION>



                                                  WellTech Summary Financial Data
                                        (In thousands, except per share amounts and ratios)

                                         Nine Months Ended
                                           September 30,                          Year Ended December 31,
                                          ---------------           ---------------------------------------------------
                                          1995       1994           1994        1993        1992        1991        1990
                                             (unaudited)
Statement of Operations Data:
<S>                                     <C>         <C>         <C>        <C>          <C>         <C>         <C>

Revenues                                 $ 52,180    $ 34,974    $ 49,043    $ 56,157    $ 58,680    $ 70,463    $ 70,070
Operating costs and expenses               50,970      35,997      50,299      58,137      61,290      75,944      71,324
Operating income (loss)                     1,210      (1,023)     (1,256)     (1,980)     (2,610)     (5,481)     (1,254)
Other income (expense), net                  (976)      2,003       1,045      (3,227)     (5,210)     (6,443)     (4,662)
Income (loss) before income taxes             234         980        (211)     (5,207)     (7,820)    (11,924)     (5,916)
Net income (loss)                             234         980        (211)     (5,207)     (7,820)    (10,335)     (5,916)
Net income (loss) per share(1)           $   0.66    $   2.78     $ (0.61)   $ (16.73)   $ (25.12)   $  (3.33)   $  (2.50)
</TABLE>


                                             As of                 As of
                                       September 30, 1995    December 31, 1994

                                          (unaudited)
      Balance Sheet Data:
  Total assets                             $ 68,998            $      58,176
  Debt, including current portion            16,752                    7,418
  Stockholders' equity (deficit)             36,882                   36,189



<TABLE>
<CAPTION>
Financial Ratios and Other Data:
<S>                                     <C>                     <C>          <C>         <C>          <C>       <C>
EBITDA(2)                                $  4,172                $  3,299     $  1,106     (1,229)     (3,825)   $  1,378
EBITDA as % of revenues(2)                   8.0%                    6.7%         2.0%       -2.1%       -5.4%       2.0%
Total debt as % of EBITDA(2)               401.5%                  224.9%      3010.2%    -2705.0%     -783.3%   2,226.0%
EBITDA to fixed charges(2)(3)              223.6%                  263.7%        27.8%      -31.2%      -78.9%      33.1%
Net cash (used) provided by:
       Operating activities                (1,803)                  4,631          933        (824)      1,439     (3,017)
       Financing activities                 5,691                   9,429         (619)      2,040         642      7,657
       Investing activities                (3,703)                (14,125)          (1)     (3,277)     (6,502)    (1,867)
Capital expenditures                        5,103                  13,738        1,748       1,979       6,445      3,061
Book value per share                       104.50                  104.15        (8.57)       8.16        3.33       3.63
</TABLE>
 

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

 (1)Reflects ten for one reverse stock split in 1992.

 (2)Net  income  loss  before   interest,   income   taxes,   depreciation   and
    amortization. EBITDA should not be considered as an alternative to operating
    or net income,  (as determined in accordance  with GAAP), as an indicator of
    Key's  performance  or  as an  alternative  to  cash  flows  from  operating
    activities  (as  determined  in  accordance  with  GAAP) or as a measure  of
    liquidity. (See "Management's Discussion and Analysis of Financial Condition
    and Results of Operations of WellTech.")

 (3)Fixed charges are the sum of (i) interest costs, (ii) interest  component
    of rent expenses, and (iii) amortization of deferred financing costs.



                                       -13-


<PAGE>
                      Key Selected Pro Forma Financial Data

         The following  selected pro forma  financial data has been derived from
the  unaudited  pro forma  condensed  financial  statements  included  elsewhere
herein.  The  information  for the year ended June 30, 1995 combines the audited
results of Key for its fiscal year then ended, and the unaudited results for the
twelve  month period  ended June 30, 1995 for  WellTech,  and for the six months
ended  December 31, 1995 the results of Key for that period and for WellTech the
six months  ended  November  30,  1995.  The  balance  sheet data  reflects  the
combination  of  balance  sheet  data  for  Key as of  December  31,  1995  with
comparable  information  for  WellTech as of November  30,  1995.  The pro forma
results  are not  necessarily  indicative  of the  combined  results  of  future
operations and do not reflect any synergies that may result from the Merger.



<TABLE>
<CAPTION>


                                                         Six Months Ended        Year Ended
                                                        December 31, 1995      June 30, 1995
Income Statement Data:                                  (in thousands except per share data)
<S>                                                     <C>                   <C>   

  Revenues...........................................         $55,821          $ 119,645
  Operating costs and expenses.......................          51,907            112,402
  Income before income taxes.........................           3,914              7,243
  Income tax expense.................................           1,312              2,368
  Net income ........................................           2,602              4,875
  Net income per share...............................            0.25               0.48

                                                          At  December 31, 1995
Balance Sheet Data:                                           (in thousands)
 Total assets........................................           $103,281
 Long-term debt, including current portion...........             35,379
 Stockholders' equity................................             42,855


                                                          Six Months Ended         Year Ended

                                                          December 31, 1995     June 30, 1995
Financial Ratios and Other Data:                              (in thousands except ratios)
         EBITDA(1)........................................      8,575             16,167
         EBITDA as a % of revenues(1).....................       15.4%             13.5%
         Total debt as a % of EBITDA(1)...................       N/A(3)           225.1%
         EBITDA to fixed charges(1)(2)....................        4.2               4.1

</TABLE>


Future Debt Service Requirements (4)

                           Year Ended                   Principal
                            June 30,                    & Interest
                                                      (in thousands)

                             1996                        $ 5,615
                             1997                          5,826
                             1998                         11,293
                             1999                          4,271
                             2000                          4,055    

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

  (1) Net income before interest, taxes,  depreciation and amortization.  EBITDA
   should not be considered as an  alternative  to operating or net income,  (as
   determined in accordance with GAAP), as an indicator of Key's  performance or
   as an alternative  to cash flows from operating  activities (as determined in
   accordance  with  GAAP),  or as a measure of  liquidity.  (See  "Management's
   Discussion and Analysis of Results of Operations  and Financial  Condition of
   Key .")


  (2) Fixed charges are the sum of (i) interest costs,  (ii) interest  component
   of rent expenses, and (iii) amortization of deferred financing costs.

  (3) Not applicable to interim periods.


  (4)Calcuated based on interest rates in effect on outstanding long-term
    debt at December 31, 1995.


                                       -14-


<PAGE>



                               THE SPECIAL MEETING

Matters to Be Discussed at the Special Meeting

         This Proxy  Statement--Prospectus  is being furnished by Key to holders
of shares of Key Common Stock in  connection  with the  solicitation  of proxies
from such stockholders for use at the Key Special Meeting.

         At the  Key  Special  Meeting  or  any  adjournments  or  postponements
thereof,  holders  of shares of Key Common  Stock  will be asked to approve  and
adopt the Key  Proposals,  which  include (i) the  approval  and adoption of the
Merger Agreement and each of the transactions  contemplated  thereby relating to
Key,  including  the merger of WellTech with and into Key; (ii) the approval and
adoption of the Key Charter Amendment which,  among other things,  increases the
total  number of  authorized  shares of Key  Common  Stock  from  10,000,000  to
25,000,000;  (iii)  the  election  of the  Board of  Directors  of six  persons,
including,  assuming the Merger is consummated,  two nominees of WellTech, or if
the Merger is not  consummated,  the  election of the Board of Directors of five
persons not including  any nominees of WellTech;  (iv) the adoption and approval
of the Key 1995 Stock Option Plan  covering an aggregate of 1,150,000  shares of
Key Common Stock; and (v) the adoption and approval of the Key Outside Directors
Stock Option Plan  covering an aggregate of 300,000  shares of Key Common Stock.
Such  stockholders  will also  consider and vote upon such other  matters as may
properly be brought before the Key Special Meeting.

         THE BOARD OF  DIRECTORS  OF KEY HAS  UNANIMOUSLY  APPROVED  THE  MERGER
AGREEMENT AND THE KEY CHARTER  AMENDMENT AND  RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER  AGREEMENT AND THE KEY CHARTER  AMENDMENT AND FOR EACH OF
THE OTHER PROPOSALS BEING SUBMITTED AT THE KEY SPECIAL MEETING.

Record Dates; Stock Entitled to Vote; Quorum


         The Record Date for the determination of shares of those holders of Key
Common Stock  entitled to notice of, and to vote at, the Key Special  Meeting is
March 1, 1996. Only holders of record of shares of Key Common Stock at the close
of  business  on the Record  Date will be entitled to notice of, and to vote at,
the Key Special Meeting or any adjournments or postponements  thereof. As of the
Record Date,  there were 6,913,513  shares of Key Common Stock  outstanding  and
entitled to vote, held by approximately 541 holders of record.


         The presence in person or by proxy of shares representing a majority of
votes  (3,456,756  votes)  entitled  to be cast by holders  of Key Common  Stock
issued and outstanding and entitled to vote as of the Record Date is required to
constitute  a quorum  for the  transaction  of  business  at any  meeting of Key
stockholders. Abstentions and broker non-votes are included in the determination
of the number of shares of Key Common Stock present at the Key Special Meeting.

                                      -15-

<PAGE>

Required Vote


         The affirmative  vote of a majority of the votes  (3,456,756  votes) of
holders of the  outstanding  shares of the Key Common  Stock is the only vote of
Key  stockholders  required to approve the Merger and the Key Charter  Amendment
under the MGCL, the Key Articles and the Key By-Laws.  The proposal  relating to
the election of the Board of Directors  will be determined by a plurality of the
votes  entitled  to be cast by the  holders of the Key Common  Stock.  All other
proposals  must  be  approved  by the  affirmative  vote  of a  majority  of the
outstanding  Key Common Stock present in person or by proxy and entitled to vote
at the meeting. Abstentions and broker non- votes are not counted in tabulations
of the total votes cast on proposals presented to stockholders. When the vote of
a majority  of  outstanding  shares is  required  for  approval  of a  proposal,
abstentions and broker non-votes have the effect of a vote against the proposal.



         Each Key Proposal will be voted upon separately by the Key stockholders
entitled  to vote at the Key  Special  Meeting;  however,  failure of either the
Merger  Agreement  or the  Key  Charter  Amendment  to be  approved  by the  Key
stockholders  will  result in the  abandonment  by Key of the Merger and, if the
Merger is not approved,  the two WellTech  nominees to the Board of Directors of
Key will  not be  elected  as  Directors.  Under  such  circumstances,  however,
WellTech would have the right,  under an existing agreement with Key which would
remain in effect, to designate one member of the Key Board of Directors.

Solicitation and Voting of Proxies

         Stockholders  of record on the Record  Date are  entitled to cast their
votes, in person or by properly executed proxy, at the Key Special Meeting.  All
shares  represented  at the Key  Special  Meeting by properly  executed  proxies
received prior to or at the Key Special Meeting and not properly revoked will be
voted at the Key Special Meeting in accordance with the  instructions  indicated
in such proxies.  If no instructions  are indicated,  such proxies will be voted
FOR  approval of each of the Key  Proposals.  The Board of Directors of Key does
not know of any matters,  other than the matters  described in the Key Notice of
Special  Meeting  attached to this Proxy  Statement--Prospectus,  that will come
before the Key Special Meeting.

         If a quorum  is not  present  at the time the Key  Special  Meeting  is
convened, or if for any other reason Key believes that additional time should be
allowed for the solicitation of proxies or for the satisfaction of conditions to
the Merger or the  transactions  contemplated  thereby,  Key may adjourn the Key
Special  Meeting  with a vote of the holders of a majority  of the voting  power
represented by the Key Common Stock present at such meeting.  If Key proposes to
adjourn the Key Special  Meeting,  the persons named in the enclosed  proxy card
will vote all  shares  for which  they have  voting  authority  in favor of such
adjournment.

                                      -16-

<PAGE>


         Any proxy  given  pursuant to this  solicitation  may be revoked by the
person  giving it any time before it is voted in the following  manner.  Proxies
may be revoked by (i) filing  with the  Secretary  of Key,  at or before the Key
Special  Meeting,  a written notice of revocation  bearing a date later than the
date of the proxy,  (ii) duly executing a subsequent  proxy relating to the same
shares and  delivering  it to the  Secretary of Key at or before the Key Special
Meeting,  or (iii)  attending  the Key  Special  Meeting  and  voting  in person
(although  attendance  at the Key  Special  Meeting  will  not in and of  itself
constitute  revocation of a proxy).  Any written notice revoking a proxy and any
subsequent  proxy  should be sent to Key  Energy  Group,  Inc.,  255  Livingston
Avenue, New Brunswick,  New Jersey 08901, Attention:  Francis D. John, President
and Chief Executive Officer.


         Proxies  are  being  solicited  by and on  behalf  of the Key  Board of
Directors.  All expenses of this  solicitation,  including the cost of preparing
and mailing this Proxy Statement--Prospectus,  will be borne by Key. In addition
to  solicitation  by use of the mails,  proxies may be solicited  by  directors,
officers and employees of Key in person or by telephone, telegram or other means
of   communication.   Such  directors,   officers  and  employees  will  not  be
additionally  compensated  but may be reimbursed for  out-of-pocket  expenses in
connection with such  solicitation.  Arrangements  will be made with custodians,
nominees and  fiduciaries  for  forwarding  of proxy  solicitation  materials to
beneficial  owners of Key Common Stock held of record by such  persons,  and Key
may reimburse such custodians,  nominees and fiduciaries for reasonable expenses
incurred in connection therewith.

Ownership of Key Securities


         The following  table  provides  information  as of January 1, 1996 with
respect to the shares of Key Common Stock  beneficially owned by (i) each person
known by Key to own more than 5% of the outstanding Key Common Stock;  (ii) each
director of Key and each nominee to the Board of Directors; (iii) each executive
officer required to be identified in the Summary  Compensation Table of Key; and
(iv) by all  directors  and  executive  officers  of Key as a group.  The  table
includes shares which may be acquired upon exercise of options granted under the
Key 1995 Stock  Option Plan and the Key Outside  Directors  Stock  Option  Plan,
subject to shareholder  approval and excludes shares granted under the Key Stock
Grant Plan, which has been terminated  subject to approval of the Key 1995 Stock
Option Plan. (See "Management of  Key--Executive  Compensation.")  The number of
shares  beneficially  owned by each director or executive  officer is determined
according to rules of the  Commission,  and the  information is not  necessarily
indicative of  beneficial  ownership  for any other  purpose.  Under such rules,
beneficial  ownership  includes any shares as to which the  individual or entity
has sole or shared voting power or investment  power. As a consequence,  several
persons may be deemed to be the "beneficial  owners" of the same shares.  Except
as noted below, each holder has sole voting and investment power with respect to
all shares of Key Common  Stock  listed as owned by such  person or entity.  The
address of each of Messrs. John, Greenfield,  Manly,  Wolkowitz,  Edwards, Evatt
and Laidley is c/o The Company, 255 Livingston Avenue, New Brunswick, New Jersey
08901.


                                       -17-


<PAGE>


<TABLE>
<CAPTION>


                                                                             Number of Shares         As Adjusted
                               Number of Shares         Percentage of          Beneficially          Percentage of
                                of Key Common         Outstanding Shares     Owned (Adjusted         Shares of Key

Name and Address              Stock Beneficially        of Key Common           to Reflect               Common
of Beneficial Owner               Owned (1)               Stock (2)             the Merger)             Stock (3)
- -------------------              -----------             -----------           -------------            ---------
<S>                              <C>                      <C>                   <C>                     <C>  

Francis D. John (4)               141,266                   2.0%                  141,266                 1.4%
Van D. Greenfield (5)              69,884                   1.0%                   69,884                  *
William Manly (6)                  25,326                    *                     25,326                  *
Morton Wolkowitz (7)              308,959                   4.4%                  308,959                 3.0%
D. Kirk Edwards (8)               175,000                   2.5%                  175,000                 1.7%
Danny R. Evatt (9)                 12,500                    *                     12,500                  *
C. Ron Laidley (10)                76,250                   1.1%                   76,250                  *
Kevin P. Collins (11)                 --                      --                   55,072                  *
W. Phillip Marcum (12)                --                      --                   55,072                  *
Kenneth C. Hill                       --                      --                       --                 --
Kenneth V. Huseman                    --                      --                       --                 --
Directors and
Executive Officers as a
group (7 persons; 11              809,185                    11.2%                919,329                8.6%
persons, as adjusted)
Morton Cohn (13)                  626,422                     9.1%                626,422                6.0%
FMR Corp. (14)                    611,000                     8.8%                611,000                5.9%
WellTech, Inc. (15)             1,885,000                    27.3%                     --                 --

</TABLE>


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

*        Less than 1%

        (1) Under the rules for determining beneficial ownership, each director,
            director  nominee and officer is deemed to own that number of shares
            of Key Common Stock which he or she may purchase or acquire pursuant
            to a warrant, option or convertible security within 60 days as if he
            or she had  exercised  the  warrant or option or had  converted  the
            convertible security.  The number of shares of Key Common Stock that
            each person is so deemed to own goes into both the numerator and the
            denominator in calculating that person's percentage  ownership.  The
            footnotes indicate the number of shares of Key Common Stock, if any,
            that are deemed to be owned by each person pursuant to this rule.


        (2) Based  on  6,913,513  shares  of  outstanding  Key  Common  Stock at
            February 26, 1996.

        (3) Based on 10,413,513  shares of outstanding  Key Common Stock,  after
            giving  effect to the Merger  assuming  no  exercise  of any New Key
            Warrants or any other options or warrants.


        (4) The number  shown under the Key Common  Stock  column  includes  (i)
            2,371 shares owned directly by Mr. John,  (ii) 50,045 shares held by
            Mr.  John as  custodian  for his two  children  as to which Mr. John
            disclaims any  beneficial  interest,  and (iii) 1,350 shares held by
            Mr.  John's  wife,  as to which Mr. John  disclaims  any  beneficial
            interest. Includes 87,500 shares purchasable at $5.00 per share upon
            exercise  of an option  granted  on July 6, 1995;  does not  include
            412,500 shares purchasable upon exercise of such option.

                                      -18-

<PAGE>

        (5) Includes 50,000 shares purchasable at $5.00 per share pursuant to an
            option granted on July 6, 1995. Mr. Greenfield  disclaims beneficial
            ownership of shares owned by the Green-Cohn  Group, Inc. of which he
            is President. See Note (13) below.

        (6) Includes 25,000 shares purchasable at $5.00 per share pursuant to an
            option granted on July 6, 1995.

        (7) Includes 50,000 shares purchasable at $5.00 per share pursuant to an
            option granted on July 6, 1995.

        (8) Includes 25,000 shares purchasable at $5.00 per share pursuant to an
            option  granted  on July 6, 1995;  does not  include  75,000  shares
            purchasable upon exercise of such option.

        (9) Includes 12,500 shares purchasable at $5.00 per share pursuant to an
            option  granted  on July 6, 1995;  does not  include  37,500  shares
            purchasable upon exercise of such option.

        (10)Includes  31,250 shares  purchasable  at $5.00 per share pursuant to
            an option  granted on July 6, 1995;  does not include  93,750 shares
            purchasable upon exercise of such option.

        (11)Prior to  consummation  of the  Merger,  Mr.  Collins is expected to
            receive 55,072 shares of Key Common Stock from WellTech  pursuant to
            an agreement with WellTech to compensate certain of its directors.

        (12)Prior to  consummation  of the  Merger,  Mr.  Marcum is  expected to
            receive 55,072 shares of Key Common Stock from WellTech  pursuant to
            an agreement with WellTech to compensate certain of its directors.

        (13)The number  shown under the Key Common  Stock  column  includes  (i)
            167,364  shares owned  directly by Mr. Cohn, and (ii) 459,058 shares
            owned indirectly through his ownership of Green-Cohn Group, Inc. Mr.
            Cohn's address is c/o Green-Cohn Group, Inc., 45 Broadway, New York,
            New York 10006.


        (14)The number of shares  shown  under the Key Common  Stock  column are
            beneficially   owned   indirectly  by  FMR  Corp.,  a  Massachusetts
            corporation ("FMR") with an address at 82 Devonshire Street, Boston,
            MA 02109. Such shares are owned directly by portfolios of investment
            companies  registered under Section 8 of the Investment  Company Act
            of 1940,  as amended,  which are advised by  Fidelity  Management  &
            Research Company, a wholly-owned subsidiary of FMR and an investment
            adviser registered under Section 203 of the Investment  Advisers Act
            of 1940.  Number of shares  owned by FMR does not include any shares
            of Key Common  Stock which FMR might be deemed to  beneficially  own
            indirectly by virtue of its ownership of WellTech Common Stock. (See
            "Ownership of WellTech Securities .")


        (15)The number  shown under the Key Common  Stock  column  includes  (i)
            1,635,000  shares owned directly by WellTech,  Inc. and (ii) 250,000
            shares  subject  to  purchase  upon  exercise  of the  Existing  Key
            Warrants.

                                      -19-

<PAGE>


Ownership of WellTech Securities


         The following table sets forth information as of February 28, 1996 with
respect to the shares of WellTech  Common Stock  beneficially  owned by (i) each
person  known by WellTech to own  beneficially  more than 5% of WellTech  Common
Stock;  (ii) each  director of WellTech;  and (iii) all  directors and executive
officers of WellTech as a group. The number of shares beneficially owned by each
director  or  executive  officer  is  determined   according  to  rules  of  the
Commission,  and the  information  is not  necessarily  indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the  individual or entity has sole or shared voting power
or investment  power. As a consequence,  several persons may be deemed to be the
"beneficial  owners" of the same shares.  Except as noted below, each holder has
sole voting and investment power with respect to shares of WellTech Common Stock
listed as owned by such person or entity.



<TABLE>
<CAPTION>



                                         Number of
                                          Shares                                  Number of Shares
                                          WellTech                                  of Key Common        As Adjusted
                                          Common            Percentage of        Stock Beneficially     Percentage of
Name and Address                           Stock         Outstanding Shares        Owned (Adjusted      Shares of Key
of Beneficial                          Beneficially          of WellTech             to Reflect             Common
     Owner                                 Owned          Common Stock (1)           the Merger)           Stock (2)
- -------------------------------       ---------------    -----------------         ----------------     ---------------
<S>                                    <C>                  <C>                    <C>                     <C>  

FMR Corp. (3)                           220,966               62.6%                 4,167,046               38.3%

Neptune Management Partners,
  L.P., as Agent and Nominee(4)          47,102               13.3%                   758,022                7.2%

Roughneck Partners, L.P.(5)              18,467                5.2%                   297,193                2.8%

CCF/WellTech, L.P.(6)                    28,240                8.0%                   454,472                4.3%

W. Phillip Marcum(7)                         --                --                      55,072                 *

Kevin Collins(7)                             --                --                      55,072                 *


Francisco Garcia (7) (8)                     --                --


George Konomos (9)                           --                --


Douglas B. Thompson (7) (10)              3,982                *                       76,105                 *


Directors as a group(5 persons)           3,982                *

</TABLE>

- -------------------------
*        Less than 1%


        (1) Based on 352,941  shares of  outstanding  WellTech  Common  Stock at
            February 28, 1996.


                                      -20-

<PAGE>

        (2) Based on 10,413,510  shares of outstanding  Key Common Stock,  after
            giving  effect to the Merger,  assuming  the exercise of the New Key
            Warrants and no exercise of any other options or warrants. Under the
            rules for determining beneficial ownership, each director,  director
            nominee  and  officer is deemed to own that  number of shares of Key
            Common Stock which he or she may  purchase or acquire  pursuant to a
            warrant,  option or convertible  security within 60 days as if he or
            she had  exercised  the  warrant  or  option  or had  converted  the
            convertible security.  The number of shares of Key Common Stock that
            each person is so deemed to own goes into both the numerator and the
            denominator in calculating that person's percentage  ownership.  The
            footnotes indicate the number of shares of Key Common Stock, if any,
            that are deemed to be owned by each person pursuant to this rule.


        (3) Such  shares are  beneficially  owned  indirectly  by FMR  Corp.,  a
            Massachusetts  corporation  ("FMR") with an address at 82 Devonshire
            Street, Boston,  Massachusetts 02109. Such shares are owned directly
            by (a) a portfolio of an investment company registered under Section
            8 of the  Investment  Company  Act of  1940,  as  amended,  which is
            advised by  Fidelity  Management  &  Research  Company  ("FMRC"),  a
            wholly-owned  subsidiary of FMR and an investment adviser registered
            under Section 203 of the  Investment  Advisers Act of 1940,  and (b)
            two private investment accounts advised by Fidelity Management Trust
            Company  ("FMTC"),  a bank as  defined  in  Section  3(a)(6)  of the
            Securities  Exchange Act of 1934 and a  wholly-owned  subsidiary  of
            FMR.  Includes  469,551  shares  of Key  Common  Stock  that  may be
            acquired upon the exercise of New Key Warrants and 611,000 shares of
            Key Common  Stock  owned  beneficially  by FMR  Corp.,  prior to the
            Merger. See Note (14) under "Ownership of Key Securities."


        (4) Includes 100,091 shares of Key Common Stock that maybe acquired upon
            the exercise of New Key Warrants.

        (5) Includes  39,242 shares of Key Common Stock that maybe acquired upon
            the exercise of New Key Warrants.

        (6) Includes  60,010 shares of Key Common Stock that maybe acquired upon
            the exercise of New Key Warrants.


        (7) As  adjusted  column  includes  shares  of Key  Common  Stock  to be
            distributed by WellTech to the director  before  consummation of the
            Merger and, in the case of Mr. Thompson,  (a) includes 11,105 shares
            of Key Common Stock held by Mr. Thompson in a retirement account and
            65,000 shares of Key Common Stock issuable upon  consummation of the
            Merger and (b) does not include  13,550  shares of Key Common  Stock
            held in a retirement account by Mr. Thompson's wife, as to which Mr.
            Thompson disclaims beneficial ownership.


        (8) Mr. Garcia disclaims  beneficial  ownership of WellTech Common Stock
            owned by Neptune Management Partners, L.P. ("Neptune"), of which Mr.
            Garcia is a manager.  Does not include  18,689  shares of Key Common
            Stock  to  be   distributed   by  WellTech  to  Mr.   Garcia  before
            consummation  of the Merger,  which shares shall be  contributed  to
            Neptune.

        (9) Mr. Konomos disclaims  beneficial ownership of WellTech Common Stock
            owned by  CCF/WellTech,  L.P.  ("CCFW")  of which Mr.  Konomos  is a
            manager.  Does not include  11,205  shares of Key Common Stock to be
            distributed by WellTech to Mr. Konomos  before  consummation  of the
            Merger, which shares shall be contributed to CCFW.


        (10)Mr. Thompson is a 100% owner of Jupiter  Management Co.  ("Jupiter")
            and he is deemed to beneficially own 3,982 shares of WellTech Common
            Stock owned by Jupiter.  Does not include  1,152  shares of WellTech
            Common  Stock  held  in  a  retirement  account  maintained  by  Mr.
            Thompson's  mother as to which  Mr.  Thompson  disclaims  beneficial
            ownership .


                                       -21-


<PAGE>


               CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTION

Reasons for the Transaction; Recommendation of Key Board of Directors

         At the meeting of the Board of  Directors  of Key held on November  18,
1995, the Key Board received a presentation by members of Key management and its
legal advisors  regarding,  and reviewed the terms of, the Merger  Agreement and
the transactions  contemplated thereby. By unanimous vote of Directors,  the Key
Board  determined  that  the  Merger  is  advisable,  fair  to,  and in the best
interests of, Key and its stockholders,  approved the Merger and the Key Charter
Amendment,  and resolved to recommend that stockholders of Key vote FOR approval
and adoption of the Merger Agreement and each of the  transactions  contemplated
thereby and FOR approval and adoption of the Key Charter Amendment.

   
Advantages and Disadvantages of the Merger

         In reaching its determination  with respect to the Merger,  the members
of the Key Board  considered  the advice and opinion of Simmons,  its  financial
advisor. See "Certain  Considerations  Relating to the  Transaction--Opinion  of
Financial  Advisor  to Key." The Key  Board  also  considered  a number of other
positive and negative factors,  including without limitation, the following: (i)
the Key Board's  familiarity  with and review of Key's and WellTech's  business,
operations,  financial  condition,  earnings and  prospects;  (ii) the business,
operations,  earnings  and  financial  condition  of WellTech  and the  enhanced
opportunities  for growth  that the Merger  makes  possible;  (iii) a variety of
factors affecting and relating to the overall strategic focus of Key,  including
without  limitation  growth in  assets  and  earnings;  (iv)  other  acquisition
opportunities available to Key; (v) the terms of the Merger Agreement;  and (vi)
the  anticipated  cost  savings and  efficiencies  available  as a result of the
Merger.  The Key Board reached its conclusion  notwithstanding  certain negative
aspects of the Merger,  including (i) WellTech's  five-year history of operating
losses;  (ii) the  discontinuation of WellTech's Russian  operations;  (iii) the
risks  and  uncertainties  associated  with  the  integration  of  the  WellTech
operations with those of Key and (iv) the fact that Key has incurred substantial
expense and devoted a  significant  amount of the time and  resources,  and will
continue to do so, in connection with the consummation of the Merger.  See "Risk
Factors."
    
   
         In view of the wide variety of factors  considered  by the Key Board of
Directors,  the Key Board did not find it  practicable  to quantify or otherwise
attempt to assign relative weights to the specific factors  considered in making
its determination.  Consequently, the Key Board did not quantify the assumptions
and results of its  analyses in reaching  its  determination  that the Merger is
advisable, fair to, and in the best interests of, Key and its stockholders.
    

         THE  BOARD  OF  DIRECTORS  OF  KEY  UNANIMOUSLY   RECOMMENDS  THAT  KEY
STOCKHOLDERS  VOTE FOR  APPROVAL AND  ADOPTION OF THE MERGER  AGREEMENT  AND FOR
APPROVAL AND ADOPTION OF THE KEY CHARTER AMENDMENT.

Opinion of Financial Advisor to Key

         Key retained  Simmons to act as its  financial  advisor and to render a
fairness  opinion in  connection  with the  Merger.  Simmons  rendered  its oral
opinion (which was subsequently  confirmed in writing) to the Board of Directors
of Key to the effect that,  as of November 18, 1995,  the Merger was fair from a
financial point of view to the holders of Key Common Stock.

                                      -22-


<PAGE>

         Simmons  is a  specialized  energy - related  investment  banking  firm
engaged in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions,  the management and underwriting of
sales of equity  and debt to the  public and  private  placements  of equity and
debt. Key selected  Simmons to act as its financial  advisor in connection  with
the Merger on the basis of  Simmons'  expertise  in the oil and gas  service and
equipment industry.


         The full text of Simmons'  opinion dated  December 29, 1995 is attached
as Annex II to this Proxy Statement-Prospectus.  Holders of Key Common Stock are
urged to read such opinion  carefully in its  entirety in  conjunction  with the
Proxy  Statement-Prospectus  for assumptions made, matters considered and limits
of the review by Simmons.  Simmons'  opinion  addresses only the fairness of the
Merger from a financial  point of view and does not constitute a  recommendation
to any holder of Key Common Stock as to how such stockholder  should vote on the
Merger.   The   summary   of   Simmons'   opinion   set  forth  in  this   Proxy
Statement-Prospectus  is qualified in its entirety by reference to the full text
of such opinion.


         In connection  with the rendering of its opinion,  Simmons has reviewed
and analyzed, among other things, the following: (i) the Merger Agreement;  (ii)
the financial  statements and other  information  concerning Key,  including the
Annual  Reports  on Form  10-K of Key for each of the  years  in the  three-year
period ended June 30, 1995 and the Quarterly  Report on form 10-Q of Key for the
quarter ended September 30, 1995;  (iii) certain  near-term  forecasts and other
internal information, primarily financial in nature, concerning the business and
operations  of Key  furnished  by Key for  purposes of Simmons'  analysis;  (iv)
certain  publicly  available  information  concerning  the  trading  of, and the
trading  market  for,  Key Common  Stock;  (v)  certain  information  concerning
WellTech,  including the audited  financial  statements for each of the years in
the three-year  period ended December 31, 1994 and certain  unaudited  financial
statements,  prepared by  WellTech,  for interim  periods  during the year ended
December  31, 1994 and the ten months  ended  October  31,  1995;  (vi)  certain
near-term  forecasts  and other  internal  information,  primarily  financial in
nature, concerning the business and operations of WellTech furnished by WellTech
for purposes of Simmons' analysis;  (vii) certain publicly available information
with respect to certain other  companies that Simmons  believes to be comparable
to Key or WellTech and the trading markets for certain of such other  companies'
securities;   (viii)  certain  publicly  available  information  concerning  the
estimate of the future operating performance of Key and the comparable companies
prepared by industry experts unaffiliated with either Key or WellTech;  and (ix)
certain  publicly  available  information  concerning  the  nature  and terms of
certain other transactions considered relevant to the inquiry.  Simmons has also
met with  certain  officers  and  employees  of Key and  WellTech to discuss the
foregoing, as well as other matters believed relevant to the inquiry.

         In  arriving  at its  opinion,  Simmons has assumed and relied upon the
accuracy and completeness of all of the financial and other information provided
or publicly available,  including, without limitation,  information with respect
to the amount and timing of cost savings  pursuant to the Merger provided by Key
and  WellTech,  and  has  not  attempted  independently  to  verify  any of such
information.  Simmons  has not  conducted  a physical  inspection  of any of the
assets,  properties or  facilities  of Key or WellTech,  nor has Simmons made or
obtained  any  independent  evaluations  or  appraisals  of any of such  assets,
properties or facilities.

                                      -23-

<PAGE>


         In  conducting  its  analysis  and  arriving at its  opinion  expressed
herein,  Simmons has  considered  such  financial and other factors as it deemed
appropriate under the circumstances including,  among others, the following: (i)
the historical and current  financial  position and results of Key and WellTech;
(ii) the business  prospects of Key and WellTech;  (iii)  estimates of pro forma
combination  benefits pursuant to the Merger prepared by Key and WellTech,  (iv)
the  historical  and  current  market  for Key  Common  Stock and for the equity
securities  of certain  other  companies  believed  to be  comparable  to Key or
WellTech;  (iv) the  respective  contributions  in terms  of  various  financial
measures of Key and WellTech to the combined company, and the relative ownership
of Key after the proposed transaction by the current holders of Key Common Stock
and WellTech Common Stock;  (v) the pro forma effect of the transaction on Key's
capitalization ratios,  earnings per share and cash flow per share; and (vi) the
nature and terms of certain other acquisition transactions that Simmons believes
to be relevant.  Simmons has also taken into account its  assessment  of general
economic,  market and financial conditions and its experience in connection with
similar  transactions  and securities'  valuation  generally.  Simmons'  opinion
necessarily is based upon  conditions as they exist and can be evaluated on, and
on the information made available at, the date of such opinion.  Simmons did not
express  any  opinion  as to the price or range or prices at which the shares of
Key Common Stock will trade subsequent to the consummation of the Merger.


         In connection with its fairness opinion, Simmons performed a variety of
financial  analyses with respect to Key and WellTech,  including those described
below:

         Analysis  of Selected  Publicly-Traded  Comparable  Companies.  Simmons
reviewed  certain  publicly  available  financial,  operating  and stock  market
information   as  of   November   17,  1995  for  Key,   WellTech   and  certain
publicly-traded companies (the "Comparable Companies") that Simmons considers to
be  comparable  to  Key or  WellTech.  For  the  Comparable  Companies,  Simmons
calculated,  among other  things,  multiples  of market  stock price to trailing
twelve months' ("TTM")  earnings per share and cash flow per share and multiples
of Adjusted  Market Value (total  market  capitalization  less cash in excess of
five percent of revenues) to TTM  revenues,  TTM earnings  before  depreciation,
depletion and amortization, interest and taxes ("EBDIT") and Adjusted Book Value
(total book capitalization less cash in excess of five percent of revenues). All
multiples  calculated  for  WellTech  were  based on the most  recent  available
results of  WellTech  for the TTM  period,  including  certain  adjustments  for
non-recurring  and/or  extraordinary items, and exclude the results attributable
to WellTech's  Russian  operations.  In addition,  the multiples  related to the
acquisition  of  WellTech  were  based on an  acquisition  price  (the  "Implied
Consideration")  calculated  using  the net  number of  additional  shares to be
issued and Key's  closing  share price at  November  17, 1995 ($5.00 per share),
plus the estimated  value of the New Key Warrants,  less the estimated  value of
the Existing Key  Warrants,  plus assumed debt to be assumed.  Unless  otherwise
noted,  WellTech's  results were not restated to reflect any benefit  associated
with the cost savings estimated by the managements of Key and WellTech.

                                      -24-


<PAGE>


   
         An analysis of the  multiples of market stock price to TTM earnings per
share and cash flow per share yielded  averages for the Comparable  Companies of
15.9x and 5.7x, respectively. This compared to 10.2x TTM cash flow per share for
WellTech  at the  Implied  Consideration  (5.9x  for  WellTech  at  the  Implied
Consideration including 50% of cost savings estimated by Key and WellTech).  TTM
earnings per share multiples  related to the acquisition  were not calculated as
WellTech  generated negative earnings for the most recent available twelve month
period.  An analysis of the  multiples of Adjusted  Market Value to TTM revenues
yielded an average of 0.8x for the  Comparable  Companies,  compared to 0.6x for
WellTech at the Impled  Consideration.  An analysis of the multiples of Adjusted
Market  Value  to TTM  EBDIT  yielded  an  average  of 6.4x  for the  Comparable
Companies,  compared to 9.9x for WellTech at the Implied Consideration (6.2x for
WellTech at the Implied Consideration including 50% of cost savings estimated by
Key and  WellTech).  An analysis of the  multiples  of Adjusted  Market Value to
Adjusted  Book Value  yielded an average of 1.3x for the  Comparable  Companies,
compared to 0.9x for WellTech at the Implied Consideration.
    

         Analysis of Selected Comparable Transactions.  Simmons reviewed several
transactions  involving the acquisition of oil service and equipment  companies.
Simmons calculated  multiples of acquisition price, or transaction value, to the
revenues  and EBDIT  generated  in the 12  months  prior to  acquisition.  These
calculations  yielded  a range of  acquisition  price to EBDIT of 4.7x to 31.5x,
with an  average  excluding  the  high and low  value  of  6.2x,  and a range of
acquisition price to revenues of 0.4x to 1.6x with an average excluding the high
and low value of 1.0x. The average transaction EBDIT multiple of 6.2x (excluding
the high and low value)  compared to a 9.9x multiple for WellTech at the Implied
Consideration (6.2x for WellTech at the Implied  Consideration  including 50% of
cost savings estimated by Key and WellTech), and the average transaction revenue
multiple 1.0x (excluding the high and low value) compares to a 0.6x multiple for
WellTech at the Implied Consideration.

         Relative   Contribution   Analysis.   Simmons   analyzed  the  relative
contributions of Key and WellTech to, among other things, the combined pro forma
historical  revenues,  EBDIT, net income,  cash flow,  total assets,  total book
capitalization  and book  equity  value.  Simmons  also  analyzed  the  relative
contributions  of Key and  WellTech to total  market  capitalization  and market
equity value based on the Implied  Consideration.  The analysis  assumes certain
pro forma adjustments for recent acquisitions and non-recurring or extraordinary
items in the historical financial  statements of Key and WellTech,  and, in some
cases, a certain level of cost savings  estimated by Key and WellTech.  Based on
the  most  recent   available  data  for  the  companies,   Simmons   calculated
contributions  by WellTech of  approximately  53% of combined  revenues,  34% of
combined  EBDIT,  28% of combined cash flow,  5% of combined net income,  53% of
combined  total assets,  49% of combined  total book  capitalization  and 51% of
combined book equity value.

         Based  on the  Implied  Consideration,  Simmons  calculated  pro  forma
contributions  by  WellTech  of  approximately  40%  of  combined  total  market
capitalization and 35% of combined market equity value.

                                      -25-

<PAGE>

         Discounted Cash Flow Analysis.  Simmons  performed  various  discounted
cash flow  calculations  of  WellTech.  Net  present  values  were  based on the
projected unlevered cash flows for five years and employed an estimated terminal
value  derived as a multiple of six times EBDIT.  Cost savings  estimated by Key
and WellTech were not incorporated into the analysis.

         Simmons  discounted  to present value  projected  future cash flows and
terminal values of WellTech by applying after-tax discount rates ranging from 12
to 15 percent.  Based on these calculations,  Simmons derived net present values
of WellTech of approximately $34 to $38 million.

         The foregoing summary does not purport to be a complete  description of
the analyses  performed by Simmons.  The  preparation of financial  analyses and
fairness  opinion is a complex  process and is not  necessarily  susceptible  to
partial analysis or summary description. Simmons believes that its analyses (and
the summary set forth above) must be considered as a whole,  and that  selecting
portions of such  analyses  and of the factors  considered  by Simmons,  without
considering all of such analyses and factors, could create an incomplete view of
the process  underlying its opinion.  Simmons made no attempt to assign specific
weights to particular analyses. Any estimates contained in Simmons' analyses are
not necessarily  indicative of actual values, which may be significantly more or
less favorable than as set forth herein.  Estimates of values of companies do no
purport to be appraisals or  necessarily  reflect the prices at which  companies
may  actually  be  sold.  Because  such  estimates  are  inherently  subject  to
uncertainty, Simmons does not assume any responsibility for their accuracy.

   
         Simmons  confirmed,  as of March 4, 1996 its opinion dated December 29,
1995. In rendering  such  confirmations,  Simmons  performs  certain  procedures
related to its opinion and reviews  the  assumptions  on which such  opinion was
based  and  the  factors  considered  in  connection   therewith.   Simmons  has
considered,  and will consider,  among other things, Key's and WellTech's recent
financial performance and recent market conditions and developments based on the
foregoing.
    

         As compensation  for rendering its fairness opinion and other financial
advisory services,  Key has agreed to pay Simmons as its financial advisor total
fees  of  approximately  $440,000,  of  which  approximately  $405,000  will  be
outstanding and payable upon consummation of the Merger.  Key has also agreed to
reimburse   Simmons  for  certain  expenses  incurred  in  connection  with  its
engagement and to indemnify  Simmons and certain related persons against certain
liabilities and expenses relating to or arising out of its engagement, including
certain  liabilities  under  federal  securities  laws.  There were no  material
relationships  between Key or WellTech and Simmons at its financial  advisor and
no  compensation  was paid,  except as noted above, by Key to Simmons during the
past two years.  Simmons did not negotiate  the terms of the Merger  between Key
and WellTech.


                                      -26-


<PAGE>



Comparative Per Share Information

         The  comparative  historical per share  information  presented below is
derived from the  historical  financial  statements of each  company.  Pro forma
information   for  Key  is  derived  from  the  unaudited  pro  forma   combined
information.  Equivalent pro forma information for WellTech is the pro forma Key
amount multiplied by the effective proposed exchange ratio (13.9682:1).


<TABLE>
<CAPTION>

                                                                     Key                           WellTech
                                                                                                         Equivalent
                                                      Historical         Pro forma        Historical        Pro forma
Year ended June 30, 1995
<S>                                                    <C>               <C>              <C>                <C>   

         Dividends                                        --                --                --               --
         Income from continuing

               operations                                $0.33            $0.48            $(0.78)           $6.70
Six months ended   December 31, 1995
         Dividends                                        --                --                --               --
         Income from continuing                          $0.22            $0.25             $1.02            $3.49

               operations
Book value per share

         As of June 30, 1995                             $2.91             $3.97          $103.49            $55.45
         As of   December 31, 1995                       $3.12             $4.12          $104.50            $57.55

</TABLE>


                                      -27-


<PAGE>
                                  RISK FACTORS


Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities  Litigation  Reform Act of 1995. Key desires to take advantage of the
"safe harbor"  provisions  of the Private  Securities  Litigation  Reform Act of
1995. Statements made herein and in documents  incorporated herein by reference,
other than statements of historical fact, are "forward-looking  statements." Key
wishes to caution  prospective  purchasers that the following important factors,
among  others,  may have  affected  and could in the future  affect Key's actual
results and could cause Key's actual  results for  subsequent  periods to differ
materially from those expressed in any forward- looking  statement made by or on
behalf of Key:

   -Occurrences  affecting  the need for,  timing  and  extent of Key's  capital
    expenditures  or affecting  Key's  ability to obtain funds from  operations,
    borrowings or investments to finance needed capital expenditures;

    -Key's  ability  successfully  to identify  and finance oil and gas property
     acquisitions  and its  ability  successfully  to operate  existing  and any
     subsequently acquired properties;

    -The  availability  of  adequate  funds under the New  Indebtedness  to fund
     operations for the foreseeable future, or if such funds are inadequate, the
     ability  of Key  to  obtain  new or  additional  financing  or to  generate
     adequate funds from operations;

    -Key's ability to enter into and retain  profitable oil field  servicing and
     drilling  contracts  with  customers  which make timely  payments  for such
     services;

    -The demand for oil field services,  drilling  services and for oil and gas,
     and the supply of and demand for drilling and servicing  rigs, all of which
     are subject to fluctuations which could adversely affect Key's operations;

    -The  amount  and  rate  of  growth  in  Key's  general  and  administrative
     expenses,   including,  but  not  limited  to,  the  costs  of  integrating
     WellTech's operations into Key assuming consummation of the Merger;

    -The effect of changes in regulations,  including environmental  regulations
     with which Key must comply, the cost of such compliance and the potentially
     material adverse effects if Key were not in substantial  compliance  either
     currently or in the future;

    -Key's  relationship  with its employees and the potential adverse effect if
     labor disputes or grievances were to occur;

    -The  costs  and  other  effects  of  legal  and  administrative  cases  and
     proceedings and/or settlements,  including but not limited to environmental
     and workers compensation cases;

    -The effect of changes in  accounting  policies and  practices or of changes
     in Key's  organization,  compensation  and benefit plans,  or of changes in
     Key's material agreements or understandings with third parties.

         In addition,  prospective purchasers should consider the following risk
factors:

                                      -28-

<PAGE>


         Substantial  Leverage  and  History of Losses.  Key,  as the  surviving
company,  will be highly  leveraged due to the substantial  indebtedness Key and
WellTech have incurred over time primarily to finance  acquisitions  and capital
expenditures,  expand operations and, in the case of WellTech, finance operating
losses.  As of December 31, 1995,  Key's aggregate debt was  approximately  $17
million.  After  giving  effect to the  Merger and the New  Indebtedness,  as of
December 31, 1995,  Key's  aggregate  debt on a pro forma basis would have been
approximately  $35  million.  Key  may  incur  additional  indebtedness  to make
investments,   acquisitions  and  capital   expenditures  in  the  future.  (See
"Management's  Discussion  and Analysis of Results of  Operations  and Financial
Condition of  Key--Liquidity  and Capital  Resources.")  Key anticipates that it
will continue to have substantial indebtedness for the foreseeable future.

         WellTech  has had  operating  losses  in each of the five  years  ended
December 31, 1994 but had operating  income for the nine months ended  September
30, 1995. There can be no assurance that WellTech will not have operating losses
for the year ended December 31, 1995 or, if the Merger is consummated,  that the
operations of Key subsequent to the Merger will not be adversely affected by the
same factors that contributed to WellTech's operating losses. (See "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  of
WellTech .")

         In recent years,  cash  generated  from Key's  operating  activities in
conjunction  with borrowings and proceeds from private equity issuances has been
sufficient  to meet its debt  service and  acquisition,  investment  and capital
expenditure  requirements.  Key  believes  that cash  generated  from  operating
activities,  together with borrowings from existing and future credit facilities
and proceeds from future equity issuances, will be sufficient to meet its future
debt service requirements and to make anticipated acquisitions,  investments and
capital expenditures.  However, there can be no assurance in this regard or that
the terms  available  for such  financing  would be favorable to Key or that any
such future  equity  issuance  would be at a price per share equal to or greater
than the current market price. Any such future equity financing would dilute the
interests of current  stockholders  of Key. (See  "Management's  Discussion  and
Analysis of Results of Operations and Financial  Condition of Key--Liquidity and
Capital Resources.")

         Cross-Guaranty and Cross-Collateralization of the New Indebtedness. Key
has guaranteed WellTech's obligations under the New Indebtedness and has pledged
its assets to secure such  WellTech  obligations,  and WellTech  has  guaranteed
Key's  obligations  under the New  Indebtedness  and has  pledged  its assets to
secure such Key  obligations.  The obligations of Key and WellTech under the New
Indebtedness  are also cross  defaulted.  Accordingly,  a default  under the New
Indebtedness  by WellTech or Key could  jeopardize the assets of the other party
even if such  other  party  were not  itself in  default.  If the  Merger is not
consummated on or before April 30, 1996, the New Indebtedness will be in default
unless  WellTech  refinances its  obligations on or before July 31, 1996 and Key
continues to operate WellTech under the Interim Operations  Agreement until such
refinancing.  There can be no  assurance,  particularly  in light of  WellTech's
operating  history,  that it will be able to refinance  its  obligations  in the
event the Merger is not  consummated.  In such event, the lender could foreclose
on substantially all of Key's, as well as WellTech's, properties and assets.

                                      -29-

<PAGE>

         Potential  Obstacles to  Integration  of  WellTech.  The success of Key
following the Merger will be dependent partially upon Key's ability to integrate
the current  management and  operations of WellTech into its ongoing  management
and  operations.  Obstacles  to such  integration  may arise,  and some of those
obstacles could adversely affect Key's ongoing operations and performance. There
can be no  assurance  that  Key  will  be  able  effectively  to  integrate  its
management  and  operations  with those of WellTech or that  administrative  and
operational efficiencies resulting from the Merger can be attained.

         Customer Response to the Transactions.  Management of Key believes that
following  the Merger Key will be able to provide its  customers  with a broader
array of products and an increased  ability to service customer needs.  However,
there can be no  assurance  that the current  Key and  WellTech  customers  will
respond favorably to the Merger. An unfavorable  customer response to the Merger
could have an adverse effect upon the ongoing operations of Key.


   
         WellTech   Shareholder   Ownership  of  Key  Common  Stock.   Upon  the
consummation of the Merger,  there will be 10,413,513 shares of Key Common Stock
outstanding.  Of such shares,  the 4,929,962  shares of Key Common Stock and New
Key Warrants to purchase an additional 750,000 shares of Key Common Stock issued
to WellTech stockholders pursuant to the Merger will be freely tradeable without
restriction or registration  under the Securities Act,  including the shares and
New Key Warrants to be issued to certain stockholders of WellTech, who will have
the benefit of an effective  registration  statement  under the Securities  Act.
Stockholders  should be aware that one group of five  affiliated  entities  will
hold  approximately  38.3% of the Key Common Stock outstanding after the Merger.
All  but  155,000  of  the  remaining  shares  of  Key  Common  Stock  currently
outstanding are freely tradeable,  although sales of shares held by "affiliates"
of Key are subject to volume and other limitations imposed by Rule 144 under the
Securities Act.
    


         No predictions can be made as to the effect,  if any, that market sales
of shares or the  availability  of shares for sale will have on the market price
for the Key Common  Stock  prevailing  from time to time.  Sales of  substantial
amounts of Key Common  Stock in the public  market  could  adversely  affect the
market price of the Key Common Stock.


         Possible  Volatility of Stock Price.  The Key Common Stock is traded on
the American Stock Exchange. The closing price of the Key Common Stock on August
30, 1995,  immediately prior to the announcement of the Merger was $4-15/16, and
on  February  26,  1996 was $6.  (See  "Price  Range of Key  Common  Stock"  for
additional  information  with  respect to the prices of the Key Common  Stock in
earlier years.) The New Key Warrants are a new issue and there exists no trading
market for them. The volume of  transactions  in the Key Common Stock has varied
from  time to  time,  although  it has,  for the most  part,  been  limited.  In
addition,  the stock  market in recent  years has  experienced  price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of a specific company. These fluctuations could adversely affect the
market price of the Key Common Stock and the New Key Warrants.  (See  "Proposals
to be  Voted  upon at the  Key  Special  Meeting--Item  1:  The  Merger--Certain
Covenants--Registration Rights.")


                                      -30-

<PAGE>

         No  Intention  to Pay  Dividends.  Key  has no  intention  to pay  cash
dividends on the Key Common Stock in the foreseeable future. In addition,  under
the terms of the New Indebtedness,  Key is prohibited from paying cash dividends
on  its  Common   Stock.   (See   "Business  and   Properties   of   Key--Recent
Developments--New Indebtedness" for a discussion of such restrictions.)


         Regulation and  Competition in the Well Servicing  Industry.  Oil field
service  operations,  oil and gas production  activities and oil and natural gas
drilling are subject to various  local,  state and federal laws and  regulations
intended, among other things, to protect the environment.  Both Key and WellTech
compete with many national and local independent  companies,  many of which have
financial  and other  resources  greatly  in excess of those  available  to Key,
WellTech or the surviving entity.



         International  Investments.  WellTech has made  investments  in foreign
countries  (Russia  and  Argentina)  and Key  may  continue  to make  additional
investments  in these and other foreign  countries  and in companies  located or
with  significant  operations  outside the United  States.  (See  "Business  and
Properties of  WellTech--Foreign  Operations.")  Such investments are subject to
risks  and  uncertainties  relating  to the  indigenous  political,  social  and
economic   structures  of  those  countries.   Risks  specifically   related  to
investments in foreign  companies may include risks of  fluctuations in currency
valuation,  expropriation,  confiscatory taxation and nationalization,  currency
conversion  restrictions,  increased  regulation and approval  requirements  and
governmental policies limiting returns to foreign investors. In that connection,
stockholders  should be aware that WellTech's contract in Russia was not renewed
upon its expiration in November, 1995.


         Anti-Takeover  Effect  of  Certain  Provisions  of Key's  Articles  and
By-Laws.  Certain  provisions of the Key Articles and the Key By-Laws could have
the  effect  of  making  it more  difficult  for a third  party to  acquire,  or
discouraging a third party from acquiring, a majority of the outstanding capital
stock of Key and could make it more  difficult to  consummate  certain  types of
transactions  involving an actual or potential change in control of Key, such as
a merger,  tender offer or proxy contest.  The most  significant of these is the
ability  of the Board of  Directors  to  issue,  without  stockholder  approval,
preferred stock  containing  class voting rights,  provided,  however,  that the
Board of Directors may not classify or reclassify  shares to create any class of
stock which (i) has more than one vote per share,  (ii) is issued in  connection
with any shareholder rights plan, "poison pill" or other anti-takeover  measure,
or (iii) is issued for less than fair consideration, as determined in good faith
by the Board of Directors.


                                      -31-


<PAGE>

                         BUSINESS AND PROPERTIES OF KEY

General

         Key is a holding  company with  diversified  energy  operations  in the
Permian Basin area of West Texas and New Mexico. Key was organized in April 1977
and  commenced  operations in July 1978.  Key  currently has three  wholly-owned
operating subsidiaries:  Yale E. Key, Odessa Exploration and Clint Hurt. Yale E.
Key is involved in oil field  services  and  operates  primarily  in the Permian
Basin area of West Texas and New Mexico,  performing services for both major and
independent oil companies.  Odessa Exploration,  acquired in July 1993, operates
and owns an  interest  in various oil and gas  properties  in West Texas.  Clint
Hurt,  acquired in March 1995, is involved in drilling oil and gas wells in West
Texas.

         On October 20, 1992, Key, then known as National  Environmental  Group,
Inc.  ("NEGI")  and  several  affiliated  companies,   filed  a  Joint  Plan  of
Reorganization under Chapter 11 of the Bankruptcy Code (the "Prepackaged Plan").
Under the  Prepackaged  Plan,  holders of the  various  debt  issues,  preferred
stockholders and common  stockholders of NEGI and affiliates  received shares of
Key Common  Stock in  exchange  for their  claims.  On  December  4,  1992,  the
Prepackaged  Plan  was  confirmed.  The  confirmation  of the  Prepackaged  Plan
converted approximately $7.4 million in debt,  approximately $700,000 in accrued
interest,  1,150,664  shares of preferred stock and 17,942,108  shares of common
stock of NEGI into  approximately  4.2 million  shares of Key Common  Stock.  In
addition,  Key issued an aggregate of 970,000 shares of Key Common Stock through
a rights offering to former preferred and common  shareholders for approximately
$1.8 million in cash. See Note 3 of Notes to Consolidated  Financial  Statements
of Key.

Recent Developments


         The Merger and the Interim Operations Agreement.  On November 18, 1995,
Key and WellTech  entered into the Merger  Agreement  pursuant to which WellTech
will  merge  with and into  Key.  (See  "Proposals  to be Voted  upon at the Key
Special Meeting--Item 1: The Merger.")  Simultaneously with the execution of the
Merger Agreement,  Key and WellTech entered into an interim operations agreement
(the "Interim Operations Agreement") pursuant to which WellTech has employed Key
as an interim manager of WellTech's  business,  property and operations.  Key is
required to obtain  consent of the Interim  Committee of the  WellTech  Board of
Directors ("Interim  Committee"),  a committee charged with the oversight of the
Interim Operations  Agreement,  prior to (i) extending,  terminating or entering
into any material lease, contract or a transaction not in the ordinary course of
business on behalf of  WellTech,  (ii) hiring or  terminating  executive  or key
officers of  WellTech,  or (iii) making or  committing  to any loan on behalf of
WellTech.  In addition,  Key is required to consult  regularly  with the Interim
Committee concerning the business,  property and operations of WellTech, provide
such  reports as are  requested  and take no action  requiring  approval  of the
WellTech  Board of Directors  under  Delaware  law, the WellTech  Charter or the
WellTech  By-Laws  without  first  obtaining  the Interim  Committee's  consent.

                                      -32-

<PAGE>

WellTech has agreed to pay all reasonable costs and expenses  incurred by Key in
connection with its management services under the Interim Operations  Agreement.
If the Merger is not  consummated,  Key will receive a management fee of $25,000
per  month  for its  services,  payable  after  the  Merger  Agreement  has been
terminated.  The Interim Operations  Agreement may be terminated by either party
at any  time  after  May  31,  1996  if the  Merger  is  not  consummated,  upon
commencement of any bankruptcy or insolvency proceedings or upon the termination
of the Merger  Agreement  provided,  however that so long as any  obligation  of
WellTech is outstanding under the New Indebtedness, neither Key nor WellTech may
terminate the Interim  Operations  Agreement  without the consent of the lender.
The Interim  Operations  Agreement will  automatically  terminate on the Closing
Date. In the event the Merger is not  consummated,  for a period of three years,
Key will be prohibited from offering  employment to certain  WellTech  employees
and  both  Key  and  WellTech  will  be  prohibited  from   disclosing   certain
confidential information.

         New  Indebtedness.  On January 19, 1996, Key and WellTech  entered into
credit agreements with The CIT Group/Credit  Finance,  Inc. ("CIT") to refinance
substantially all of the existing indebtedness of Key (other than that of Odessa
Exploration)  and  WellTech  (other than  indebtedness  to certain  affiliates),
respectively.  The  aggregate  principal  amount  available  under  such  credit
arrangements to each of Key and WellTech is $17.5 million  (subject to a certain
advance  formula).  The New Indebtedness is in the form of three-year  revolving
credit or term-loan arrangements,  automatically renewed for successive two-year
periods,  unless  terminated  by either CIT or Key.  After giving  effect to the
repayment  of all  such  existing  debt  of  Key  (other  than  that  of  Odessa
Exploration) and WellTech (other than indebtedness to certain affiliates) out of
the proceeds of such  borrowing,  Key and WellTech have available  approximately
$5.6 million and $1.4 million,  respectively,  of borrowing capacity, depending,
in part, on the amount of their respective  accounts receivable and the value of
their  respective  equipment.  The  borrowing  arrangements  prior to the Merger
entail separate borrowings by, on the one hand, Key, Yale E. Key and Clint Hurt,
jointly and severally,  up to an aggregate of $17.5 million  principal amount of
revolving  credit  loans  less the  aggregate  principal  amount  of term  loans
(currently  aggregating  approximately  $10.1  million)  and, on the other hand,
WellTech of up to an aggregate of $17.5  million  principal  amount of revolving
credit  loans  less the  aggregate  principal  amount of term  loans  (currently
aggregating  approximately  $16.1  million)  . Each of the  borrowers  has also,
jointly and severally,  cross-guaranteed  the obligations of each other borrower
and   the   obligations   of  all   borrowers   are   cross-collateralized   and
cross-defaulted.  Accordingly,  Key is liable for all borrowings by WellTech. In
an attempt to protect Key, should the Merger not be consummated,  Key negotiated
the  management  and  operational  power and  authority it has under the Interim
Operations  Agreement.  At the option of CIT, the loans will be immediately  due
and payable if the Merger has not been  consummated  on or before April 30, 1996
and WellTech has failed to refinance its borrowings on or prior to July 31, 1996
or Key ceases to  continue  to operate  WellTech  under the  Interim  Operations
Agreement until such  refinancing.  Key and WellTech have agreed that so long as
any obligation of WellTech to CIT is outstanding,  neither Key nor WellTech will
terminate the Interim Operations Agreement without CIT's consent.  There can, of
course, be no assurance that, should the Merger not be consummated, Key will not
suffer a significant loss with respect to its guaranty of WellTech  indebtedness
pursuant to these arrangements.

                                      -33-

<PAGE>

         The loans are secured by a first lien on  substantially  all the assets
of Key (other than the assets of Odessa Exploration) and of WellTech (other than
the Existing Key Shares, the Existing Key Warrants and shares in Dawson owned by
WellTech).  The loans bear  interest at an annual rate of 1.25% in excess of the
"prime"  rate of Chemical  Bank,  New York,  New York.  CIT is also  entitled to
various fees, including a closing commitment fee of $100,000,  interest based on
certain minimum  borrowing  levels,  whether or not such amounts are or could be
(because  of  borrowing  formula  limitations)   outstanding,   and  to  certain
prepayment  penalties  including for early  termination of the revolving  credit
arrangements.

         Acquisition  of Clint Hurt Assets.  In March 1995, Key and Clint Hurt &
Associates,  Inc. ("CHA") entered into an Asset Purchase  Agreement  pursuant to
which  CHA sold to Key all of its  assets  in West  Texas  for an  aggregate  of
approximately  $1.7  million,  of which  $1.0  million  was paid in cash and the
balance was paid in the form of a 60-day promissory note, which was paid in full
on July 2, 1995. The acquired assets  consisted  principally of four oil and gas
drilling  rigs and related  equipment.  Mr. Clint Hurt entered into a consulting
agreement and a noncompetition  agreement with Key, pursuant to which neither he
nor CHA may  directly  or  indirectly  engage  in  providing  contract  drilling
services or engage in the well service business in Texas until April 1, 1998. In
connection with the consulting and non-competition  agreement,  Key issued 5,000
shares of Key Common Stock to Mr. Hurt.

         Acquisition  of WellTech  West Texas.  On December  10,  1993,  Key and
WellTech  entered into an Asset  Purchase  Agreement  pursuant to which WellTech
sold Key all of the assets and liabilities of WellTech's West Texas region.  The
assets purchased included 58 well service workover rigs, various trucks, parcels
of real estate,  inventory and office  furniture and equipment.  The acquisition
was consummated in August 1994.  Consideration for the acquisition  consisted of
the  issuance  by Key to  WellTech  of  1,635,000  shares of Key  Common  Stock,
warrants to acquire 250,000  additional  shares of Key Common Stock at $5.00 per
share and the assumption of certain  current  liabilities  related to WellTech's
West Texas  operations.  Those  shares and  warrants  are  referred to elsewhere
herein as the  Existing Key Stock and the Existing Key Warrants and will (except
for 205,038 shares) be surrendered to Key pursuant to the Merger.  In connection
with the  WellTech  West Texas  acquisition,  WellTech  was granted the right to
designate one nominee to serve on Key's Board of Directors.  (See  "Proposals to
be  Voted  upon at the  Key  Special  Meeting--Item  3:  Election  of  Board  of
Directors.")  Since December  1993,  Key has operated the WellTech's  West Texas
well service business.

Business

         Oil  Field  Services.  Yale E.  Key  performs  a  variety  of  services
involving  the  production  and  exploration  of oil and natural gas,  including
workovers, well maintenance,  operation of hot oilers and trucking equipment and
well completions. Yale E. Key operates a variety of oil field service equipment,
including  136 workover  rigs, 28 hot oil units and 12  transports.  Yale E. Key
serves over 200 customers in West Texas,  with its two largest customers (Parker
& Parsley and Texaco)  providing  approximately  18% and 10%,  respectively,  of
Key's total revenue  during  fiscal 1995,  15% and 14%,  respectively,  of Key's
total revenue during fiscal 1994, and 23% and 26%, respectively,  of Key's total
revenue during fiscal 1993.

                                      -34-


<PAGE>

         Workovers  are  performed  to  remedy   downhole   equipment   failure,
reactivate a shut-in well,  convert a producing  well into an injection well for
enhanced recovery projects,  repair casing leaks and recomplete wells from which
production has declined. Yale E. Key's equipment and crews are used to drill out
plugs and packers and to remove downhole  equipment from the well bore, which is
then  replaced or repaired  and  repositioned.  Well  maintenance  services  are
required throughout the lives of most wells to keep them producing economically.
Yale E. Key's rigs are used to remove and replace  worn or broken  sucker  rods,
production  tubing,   down-hole  pumps  and  other  artificial  lift  equipment.
Maintenance services are usually of short duration, lasting fewer than 48 hours.
Hot oil units  are used to  inject  heated  oil and  water  into the  production
tubing, casing and flow line to melt paraffin which solidifies and obstructs the
flow of oil, as well as to treat oil in producers'  storage tanks to upgrade the
quality for sale to pipelines.  Yale E. Key's crews perform routine  maintenance
at the well site and its  transport  vehicles  carry  water to and from the well
site for well stimulation operations and for disposal.

         When a well has been  drilled,  the casing has been set and it has been
determined that the well will produce oil or gas in commercial  quantities,  the
expensive  drilling  rig is moved off the well site and a more  economical  well
service rig is moved on the well site to perform  completion  services.  Yale E.
Key's  rig  crews  are  responsible  for  rigging  the  derrick,  operating  rig
machinery,  handling pipe and tools,  circulating well fluids,  and assisting in
various completion activities performed by other contractors.

         Oil and Gas Production.  Odessa  Exploration is engaged in the drilling
and production of oil and natural gas in the Permian Basin of West Texas. Odessa
Exploration  acquires and manages  interests in producing oil and gas properties
for  its  own  account  and  for  drilling  partnerships  it  sponsors.   Odessa
Exploration acquires producing oil and gas properties from major and independent
producers  and,  subsequently,  either  reworks  the  acquired  well to increase
production  and/or forms  drilling  ventures for additional  development  wells.
Odessa  Exploration  operates  oil and gas wells on  behalf of over 150  working
interest owners as well as for its own account.  During fiscal 1995, it acquired
approximately  $1.0 million in additional oil and gas properties  with estimated
proved developed and undeveloped reserves of 1,132,000 bbls (barrels) of oil and
3.2 bcf  (billion  cubic  feet) of  natural  gas.  As of June 30,  1995,  Odessa
Exploration's  proved oil and gas reserves were  estimated at 1,682,000  bbls of
oil and 14 bcf of natural gas and operated and/or owned an interest in 90 wells.

         Producing Wells and Acreage.  The major proved producing  properties of
Odessa  Exploration  are located  primarily  in the  Permian  Basin area of West
Texas. The following table sets forth Odessa  Exploration's  total gross and net
producing oil and gas wells and its total gross and net developed  acreage as of
June 30,  1995.  As of such  date,  Key did not have  any  undeveloped  acreage.
"Gross" as it applies to wells or acreage refers to the number of wells or acres
in which a working interest is owned by Odessa Exploration.  "Net" as it applies
to wells or acreage refers to the sum of the fractional  working interests owned
in gross wells or gross acres.


                                      -35-

<PAGE>

                    Producing Wells
                   Oil                      Gas             Developed Acreage
              Gross      Net      Gross       Net         Gross          Net

                 75       42       15          5        21,320          11,037

In addition,  Odessa  Exploration  serves as operator of two injection wells. As
operator, Odessa Exploration receives fees from other working interest owners as
reimbursement  for the  general and  administrative  expenses  attendant  to the
operation of the wells.

         Odessa  Exploration's  oil and gas  properties  are subject to royalty,
overriding  royalty and other outstanding  interests  customary in the industry.
The  properties  are also subject to burdens such as liens incident to operating
agreements,  current taxes, development obligations under oil and gas leases and
other  encumbrances,  easements and restrictions.  Management  believes that the
existence  of such  burdens  does not  materially  detract from the value of its
leasehold interests.  Moreover,  certain of Odessa Exploration's  properties are
subject to liens securing debt.  See Note 5 of Notes to  Consolidated  Financial
Statements of Key.

         Exploration and Development Activities. The following table shows gross
and net wells drilled in which Odessa Exploration had a working interest (all of
which were developed wells) during the years ended June 30, 1995 and 1994:

                             1995                  1994
                     ------------------      ----------------
                     Gross        Net       Gross         Net

    Productive        8.0         6.2        1.0           0.1
    Dry                -           -          -              -

Since  the  beginning  of  the  current  fiscal  year,  Odessa  Exploration  has
participated in or drilled five wells on its operated properties, and it expects
the total number of such wells for the current fiscal year to be 14.

         Oil and Gas  Reserve  Information.  Estimates  of Odessa  Exploration's
proved oil and gas  reserves as of June 30,  1995 and 1994 were  prepared by Key
and  reviewed by Victor J.  Sirgo,  P.E.,  an  independent  petroleum  reservoir
engineer.  All estimates were made in accordance with guidelines  established by
the  Commission.  Proved oil and gas reserves are the  estimated  quantities  of
crude oil and natural gas which geological and engineering data demonstrate with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing economic conditions, that is, prices and costs as of the date the
estimate is made.  Prices utilized reflect  consideration of changes in existing
prices provided by contractual arrangements if any, but not of escalations based
upon future conditions.

         Proved developed oil and gas reserves are reserves that can be expected
to be  recovered  through  existing  equipment  and  operating  methods.  Proved
undeveloped  oil and gas  reserves are proved  reserves  that are expected to be
recovered  from new wells on undrilled  acreage or from  existing  wells where a

                                      -36-

<PAGE>

relatively  major  expenditure  is required  for  recompletion  or  secondary or
tertiary  recovery.  Reserves assigned to undrilled acreage are limited to those
drilling units that offset  productive  units  reasonably  certain of production
when  drilled.  The  following  table  summarizes  oil and gas reserve data with
respect to Odessa Exploration's proved oil and gas reserves at June 30, 1995 and
1994:

                                                       June 30,
                                              1995             1994
      Proved developed reserves
               Oil (bbls)                     750,604       114,908
               Gas (mcf)                   11,203,232     6,785,661

      Proved undeveloped reserves
               Oil (bbls)                     931,613             -
               Gas (mcf)                    2,794,828             -

         Management  is not aware of any major  discovery or other  favorable or
adverse  event  which has  occurred  since July 1, 1995 and which is believed to
have caused a significant change in the estimated proved oil and gas reserves of
Odessa Exploration. The estimate of reserves has not been filed with or included
in  reports  to  any  federal  agency  other  than  the  Commission.  Additional
information concerning estimated proved oil and gas reserves is included in Note
15 of Notes to the Consolidated Financial Statements of Key.

         Production.  The  following  table  summarizes  the  net  oil  and  gas
production,  average sales prices,  and average  production  (lifting) costs per
equivalent barrel of oil for the years ended June 30, 1995 and 1994:
                                                         1995            1994
                                                       --------         -----
         Oil
                  Production (bbls)                      40,330         4,383
                  Average sales price per bbls           $15.02         13.54

         Natural Gas
                  Production (mcf)                      770,197       552,791
                  Average sales price per mcf           $  1.54       $  2.33

         Production Costs
                  Production (lifting) costs per
                  equivalent barrel of oil (boe)        $  4.48       $  5.38

         Oil and Gas  Drilling.  Clint Hurt  operates  four  drilling rigs which
drill for oil and natural gas for independent and major oil companies, primarily
in West Texas.  Clint Hurt  completed 18 wells at an average depth of 7,900 feet
during the three months ended September 30, 1995.

                                      -37-

<PAGE>

Competition and Other External Factors

         The need for oil field services  fluctuates,  in part,  from the demand
for oil and natural gas. As demand for those commodities increases,  service and
maintenance  requirements  increase.  Yale E. Key competes  with other local oil
field  service  companies  as well as national  service  companies.  Yale E. Key
believes  it is the  largest oil well  service  company in West Texas  (based on
number of workover rigs and  employees).  Key believes that the reputation  that
Yale E. Key (including its  predecessors) has developed over its 48 years in oil
field service operations contributes greatly to its competitive position.

         Odessa   Exploration   acquires  various  oil  and  gas  properties  by
purchasing them from independent and major oil companies and competes with other
independent   and  integrated  oil  companies  for  the   acquisition  of  these
properties.

         Clint Hurt competes with other local oil and gas drilling  contractors,
as well as national  oil and gas  drilling  companies.  As with Yale E. Key, the
need for drilling oil and gas wells fluctuates, in part, from the demand for oil
and natural gas.

Property

         Key leases  approximately 1,500 square feet for its principal executive
offices in New Brunswick, New Jersey.

         The  following  table sets forth  information  with  respect to Yale E.
Key's operating  facilities at December 31, 1995, all of which were used in the
operations of Yale E. Key and are located in Texas,  including those acquired in
August of 1994 as part of the WellTech West Texas acquisition.

        Approximate                                                Ownership
         Location                   Square Footage                  Interest

         Lamesa                            3,350                     Fee
         Midland                          18,250                     Fee
         Odessa                           10,000                     Fee
         Seminole                         12,500                     Fee
         Big Lake                          3,500                     Fee
         Odessa *                         10,000                     Fee
         Snyder *                         10,000                     Fee
         Kermit *                          7,000                     Fee
         Forsan *                         10,000                     Fee
         Big Lake *                        8,000                     Lease
         Sterling City                     1,400                     Lease
         Andrews *                         5,000                     Lease
- -----------
*  Former WellTech locations.

                                      -38-

<PAGE>

All of Yale E. Key's operating facilities are metal one story combination office
and shop  buildings  and are  considered to be in good  condition.  All of these
properties are encumbered by security interests in favor of certain lenders. See
Note 5 of Notes to Consolidated Financial Statements of Key.

       Odessa Exploration leases approximately 3,300 square feet of office space
in Odessa, Texas.

Employees

       As of December 31, 1995, Key employed  approximately  827 persons (737 at
Yale E. Key,  five at Odessa  Exploration,  83 at Clint  Hurt and three at Key).
None  of  Key's  employees  are  represented  by a  labor  union  or  collective
bargaining  agent.  Key has experienced no work stoppages  associated with labor
disputes or grievances  and  considers  its  relations  with its employees to be
satisfactory.

Regulation

       The oil field service operations,  the oil and gas production  activities
and the oil and natural gas drilling of Key are subject to various local,  state
and federal laws and regulations intended to protect the environment. Management
of Key believes that it is in  substantial  compliance  with all material  known
existing federal, state and local regulations as they relate to the environment.
Although  Key  has  incurred   certain  costs   relating  to   compliance   with
environmental  laws and  regulations,  such amounts were not material during the
past three fiscal years.

       Management believes that Key is in substantial  compliance with all known
material local, state and federal safety guidelines and regulations. In order to
comply  with such  safety  guidelines  and  regulations  and  increase  employee
awareness of on-the-job safety,  Yale E. Key employs four safety officers.  Yale
E. Key also has a safety  training and education  center which is used by it for
continued safety training and awareness.

Legal Proceedings

       There are no material  pending  legal  proceedings  against  Key.  Key is
subject to legal  proceedings  and claims which arise in the ordinary  course of
business, none of which, in the opinion of management, have a material impact on
Key's financial condition or results of operations.

                                      -39-


<PAGE>



                         PRICE RANGE OF KEY COMMON STOCK


       The Key Common Stock is traded on the American Stock Exchange,  under the
symbol "KEG." The following table sets forth for the periods  indicated the high
and low closing prices of Key's Common Stock on the American Stock Exchange,  as
derived from published sources.


           Fiscal Quarter                      High                 Low

        1996

             First Quarter                     5 1/2                4 7/8
             Second Quarter                    6 1/2                4 15/16
             Third Quarter (through            6 7/8                5 7/8
                  February 26,  1996)         


        1995
             First Quarter                      5 1/2               5
             Second Quarter                     5 1/2               4 3/4
             Third Quarter                      4 5/8               4 1/4
             Fourth Quarter                     5 1/2               4 3/4

        1994
             First Quarter                      5 1/2               5
             Second Quarter                     5 1/2               4 3/4
             Third Quarter                      5 5/8               4 7/8
             Fourth Quarter                     5 1/2               4 7/8


         On August 30, 1995,  the date prior to the public  announcement  of the
merger of Key and  WellTech,  the closing  price of the Key Common  Stock on the
American  Stock  Exchange  was 4 15/16.  As of  February  26, 1996 there were 
541 holders of record of Key Common Stock.


        There were no  dividends  paid on the Key Common Stock during the fiscal
years ended June 30, 1994 or 1995 or since June 30,  1995.  Key does not intend,
for the  foreseeable  future,  to pay  dividends  on its Common  Stock.  The New
Indebtedness prohibits the payment of cash dividends by Key. See Note 5 of Notes
to Consolidated Financial Statements of Key.

                                      -40-


<PAGE>






                       BUSINESS AND PROPERTIES OF WELLTECH

General


        WellTech provides a broad range of workover and production  services for
oil and gas wells in Oklahoma, Texas, Michigan,  Pennsylvania and West Virginia.
WellTech is engaged in the business of  providing:  (i)  workover rig  services,
including  completion of new wells,  maintenance  and  recompletion  of existing
wells (including horizontal recompletions) and plugging and abandonment of wells
at the end of their useful lives; (ii) oil field liquid transportation,  storage
and disposal  services,  including  vacuum truck services,  frac tank rental and
salt water injection; and (iii) other services,  including pipeline installation
and testing,  slickline wireline services,  fishing and rental tool services and
general oil field roustabout services. WellTech's services are utilized by major
oil and gas companies as well as independent  producers to optimize  performance
of oil and gas wells. In addition to its domestic operations,  WellTech provides
equipment and services in Argentina and, until November 1995,  conducted certain
operations  in Russia.  For the ten months  ended  October  31,  1995,  WellTech
derived  approximately  65%, 9% and 26% of its  revenues  from its  workover rig
services, liquid services and other services, respectively.


        WellTech  was  established  in 1973  as a well  servicing  business.  It
undertook significant  expansion activities  principally through internal growth
and the  acquisition  of well  servicing  assets in  diverse  geographic  areas.
Commencing in 1992,  WellTech  consolidated  its operations in those  geographic
areas where it believed it could be the dominant or a significant  factor in the
well  servicing  business  and  could  realize   consolidation  savings  through
operation of a greater  number of rigs with lower  management and overhead costs
per rig operated.  In addition to expanding  its workover rig service  business,
WellTech entered into complimentary businesses thereby increasing its asset base
and market share  through  diversification  by service  line.  At the same time,
WellTech commenced to withdraw operations from less profitable  geographic areas
where lower costs could not be realized.

        WellTech  believes  that its  ability to offer a wide range of  services
provides  it  with  a  competitive   advantage  by  allowing  its  customers  to
consolidate  with fewer  vendors  the  procurement  of workover  and  production
services.  Customers  may thereby lower their costs by  streamlining  production
decisions and increasing  operational  efficiencies.  WellTech  believes that no
single  competitor  in  WellTech's  primary  market  areas  provides  a range of
services as extensive as the services  provided by WellTech.  WellTech  believes
that its strategy  creates  cross-marketing  opportunities  for its services and
appeals to a broader  customer  base by  enhancing  its  position  as a one-step
source for workover and production services.

                                      -41-


<PAGE>


Recent Developments


         The Merger and the Interim Operations Agreement.  On November 18, 1995,
Key and WellTech  entered into the Merger  Agreement  pursuant to which WellTech
will  merge  with and into  Key.  (See  "Proposals  to be Voted  upon at the Key
Special Meeting--Item 1: The Merger.")  Simultaneously with the execution of the
Merger  Agreement,   Key  and  WellTech  entered  into  the  Interim  Operations
Agreement. (See "Business and Properties of Key--Recent Developments--The Merger
and the Interim Operations Agreement.") In January 1996, WellTech entered into a
credit  agreement  with  CIT.  (See  "Business  and  Properties  of  Key--Recent
Developments--New Indebtedness .")

         Dawson  WellTech.  Dawson  WellTech,  L.C., a Texas  limited  liability
company,  was owned 61% by Dawson and 39% by  WellTech.  Effective  November  1,
1995,  WellTech exchanged its 39% interest in Dawson WellTech,  L.C. for 309,186
shares of Dawson and  effective  December  31, 1995 Dawson  WellTech,  L.C.  was
merged into Dawson.  WellTech has directed Dawson to distribute the Dawson stock
to the WellTech  shareholders  and directors  prior to the Merger.  In addition,
WellTech has agreed to perform consulting services to Dawson in return for 11.7%
of Dawson's  consolidated  pre-tax  earnings.  This  consulting  agreement  will
terminate on the earlier of (i) March 31, 1996,  (ii) the date Dawson closes and
funds an initial public offering of its securities, or (iii) the date upon which
Dawson shall engage in a business  combination or sell  substantially all of its
assets to another party.


Domestic Operations

        Presently, WellTech conducts its domestic operations in two regions: the
Mid-Continent  Region with  approximately  110 rigs,  12 water haul trucks,  and
other  well  servicing  assets  operating  principally  in  Oklahoma  and  Texas
(confined to East Texas);  and the Northeast Region with  approximately 60 rigs,
68 water haul trucks,  and other well servicing assets operating  principally in
Michigan, Pennsylvania and West Virginia.

        WellTech  provides  services  pursuant  to the terms and  provisions  of
written   (approximately   60%)  and  verbal   (approximately   40%)  contracts,
specifying,  in general,  the equipment to be used,  crew  component,  hourly or
daily rate, payment terms and other terms customary in the industry.  During the
first three quarters of 1995, the major  customers in the  Mid-Continent  Region
were Amoco Production Co., Exxon Co. U.S.A.,  Texaco Exploration and Production,
Inc.,  and Maxus  Exploration,  Inc.; and in the  Northeastern  Region were U.S.
Steel  Mining Co.,  Amoco  Production  Co.,  Bethlehem  Steel  Corporation,  and
Angerman  Associates,  Inc.  No  single  customer  accounted  for 10% or more of
WellTech's  revenues  during  any of  its  last  three  fiscal  years.  WellTech
considers its customer relations to be good.

Foreign Operations

        In 1993 WellTech entered into an agreement with a foreign  subsidiary of
M.D. Seis ("Seis") for the  procurement  and  mobilization of two well servicing
rigs to operate near Kogalym, Russia, under a 700 (initially 500) well servicing

                                      -42-

<PAGE>


contract  between the Russian  Oil  Ministry  and Seis.  In  addition,  WellTech
provided  supervisory and rig personnel during the term of the contract pursuant
to the  provisions of a labor  contract.  The contract was completed in November
1995.  WellTech no longer  conducts  operations in Russia  although  discussions
continue for additional opportunities in Russia.

         In  1992  WellTech,  with  two  Argentine  corporate  partners,  formed
Servicios  WellTech,  S.A.  ("Servicios")  for the  purpose  of  conducing  well
servicing operations in Argentina.  WellTech owns 63% of the stock of Servicios.
Currently,  Servicios owns and operates 10 well servicing rigs in Argentina.  In
addition, Servicios operates trucks to transport its oilfield equipment from one
location  to another  and,  subject to  availability,  rents the trucks to other
operators to move their oilfield  equipment.  Servicios'  principal  customer is
Yacimientos  Petroliferos  Fiscales, the Argentine government owned and operated
oil company. Servicios believes that it provides superior equipment and services
and enjoys a high level of customer  satisfaction.  Servicos competes with three
drilling/workover companies with dominant market share, each with 40 to 90 rigs.
Profitability  of Servicios has been adversely  affected by  undercapitalization
and high interest rates on funds required to expand operations.

Employees

        As of January 12, 1996,  WellTech employed  approximately  1,125 persons
(including  250  persons  employed  by  Servicios),  consisting  of  580  in the
Mid-Continent  Region,  285 in the Northeast  Region,  10 in the Houston,  Texas
corporate  office,  and 250 in  Argentina.  Employees  provided by the Northeast
Region in the State of Indiana for a certain  industrial  facility were provided
pursuant to a union agreement with International  Union of Operating  Engineers.
Efforts  in late  1995 of the  International  Union of  Operating  Engineers  to
organize  WellTech's  labor force in  Countyline,  Oklahoma  were  unsuccessful.
WellTech has  experienced  no work stoppages  associated  with labor disputes or
grievances and considers its relations with its employees to be satisfactory.

Legal Proceedings

        WellTech is a party to numerous workers'  compensation  claims,  general
and automotive  liability actions and other types of lawsuits,  none of which is
expected to have a material adverse effect on the financial condition or results
of operations of WellTech.

Competition and Other External Factors

        The need for oil field services fluctuates, in part, from the demand for
oil and natural  gas.  As demand for those  commodities  increases,  service and
maintenance requirements increase.  WellTech competes with other local oil field
service companies as well as national service companies.  WellTech believes that
the reputation that it has developed in oil field service operations contributes
greatly to its competitive position.

                                      -43-

<PAGE>


Regulation

        The oil field service operations,  the oil and gas production activities
and the oil and natural gas drilling of WellTech  are subject to various  local,
state and federal  laws and  regulations  intended  to protect the  environment.
Management of WellTech  believes that it is in substantial  compliance  with all
material known existing  federal,  state and local regulations as they relate to
the  environment.  Although  WellTech has  incurred  certain  costs  relating to
compliance  with  environmental  laws and  regulations,  such  amounts  were not
material during the past three fiscal years.

        Management believes that WellTech is in substantial  compliance with all
known material local, state and federal safety guidelines and regulations.


                                      -44-


<PAGE>

                                MANAGEMENT OF KEY

     The following  table sets forth the names and ages of each of the executive
officers of Key and includes the positions each officer  currently holds as well
as positions held for the past five years.

     Name       Age  Positions

Francis D. John  42 President and Chief Executive Officer since September 1989
                    and Chief Financial Officer of Key since June 1988; Co-
                    Chairman of the Board of Directors of Key since March
                    1994; Chairman of the Board of Directors of Yale E. Key
                    from March 1990 to February 1995 and currently a Director
                    and Executive Vice President of Yale E. Key, Odessa
                    Exploration and Clint Hurt.  Director of Aerosonics Corp.,a
                    company which produces components for aircraft.

C. Ron Laidley  50  President and Chief Executive Officer of Yale E. Key since
                    March 1995. Vice President of Yale E. Key from 1982 until
                    March 1995.

D. Kirk Edwards 36  Vice President of Key since July 1993, President and Chief
                    Executive Officer of Odessa Exploration since July 1993.
                    Owner and President of Odessa Exploration Inc. from 1986
                    to July 1993.   Director of Key since July 1993.

Danny R. Evatt  37  Chief Accounting Officer and Treasurer of Key since July
                    1990; Treasurer, Secretary and Chief Financial Officer of
                    Yale E. Key since 1983. Director of Yale E. Key since 1992.

         Each officer of Key holds  office until the first  meeting of the Board
of  Directors  following  the  annual  meeting  of  stockholders  and  until his
successor has been duly elected and qualified,  or until he has resigned or been
removed as provided by the Key By-Laws.  No family  relationship  exists between
any of the above listed executive officers or between any such executive officer
and any director of Key.

         Subsequent  to  consummation  of the Merger,  the  management of Key is
expected to consist of the officers named above,  and the following  individuals
who are currently executive employees of WellTech:

                                      -45-


<PAGE>


Name                Age    Positions

Kenneth C. Hill     51    Northeast Regional President of WellTech since
                          August 18, 1994, and Vice President and Northeast
                          Regional Manager of WellTech from April 5,
                          1990, to August 18, 1994.  Mr. Hill will become
                          President and Chief Executive Officer of Key's
                          Northeast operating subsidiary upon
                          consummation of the Merger.

Kenneth V. Huseman  43    Mid-Continent Regional President of WellTech
                          since August 18, 1994, and Vice President and
                          Mid-Continent Regional Manager of WellTech
                          from April 23, 1993, to August 18, 1994.  Mr.
                          Huseman will become President and Chief
                          Executive Officer of Key's Mid-Continent
                          operating subsidiary upon consummation of the
                          Merger.



         For  information  concerning the Directors of Key, see "Proposals to be
Voted upon at the Key Special Meeting--Item 3: Election of Board of Directors."


Executive Compensation
`
         The following  table sets forth the  compensation,  including  bonuses,
paid by Key and its subsidiaries for services  rendered in all capacities to Key
and its  subsidiaries  during each of the three fiscal years ended June 30, 1995
to the Chief Executive  Officer and to each of the four most highly  compensated
executive officers of Key and its subsidiaries.



                                      -46-


<PAGE>


<TABLE>
<CAPTION>

                                                       Annual Compensation                               Long Term Compensation

                                 Awards                      Payouts
          (a)              (b)          (c)           (d)           (e)             (f)           (g)         (h)           (i)
                                                                                Restricted
       Name and                                                    Other           Stock        Options      LTIP        All Other
       Principal                      Salary         Bonus        Annual          Award(s)       SARs       Payouts       Compen-
       Position         Year            ($)           ($)      Compensation       ($) (1)         (#)          ($)      sation ($)
- --------------------------------  -------------  ------------  ------------    ------------   ----------  -----------   ----------
<S>                    <C>        <C>              <C>              <C>             <C>          <C>          <C>           <C>

Francis D. John         1995       $225,000                          ---             ---           ---         ---           ---
  Chief Executive       1994        215,000
  Officer               1993        200,000          $25,000
C. Ron Laidley          1995        155,000           ---            ---             ---           ---         ---           ---
  Chief Executive       1994        155,000
  Officer of  Yale      1993        155,000
  E. Key
Danny R. Evatt          1995         95,000           ---            ---             ---           ---         ---           ---
  Chief Accounting      1994         93,000
  Officer               1993         93,000
D. Kirk Edwards         1995        125,000           10,000         ---             ---           ---         ---           ---
  Chief Executive       1994        125,000
  Officer of
  Odessa
  Exploration
Max Emmert III          1995        129,000(2)         ---           ---             ---           ---         ---           ---
                        1994        225,000
                        1993        215,000
</TABLE>


(1)     Although restricted stock awards were approved by the Compensation 
        Committee pursuant to Key's Stock Grant Plan, none of the shares have 
        been issued and, upon and subject to approval of the Key 1995 Stock 
        Option Plan at the Key Special Meeting, the Stock Grant Plan
        will be canceled.  See "--Stock Grant Plan" below for information 
        concerning shares reserved for award thereunder.

(2)     Mr. Emmert retired from his position as an executive officer of Key as 
        of February 1, 1995.  Amount in column (c) represents salary paid to 
        Mr. Emmert from July 1, 1994 to January 31, 1995.

         For  information  concerning  employment  agreements  entered into with
Messrs.  John,  Laidley,  and Evatt  effective July 1, 1995,  see  "--Employment
Agreements with Executive Officers" below.

         Stock Grant Plan. On September 27, 1993, a Stock Grant Plan (the "Grant
Plan") was adopted by the Board,  subject to the approval of Key's stockholders,
which  approval  was  obtained on July 25,  1994.  The Grant Plan  authorizes  a
Compensation  and Stock Grant Plan Committee of the Board (the  "Committee")  to
recommend to the Board the award of up to 600,000  shares of Key Common Stock to
key employees  between  October 15, 1993 and December 31, 2003.  Under the Grant
Plan, a specified  number of shares of Key Common  Stock have been  reserved for
grant to each of six executive officers and a specified number has been reserved
for grant to non-executive  officers of Key's  subsidiaries as a group. Upon and
subject to approval of the Key 1995 Stock Option Plan described below by the Key
stockholders  at the Key Special  Meeting,  the Grant Plan will be canceled  and
will be replaced  in its  entirety by the 1995 Stock  Option  Plan.  See "--1995
Stock Option Plan" below.

                                      -47-


<PAGE>

         1995 Stock Option Plan. On July 6, 1995, Key's  Compensation  Committee
adopted Key 1995 Stock Option Plan (the "1995 Plan") and granted certain options
under the 1995 Plan effective July 6, 1995 subject to the Board of Directors and
stockholder approval.  The Board approved the 1995 Plan and the option grants on
October 5, 1995.  Approval of the 1995 Plan is one of the items to be considered
at the Key Special Meeting.  (See "Proposals to be Voted upon at the Key Special
Meeting--Item 4: Adoption and Approval of the Key 1995 Stock Option Plan"). Upon
and subject to approval  of the 1995 Plan,  the Grant Plan will be canceled  and
will be replaced in its entirety by the 1995 Plan.

         The 1995 Plan provides for the grant of options  designed to qualify as
"incentive stock options" ("ISOs") within the meaning of Section 422 of the Code
and options not designed to qualify for such special tax treatment ("NSOs"),  to
purchase up to an  aggregate  of 1,150,000  shares of Key Common  Stock.  Unless
sooner  terminated,  the 1995 Plan will terminate on July 1, 2005 and no options
may be granted pursuant to the 1995 Plan after June 30, 2005. The 1995 Plan will
be administered  by the Committee  consisting of at least three (3) directors of
Key, each of whom is, to the extent so required,  both a "disinterested  person"
within the meaning of Rule 16b-3 of the Exchange  Act and an "outside  director"
within the  meaning  of  Section  162(b) of the Code.  The  Committee  currently
consists of Messrs. Greenfield, Manly and Wolkowitz.

         Subject  to  approval  by Key  stockholders,  options to  purchase  the
respective  number of shares of Key  Common  Stock  shown  below  were  granted,
effective  July 6, 1995,  to executive  officers and other key  employees of Key
under the 1995 Plan:

             Optionee                           Number of Shares

             Francis D. John                        500,000
             C. Ron Laidley                         125,000
             D. Kirk Edwards                        100,000
             Danny Evatt                             50,000
             Other key employees                    175,000
                                                    -------
                         Total                      950,000

         All of such  options are  exercisable  at $5.00 per share,  the closing
price of Key Common Stock on July 6, 1995, the date of the grant,  and, with the
exception of 150,000  options  granted to Mr. John,  will generally vest in four
annual installments,  with the first installment to vest effective July 6, 1995,
subject to acceleration  of vesting upon the occurrence of certain events.  Upon
approval of the 1995 Plan by the stockholders,  compensation  expense associated
with these options will be recorded over the vesting period  beginning in fiscal
1996.  Compensation expense to be recognized over such period will be calculated
based on the  value of the  options  at the date 1995  Plan is  approved  by the
shareholders.  Options to purchase  150,000 shares granted to Mr. John will vest
on the first date (occurring on or after July 1, 1995 but prior to July 1, 1999)
on which the fair  market  value of Key Common  Stock  equals at least $9.50 per
share.  Compensation expense will be measured as the value of the options on the
first date on which vesting becomes  probable.  (See "Proposals to be Voted upon
at the Key Special  Meeting--Item 4: Adoption and Approval of the Key 1995 Stock
Option Plan.")

                                      -48-

<PAGE>



         Outside  Directors Stock Option Plan. On July 6, 1995, the Compensation
Committee  adopted,  subject to Board of Directors and stockholder  approval,  a
stock option plan for its outside directors (the "Outside Directors Plan") which
provides  for the grant of options to purchase a total of 300,000  shares of Key
Common Stock to the outside  directors  of Key.  The Board  approved the Outside
Directors  Plan on October 5,  1995.  Under the  Outside  Directors  Plan,  each
outside director who was a member of the Executive Committee on July 1, 1995 and
remains an Outside  Director at the time of stockholder  approval of the Outside
Directors Plan will automatically receive an option to purchase 50,000 shares on
July 6, 1995 and an option  to  purchase  25,000  shares on July 1,  1996;  each
outside director who was not a member of the Executive Committee on July 1, 1995
and  remains an Outside  Director  at the time of  stockholder  approval  of the
Outside Directors Plan will  automatically  receive an option to purchase 25,000
shares  effective July 5, 1995 and an option to purchase 25,000 shares effective
July 1, 1996;  and each outside  director who first becomes an outside  director
after July 1, 1995,  but prior to July 1, 1996,  will  automatically  receive an
option purchase 50,000 shares on July 1, 1996. The exercise price of each option
will be the fair  market  value of Key  Common  Stock on the date of the  grant.
Compensation  expense  relative  to such  options  will be  measured in a manner
similar to options  issued under the 1995 Stock Option Plan.  The  expenses,  if
any,  will be  recognized  over the two-year  period  ended June 30,  1997.  The
Outside  Directors  Plan is one of the items to be considered at the Key Special
Meeting.  (See "Proposals to be Voted upon at the Key Special  Meeting--Item  5:
Adoption and Approval of the Outside Directors Stock Option Plan.")


         Yale E. Key Plan.  Yale E. Key  maintains a 401-(k)  Plan which  covers
substantially  all of the employees of Yale E. Key. Key made a  contribution  to
the 401-(k)  Plan in fiscal  1995 in the amount of  $20,000,  but did not make a
contribution in fiscal 1994 or 1993.

         Employment Agreements with Executive Officers.  Until July 1, 1995, Mr.
John was a party to an employment letter agreement (the "Letter Agreement") with
Key which  provided that Mr. John would receive  $225,000 in salary per year and
would also be eligible to earn a cash bonus, Common Stock grant or options based
on  his  individual  and  Key's  performance.  In  addition,  if Mr.  John  were
terminated,  the  Letter  Agreement  provided  that he would  receive  severance
payments in an amount of up to approximately $244,000 and benefits, comprised of
life insurance, health insurance and use of a car, for up to 13 months after the
date of termination.

         Effective  as of  July  1,  1995,  Key  entered  into a new  employment
agreement  with Mr. John which  provides  that Mr. John will serve as President,
Chief  Executive  Officer and a Director of Key for a three year term commencing
July 1, 1995 and continuing until June 30, 1998, and thereafter the term will be
automatically  extended for successive one year terms unless terminated no later
than  30  days  prior  to the  commencement  of an  extension  term.  Under  the
agreement,  Mr. John will receive a base  compensation  of $325,000 per year and
will  be  eligible  for  annual  incentive  compensation  of up to 30%  of  base

                                      -49-

<PAGE>


compensation  contingent  upon Key's  achievement  of goals to be set forth in a
strategic  plan to be developed by the Executive  Committee.  Base  compensation
will be reviewed  annually and may be increased (but not decreased) by the Board
of Directors in its discretion.  Pursuant to the agreement,  upon and subject to
completion by Key of a significant  merger or other major corporate  transaction
in fiscal 1996 or 1997,  Mr. John will also receive a bonus of $250,000  payable
in four equal  installments,  commencing on the date of completion of the merger
or other  transaction and thereafter at equal  intervals  determined so that the
final  installment is paid on January 1, 1998.  Payments made after July 1, 1995
will bear interest at 6%. The determination of when a merger is "significant" or
other  corporate  transaction  "major",  so as to entitle Mr. John to the bonus,
will be made by the Board of Directors. The Board has determined that the Merger
is a significant merger and,  accordingly,  Mr. John will be entitled to a bonus
as described  above. The agreement also provides for the grant of options to Mr.
John  described  above under "1995 Stock Option Plan." If during the term of the
agreement Mr. John is  terminated by Key for any reason other than cause,  or if
he terminates his employment for a good reason or following a change of control,
he  will  receive  severance   compensation   equal  to  three  times  his  base
compensation in effect at the time of  termination,  payable in 36 equal monthly
installments,  provided,  however,  that if termination results from a change of
control,  severance  compensation  will be  payable in a lump sum on the date of
termination.  Mr. John is also subject to restrictions on competition during the
term of the agreement and, with certain  exceptions,  the severance period.  Mr.
John has waived his rights with  respect to a change of control  resulting  from
the Merger with WellTech.


         Key has also entered into employment agreements as of July 1, 1995 with
Messrs.  Laidley and Evatt. Mr. Laidley's  agreement provides that he will serve
as  President  of Yale E Key for a three year term  commencing  July 1, 1995 and
thereafter for successive one year terms unless  terminated 30 days prior to the
commencement  of an extension  term,  receive base  compensation of $192,000 per
year,  participate in an incentive  compensation plan providing for cash bonuses
up to 50% of base  compensation,  and  receive  stock  options  under 1995 Stock
Option Plan.  Mr. Evatt's  agreement  provides that he will serve as Key's Chief
Accounting  Officer  and  Treasurer  for a term  identical  to the  term  in Mr.
Laidley's agreement, receive base compensation of $105,000 per year, participate
in an incentive  compensation plan, providing for cash bonuses up to 30% of base
compensation, and receive stock options under 1995 Plan.

         In connection with the acquisition of Odessa  Exploration,  Key entered
into a three year  employment  agreement  with D. Kirk  Edwards.  The  agreement
provides  for an annual  salary of $125,000  and a bonus  contingent  upon Key's
attainment of certain  earnings  criteria from certain wells. The amount of such
bonus for fiscal 1995 and fiscal 1994 is  reflected  in the  compensation  table
above.

         Effective  February 1, 1995,  Max Emmert III retired as a Director  and
Vice  President of Key and as President and Chief  Executive  Officer of Yale E.
Key. During the three year period  commencing  February 1, 1995, Mr. Emmert will
receive $112,500 per year,  reimbursement of reasonable  automobile expenses and
health and life  insurance  and will serve as a  consultant  and Chairman of the
Board of Directors  of Yale E. Key.  Mr.  Emmert has also agreed that for a five
year period,  commencing  February 1, 1995,  he will not directly or  indirectly
compete with Key or its subsidiaries.

         Effective as of and subject to consummation of the Merger, Key and each
of Messrs. Hill and Huseman have agreed to enter into employment agreements. The
employment agreements are expected to be for three years and to provide for base
compensation of $180,000 per year,  participation  in an incentive  compensation
plan providing for cash bonuses up to 50% of base compensation and participation
in Key's 1995 Stock  Option  Plan.  Mr. Hill will serve as  President  and Chief
Executive Officer of the Key subsidiary which will operate WellTech's  NorthEast
operations subsequent to the Merger, and Mr. Huseman will serve as President and
Chief  Executive  Officer of the Key  subsidiary  which will operate  WellTech's
Mid-Continent operations subsequent to the Merger.

                                      -50-

<PAGE>


         Other Compensation. Key has no other deferred compensation,  pension or
retirement plans in which executive officers participate.

         Compensation  Committee  Interlocks  and  Insider  Participation.   The
following  persons  served  as  members  of the  Compensation  and  Stock  Grant
Committee of the Board of Directors (the  "Compensation  Committee")  during the
year ended June 30, 1995: Van Greenfield,  William Manly, and Morton  Wolkowitz.
None of the members of the Compensation Committee were employees of Key.

         Compensation   Committee   Report.   The   Compensation   Committee  is
responsible for establishing Key's compensation philosophy and policies, setting
the terms of and  administering  the Key 1995 Stock  Option Plan and other stock
option or stock  grant  plans  which may from  time to time be  adopted  by Key,
reviewing and approving  employment  contracts  and salary  recommendations  for
executive  officers of Key and setting the  compensation for the Chief Executive
Officer of Key. Key's overall compensation  philosophy is to align the financial
interest of Key's management with those of its stockholders, taking into account
Key's  expectations for growth and  profitability,  the necessity to attract and
retain  the  best  possible  executive  talent  and  to  reward  its  executives
commensurate  with  their  ability to enhance  stockholder  value.  Accordingly,
employment  agreements with the executive  officers approved by the Compensation
Committee provide for compensation  consisting of base salary,  participation in
an incentive  compensation  plan based upon  performance and stock options.  The
Compensation  Committee's decision to recommend termination of Key's Stock Grant
Plan and adoption of the Key 1995 Stock Option Plan was taken, in part, to align
more closely the  financial  interests of executive  officers and key  employees
with those of Key's  stockholders.  The  Compensation  Committee  believes  that
providing  executives with  opportunities to acquire  significant  stakes in the
growth and  prosperity  of Key through  grants of stock options will both enable
Key to attract and retain executives with the outstanding  managerial  abilities
essential to Key's success,  motivate these  executives to perform to their full
potential and enhance stockholder value.

         In  approving  base and  incentive  compensation  levels for  executive
officers,  the  Compensation  Committee  has  considered  the actual  results of
operations of Key compared with Key's internal projections and target levels for
revenues,  income before taxes and extraordinary  items, net income and earnings

                                      -51-

<PAGE>

per share. The Compensation Committee determined that in each of the three years
ended June 30, 1995,  Key exceeded its internal  projections  and target levels.
During the three year period, salary increases and bonuses had been conservative
and  modest  compared  with  Key's  performance,   in  large  part  due  to  the
Compensation  Committee's and the Board of Directors'  cautious and conservative
approach following Key's successful  reorganization in December 1992. In lieu of
bonuses for the fiscal year ended 1995, the  Compensation  Committee  elected to
approve the employment  agreements  with executive  officers which are described
elsewhere  in  this  Proxy  Statement-Prospectus.  These  employment  agreements
provide for  significant  bonuses in future years based upon an  incentive  plan
adopted by Key.  Bonus awards under the  incentive  plan will be based upon both
Key or Key's respective  operating  subsidiary  achieving certain earnings goals
and the  attainment of individual  qualitative  goals relating to the employee's
position and responsibilities  with Key. The Board of Directors determines Key's
overall  earnings  goals and,  with the review and approval of the  Compensation
Committee,  the  Chief  Executive  Officer  sets  the  earnings  and  individual
qualitative goals for Key's operating subsidiaries.

         The employment agreements also provide for option grants under the 1995
Stock Option Plan. In  determining  stock option grants for executive  employees
under the 1995 Stock Option Plan, the Compensation  Committee considered,  among
other things, the value of the shares reserved for grant to such employees under
the  Grant  Plan,  rights  to which are being  surrendered  in  connection  with
adoption of the 1995 Stock  Option  Plan and the  employee's  position  with and
contributions to Key, performance, salary and the price of the Key Common Stock.

         Fiscal year 1995  compensation for Mr. John as Chief Executive  Officer
and Chief Financial  Officer  consisted of his base salary of $250,000 under the
now superseded  Employment Letter. In lieu of bonus compensation for fiscal 1995
and in consideration  of the other factors  described  herein,  the Compensation
Committee  structured the new employment  agreement with Mr. John.  Compensation
under and the other terms and conditions of Mr. John's new employment  agreement
were determined  after  consideration  and analysis of, among other things,  the
following factors:  Key's three year performance history and the relationship of
Key's  performance  to  internal  projections  and  targets,  all of which  were
exceeded; the modest salary increases and conservative bonuses paid to the Chief
Executive  Officer  during  the  three  year  period;  average  cash  and  other
compensation  and equity  positions  of chief  executive  officers  of  selected
companies  deemed by the  Compensation  Committee  to be  comparable;  the Chief
Executive  Officer's  central  role  in  Key's  successful   reorganization  and
operating  results  since the  reorganization;  Key's  deferral  of  payment  of
emergence or success bonuses to its Chief Executive  Officer;  the fact that the
Chief Executive  Officer has also performed the functions of the Chief Financial
Officer thereby reducing corporate  overhead;  the fact that the Chief Executive
Officer  has   identified,   negotiated   and  structured   several   beneficial
acquisitions  and financings  without payment of investment  banking or finders'
fees or receipt of bonuses  with respect  thereto;  and Key's  determination  to
shift from a stock  grant to a stock  option  plan,  including  certain  options
linked  directly to increases in the price of Key's Common Stock,  and the Chief
Executive  Officer's  agreement to forego  designated and committed awards under
the Stock Grant Plan.

         Since Key's  reorganization  in December 1992, total  shareholder value
has increased  from a negative net worth of $5.6 million at November 30, 1992 to
a positive net worth of $20.8  million at September 30, 1995, an increase in net

                                      -52-

<PAGE>


worth of over $26  million.  In addition  to leading  Key  through its  critical
post-reorganization   period,  Mr.  John  strengthened  Key's  position  through
strategic  acquisitions,  including the acquisitions of Odessa Exploration,  the
WellTech West Texas assets and Clint Hurt,  and by negotiating  and  structuring
financings  for Key.  The Merger with  WellTech  now in progress is an important
step in positioning  Key as a leader in the well servicing  business.  Corporate
overhead  has  remained  low and  staffing  patterns  lean.  In these  and other
initiatives,  Mr. John has enhanced Key's ability to compete effectively and has
positioned  Key to  participate  in future growth in the industry and to enhance
stockholder value.

         The Compensation Committee believes that its current policies have been
and will  continue to be  successful  in aligning  the  financial  interests  of
executive  officers  with  those of Key's  stockholders  and Key's  performance.
Nevertheless,  the Compensation  Committee intends to continue to review whether
and how to modify its policies to further link executive  compensation with both
individual and Company performance.

                                                  Van Greenfield
                                                  William Manly
                                                  Morton Wolkowitz

         Shareholder Return Performance Presentation. Set forth below is a chart
comparing  the yearly change in Key's Common Stock against the S&P 500 Index and
the SCI  Production/Well  Service Group Index ("Peer Group") provided by Simmons
for the last three years.




                      1992          1993             1994            1995
                      ----          ----             ----            ----
Key                   100           200.0            171.1           231.1
S&P 500               100           110.1            111.5           153.4
Peer Group            100           133.9            104.3           133.0



                                      -53-


<PAGE>




              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF KEY

         On August 5, 1993, Key completed the acquisition of Odessa Exploration,
which was  effective  as of July 1, 1993,  in  consideration  of the issuance of
150,000 shares of Key Common Stock to D. Kirk Edwards,  the former owner and the
now current President and Chief Executive Officer of Odessa Exploration, and the
assumption of approximately $1.8 million in bank debt. Key has guaranteed all of
the assumed  bank debt.  In  connection  with the  acquisition,  Key granted Mr.
Edwards  a  percentage  reversionary  working  interest  in five  deep gas wells
located  in west Texas  upon  repayment  of  approximately  $1.6  million of the
assumed  bank debt from  Key's  earnings  from the five  wells.  The  percentage
reversionary  working  interest  decreases based on the date of repayment of the
assumed  bank debt and ranges  from 20% of the  earnings  from the five wells if
repayment  occurs on or prior to July 7, 1995,  to 5% of the  earnings  from the
five wells if repayment occurs after July 7, 1996.

         Key leases automotive  equipment from an independent third party, which
purchases the equipment  from an automobile  dealership in which Mr.  Emmert,  a
former officer and director of Key, has a majority interest. The net proceeds to
the automotive dealership totaled $399,000,  $1,058,000, and $713,000 for fiscal
1995,  fiscal 1994 and the twelve months ended June 30, 1993,  respectively.  In
the  opinion of the Board of  Directors  of Key,  the  purchases  of  automotive
equipment were on terms at least as favorable to Key as could have been obtained
from a third  party.  This opinion is based on  information  provided by a third
party leasing  company,  that is not affiliated  with the officer or Key, to the
Board  regarding  purchase  prices and equipment  lease rentals offered by third
parties and the conclusion of the Board that the leases of automotive  equipment
were as favorable as leases of  automotive  equipment  from third party  leasing
companies, who did not make purchases from Mr. Emmert's automobile dealership.

         Key paid  $55,000 and  $90,000  for fiscal  1994 and the twelve  months
ended June 30, 1993, respectively,  for oil field related services and equipment
to two oil field related  companies in which Mr.  Laidley and Mr. Emmert have an
interest.  In the opinion of the Board of Directors of Key,  based on its review
of competitive  bids, these  transactions were on terms at least as favorable to
Key as could have been obtained from a third party.


         In March of 1995,  Odessa  Exploration  entered into a credit agreement
with Norwest Bank Texas, Midland, N.A. ("Norwest"). As part of this transaction,
seven individuals,  including Messrs.  Wolkowitz,  Emmert, Laidley,  Edwards and
John, as attorney in fact for one of his children,  pledged  approximately  $2.7
million  in  collateral  to secure  Odessa  Exploration's  credit  facility.  As
compensation for such pledge, Key paid these individuals a one-time fee equal to
1% of the  collateral  each  individual  pledged.  Key also  agreed to pay these
individuals a monthly fee equal to 3% per annum of the  collateral  pledge.  The
aggregate fees paid to such seven  individuals  during 1995 were $72,250.  Key's
Board of Directors  believes that these fees were on terms at least as favorable
to Odessa  Exploration  as could have been  obtained  from a third party.  As of
December  31, 1995,  Norwest  waived the pledge of  collateral  and released the
collateral to the seven individuals who had pledged it.


                                      -54-


<PAGE>




                         SELECTED FINANCIAL DATA OF KEY

         The following table sets forth the selected consolidated financial data
of Key for the five  years  ended  June 30,  1995 and for the six  months  ended
December 31, 1995 and 1994.  This data should be read in conjunction  with Key's
Financial  Statements  and the Notes thereto and  "Management's  Discussion  and
Analysis  of  Results of  Operations  and  Financial  Condition  of Key",  which
follows.


<TABLE>
<CAPTION>

                                                            Fiscal      Fiscal                               Fiscal     Fiscal 
                                          Six Months        Year        Year   Seven Months  Five Months     Year       Year
                                            Ended           Ended        Ended     Ended        Ended        Ended       Ended
                                         December 31,      June 30,     June 30,  June 30,     Nov. 30,     June 30,    June 30,
                                        1995     1994        1995        1994       1993       1992(3)       1992(3)     1991(3)
                                         (unaudited)
                                                                       (in thousands except per share data)

OPERATING DATA:
<S>                                 <C>         <C>      <C>         <C>        <C>           <C>         <C>         <C>

  Revenues                           $ 24,792  $ 21,962   $   44,689   $  34,621 $    14,256    $ 10,433   $  21,535   $  24,223
  Income from continuing operations
    before reorganization items, income
    taxes and extraordinary item        2,224     1,487        3,328       2,295       1,124         400           83       1,716
  Income from continuing operations
    before extraordinary item           1,494     1,011        2,178       1,345         711       2,118          557       1,011
  Income (loss) before 
      extraordinary item                1,494     1,011        2,178       1,345         711       2,118         (345)     (5,216)
  Net income (loss)                     1,494     1,011        2,178       1,345         711       4,986         (345)     (5,186)
  Income (loss) applicable to common
     shareholders                       1,494     1,011        2,178       1,345         711       4,986         (596)     (5,571)
  Income (loss) per common share:
    Primary:
  Income from continuing operations
    before reorganization items, 
    income taxes and 
     extraordinary item                $ 0.32  $   0.23   $     0.50   $    0.44    $   0.21    $   0.02    $   0.02   $    0.05
      Income from continuing 
        operations before 
        extraordinary item             $ 0.22  $   0.16   $     0.33        0.26        0.21    $   0.12    $   0.02        0.05
      Income (loss) before
         extraordinary                   0.22      0.16         0.33        0.26        0.14        0.12       (0.04)      (0.44)
      Net income (loss)                  0.22      0.16         0.33        0.26        0.14        0.28       (0.04)      (0.44)
    Assuming full dilution:
  Income from continuing operations
    before reorganization items, 
    income taxes and 
    extraordinary item                 $ 0.32  $   0.23   $     0.50   $    0.43    $   0.21    $   0.00   $    0.01   $    0.02
      Income from continuing 
        operations before 
        extraordinary item             $ 0.22  $   0.16   $     0.33        0.25        $.21        0$01         $.01       0.02
      Income (loss) before 
        extraordinary                    0.22      0.16         0.33        0.25        0.14        0.01       (0.02)      (0.14)
      Net income (loss)                  0.22      0.16         0.33        0.25        0.14        0.03       (0.02)      (0.14)
  Average common shares outstanding:
    Primary                             6,914     6,500        6,647       5,274       5,124      17,942       14,717      12,684
    Assuming full dilution              6,914     6,500        6,647       5,288       5,138     176,508       38,339      40,720
  Common shares outstanding 
    at period end                       6,914     6,914        6,914       5,274       5,124      17,942       17,942      14,717
  Market price per common share 
    at period end                    $   6.38   $  4.63     $  5.06         4.67       3.67            *    $    0.06        0.19
  Cash dividends paid on 
    common shares                    $      -   $     -     $     -      $     -    $     -      $     -    $       -           -

</TABLE>


                                   (continued)

                                      -55-

<PAGE>

<TABLE>
<CAPTION>


                                                            Fiscal      Fiscal                               Fiscal     Fiscal  
                                          Six Months        Year        Year   Seven Months  Five Months     Year       Year
                                            Ended           Ended        Ended     Ended        Ended        Ended       Ended
                                         December 31,      June 30,     June 30,  June 30,     Nov. 30,     June 30,    June 30,  
                                        1995     1994        1995        1994       1993       1992(3)       1992(3)     1991(3)
                                         (unaudited)
                                                                       (in thousands except per share data)



BALANCE SHEET DATA:
<S>                                 <C>        <C>        <C>          <C>        <C>                <C>   <C>         <C>

  Property and equipment, net        $ 34,392  $ 28,415     $ 31,942    $ 17,159     $ 9,688           *      $ 7,417     $ 7,079
  Total assets                         47,511    39,379       45,243      28,095      15,906           *       12,239      11,829
  Long-term debt                       15,237    12,837       13,700       9,497       4,396           *        4,483       3,939
  Liabilities subject to compromise         -         -            -           -           -           *        7,398       7,398
  Preferred stock                           -         -            -           -           -           *          115         115
  Stockholders' equity (deficit)       21,605    18,861       20,111       9,263       7,280           *      (4,938)     (4,287)
  Book value per common share        $   3.12   $  2.73     $   2.91     $  1.76    $   1.42           *    $  (0.26)      (0.27)
  * - Not applicable due to Key's  
     1992 Reorganization Plan.
</TABLE>




  * - Not applicable due to Key's  1992
        Reorganization Plan.


(1)      Earnings per common  share for the five months ended  November 30, 1992
         and prior period,  reflect the previous capital structure of Key Energy
         Group, Inc. (previously "National  Environmental Group, Inc.") prior to
         the 1992  Reorganization  Plan  and are not  comparable  to  subsequent
         periods.
         See Note 3 to Key's  Consolidated  Financial  Statements  for the years
         ended June 30,  1995 and 1994 and for the seven  months  ended June 30,
         1993 and five months ended November 20, 1992.

                                      -56-


<PAGE>



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF KEY

         The  following   discussion  provides  information  to  assist  in  the
understanding of Key's financial condition and results of operations.  It should
be read in conjunction with the consolidated  financial statements and the notes
thereto of Key appearing elsewhere herein.


         Six Months  Ended  December  31,  1995  Compared  to Six  Months  Ended
December 31, 1994

         Operating  results for the six months  ended  December 31, 1995 include
Key's oil field well  service  operations  conducted by Yale E. Key, its oil and
natural  gas   exploration  and  production   operations   conducted  by  Odessa
Exploration,  and oil and natural gas well contract drilling  conducted by Clint
Hurt.


         Historically,  fluctuations in oilfield well service operations and gas
well contract  drilling  activity have been closely  linked to  fluctuations  in
crude oil and natural gas prices.  However,  Key, through customer alliances and
agreements,  and diversification of services, is seeking to minimize the effects
of such fluctuations on its results of operations and financial condition.

Results of Operations


         Key.  Revenues for the six months ended December 31, 1995 increased 13%
to $24,792,000 from $21,962,000 for the comparable 1994 period, while net income
of $1,494,000  increased 48% over the prior six month total of  $1,011,000.  The
increase in revenues was primarily due to the addition of Clint Hurt on April 1,
1995, whose operations were not included in the prior year's quarterly  results.
The  improvement  in  quarterly  net  income is  partially  attributable  to the
inclusion  of Clint Hurt,  but is also a result of an increase in net income for
Odessa  Exploration and a decrease in total  consolidated Key costs and expenses
as a percent of total revenues.

         Yale E. Key.  Oilfield service revenue declined 8% from $20,923,000 for
the prior six months to  $19,148,000  for the current  quarter.  The decline was
primarily  attributable  to  curtailed  equipment  utilization  as the result of
adverse weather conditions and a slight decline in demand.  Yale E. Key averaged
an 82% equipment utilization for the period. However, the gross margin increased
from 22% to 26% of revenues  for the current  period due to lower  expenses  and
costs and to the  continued  diversification  of  services  into  higher  margin
business  segments  such as oilfield  frac  tanks,  oilfield  fishing  tools and
trucking operations.

         Odessa Exploration.  Revenues from oil and gas activities increased 60%
from  $1,077,000  in the  prior  period to  $1,727,000  for the  period  despite
relatively  constant  crude oil and lower  natural gas prices.  The  increase in
revenues was primarily the result of increased production of oil and natural gas
as several  drilled oil and natural gas wells began  production  during the 1996
period.

                                      -57-

<PAGE>


         Of the  total  of  $1,727,000  in  revenues  for the six  months  ended
December 31, 1995,  approximately  $1,308,000 was from the sale of oil and gas -
44,351  barrels of oil at an average  price of $16.19 per barrel and 479,149 mcf
of natural gas at an average price of $1.62 per mcf. The  remaining  $419,000 of
revenues represented primarily administrative fee income.

         Clint Hurt. Clint Hurt was acquired in March 1995 . Comparable  numbers
for the prior quarter are, therefore, not available.


Depreciation, Depletion and Amortization


         Depreciation , depletion and  amortization  expense  increased 44% from
$1,245,000  to  $1,794,000  during the six months  ended  December  31,  1995 as
compared  with the prior  period.  The  increase was  primarily  due to oilfield
service depreciation expense,  which resulted from increased capital expenditure
depreciation  for the current period compared to the prior period.  In addition,
depletion expense,  generated by Odessa  Exploration,  increased for the current
period due to the increase in the production of oil and natural gas.


Interest Expense


         Interest  expense for Key increased  40% from  $627,000  during the six
months ended December 31, 1994 to $877,000 for the current period.  The increase
was primarily the result of acquisitions and the addition of certain oil and gas
properties by Odessa Exploration .


General and Administrative Expenses


         General and  administrative  expenses  include  those of Key as well as
Yale E. Key, Odessa  Exploration and Clint Hurt. These expenses increased 31% to
$2,390,000  during  the six  months  ended  December  31,  1995 as  compared  to
$1,822,000  for the three months  ended  September  30,  1994.  The increase was
primarily attributed to the acquisition and subsequent inclusion of Clint Hurt's
general and administrative expenses.


Income Tax Expense


         Income tax expense for Key for the six months  ended  December 31, 1995
and 1994 was $730,000 and $476,000 respectively.


Net Income


         Net income before income taxes was  $2,224,000 for the six months ended
December 31, 1995,  which was an increase of $737,000 or 50% over $1,487,000 for
the  comparable  quarter in 1994. The increase in net income before income taxes
was  primarily  due to the  addition  of Clint  Hurt and  increased  oil and gas
revenues.  Net income for the six months ended December 31, 1995 was $1,494,000,
an increase of 48% from $1,011,000 for the six months ended December 31, 1994.


                                      -58-

<PAGE>  

Cash Flow


         Net cash  provided by  operations  increased  $2,925,000  from $121,000
during the six months  ended  December  31, 1994 to  $3,046,000  for the current
period.  The  increase  was  attributable  primarily  to a smaller  increase  in
accounts  payable and accrued  expenses  and higher net income and  depreciation
expense compared to the same period last year.

         Net cash used in investing activities increased from $3,117,000 for the
six months ended  December 31, 1994 to $4,244,000  for the current  period.  The
increase  was  primarily  the result of increased  expenditures  for oil and gas
properties . In addition,  net cash used in investing activities for the current
period included $360,000 used in the oil and gas well drilling operations.

         Net cash provided by financing activities decreased to $878,000 for the
six months ended  December 31, 1995 as compared to $2,790,000 for the comparable
period in 1994.  The decrease was  primarily  the result of increased  principal
payments  made during the current  period  compared to the prior  period,  and a
decrease in proceeds  from  long-term  debt  during the  current  period.  Such
proceeds  were  primarily  used for the oil and  natural  gas  drilling  program
conducted by Odessa Exploration.


Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994

Results of Operations

         Results of operations for the fiscal years ended June 30, 1994 and 1995
include Key's oil field well service operations,  its oil and gas operations and
its oil and gas drilling operations.  Comparative results during the period were
effected to a significant extent by the several  acquisitions made by during the
period as follows:

o        In March 1995, Key acquired from Clint Hurt & Associates ("CHA") all of
         CHA's assets in West Texas, which consisted principally of four oil and
         gas  drilling  rigs  and  related  equipment.   As  a  result  of  this
         acquisition,  Key entered into the business of drilling oil and natural
         gas wells for independent and major oil companies primarily in the West
         Texas region.

o        In August 1994, Key consummated the acquisition of substantially all of
         WellTech's assets used in its oil and gas well servicing business in 
         West Texas.  Prior to consummation of the acquisition, in December
         1993, Key entered into an interim operating agreement under which it
         operated the West Texas division of WellTech.

o        In August 1993, Key acquired Odessa Exploration and, as a consequence,
         commenced operation of oil and natural gas wells and exploration for
         oil and natural gas in the Permian Basin area of West Texas.

                                      -59-

<PAGE>

Operating Income

         Fiscal 1995 revenues of $44,689,000  increased  $10,068,000 or 29% over
fiscal 1994 revenues of $34,621,000.  Fiscal 1995 revenues  increased due to the
acquisition  of oil and gas  producing  properties  by Odessa  Exploration,  the
operation of the assets of WellTech West Texas (which  included twelve months of
fiscal 1995 and seven months of fiscal 1994),  and the additional  revenues from
Clint Hurt (which was acquired in March 1995).  In  addition,  Key  continued to
expand its services offering oil well fishing tools, blow-out preventers and oil
well frac tanks.

         Fiscal 1995 costs and expenses of $41,361,000  increased  $9,035,000 or
28% over fiscal 1994 costs and  expenses of  $32,326,000.  Fiscal 1995 costs and
expenses  increased  primarily due to the  operations of WellTech West Texas and
the  acquisition of Clint Hurt as well as increased lease operating costs due to
acquisitions of oil and gas producing properties by Odessa Exploration.

         Income before income taxes was $3,328,000 for fiscal 1995,  which was a
45%  increase  from  $2,295,000  in fiscal 1994.  The increase in income  before
income taxes was due to the  increase in revenues  for the current  fiscal year,
the acquisition by Odessa  Exploration of producing oil and gas properties,  the
operations of WellTech West Texas and the acquisition of Clint Hurt.

Interest Expense

         Interest  expense   increased  from  $830,000  during  fiscal  1994  to
$1,478,000  during  fiscal  1995,  primarily as a result of  borrowings  for the
acquisition  and  drilling  of  oil  and  gas  producing  properties  by  Odessa
Exploration and the acquisition of Clint Hurt.

General and Administrative Expenses

         General  and  administrative  expenses  increased  23% or  $812,000  to
$4,352,000 during fiscal 1995 from $3,540,000 during fiscal 1994,  primarily due
to increased  expenses of Odessa  Exploration  and the acquisition of Clint Hurt
and  WellTech  West  Texas.  However,  as a percent  of  revenues,  general  and
administrative  expenses  decreased from 10.2% of revenues during fiscal 1994 to
9.7% of revenues during fiscal 1995.

Depreciation and Depletion Expense

         Depreciation  and  depletion  expense  increased  100% to $2,738,000 in
fiscal  1995  from  $1,371,000  in  fiscal  1994 due  mainly  to the  additional
depreciation  expense associated with the acquisition of the WellTech West Texas
oil  field  service  equipment  and  subsequent  capital  expenditures  on  such
equipment.

Income Taxes

         Income  tax  expense  of  $1,150,000  for fiscal  1995  increased  from
$950,000 in income tax expense for fiscal 1994. The increase in income taxes was
primarily due to the increase in operating income.  However, Key does not expect
to be required to remit a significant amount of the $1,150,000 in federal income
taxes in cash during fiscal 1996,  because of the  availability of net operating
loss carry forwards.
                                      -60-


<PAGE>

Net Income

         Net income for fiscal 1995 was  $2,178,000  compared to $1,345,000  for
fiscal 1994, a 62% increase, as a consequence of the foregoing factors.

Cash Flow

         Net cash provided by operating  activities increased 77% or $1,416,000,
from  $1,842,000  during the 1994 fiscal year to $3,258,000  for the 1995 fiscal
period. The increase was attributable primarily to an increase in net income.

         Net cash used in investing activities increased 28% from $5,608,000 for
fiscal 1994 to $7,154,000 for fiscal 1995. The increase was primarily the result
of  increased  capital  expenditures  for  oil  and  gas  properties  and  costs
associated  with the  acquisition  of Clint Hurt.  This  increase was  partially
offset by a decrease  in oil field  service  capital  expenditures.  The capital
expenditures  for the oil  field  service  operations  during  fiscal  1994 were
primarily the result of the  improvements  necessary for the WellTech West Texas
equipment.

         Net cash provided by financing  activities  was $3,998,000 for the 1995
fiscal  year as  compared  to  $4,316,000  for fiscal  1994.  The  decrease  was
primarily the result of increased  principal  payments  during fiscal 1995. This
increase in principal  payments was somewhat  off-set by an increase in proceeds
from  long-term  debt during  fiscal 1995 as the result of the  financing of the
improvement costs to the equipment of the West Texas operations of WellTech, the
purchase of oil and gas properties by Odessa  Exploration and the acquisition of
Clint Hurt.

Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993

         Results of  operations  for the fiscal year ended June 30, 1994 include
Key's oil field well service operations and its oil and gas operations.  Results
of  operations  for the five months ended  November 30, 1992 (prior to emergence
from bankruptcy) and the seven months ended June 30, 1993 have been combined for
fiscal 1993 for comparison to fiscal 1994.

Operating Income

         Fiscal 1994 revenues of  $34,621,000  increased  $9,932,000 or 40% over
fiscal 1993 revenues of $24,689,000 due to the acquisition of Odessa Exploration
and the operation of the assets of WellTech West Texas. In addition, Yale E. Key
expanded its services to offer oil well fishing tools,  blow-out  preventors and
oil well frac tanks.
                                      -61-

<PAGE>


         Fiscal 1994 costs and expenses increased  $9,161,000 or 40% over fiscal
1993  costs  and  expenses  of  $23,165,000  due to the  acquisition  of  Odessa
Exploration and the West Texas  operations of WellTech as well as start-up costs
for the several new services offered by Yale E. Key.

         Income  before  reorganization  items,  income taxes and  extraordinary
items was $2,295,000 for the year ended June 30, 1994,  which was an increase of
51% from $1,524,000 in fiscal 1993. The increase in income before reorganization
items,  income  taxes and  extraordinary  items was due to the increase in gross
revenues  for 1994  fiscal and the  acquisition  of Odessa  Exploration  and the
operations of WellTech West Texas.

         Net  income  for  fiscal  1994  was  $1,345,000,  a 21%  increase  from
$1,111,000  for fiscal 1993,  before an adjustment of $4,586,000  related to the
1992  reorganization  plan,  pursuant to which Key emerged from  bankruptcy (the
"1992 Reorganization Plan").

Interest Expense

         Interest  expense  increased  12% from  $740,000  during fiscal 1993 to
$830,000 during fiscal 1994,  primarily as a result of the acquisition of Odessa
Exploration. The increase in interest expense was partially offset by a decrease
in interest  expense for the seven months ended June 30, 1993 as a result of the
successful consummation of the 1992 Reorganization Plan.

General and Administrative Expenses

         General  and  administrative  expenses  increased  $836,000  or  31% to
$3,540,000 during fiscal 1994 from $2,704,000 during fiscal 1993,  primarily due
to the  acquisition  of Odessa  Exploration  and the West  Texas  operations  of
WellTech. However, as a percent of revenues, general and administrative expenses
decreased  from 11% of revenues  during  fiscal  1993 to 10% of revenues  during
fiscal 1994.

Depreciation and Depletion Expense

         Depreciation  and depletion  expense  increased to $1,371,000 in fiscal
1994 from  $911,000  in fiscal  1993 due  mainly  to the  acquisition  of Odessa
Exploration which contributed $386,000 in depletion expense for fiscal 1994. The
increase  was  partially  offset by a decrease in  depreciation  expense for the
seven months ended June 30, 1993 as the result of Key's adoption of "fresh start
reporting" upon emergence from  bankruptcy.  See Note 3 of Notes to Consolidated
Financial Statements of Key.

                                      -62-

<PAGE>

Income Taxes

         Income tax expenses of $950,000 for fiscal 1994 increased from $413,000
in income tax expense for fiscal  1993.  The  increase in income tax expense was
due to the  increase  in income  before  extraordinary  items.  Because of Key's
adoption of "fresh-start reporting," it is required to report any utilization of
net operating loss carryforwards  arising prior to the 1992 Reorganization as an
increase in stockholders'  equity rather than as a credit to income tax expense.
(See Note 3 of Notes to Consolidated Financial Statements of Key.)

Extraordinary Item

         During fiscal 1993, Key recorded an extraordinary  gain on discharge of
indebtedness of $2,868,000 in connection with the 1992 Reorganization  Plan. See
Note 3 of Notes to Consolidated Financial Statements of Key.

Net Income

         Net  income  for  fiscal  1994  was  $1,345,000,  a 21%  increase  from
$1,111,000  for fiscal 1993,  before an adjustment of $4,586,000  related to the
1992 Reorganization Plan.

Cash Flow

         Net cash provided by operating  activities  increased  $1,524,000  from
$318,000  during the 1994 fiscal year to  $1,842,000  for the 1993  period.  The
increase was attributable primarily to an increase in net income.

         Net cash used in investing activities increased from $1,821,000 for the
1993 period to $5,608,000 for fiscal 1994. The increase was primarily the result
of increased  capital  expenditures for the oil well service  operations  during
1994 and $850,000 for  expenditures  for oil gas properties.  Increased oil well
service capital expenditures was primarily the result of improvements  necessary
for the WellTech West Texas equipment.

         Net cash provided by financing  activities  was  $4,316,000  for fiscal
1994 as compared to $1,918,000  for fiscal 1993.  The increase was primarily the
result of the proceeds from  long-term  debt during  fiscal 1994  primarily as a
result of the  financing of the  improvement  costs to the equipment of the West
Texas  operations  of  WellTech  and to  finance  the  purchase  of oil  and gas
properties by Odessa Exploration.

Liquidity and Capital Resources


         At December 31, 1995, Key had $955,000 in cash and restricted cash.

         Yale E. Key has projected  $2.5 million for oil field  service  capital
expenditures  for fiscal  1996 as  compared to  approximately  $2.8  million for
fiscal 1995.  Capital  expenditures  are  expected to be  primarily  capitalized

                                      -63-

<PAGE>


improvement costs to existing equipment and machinery.  Capital expenditures are
expected to decrease  from fiscal 1995 levels due to less  capital  improvements
for the WellTech West Texas operations acquired during fiscal 1995. Financing of
capital  expenditures  is expected to come from the operating cash flows of Yale
E. Key.  Working capital  requirements  for WellTech West Texas were met through
the additional cash flows generated from the additional equipment,  the acquired
WellTech West Texas accounts receivable and the additional  borrowings.  Capital
expenditures were approximately $4.4 million in fiscal 1994.

         Odessa Exploration is forecasting approximately $3.0 million in oil and
gas property acquisitions for fiscal 1996 compared to $2.8 million during fiscal
1995, and $6.0 million in development  costs for fiscal 1996 as compared to $3.7
million during fiscal 1995. Oil and gas acquisitions  aggregated  $2,150,000 for
the six months ended December 31, 1995. Financing of oil and gas acquisitions is
expected to come from borrowings and/or private investors.


         Clint Hurt has forecast approximately $500,000 for oil and gas drilling
capital  expenditures  for fiscal 1996  primarily for  improvements  to existing
equipment and machinery. Such outlays are treated as capital costs. Financing is
expected to come from existing cash flow.

         In January  1995,  Key received $2.5 million in term note proceeds from
its  principal  lender.  The  term  note  is  collateralized  by the  additional
equipment Key received from the WellTech West Texas acquisition and was used for
working capital purposes.  The term note, requires monthly principal payments of
approximately  $42,000 plus  interest,  with the unpaid  balance of the note due
December 31, 1996. The interest rate is 2 1/2% above the stated prime rate, 9.0%
at June 30,  1995. A portion of the note has been  classified  as current in the
accompanying balance sheet.

         During   March   1995,   Odessa   Exploration   refinanced   its   debt
(approximately $2.8 million at March 31, 1995) with Norwest Bank Texas, Midland,
N.A.  ("Norwest").  The  refinanced  debt  consists of a $7.5  million  reducing
revolver  with a current  borrowing  base of $5.3  million.  As of September 30,
1995,  $5.5  million  principal  amount  of  debt  was  outstanding  under  this
arrangement.  The  revolver  requires  the  borrowing  base  to  be  reduced  by
approximately  $60,000 per month.  The revolver has an interest  rate of Norwest
prime rate (9.0% at June 30, 1995),  plus 1/2 of one percent,  payable  monthly.
The note matures on October 15, 1997.  The revolver is secured by  substantially
all of the oil and gas  properties  of Odessa  Exploration  and is guaranteed by
Key.   In   addition,   the   revolver   has   cross-default    provisions   and
cross-collateralization provisions with Clint Hurt.

         As a result of the purchase of the Clint Hurt drilling equipment, Clint
Hurt  borrowed $1.0 million from Norwest.  The loan requires  monthly  principal
payments of  approximately  $28,000 until maturity in April 1998. The loan bears
interest  at the  Norwest  prime rate (9.0% at June 30,  1995),  plus 3/4 of one
percent,  is secured by all of the  equipment of Clint Hurt and is guaranteed by
Key. In  addition,  Clint Hurt  obtained a working  capital  line of credit with
Norwest in the amount of $200,000. The line of credit requires monthly principal
and interest payments of $20,000, bears interest at the Norwest prime rate (9.0%
at June 30, 1995),  plus 3/4 of one percent,  is secured by all of the equipment
of Clint Hurt and is guaranteed by Key.


                                      -64-

<PAGE>


         Each of Key (and Yale E. Key and  Clint  Hurt)  and  WellTech  recently
entered into new credit  facilities of  approximately  $17.5 million (subject to
certain advance  formulas) the proceeds of the initial  borrowings of which were
used to repay  substantially  all of the debt of Key (other  than that of Odessa
Exploration)  and  WellTech  (other  than  that  owed  to  certain  affiliates),
respectively.  Key believes that such facility will provide  sufficient funds to
finance its operating and capital  expenditure needs for the foreseeable future.
The New Indebtedness has been  cross-guaranteed  by Key, Yale E. Key, Clint Hurt
and  WellTech  and   cross-collateralized   by  their  respective  assets.  Upon
consummation of the Merger,  the New Indebtedness will be the obligation of Key,
as survivor of the Merger, and Key's  subsidiaries,  Yale E. Key and Clint Hurt.
The cross-guaranty and cross- collateralization arrangement could, if the Merger
is not consummated,  create contingent liabilities for each of Key and WellTech.
The failure to consummate  the Merger on or prior to April 30, 1996 will, at the
option of the lender,  constitute an event of default under the New Indebtedness
if WellTech  fails to refinance its credit  agreement on or before July 31, 1996
or Key fails to continue to operate WellTech pursuant to the Interim  Operations
Agreement until such refinancing.  Key and WellTech have agreed not to terminate
the  Interim  Operations  agreement  without  the  consent of the  lender.  (See
"Business and Properties of Key--New Indebtedness.")


Impact of SFAS 121

         In  March  1995,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial Accounting  Standards No.  121--Accounting for Long-Lived
Assets and for  Long-Lived  Assets to be Disposed Of ("SFAS 121")  regarding the
impairment of long-lived assets,  identifiable  intangibles and goodwill related
to those assets. SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is encouraged.  The
application of SFAS 121 will require periodic  determination of whether the book
value of long-lived assets exceeds the future cash flows expected to result from
the use of such assets and, if so, will require reduction of the carrying amount
of the "impaired" assets to their estimated fair values.  Key estimates that the
implementation  of SFAS 121 will not have a material  effect on Key's  financial
position.

Impact of Inflation on Operations

         Although in our complex  environment it is extremely  difficult to make
an  accurate  assessment  of  the  impact  of  inflation  on  Key's  operations,
management is of the opinion that inflation has not had a significant  impact on
its business.

                                      -65-



                                                       


<PAGE>



                       SELECTED FINANCIAL DATA OF WELLTECH


         The following table sets forth the selected consolidated financial data
of WellTech for the five years ended December 31, 1994 and the nine months ended
September 30, 1995.  These data should be read in  conjunction  with  WellTech's
Financial  Statements  and the Notes thereto and  "Management's  Discussion  and
Analysis of Results of Operations  and Financial  Condition of WellTech,"  which
follows:



<TABLE>
<CAPTION>
                           
                                             Nine Months   Nine Months  
                                                Ended         Ended    Year Ended  Year Ended  Year Ended  Year Ended Year Ended
                                              Sept. 30,     Sept. 30    Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                                1995          1994        1994        1993        1992       1991         1990
                                             ------------------------------------------------------------------------------------
                                                  (unaudited)                     (in thousands except per share amounts)
<S>                                           <C>         <C>        <C>          <C>        <C>         <C>          <C>

  Operating Data:
   Revenues from continuing operations          $ 52,180   $ 34,974    $ 49,043    $ 56,157    $ 58,680    $ 70,463    $ 70,070
   Operating costs and expenses:
       Direct operating                           40,867     27,897      39,050      45,522      45,986      58,020      55,509
       General and administrative                  7,579      5,872       8,474       9,520      11,732      13,350      11,579
       Depreciation and amortization               2,524      2,228       2,775       3,095       3,572       4,574       4,236
   Other (income) expense                            976     (2,003)     (1,045)      3,227       5,210       4,874       4,662
   Income (loss) before extraordinary items          234        980        (211)     (5,207)     (7,820)    (11,924)     (5,916)
   Net income (loss)                                 234        980        (211)     (5,207)     (7,820)    (10,355)     (5,916)
   Income (loss) per common share:
   Primary:
   Income (loss) before extraordinary item          0.66       2.82       (0.61)     (16.73)     (25.12)      (3.83)      (2.50)
   Net income (loss)                                0.66       2.82       (0.61)     (16.73)     (25.12)      (3.33)      (2.50)
   Assuming full dilution:
   Income (loss) before extraordinary item          0.66       2.82       (0.61)     (16.73)     (25.12)      (3.83)      (2.50)
   Net Income (loss)                                0.66       2.82       (0.61)     (16.73)     (25.12)      (3.33)      (2.50)
   Average common shares outstanding:
       Primary                                       353        347         347         311         311       3,113       2,363
       Assuming full dilution                        353        347         347         311         311       3,113       2,363
Common shares outstanding at end of period           353        347         347         311         311       3,113       2,363
Market price per common share at end of
period                                               N/A        N/A         N/A         N/A         N/A         N/A         N/A
Cash dividends paid on common shares                --         --          --          --          --          --

Balance Sheet Data:
   Property and equipment, net                  $ 30,897   $ 21,755    $ 24,905    $ 18,209    $ 26,394    $ 32,317      33,988
   Total assets                                   68,998     52,027      58,176      44,563      48,853      52,590      58,022
   Long-term debt                                  9,983      5,237       6,620      32,782      32,736      29,769      30,674
   Stockholders' equity (deficit)                 36,882     37,381      36,189      (2,668)      2,539      10,359       8,567
   Book value per share                           104.50     107.58      104.15       (8.57)       8.16        3.33        3.63
</TABLE>

                                      -66-


<PAGE>



               MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
                 OPERATIONS AND FINANCIAL CONDITION OF WELLTECH


         The  following  discussion  should  be read  in  conjunction  with  the
financial statements of WellTech and related notes appearing elsewhere herein.

Operating Losses

         WellTech has generated losses during each of the past five years. These
losses were primarily  attributable  to the  operations of certain  unprofitable
locations  which have been sold or joint  ventured over the past several  years.
WellTech has also expanded its  profitable  operations  and acquired  additional
profitable  operations  during  this  time  period  (1991 - 1995)  resulting  in
declining  losses.  In  addition  to  the  unprofitable  operations,  WellTech's
overhead and level of outstanding  debt was more than the profitable  operations
could  service.  Steps were also taken in these and other areas to reduce losses
and improve  profitability.  From the year ended  December  31, 1991 to the nine
months ended  September  30, 1995,  direct  operating  costs as a percentage  of
revenues have decreased from 82.3% to 78.3%, general and administrative expenses
have  decreased from 18.9% of revenues to 14.5% and long term debt has decreased
from approximately $30.0 million to $10.0 million.

Nine Months Ended September 30, 1995 versus Nine Months Ended September 30, 1994

Results of Operations

Revenues

         Revenues increased to $52.2 million for the nine months ended September
30, 1995 compared to $35.0 million for the nine months ended September 30, 1994,
an increase of $17.2  million or 49%.  This  increase  was due to  increases  in
nearly all of WellTech's  operations  including  drilling  ($3.9  million),  Mid
Continent ($5.0 million),  Eastern ($1.1 million), Russia ($1.6 million) and the
consolidation of Servicios effective April 1995 ($6.2 million).

Operating Expenses

         Operating  expenses as a percentage of revenues were 78.3% for the nine
months ended September 30, 1995 versus 79.8% for the nine months ended September
30, 1994. This decrease was due to a provision for workers  compensation  losses
recorded in 1994. This was partially offset by the lower gross margins generated
by WellTech's drilling operations which were begun in late 1994.

                                      -67-

<PAGE>


Depreciation Expense

         Depreciation  expense  increased  by $0.3  million  or 13.3%  from $2.2
million for the nine months  ended  September  30, 1994 to $2.5  million for the
comparable  fiscal 1995 period  primarily  as a result of the  consolidation  of
Servicios in 1995.

General and Administrative Expense

         General and administrative expenses increased from $5.9 million to $7.6
million,  an  increase  of $1.7  million  or 29% during  the nine  months  ended
September  30, 1995  compared  with the nine months  ended  September  30, 1994.
Approximately  53% of this increase related to the consolidation of Servicios in
1995.  The  remaining  increase  was the  result  of  increases  in  several  of
WellTech's  operating  areas  including  drilling   ($319,000),   Mid  Continent
($554,000) and Eastern  ($175,000)  partially  offset by cost  reductions at the
corporate level.

Interest Expense

         Interest expense  increased from $550,000 to $1.4 million,  an increase
of $850,000 or 155%,  during the nine months ended  September  30, 1995 compared
with the  nine  months  ended  September  30,  1994,  primarily  due to the bank
financing which was completed in January 1995  ($535,000) and the  consolidation
of Servicios during the nine months ended September 30, 1995 ($325,000).

Gain on Disposition of Assets

         The gain on  disposition  of assets  decreased to $390,000 for the nine
months ended September 30, 1995 compared with $2,499,000 for the comparable 1994
period because the gain of approximately  $3.0 million from the sale of the West
Texas  operations  to Key was  included in the nine months ended  September  30,
1994.

Cash Flow

         Net cash provided by operating activities decreased by $2.4 million, to
$(1.8)  million,  during the nine  months  ended  September  30,  1995 from $0.6
million for the  comparable  1994 period.  Of this decrease $4.0 million was the
result of changes in working  capital  components  offset by $1.5 million higher
cashflows from  operations  during the 1995 period.  Net cashflows  required for
investing activities  decreased $4.0 million,  from $7.7 million in 1994 to $3.7
million in 1995 primarily due to a decrease in contributions  to  unconsolidated
operations ($1.2 million) and a decrease in capital expenditures ($4.0 million).
These were offset by a decrease in proceeds from asset sales ($1.1 million). Net
cash from financing  activities decreased by $2.0 million during the 1995 period
versus the 1994  period.  While  there was no new equity in 1995 as  compared to
$4.6 million in 1994 there was an increase in the  additions to new debt of $5.6
million in 1995.  This net increase was offset by an increase in debt repayments
of $2.7 million.

                                      -68-


<PAGE>


Year Ended December 31, 1994 Versus Year Ended December 31, 1993

Results of Operations

Revenues

         Revenues  for 1994 of $49.0  million were $7.1 million or 13% less than
1993 revenues of $56.2  million.  The primary cause of the decrease was the sale
of WellTech's West Texas  operations to Key effective  December 1, 1993,  ($13.5
million) with  additional  decreases in WellTech's  drilling  activities and the
operations in the Eastern  region.  These  decreases  were  partially  offset by
increases  which  resulted  from  the  expansion  of  WellTech's  Mid  Continent
operations  during  1993 and the start up of its Russia  operations  in December
1993.

Operating Expenses

         Operating  expenses of $39.1 million  represented  79.6% of revenues in
1994 compared to $45.5  million or 81.1% of revenues in 1993.  The primary cause
of the decrease  related to the sale of WellTech's West Texas  operations to Key
effective  December  1993 as the gross margin of the West Texas  operations  was
generally less than WellTech's other well servicing operations. In addition, the
gross  margin of  WellTech's  Russian  operations  was  generally  greater  than
WellTech's other operations.

General and Administrative Costs


         General and  administrative  costs of $8.5 million in 1994 decreased by
$1.0 million or 11% from $9.5 million in 1993. This decrease was due to the sale
of the  West  Texas  operations  and  cost  reductions  at the  corporate  level
partially  offset by  increases  which  resulted  from the  expansion of the Mid
Continent and Eastern operations and the start up of the Russian operations.


Depreciation Expense

         The $300,000 decrease in depreciation expense from $3.1 million in 1993
to $2.8  million  in 1994  related  primarily  to the  sale  of the  West  Texas
operations.

Interest Expense


         The $2.5  million,  or 78%,  decrease  in  interest  expense  from $3.2
million in 1993 to $700,000 in 1994 related to the  conversion of  approximately
$31 million of debt into equity in January  1994.  This  reduction was partially
offset by the issuance of new debt of approximately $5.5 million during 1994.


                                      -69-

<PAGE>

Investment Valuation Provision

         There  were no  investment  valuation  provisions  recorded  in 1994 as
compared to the $582,000 write down recorded in 1993.

Equity in (Earnings) Losses of Unconsolidated Affiliates

         The  $580,000  or  659%  decrease  in the  earnings  of  unconsolidated
affiliates  to a loss of $492,000 in 1994 compared to income of $88,000 in 1993,
related primarily to an increase in the losses from Servicios of $536,000.

Gain on Disposition of Assets

         The gain on disposition of assets of $2.9 million in 1994 compared with
$0.3 million in 1993,  related primarily to the gain recognized upon the sale of
WellTech's West Texas operations to Key.

Cash Flow


         Net cash  provided  by  operating  activities  of $4.6  million in 1994
increased by $3.7 million over the $933,000 generated in 1993. Of this increase,
$2.3 million was the result of changes in working  capital  components  with the
balance of $1.4 million due to increased cash flows from operations in 1994. Net
cash flows required for investing activities increased in 1994 by $14.1 million.
This increase was due to a substantial  increase in capital  expenditures ($12.0
million),  increased  contributions to unconsolidated  operations ($2.6 million)
and  reduced  distributions  from  Dawson  ($363,000)  offset by an  increase in
property  sales  proceeds of  $822,000.  The 1994 capital  expenditures  program
included  significant  capital  expenditures  related to  expansion,  consisting
primarily of expanded rig operations ($3.7 million),  drilling  operations ($1.8
million) and expansion into the trucking and disposal  business ($4.3  million).
The balance ($3.9 million) was primarily for  refurbishments and improvements to
existing machinery and equipment.  Net cash from financing  activities increased
by $10.0  million  from 1993 to 1994 due to an increase in debt  proceeds  ($5.5
million) and a sale of common stock ($4.5 million).  During 1993,  there were no
new equity proceeds and an insignificant amount of new debt proceeds.


Year Ended December 31, 1993 Versus Year Ended December 31, 1992

Results of Operations

Revenues

         Revenues for 1993 were $2.5 million or 4% less than 1992. This decrease
was due to  WellTech's  contribution  of its Gulf Coast  operations  into Dawson
effective  November  1992.  WellTech's  investment in Dawson is accounted for in
accordance with the equity method.  This was partially offset by an increase due
to the expansion of the Mid Continent operations during 1993.

                                      -70-

<PAGE>


Operating Expenses

         Operating  expenses  represented  81.1% of the  revenues in 1993 versus
78.4% in 1992. This increase was the result of lower insurance costs in 1992 and
additional  costs incurred in connection with the expansion of the Mid Continent
and Eastern operations during 1993.

General and Administrative Expenses

         General and administrative expenses decreased by $2.2 million or 19% in
1993 versus 1992.  This decrease was due to the  contribution  of the Gulf Coast
operation  into Dawson in late 1992 and  extensive  cost cutting  efforts at the
corporate  level.  This was offset by a slight  increase due to the expansion of
the Mid Continent operations during 1993.

Depreciation Expense


         The 13 % decrease in depreciation expense from 1992 to 1993 of $477,000
related to the  contribution of the Gulf Coast operation into Dawson in November
1992.


Investment Valuation Provision


         In 1992,  WellTech  reassessed  the  carrying  value of  certain of its
non-well servicing investments and recorded a provision of $2.4 million to write
these  investments  down to their  estimated net  realizable  value.  In 1993, a
similar assessment was made and a provision of $582,000 was recorded.


Cash Flow

         Net cash provided by operating  activities  increased $1.8 million from
($824,000) in 1992 to $933,000 in 1993. Of this  increase,  $2.0 million was the
result of changes in working  capital  components  offset by $300,000 lower cash
flows from operations in 1993. Net cashflows  required for investing  activities
decreased  in  1993  by  $3.3  million  primarily  due  to  a  decrease  in  the
contributions  to  unconsolidated  operations  ($2.1 million) and an increase in
distributions  from  Dawson  ($775,000).  Net  cash  from  financing  activities
decreased by $2.7  million from 1992 to 1993 due to a decrease in proceeds  from
the  issuance  of debt  ($2.3  million)  and an  increase  in  payments  on debt
($366,000).

Liquidity And Capital Resources

         During  1993,   capital   expenditures   were   generally   limited  to
refurbishments  and  improvements  to existing  machinery and equipment and were
funded  with the  proceeds  from the sale of  obsolete  or unused  property  and
equipment.   The  cash   provided  by  operating   activities   along  with  the
distributions from Dawson funded the contributions to unconsolidated  operations
and the debt service requirements.

                                      -71-

<PAGE>



         During 1994, there were extensive  capital  expenditures,  acquisitions
and contributions to unconsolidated  operations  totalling  approximately  $17.3
million. These expenditures were funded from operations ($4.6 million), property
and equipment sales ($2.8  million),  proceeds from debt issuance ($5.5 million)
and sale of common stock ($4.5 million).

         WellTech  recently  entered into a new credit facility of approximately
$17.5 million (subject to certain advance  formulas) the proceeds of the initial
borrowings  of which  were  used to repay  substantially  all debt of  WellTech,
including debt to Shawmut, except debt to certain affiliates.  WellTech believes
that such  facility will provide  sufficient  funds to finance its operating and
capital  expenditure  needs  until the  Merger.  The New  Indebtedness  has been
cross-guaranteed   by  Key,   Yale  E.  Key,   Clint  Hurt  and   WellTech   and
cross-collateralized  by  their  respective  assets.  Upon  consummation  of the
Merger,  the New Indebtedness  will be the obligation of Key, as survivor of the
Merger, and Key's  subsidiaries,  Yale E. Key and Clint Hurt. The cross-guaranty
and  cross-   collateralization   arrangement   could,  if  the  Merger  is  not
consummated,  create  contingent  liabilities for each of Key and WellTech.  The
failure  to  consummate  the Merger on or prior to April 30,  1996 will,  at the
option of the lender,  constitute an event of default under the New Indebtedness
if WellTech  fails to refinance its credit  agreement on or before July 31, 1996
or Key fails to continue to operate WellTech pursuant to the Interim  Operations
Agreement  until such  financing.  Key and WellTech have agreed not to terminate
the  Interim  Operations  Agreement  without  the  consent of the  lender.  (See
"Business and Properties of Key--Recent Developments--New Indebtedness.")


                                      -72-


<PAGE>



                           PROPOSALS TO BE VOTED UPON
                           AT THE KEY SPECIAL MEETING



         The  matters  discussed  below  will be voted  upon at the Key  Special
Meeting.  The Board of  Directors  of Key  recommends  a vote FOR  approval  and
adoption of each of the Merger, the Key Charter Amendment, the Election of Board
of Directors, the Key 1995 Stock Option Plan and the Key Outside Directors Stock
Option Plan. A vote of at least a majority of all  outstanding  Key Common Stock
is required to approve the Merger and the Key Charter  Amendment.  The  proposal
relating  to the  election of the Board of  Directors  will be  determined  by a
plurality  of the votes  entitled  to be cast by the  holders  of the Key Common
Stock.  All  other  proposals  must be  approved  by the  affirmative  vote of a
majority of the  outstanding  Key Common Stock present in person or by proxy and
entitled to vote at the meeting.  Each proposal will be voted upon separately by
the Key  stockholders  entitled  to vote at the Key  Special  Meeting.  Failure,
however,  of either the Merger  Agreement  or the Key  Charter  Amendment  to be
approved will result in the  abandonment by Key of the Merger and, if the Merger
is not approved, WellTech's two nominees will not be elected to the Board and it
is  proposed  that the  Board  consist  of five  Directors  none of whom will be
WellTech  nominees.  Abstentions and broker  non-votes will have the effect of a
vote against the proposal.


 
                              ITEM 1. THE MERGER


         The following description of certain provisions of the Merger Agreement
and the exhibits and schedules thereto is only a summary and does not purport to
be complete.  This  description is qualified in its entirety by reference to the
complete  text of the Merger  Agreement,  a conformed  copy of which is attached
hereto as Annex I and  incorporated  herein by reference.  Certain terms used in
this Section without definition are defined in the Merger Agreement .


General Provisions

         Share  Exchange.  The Merger  Agreement  provides that,  subject to the
requisite   adoption  and  approval  by   WellTech's   stockholders   and  Key's
stockholders of the Merger and certain related transactions and the satisfaction
or waiver of certain other conditions,  at the Effective Time,  WellTech will be
merged with and into Key, the separate  existence of WellTech will cease and Key
will continue as the surviving corporation.  As a result of the Merger, Key will
acquire all of the  business  and assets of WellTech  and will assume all of its
obligations and  liabilities,  and shares of WellTech  Common Stock  outstanding
immediately  prior to the Merger  will be  converted  into  shares of Key Common
Stock and New Key Warrants.

         Pursuant to the Merger  Agreement,  by virtue of the Merger and without
any action on the part of the any holder of shares of capital stock:

                                      -73-

<PAGE>


         o Each share of WellTech Common Stock outstanding  immediately prior to
the Merger  (other  than those  owned  directly  or  indirectly  by  WellTech as
treasury  stock or by any of its  subsidiaries)  will be converted into and will
become 13.9682 shares of fully paid and nonassessable shares of Key Common Stock
and New Key Warrants to purchase  2.125 fully paid and  nonassessable  shares of
Key Common Stock;

         o Each share of the capital  stock of WellTech  issued and  outstanding
immediately  prior to the Merger and owned directly or indirectly by WellTech as
treasury  stock  or by  any  of  its  subsidiaries  will  be  canceled,  and  no
consideration will be delivered in exchange therefor;

         o Each share of Key Common  Stock  issued and  outstanding  immediately
prior to the Merger  (other than  1,429,962  shares owned  directly by WellTech)
will remain outstanding; and

         o An  aggregate  of  1,429,962  shares  of Key  Common  Stock  and each
Existing Key Warrant issued and outstanding  immediately prior to the Merger and
owned by WellTech will be canceled,  and no  consideration  will be delivered in
exchange therefor. As of the date of this Proxy Statement--Prospectus,  WellTech
owns,  an  aggregate  of  1,635,000  shares of Key Common Stock and Existing Key
Warrants to purchase an aggregate  of 250,000  shares of Key Common  Stock.  The
remaining  205,038  shares  of Key  Common  Stock  owned  by  WellTech  will  be
distributed to directors of WellTech prior to the Merger.

          The  holder  of  any  shares  of  WellTech  Common  Stock  outstanding
immediately  prior to the  Merger  which has  validly  exercised  such  holder's
appraisal rights under Delaware Law will not be entitled to receive,  in respect
of the  shares of  WellTech  Common  Stock as to which such  holder has  validly
exercised  appraisal rights, the shares of Key Common Stock and New Key Warrants
to which such holder  would have been  entitled  had such  holder not  exercised
appraisal rights.  WellTech and Key have reached certain agreements  relating to
any such  exercise  of  appraisal  rights,  including  Key's  agreement,  as the
surviving  corporation  of the  Merger,  to pay any  amount  payable to any such
stockholder who becomes entitled under Delaware Law to payment for such holder's
shares of WellTech  Common  Stock.  (See "Rights of Dissenting  Stockholders  of
WellTech"  for  further  information  concerning  the  rights  to  appraisal  of
WellTech's stockholders.)

         The Merger Agreement  provides that no fractional  shares of Key Common
Stock and no fractional  New Key Warrants will be issued in connection  with the
Merger. In lieu of any such fractional interests, Key will pay an amount in cash
(without interest),  rounded to the nearest cent,  determined by multiplying the
closing  price of the Key Common Stock on the day prior to the  consummation  of
the Merger by the fractional  interest in the share of Key Common Stock to which
such holder would otherwise be entitled (after taking into account all shares of
Key Common Stock being issued to such holder pursuant to the Merger Agreement).

         The number of shares of Key Common  Stock to be issued  will be further
adjusted if between  November 18, 1995 and the  Effective  Time the  outstanding
shares of Key Common  Stock or WellTech  Common  Stock have been  changed into a
different  number  of  shares  or a  different  class,  by  reason  of any stock

                                      -74-

<PAGE>


dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.  However,  the Merger  Agreement  prohibits Key and WellTech
from issuing any equity  securities  or rights,  options or warrants to purchase
equity  securities  without the consent of the other,  except in the case of Key
for  issuances  pursuant  to the Key 1995 Stock  Option  Plan,  the Key  Outside
Directors  Stock  Option Plan and the warrant to purchase  75,000  shares of Key
Common Stock issued to CIT in connection with the New Indebtedness.

         The holders of  WellTech  Common  Stock will  receive an  aggregate  of
4,929,962  shares  of Key  Common  Stock and New Key  Warrants  to  purchase  an
aggregate  of  750,000  shares of Key  Common  Stock at $6.75 per  share.  For a
description of the rights and  preferences,  if any, of the Key Common Stock and
the New Key Warrants,  see "Description of Key Common Stock" and "Description of
the New Key Warrants" below.

         A  description  of the method of delivery of shares of Key Common Stock
and New Key  Warrants to be issued in the Merger will be  furnished,  along with
the appropriate transmittal forms,
prior  to  or  immediately  following  consummation  of  the  Merger.   WellTech
stockholders  should not send in their  certificates until they receive a letter
of transmittal.

         Articles of Incorporation and By-Laws;  Directors. The Merger Agreement
provides  that the Key  Articles,  as proposed to be amended and restated by the
Key Charter Amendment,  and the Key By-Laws, each as in effect immediately prior
to the Effective Time, will be the Articles of Incorporation  and By-Laws of the
surviving  corporation.  In  addition,  subject  to  the  approval  of  the  Key
stockholders at the Key Special Meeting,  the directors of Key immediately prior
to the Effective Time, except Mr. Edwards,  who will resign immediately prior to
the Effective Time, and Messrs.  Collins and Marcum will be the directors of the
surviving corporation and the officers of Key immediately prior to the Effective
Time will be the officers of the  surviving  corporation.  In addition,  certain
officers of WellTech  will become  officers of Key. From and after the Effective
Time, the Merger will have all the effects provided by applicable law.


         Fairness Opinion.  Simmons rendered to the Key Board its opinion to the
effect that as of November 18, 1995, the Merger was fair, from a financial point
of view, to the stockholders of Key.

         In  conducting  its  analysis  and  arriving  at its  opinion,  Simmons
considered such financial and other factors as it deemed  appropriate  under the
circumstances  including,  among others,  the following:  (i) the historical and
current  financial  position and results of Key and WellTech;  (ii) the business
prospects of Key and WellTech; (iii) estimates of pro forma combination benefits
pursuant to the Merger  prepared by Key and WellTech,  (iv) the  historical  and
current  market for Key Common  Stock and for the equity  securities  of certain
other companies believed to be comparable to Key or WellTech; (v) the respective
contributions in terms or various financial  measures of Key and WellTech to the
combined  company,  and  the  relative  ownership  of  Key  after  the  proposed
transaction  by the  current  holders of Key Common  Stock and  WellTech  Common
Stock;  (vi) the pro forma  effect of the  transaction  on Key's  capitalization
ratios,  earnings  per share and cash flow per  share;  and (vii) the nature and
terms of certain  other  acquisition  transactions  that Simmons  believed to be
relevant.  Simmons  has also  taken  into  account  its  assessment  of  general
economic,  market and financial conditions and its experience in connection with
similar  transactions  and securities'  valuation  generally.  Simmons'  opinion

                                      -75-

<PAGE>

necessarily is based upon  conditions as they exist and can be evaluated on, and
on the information made available at, the date of such opinion.  Simmons did not
express  any  opinion  as to the price or range or prices at which the shares of
Key Common Stock will trade subsequent to the consummation of the Merger.

         In connection with its fairness opinion, Simmons performed a variety of
financial  analysis  with  respect to Key and  WellTech,  including  a review of
certain publicly available financial,  operating and stock market information as
of November  17, 1995 for Key,  WellTech and certain  publicly-traded  companies
that Simmons  considers  to be  comparable  to Key or  WellTech,  an analyses of
selected comparable  transactions,  an analysis of the relative contributions of
Key and  WellTech  to, among other  things,  the  combined pro forma  historical
revenues,  net income,  cash flow, total assets,  total book  capitalization and
book equity values,  and various  discounted cash flow calculations of WellTech.
See "Certain Considerations Relating to the Transaction."


         Effective  Time of Merger.  The Merger will become  effective  upon the
filing of a  certificate  of merger with the  Secretary of State of the State of
Delaware and articles of merger with the  Department of Assessment  and Taxation
of the State of Maryland in  accordance  with  applicable  law, or at such later
date as the certificate of merger and articles of merger may specify.

Conditions Precedent

         Conditions  to the  Obligations  of Key and  WellTech.  The  respective
obligations of WellTech and Key to consummate the  transactions  contemplated by
the Merger Agreement are subject to the requirements that:

         o The Merger shall have been  approved and adopted by the  stockholders
of Key and WellTech;

         o No  Legal  Action  shall  be  pending  before  or  threatened  by any
Authority seeking to restrain,  prohibit,  make illegal or delay materially,  or
seeking  material  damages or to impose any Adverse (i.e., a "material"  loss of
benefits)  conditions in connection  with, the  consummation  of the Merger,  or
which is likely to have an Adverse Effect on Key and its subsidiaries taken as a
whole assuming consummation of the Merger;

         o All authorizations,  consents,  waivers, orders or approvals required
to  be  obtained,  and  all  filings,  submissions,  registrations,  notices  or
declarations  required to be made by Key and WellTech prior to the  consummation
of the Merger  shall  have been  obtained  from,  and made  with,  all  required
authorities,   except  for  such  authorizations,   consents,  waivers,  orders,
approvals, filings, registrations, notices or declarations the failure to obtain
or make would not, assuming  consummation of the Merger,  have an Adverse Effect
on Key and its subsidiaries taken as a whole;


         o Key and one or more banks or other financial  institutions shall have
entered  into  credit  facilities  substantially  on the  terms  and  conditions
described  in this Proxy  Statement--  Prospectus,  all  documents  required  in
connection  therewith  shall have been executed and delivered,  and the closings

                                      -76-

<PAGE>

with respect  thereto shall have been  authorized by Key and such banks or other
financial  institutions  subject  to the  consummation  of the  Merger;  the New
Indebtedness described elsewhere in this Proxy  Statement--Prospectus  satisfies
this condition;


         o The Registration Statement (of which this Proxy Statement--Prospectus
is a part)  shall have become  effective  under the  Securities  Act and no stop
order  suspending its  effectiveness  or any part thereof shall have been issued
and remain in effect and no  proceedings  for that  purpose  shall be pending or
contemplated under the Securities Act; and

         o The  shares of Key  Common  Stock to be issued in the  Merger and the
shares of Key Stock  issuable upon  exercise of the New Key Warrants  shall have
been approved for listing on the American  Stock  Exchange,  subject to official
notice of issuance.

         Conditions to Obligations of WellTech.  The  obligations of WellTech to
effect the transactions  contemplated by the Merger Agreement are subject to the
satisfaction,  on or prior to the Effective  Time,  of the following  additional
conditions, among others:

         o The  representations and warranties of Key in the Merger Agreement or
in any other document delivered pursuant thereto will be true and correct in all
material  respects on and as of the Closing Date with the same effect as if made
on and as of the  Closing  Date,  and Key will  have  delivered  to  WellTech  a
certificate to that effect;

         o Each of the  obligations  of Key to be  performed  on or  before  the
Closing Date pursuant to the terms of the Merger  Agreement  will have been duly
performed in all material  respects on or before the Closing Date,  and Key will
have delivered to WellTech a certificate to that effect;


         o WellTech will have received an opinion from Sullivan & Worcester LLP,
counsel to Key, dated the Closing Date, with respect to the matters set forth in
the Merger Agreement,  in form and substance reasonably satisfactory to WellTech
and its counsel;


         o The Shelf  Registration  Statement shall have become  effective under
the Securities Act and no stop order  suspending its  effectiveness  or any part
thereof shall have been issued and remain in effect and no proceedings  for that
purpose shall be pending or contemplated under the Securities Act;

         o Two  nominees of WellTech  shall have been  elected as members of the
Board of  Directors  of Key to hold  office  until the next  annual  meeting  of
stockholders  of Key and  until  their  respective  successors  shall  have been
elected and qualified,  or the earlier  resignation or removal of such nominees,
as a  consequence  of which the Board of Directors  of Key shall  consist of two
nominees of WellTech and four other directors; and

                                      -77-

<PAGE>


         o As of  the  Closing  Date,  there  shall  not  have  occurred  and be
continuing  any Adverse  Change  affecting Key and its  subsidiaries  taken as a
whole from that reflected in the most recent Key financial statements.

         Conditions to Obligations of Key. The  obligations of Key to effect the
transactions   contemplated   by  the  Merger   Agreement  are  subject  to  the
satisfaction,  on or prior to the Effective  Time, of the following  conditions,
among others:

         o The  representations  and  warranties  of WellTech  contained  in the
Merger  Agreement or in any other document  delivered  pursuant  thereto will be
true and correct in all material respects on and as of the Closing Date with the
same effect as if made on and as of the Closing  Date,  and  WellTech  will have
delivered to Key a certificate to that effect;

         o Each of the  obligations of WellTech to be performed on or before the
Closing Date pursuant to the terms of the Merger  Agreement  will have been duly
performed in all material  respects on or before the Closing Date,  and WellTech
will have delivered to Key a certificate to that effect;

         o Key will have received an opinion of Porter & Hedges, L.L.P., counsel
for  WellTech,  dated as of the Closing  Date,  with  respect to the matters set
forth in the Merger Agreement,  in form and substance reasonably satisfactory to
Key and its counsel;


         o Key shall have received a favorable  opinion,  dated the Closing Date
of Sullivan & Worcester  LLP,  its special tax  counsel,  to the effect that the
Merger Agreement  constitutes a plan of reorganization  within the provisions of
Section  368(a)(1)(A) of the Code and as to the Federal income tax  consequences
thereof to Key and Key's stockholders;


         o As of  the  Closing  Date,  there  shall  not  have  occurred  and be
continuing any Adverse Change affecting WellTech and its subsidiaries taken as a
whole from that reflected in the most recent WellTech financial statements;

         o Each officer and  director of WellTech  and each of its  subsidiaries
shall  have  submitted  his  unqualified  written  resignation,  dated as of the
Closing Date, from such position held;
and

         o The Interim  Operations  Agreement  shall have remained in full force
and effect at all times up to the  Effective  Time and WellTech  shall not be in
breach or default in any Adverse
respect.

Certain Covenants

         Certain  Rights with  Respect to Key's Board of  Directors.  The Merger
Agreement  provides that at the Effective  Time,  the WellTech  Nominees will be
designated as directors of Key.  WellTech has designated Kevin P. Collins and W.
Phillip Marcum as the WellTech Nominees;  however,  the Merger Agreement permits
WellTech to change the WellTech Nominees prior to the Merger.

                                      -78-

<PAGE>


         Commission Filings.  The Merger Agreement provides that, as promptly as
practicable  after the date thereof,  WellTech and Key will prepare and file any
filings  required to be filed by each under the Securities Act, the Exchange Act
or any other federal or state laws relating to the transactions  contemplated by
the Merger  Agreement and will use their best efforts to respond to any comments
of the  Commission  or any other  appropriate  government  official with respect
thereto. In addition,  WellTech and Key have agreed to cooperate with each other
and provide to each other all  information  necessary  in order to prepare  such
filings,   including  this  Proxy   Statement--Prospectus,   Key's  Registration
Statement  as to which  this  Proxy  Statement--Prospectus  forms a part and the
Shelf Registration Statement of Key under the Securities Act.


   
         Registration  Rights.  Simultaneously  with the execution of the Merger
Agreement,  Key  agreed to enter into an  agreement  (the  "Registration  Rights
Agreement")  pursuant  to which it agreed  with those  stockholders  of WellTech
which are parties  thereto  that all shares of Key Common  Stock and the New Key
Warrants  (together  with the shares of Key Common Stock  issuable upon exercise
thereof) to be issued pursuant to the Merger to such WellTech stockholders shall
be registered  under the  Securities Act for resale by such  stockholders.  This
Prospectus  has been prepared for use by such  stockholders  of WellTech for the
resale of the Key Common Stock and Warrants.  See "Resales of  Securities."  The
Registration  Rights Agreement requires Key to keep such registration  statement
effective  for a period of three  years.  The  WellTech  stockholders  agreed to
certain  so-called  "standback"  provisions  and to refrain from selling  during
certain periods, which provisions are designed to facilitate underwritten public
offerings  by Key  of  its  equity  securities.  Key  will  also  file  a  shelf
registration  statement to become  effective on the effective date of the Merger
to enable  certain  exisiting  Key  stockholders  to resell  their shares of Key
Common  Stock and to enable  Key's  senior  lender to sell the Key Common  Stock
issuable  upon  exercise  of  its  Key  warrant.  Effectiveness  of  such  shelf
registration statement is a condition of WellTech's obligation to consummate the
Merger.
    


         Acquisition Proposals.  The Merger Agreement prohibits each of WellTech
and Key and their respective subsidiaries,  officers, directors, representatives
and agents from,  directly or indirectly,  knowingly  soliciting,  initiating or
participating  in any way in proposals,  discussions  or  negotiations  with, or
knowingly providing any confidential  information to, any person (other than the
other or any affiliate or associate of the other and their respective directors,
officers,  employees,  representatives  and agents)  which  constitutes,  or may
reasonably  be  expected  to lead to, a  proposal  to seek or  effect  any Other
Transaction (as defined below).  However,  each of WellTech's and Key's Board of
Directors may make such  disclosure to WellTech's or Key's  stockholders  as, in
the judgment of WellTech's or Key's Board of Directors  with the written  advice
of outside counsel, may be required under applicable law.

         Each party has agreed to notify the other promptly if any such proposal
or inquiry is received by, any such  information is requested  from, or any such
negotiations or discussions are sought to be initiated with, either party and to
furnish  the  other  with a copy  of  any  proposal  that  relates  to an  Other
Transaction.  An "Other  Transaction"  is a  transaction  or  series of  related
transactions (other than the Merger and the related  transactions)  resulting in

                                      -79-

<PAGE>

(a) any change of control of WellTech or Key, (b) any merger or consolidation of
WellTech or Key, or any of their subsidiaries, regardless of whether WellTech or
Key (or any such subsidiary) is the surviving corporation,  (c) any tender offer
or exchange  offer for, or any  acquisitions  of, any  securities of WellTech or
Key, (d) any sale or other  disposition  of assets of WellTech or Key, or any of
their subsidiaries,  not otherwise permitted under the Merger Agreement,  or (e)
so long as the Merger  Agreement  remains in effect,  any issue or sale,  or any
agreement to issue or sell, any capital stock,  Convertible Securities or Option
Securities  by  WellTech  or  Key  not  otherwise  permitted  under  the  Merger
Agreement.

         If either party  terminates the Merger  Agreement  because of an "Other
Transaction"  proposal,  and if, prior to such termination or within nine months
thereafter, the terminating party consummates an Other Transaction,  it will pay
to the other party  $500,000,  which  amount is in  recognition  of, among other
things, the out-of-pocket costs and expenses of the other party, its reliance on
the  terminating  party's  fulfillment  of  its  obligations  under  the  Merger
Agreement,  the costs in delayed  opportunity to the other party and the benefit
to the terminating party.


Representations and Warranties

         The Merger Agreement contains various representations and warranties of
WellTech and Key. The representations and warranties will not survive beyond the
Closing Date. The  representations  of WellTech and Key are made with respect to
those companies and their  respective  subsidiaries and relate generally to: due
organization, qualification and authority; absence of violations of, among other
things, their respective charter documents, by-laws, certain contracts, and law;
required consents and approvals of governmental  authorities;  approval by their
respective  Boards of Directors  of the Merger  Agreement  and the  transactions
contemplated  thereby;  their capital  structures;  the accuracy of information,
including financial statements, contained in the Merger Agreement and this Proxy
Statement-Prospectus;  the absence of certain  material  changes or  undisclosed
liabilities;  compliance with applicable laws, including environmental laws, and
material agreements; taxes; litigation;  employee benefits; labor matters; title
to properties; and brokers and finders.

Termination

         The  Merger   Agreement   may  be  terminated   and  the   transactions
contemplated thereby,  including the Merger,  abandoned at any time prior to the
Effective Time as follows:

         (a)  by either Key or WellTech:

                  (i) if any  permanent  injunction,  decree or  judgment by any
         governmental  authority preventing the consummation of the Merger shall
         have become final and nonappealable; or

                  (ii) if the Merger and the transactions  contemplated  thereby
         have  not  been  consummated  prior to the  Termination  Date  (defined
         below); or

                                      -80-

<PAGE>

         (b)  by WellTech:

                  (i) in the event (A)  WellTech  is not in breach of the Merger
         Agreement and none of its material  representations or warranties shall
         have become and continue to be untrue in any material respect,  and (B)
         Key  is in  breach  of the  Merger  Agreement  or  any of its  material
         representations  or  warranties  shall have  become and  continue to be
         untrue in any  material  respect,  unless  such  breach or  untruth  is
         capable of being cured by and will not prevent or delay consummation of
         the Merger by or beyond the Termination Date; or

                  (ii) if (A) the Board of Directors of Key shall (1)  withdraw,
         modify or change its  recommendation  so that it is not in favor of the
         Merger Agreement, the Merger or the related transactions, or shall have
         resolved  to do any of  the  foregoing,  or  (2)  have  recommended  or
         resolved to recommend to its stockholders an Other Transaction,  or (B)
         Key  shall  have  entered  into  or  agreed  to  enter  into  an  Other
         Transaction; or

         (c)  by Key:

                  (i) in the  event  (A)  Key is  not in  breach  of the  Merger
         Agreement and none of its material  representations or warranties shall
         have become and continue to be untrue in any material respect,  and (B)
         WellTech is in breach of the Merger  Agreement  or any of its  material
         representations  or  warranties  shall have  become and  continue to be
         untrue in any  material  respect,  unless  such  breach or  untruth  is
         capable of being cured by and will not prevent or delay consummation of
         the Merger by or beyond the Termination Date; or

                  (ii) if (A) the  Board of  Directors  of  WellTech  shall  (1)
         withdraw,  modify or  change  its  recommendation  so that it is not in
         favor of the Merger Agreement,  the Merger or the related transactions,
         or  shall  have  resolved  to do  any  of the  foregoing,  or (2)  have
         recommended  or  resolved to  recommend  to its  stockholders  an Other
         Transaction, or (B) WellTech shall have entered into or agreed to enter
         into an Other Transaction.


         The term "Termination Date" is defined in the Merger Agreement as March
29,  1996 or such other date as the  parties  may,  from time to time,  mutually
agree;  provided,  however,  that  notwithstanding the foregoing,  either Key or
WellTech may, in its sole  discretion,  elect to extend such date,  from time to
time,  to not later than May 31,  1996 in the event  that (a) in its  reasonable
business judgment not all of the conditions of the obligations of the parties to
consummate  the  Merger  set  forth in the  Merger  Agreement  are  likely to be
satisfied by the then current  Termination  Date and (b) either (i) it is not in
material breach of the Merger Agreement and none of its material representations
and  warranties  has  become  untrue in any  material  respect or (ii) if such a
breach or untruth  exists,  such  breach or untruth is capable of being cured by
and will not prevent or delay  consummation  of the Merger by or beyond the date
to which it proposes to extend the Termination Date.


         In the  event of the  termination  of the  Merger  Agreement,  it shall
become void, and there shall be no liability on the part of either party, or any
of their  respective  officers  or  directors,  to the other and all  rights and

                                      -81-

<PAGE>

obligations of either party shall cease,  except that no such termination  shall
relieve  either party from  liability for the  intentional  breach of any of its
representations,  warranties,  covenants or  agreements  set forth in the Merger
Agreement.

Fees and Expenses


         All  costs  and  expenses,  incurred  in  connection  with  the  Merger
Agreement,  the  Merger  and  the  related  transactions,   including,   without
limitation,   fees  and  disbursements  of  counsel,   financial   advisors  and
accountants,  incurred by the parties  hereto shall be borne solely and entirely
by the party which has  incurred  such costs and  expenses,  except that Key has
agreed that WellTech may pay the costs and expenses of  WellTech's  stockholders
up to an aggregate amount of $150,000.


Regulatory and Other Third Party Approvals

         Consummation  of the Merger  requires  consents or waivers from certain
third parties which have a business  relationship  with WellTech and Key.  There
are  no  significant   consents  or  waivers   required  from  any  governmental
authorities.

Amendment; Waiver

         Subject to applicable  law, (a) the Merger  Agreement may be amended at
any time prior to the Effective Time (including after the approval of the Merger
and after the approval of the Key  Proposals) by an instrument in writing signed
on behalf of all of the parties  thereto and (b) the parties may extend the time
for  performance  of any of the  obligations  of the other parties to the Merger
Agreement and may waive  inaccuracies in the  representations  and warranties or
compliance with any of the agreements or conditions for their respective benefit
therein.

Ownership of Key Stock after the Merger

         Pursuant to the Merger, Key will issue an aggregate of 4,929,962 shares
of Key Common Stock and the New Key Warrants.  As a condition to consummation of
the Merger,  however,  1,429,962 of the 1,635,000 shares of Key Common Stock and
the  Existing Key Warrants  will be canceled.  Accordingly,  based solely on the
securities  to be issued to the  WellTech  stockholders  pursuant to the Merger,
such stockholders would own in the aggregate  approximately  47.3% of the shares
of Key Common Stock before  giving  effect to the exercise of any of the New Key
Warrants (or any other outstanding  options or warrants).  Assuming the exercise
in their  entirety  of the New Key  Warrants  (but not of any other  options  or
warrants),  such holders would own in the aggregate  approximately  50.9% of the
shares of Key Common Stock.

Description of Key Common Stock

         Key is currently  authorized to issue  10,000,000  shares of Key Common
Stock, of which an aggregate of 6,913,513 shares are issued and outstanding. The
outstanding  shares of Key Common Stock are fully paid and  nonassessable.  Each
    
                                      -82-

<PAGE>

share is entitled to one vote in the election of directors  and other  corporate
matters.  The holders of Key Common Stock do not have cumulative  voting rights,
which means that the  holders of a majority of the votes  entitled to be cast by
holders of the  outstanding  Key Common Stock are able to elect all directors of
Key. Key Common Stock has no redemption  provisions and the holders thereof have
no  preemptive  rights.  The holders of Key Common Stock are entitled to receive
dividends  in such  amounts as may be  declared  by the Board of  Directors,  as
permitted by applicable law, and upon liquidation, dissolution, or winding up of
Key, subject to the rights of any preferred stock then outstanding,  the holders
of Key  Common  Stock  are  entitled  to share  ratably  in the  assets  of Key,
according  to the number of shares they hold.  The Key Common Stock is listed on
the American Stock Exchange.


         For a  description  of proposed  amendments  to the Key Articles  which
affect  Key Common  Stock see  "Proposals  to be Voted  upon at the Key  Special
Meeting--Item 2: Key Charter Amendment."


Description of the New Key Warrants

         Pursuant to the Merger,  Key will issue New Key Warrants to purchase an
aggregate of 750,000  shares of Key Common  Stock at an exercise  price of $6.75
per share.  Warrants to purchase  250,000  shares of Key Common Stock  currently
owned by WellTech  will be canceled.  The following is a summary of the material
terms of the New Key Warrants.

         Exercise of Warrant.  A New Key  Warrant is  exercisable  in full or in
part at any time during a five year period from the date of issue.  If a New Key
Warrant  is  exercised  in  respect  of fewer  than the full  number  of  shares
issuable,  a new Warrant shall be issued providing for the difference.  Key does
not have to issue  fractional  shares upon the exercise of a New Key Warrant and
may substitute cash in lieu of fractional shares.

         Dividends.  If Key declares a dividend (other than Key Common Stock) or
makes a distribution  of property,  cash,  securities or options (other than Key
Common  Stock) the holder of a New Key Warrant  shall  receive  the  dividend or
distribution as if such holder had exercised the New Key Warrant.


         Adjustment of Exercise  Price.  The exercise  price will be adjusted if
Key  changes the number of  outstanding  shares by  declaring a stock  dividend,
subdividing,  combining or reclassifying  the outstanding  shares.  The exercise
price will be multiplied by the number of shares of Key Common Stock outstanding
before the transaction, then divided by the number of shares of Key Common Stock
outstanding  after  the  transaction.  In the  event  that Key  issues  options,
warrants or convertible  securities to its stockholders  which enable the holder
to purchase  Key Common  Stock for less than Market Price (as defined in the New
Key Warrants), the exercise price shall be multiplied by the number of shares of
Key Common Stock  outstanding  before the transaction  plus the number of shares
which could be purchased at Market Price with the aggregate offering price. That
figure is then divided by the number of shares of Key Common  Stock  outstanding
plus the  number of shares  offered  for  purchase  in the  transaction.  If Key
proposes to make a distribution  of (i) any class of stock other than Key Common

                                      -83-

<PAGE>

Stock,  (ii) debt,  (iii) certain  assets or (iv) rights,  options,  warrants or
convertible  securities  which  are not  covered  by the  above  scenarios,  the
exercise price shall be multiplied by a fraction, the numerator of which will be
the  number  of  shares of Key  Common  Stock  outstanding  on the  record  date
multiplied  by the  Market  Price  less the  aggregate  fair  market  value  (as
determined  by the  Board  of  Directors)  of the  assets  or  securities  being
distributed  and the  denominator  of which  will be the number of shares of Key
Common Stock outstanding  before the transaction  multiplied by the Market Price
per share.  The Market Price on any given date shall be the average of the daily
closing  price of the Key Common Stock for 20 trading days prior to the date. No
adjustment to the exercise  price must be made unless it will result in at least
a 1% change in the exercise price. Transactions which do not meet this threshold
carry over and count toward future transactions. Reorganizations or mergers will
not affect the validity of the New Key Warrant,  but the Board of Directors  may
adjust the application of the above-mentioned provisions.


         Voting and  Information  Rights.  A holder of a New Key  Warrant is not
entitled to vote or to consent as a  stockholder  in respect of any  stockholder
meeting.  Key  must  furnish  the New Key  Warrant  holder  with  copies  of all
financial  statements,  reports,  notices  and proxy  statements  as they become
available.


         Notice of Certain  Actions.  In the event Key (i) declares any dividend
payable in stock or makes a  distribution  other than cash to the holders of Key
Common  Stock,  (ii)  offers to the  holders  of Key  Common  Stock the right to
subscribe  for or purchase  any shares of any class of stock or any other rights
or options  or (iii)  effects  any  reclassification  of the Key  Common  Stock,
capital  reorganization,  consolidation  or  merger,  sale,  transfer  or  other
disposition  of  all  or  substantially  all  of  its  assets,  or  liquidation,
dissolution  or  winding up of the  corporation,  it will serve a notice of such
proposed  action to the  holders  of the New Key  Warrants.  Such  notice  shall
specify the record  date for  determining  eligibility  to receive a dividend or
distribution,  the date on which any action described in (iii) shall take place,
and the date as of which it is expected that the holders of record of Key Common
Stock shall be entitled to receive securities or other property deliverable upon
such action.


         Transfers.  A New Key Warrant may be transferred by surrendering it and
submitting a written  instrument of transfer,  duly  executed by the  registered
holder.  Another  New Key  Warrant  shall be  issued to the  transferee  and the
surrendered  New Key  Warrant  shall  be  canceled.  If a  transfer  is not made
pursuant to an effective  registration  statement  under the Securities Act, Key
may request that the New Key Warrant holder deliver a legal opinion that the New
Key Warrant may be sold publicly without  registration under the Securities Act,
an investment covenant signed by the proposed  transferee,  an agreement by such
transferee to adhere to the restrictive  investment  covenant on the face of the
New Key  Warrant  and an  agreement  to be  bound  by the  terms  of the New Key
Warrant.

         Amendment. A New Key Warrant may not be amended or modified except by a
written  instrument  signed  by Key and  the  holder  of the  New  Key  Warrant.

                                      -84-

<PAGE>


Comparison of Rights of Stockholders of Key and WellTech


         Key  and  WellTech   are   incorporated   in  Maryland  and   Delaware,
respectively.  Upon consummation of the Merger,  stockholders of WellTech, whose
rights as stockholders are currently governed by DGCL, the WellTech Charter, and
the  WellTech  By-Laws,  will  automatically  become  stockholders  of  Key.  As
stockholders  of Key,  their  rights  will be  governed  by MGCL  and by the Key
Articles, as amended and restated pursuant to the Key Charter Amendment, and the
Key ByLaws. The following is a summary of certain material  differences  between
the rights of holders of WellTech  Stock and the rights of holders of Key Common
Stock.  The  following  does not  purport  to be a complete  description  of the
differences  between  the  rights  of  Key  and  WellTech   stockholders.   Such
differences  may be determined in full by reference to the MGCL,  DGCL,  the Key
Articles, the WellTech Charter and the Key and WellTech By-Laws.


Required Vote for Certain Business Combinations

         Key.  MGCL  provides  that  unless the  charter  states  otherwise,  an
affirmative  vote of  two-thirds  of all the  votes  entitled  to be cast on the
matter is required to approve the Merger. The Key Articles provide, as permitted
by the MGCL,  that only an  affirmative  vote of majority of the total number of
shares of all classes  outstanding  and entitled to vote  thereon is  necessary.
Maryland Law also provides that,  unless the corporate charter states otherwise,
the vote of the  stockholders  of a  surviving  corporation  is not  required to
approve a merger if (a) the plan of merger  does not  reclassify  or change  its
outstanding  stock or  otherwise  amend the  corporation's  charter  and (b) the
number of shares of common stock to be issued or  transferred in the merger does
not  exceed  15% of the  number  of its  shares  of the same  class  outstanding
immediately before the merger becomes effective.  MGCL has extensive  provisions
governing certain business  combinations with certain interested parties,  which
provisions are not applicable to Key.


         WellTech.   DGCL   requires   approval  of  a  merger,   consolidation,
dissolution or sale of all or substantially all of a corporation's assets by the
affirmative vote of the holders of a majority of the outstanding shares of stock
of the  corporation  entitled  to vote  thereon.  Pursuant  to DGCL,  unless the
corporate charter provides otherwise, no vote of the stockholders of a surviving
corporation  is required to approve a merger if (a) the agreement of merger does
not amend in any respect the surviving  corporation's charter; (b) each share of
the corporation's  stock outstanding  immediately prior to the effective date of
the  merger  is to  remain  outstanding;  and (c) the  number  of  shares of the
surviving  corporation's common stock (including shares issuable upon conversion
of any  convertible  securities)  to be  issued or  delivered  under the plan of
merger  does  not  exceed  20%  of  the  surviving  corporation's  common  stock
outstanding  immediately  prior  to  the  effective  date  of  the  merger.  For
transactions  falling outside the enumerated  exceptions,  majority  stockholder
approval is required.


Charter Amendments


         Key. MGCL provides that unless the charter states otherwise,  a vote of
two-thirds  of all votes  entitled  to be cast is  required to approve a charter
amendment;  however,  the Key Articles  provide,  as permitted by MGCL, that any

                                      -85-

<PAGE>

action that  requires  under MGCL a vote of more than a majority of shares shall
be  valid if  authorized  by a  majority  of the  total  shares  of all  classes
outstanding and entitled to vote thereon.


         WellTech.  DGCL generally  requires the affirmative vote of the holders
of a majority of the outstanding  shares  entitled to vote thereon.  It provides
for any class or series of stock to vote as a class for the  proposed  amendment
if the amendment  would increase or decrease the number of authorized  shares or
change the number or par value of the aggregate  authorized shares of a class or
series, unless the charter provides otherwise and also provides for class voting
if the amendment would alter or modify the powers, preferences or special rights
of the shares of such class to affect such class adversely.

By-Law Amendments

         Key.  Under MGCL,  the power to adopt,  alter and repeal by-laws of the
corporation  is vested in the  stockholders,  unless the  charter or the by-laws
provide otherwise. The Key By-Laws grant the power to amend such By-Laws to both
the stockholders and the Board of Directors.

         WellTech.  DGCL  provides  that the  by-laws  of a  corporation  may be
amended by the vote of a majority  of the Board of  Directors  if so provided in
the charter. WellTech Charter and By-Laws permit the Board of Directors to amend
the By-Laws by a majority vote. The Board of Directors authority to adopt, amend
or repeal  the  by-laws of a  corporation  does not divest or limit the power of
stockholders to adopt,  amend or repeal  by-laws.  Any amendment by the Board of
Directors to the by-laws may be subsequently  changed by the affirmative vote of
holders of a majority of the shares entitled to vote thereon.

Voting Rights

         Both  DGCL  and MGCL  provide  that,  unless  otherwise  provided  in a
corporation's  charter,  each share of stock is  entitled  to one vote.  The Key
Articles  prohibit the Board of Directors  from creating any class of stock that
will have more than one vote per share.  MGCL also limits  certain voting rights
of "control shares" held by persons who, directly or indirectly,  have the power
to exercise (i) one-fifth or more,  but less than  one-third,  (ii) one-third or
more, but less than a majority,  or (iii) a majority or more of all voting power
in the election of directors. Under the Key By-Laws, Key is not subject to these
restrictions. There is no similar limitation under DGCL.


Preemptive Rights

         Unless  otherwise  provided  in the  charter,  DGCL  does not grant any
preemptive  rights to the  stockholders.  The  WellTech  Charter  does not grant
preemptive  rights.  MGCL  provided  preemptive  rights with respect to charters
filed  before  October 1, 1995  unless the  charter  stated  otherwise.  The Key

                                      -86-

<PAGE>


Articles,  both prior and  subsequent to the Key Charter  Amendment,  allow only
such preemptive  rights as the Key Board of Directors,  in its sole  discretion,
may authorize. At this time, the Key Board has not authorized any such rights.


Transferability of Shares

         Neither  the  Key  Articles  nor  the  WellTech   Charter   limits  the
transferability of any shares of stock.

Special Meetings

         Key. MGCL permits a special meeting of stockholders to be called by the
President, the Board of Directors, by holders of at least 25% of shares entitled
to vote or any other person specified in the charter or by-laws. The Key By-Laws
permit a special  meeting of  stockholders  to be called by the  Chairman of the
Board,  the  President,  a majority of the Board of  Directors or upon a written
request of at least 25% of all votes  entitled to be cast.  Unless  requested by
stockholders  entitled to cast a majority of all votes,  a special  meeting need
not be called to consider any matter which is substantially the same as a matter
voted on at any special meeting during the previous 12 months.

         WellTech.  Under DGCL, a special meeting of stockholders  may be called
by the  Board of  Directors  or such  other  persons  as are  authorized  by the
certificate of  incorporation  or by-laws.  The WellTech  By-Laws  authorize the
Board of Directors or the holders of at least 1/10th of all  outstanding  shares
of stock entitled to vote to call a special meeting.

Corporate Action Without A Meeting

         Key.  Under MGCL,  any action to be taken at a meeting of  stockholders
may be taken without a meeting if a unanimous  written consent is signed by each
stockholder  entitled to vote on the matter.  The Key By-Laws  permit  corporate
action without a meeting of  stockholders  in accordance with the parameters set
forth in MGCL.

         WellTech.  Unless  otherwise  provided for in charter or by-laws,  DGCL
permits corporate action without a stockholders'  meeting,  without prior notice
and without a vote of stockholders,  upon receipt of the written consent of that
number of shares that would be  necessary to  authorize  the proposed  corporate
action at a meeting at which all shares  entitled to vote  thereon  were present
and voting.  WellTech's Charter and By-Laws do not prohibit such action.  Prompt
notice of the taking of action without a meeting by less than unanimous  written
consent must be given to all stockholders who have not consented in writing.

Dividends

         Key.  Under MGCL,  the Board of Directors  has the power to declare and
pay  dividends in cash,  property or securities  of the  corporation  unless the
declaration  of such  dividends  would be contrary to the charter.  MGCL further
provides that no distribution  may be made (i) if the  corporation  would become
unable to pay its debts as they  become due in the usual  course of  business or

                                      -87-

<PAGE>

(ii)  the  corporation's  total  assets  would  be  less  than  the  sum  of its
liabilities plus, unless the charter permits otherwise, the amount that would be
needed, if the corporation were to be dissolved at the time of the distribution,
to satisfy any preferential  rights upon  dissolution.  The Key Articles provide
for a ratable payment of dividends to holders of Common Stock in accordance with
Maryland Law.

         WellTech.  Under DGCL,  the  directors of a  corporation  are generally
permitted to declare and pay  dividends out of surplus or out of net profits for
the current and/or preceding fiscal year,  provided that such dividends will not
reduce capital below the amount of capital  represented by all classes of issued
and outstanding stock having a preference upon the distribution of assets.  Also
under DGCL, a corporation  may generally  redeem or purchase shares of its stock
if such redemption or purchase will not impair the capital of the corporation.

Appraisal or Dissenters' Rights

         Key. Under MGCL,  appraisal  rights are available in connection  with a
(a)  merger  or  consolidation,  (b)  share  exchange,  (c)  transfer  of assets
requiring  stockholder  approval,  (d)  amendment  of charter  which  alters the
contract rights of any outstanding  stock and  substantially  adversely  affects
stockholder  rights  or  (e)  business  combination  transaction.   However,  no
appraisal  rights are available if the stock of the  corporation  is listed on a
national  securities  exchange  or is  designated  as a national  market  system
security  on an  interdealer  quotation  system  by The NASD.  Accordingly,  Key
stockholders are not entitled to appraisal rights.


         WellTech. Under DGCL, appraisal rights are available in connection with
a statutory merger or consolidation in certain specified  situations.  Appraisal
rights are not available  when a corporation  is to be a surviving  corporation,
and no vote of its stockholders is required to approve the merger.  In addition,
unless otherwise  provided in the charter,  no appraisal rights are available to
holders of shares of any class of stock which, as of the record date, is either:
(a) listed on a national  securities exchange or designated as a national market
system  security  and  quoted on NASDAQ or (b) held of record by more than 2,000
stockholders,  unless such  stockholders are required by the terms of the merger
to accept anything other than (i) shares of stock of the surviving  corporation;
(ii) shares of stock of another  corporation which are or will be so listed on a
national  securities exchange or designated as a national market system security
and  quoted on NASDAQ or held of record by more than 2,000  stockholders;  (iii)
cash  in lieu of  fractional  shares  of such  stock;  or (iv)  any  combination
thereof. (See "Rights of Dissenting Stockholders of WellTech.")


Provisions Relating to Directors and Officers

         Key. Under MGCL, a corporation must have at least three directors. MGCL
provides that corporation's  charter or by-laws may permit classification of the
Board of Directors,  provided that no term of a director may be longer than five
years and the term of at least one class shall  expire each year.  Each share of
stock may be voted for as many  individuals as there are directors to be elected
and for whose election the share is entitled to be voted.

                                      -88-

<PAGE>


         The Key Articles sets the number of directors at five, which number may
be  increased  or  decreased  subject  to Key  By-Laws  and MGCL.  Under the Key
By-Laws, the number of directors may be set by an action of stockholders or of a
majority of the Board of  Directors,  but there may be no less than three and no
more than 25 directors. Assuming approval of the Merger, the number of Directors
will be fixed at six. A vacancy  resulting from the removal of a director may be
similarly  filled by an action of stockholders or of a majority of the remaining
directors.  A director elected by the stockholders  will serve for the remainder
of the  term of the  removed  director.  A  director  elected  by the  Board  of
Directors  to fill a vacancy  will serve  until the next  annual  meeting of the
stockholders and until the successor is elected and qualified.

         WellTech.  Under DGCL,  a  corporation  must have a Board of  Directors
consisting of at least one director. A corporation's charter may (i) confer upon
holders of any class or series of stock the right to elect one or more directors
to serve  for such  term and to have  such  voting  powers  as may be  specified
therein, (ii) permit classification of the Board of Directors,  and (iii) permit
cumulative  voting of the election of directors.  The WellTech  By-Laws  provide
that there shall be at least three  directors and a director shall serve until a
successor is elected and qualified.  No cumulative voting is permitted under the
WellTech By-Laws.

Removal of Directors

         Key.  Under  MGCL,  unless  the  charter  of the  corporation  provides
otherwise, stockholders may remove a director, with or without cause, by vote of
a majority of stockholders  entitled to vote. 


         WellTech.  Under DGCL, any director or the entire Board of Directors of
a  corporation  may be  removed,  with or  without  cause,  by the  holders of a
majority  of the  shares  then  entitled  to elect  directors.  In the case of a
corporation whose Board is classified, stockholders may effect such removal only
for cause unless the charter  provides  otherwise.  The WellTech By-Laws provide
that any  director  may be  removed,  with or  without  cause,  at any time upon
recommendation  of the Board by holders of the  majority  of stock  entitled  to
vote.


Derivative Suits

         Key. There is no statutory right to bring a derivative suit under MGCL;
however,  there is a clear  common law right in Maryland  to bring a  derivative
suit.

         WellTech.  Under  DGCL,  stockholders  may bring  suit on behalf of the
corporation  to enforce the rights of the  corporation,  but a  stockholder  may
institute and maintain a suit only if such person was a stockholder  at the time
of the transaction which is the subject of the suit.

                                      -89-

<PAGE>


Anti-Takeover Provisions

         Key.  MGCL has detailed  provisions  concerning  business  combinations
which are not  generally  applicable  to Key because  Key was not  automatically
subject to such provisions as of the date of their enactment by reason of having
an "interested  stockholder" as of such date and Key did not subsequently opt to
become  subject to or governed  by such  provisions.  The Key Charter  prohibits
creation  of any class of stock  which  shall be issued in  connection  with any
so-called  "shareholder  rights  plan",  "poison  pill" or  other  anti-takeover
measure.

         WellTech. DGCL has detailed provisions concerning business combinations
which are not applicable to WellTech because WellTech does not have voting stock
which is (i) listed on a  national  securities  exchange,  (ii)  authorized  for
quotation on NASDAQ or (iii) held by more than 2,000 stockholders.

Rights Of Dissenting Stockholders Of WellTech

         SECTION 262 OF DGCL IS  REPRINTED  IN ITS ENTIRETY AS ANNEX III TO THIS
PROXY STATEMENT-PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT
OF THE LAW  RELATING TO  APPRAISAL  RIGHTS AND IS  QUALIFIED  IN ITS ENTIRETY BY
REFERENCE  TO ANNEX  III.  THIS  DISCUSSION  AND  ANNEX III  SHOULD BE  REVIEWED
CAREFULLY BY ANY WELLTECH STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL
RIGHTS OR WHO WISHES TO  PRESERVE  THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH
THE  PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL
RIGHTS.

         A holder of record of WellTech  Common Stock as of the WellTech  record
date who makes the demand  described  below with  respect  to such  shares,  who
continuously is the record holder of such shares through the Effective Time, who
otherwise  complies with the statutory  requirements  of Section 262 of DGCL and
who  neither  votes in favor of the Merger  Agreement  nor  consents  thereto in
writing may be entitled to an appraisal by the Delaware  Court of Chancery  (the
"Delaware Court") of the fair value of his, her or its shares of WellTech Common
Stock.  All references in this summary of appraisal rights to a "stockholder" is
to the record holder or holders of shares of WellTech Stock. Except as set forth
herein,  stockholders  of WellTech  will not be entitled to appraisal  rights in
connection with the Merger.

         Under Section 262,  where a merger is to be submitted for approval at a
meeting  of  stockholders  not  less  than 20 days  prior to the  meeting,  each
constituent  corporation  must notify each of the holders of its stock for which
appraisal  rights are  available  that such  appraisal  rights are available and
include in each such notice a copy of Section 262.

         WellTech  stockholders  who desire to exercise their  appraisal  rights
must not vote in favor the Merger  Agreement  or the  Merger and must  deliver a
separate  written  demand for  appraisal  to  WellTech  prior to the vote by the
stockholders  of WellTech on the Merger  Agreement and the Merger.  A demand for

                                      -90-

<PAGE>

appraisal must be executed by or on behalf of the stockholder of record and must
reasonably inform WellTech of the identity of the stockholder of record and that
such record  stockholder  intends  thereby to demand  appraisal  of the WellTech
Common Stock. A person having a beneficial interest in shares of WellTech Common
Stock that are held of record in the name of another  person,  such as a broker,
fiduciary  or other  nominee,  must act  promptly to cause the record  holder to
follow the steps  summarized  herein  properly and in a timely manner to perfect
whatever appraisal rights are available.  If the shares of WellTech Common Stock
are owned of record by a person  other than the  beneficial  owner,  including a
broker,  fiduciary (such as a trustee,  guardian or custodian) or other nominee,
such  demand  must be  executed  by or for the  record  owner.  If the shares of
WellTech Common Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common,  such  demand must be executed by or for all joint
owners.  An authorized  agent,  including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record;  however,  the
agent must  identify the record owner and  expressly  disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner.

         A record owner, such as a broker, fiduciary or other nominee, who holds
shares of WellTech Common Stock as a nominee for others,  may exercise appraisal
rights  with  respect  to the  shares  held for all or less than all  beneficial
owners of shares as to which such person is the record owner.  In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not  expressly  stated,  the demand  will be presumed to
cover all shares of WellTech Common Stock outstanding in the name of such record
owner.

         A stockholder who elects to exercise  appraisal  rights,  if available,
should mail or deliver his, her or its written demand to:  WellTech,  Inc., 3535
Briarpark, Suite 200, Houston, TX 77042.

         The written demand for appraisal should specify the stockholder's  name
and mailing  address,  the number of shares of WellTech Common Stock owned,  and
that the stockholder is thereby demanding appraisal of his, her or its shares. A
vote  against the Merger  Agreement  will not itself  constitute  such a demand.
Within ten days after the Effective Time, the surviving corporation must provide
notice of the Effective Time to all  stockholders who have complied with Section
262.

         Within  120  days  after  the  Effective  Time,  either  the  surviving
corporation or any stockholder who has complied with the required  conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on the
surviving  corporation  in  the  case  of a  petition  filed  by a  stockholder,
demanding  a  determination  of the fair value of the  shares of all  dissenting
stockholders. Accordingly, WellTech stockholders who desire to have their shares
appraised  should  initiate any petitions  necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in Section
262. If  appraisal  rights are  available,  within 120 days after the  Effective
Time,  any  stockholder  who  has  theretofore   complied  with  the  applicable
provisions  of Section 262 will be entitled,  upon written  request,  to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of WellTech Common Stock not voting in favor of the Merger  Agreement and
with respect to which  demands for  appraisal  were received by WellTech and the
number of holders of such shares.  Such  statement must be mailed within 10 days
after  the  written  request   therefor  has  been  received  by  the  surviving
corporation.

                                      -91-

<PAGE>

If a petition for an appraisal is timely filed and assuming appraisal rights are
available,  at the hearing on such  petition,  the Delaware Court will determine
which stockholders, if any, are entitled to appraisal rights. The Delaware Court
may require the stockholders who have demanded an appraisal for their shares and
who hold stock represented by certificates to submit their certificates of stock
to the  Register  in  Chancery  for  notation  thereon  of the  pendency  of the
appraisal  proceedings;  and  if any  stockholder  fails  to  comply  with  such
direction,   the  Delaware  Court  may  dismiss  the   proceedings  as  to  such
stockholder.  Where  proceedings  are not  dismissed,  the  Delaware  Court will
appraise  the  shares  of  WellTech  Common  Stock  owned by such  stockholders,
determining  the fair value of such  shares  exclusive  of any  element of value
arising from the  accomplishment  or expectation of the Merger,  together with a
fair rate of interest,  if any, to be paid upon the amount  determined to be the
fair value.  In  determining  fair  value,  the  Delaware  Court is to take into
account all relevant  factors.  In Weinberger v UOP Inc.,  the Delaware  Supreme
Court  discussed the factors that could be considered in determining  fair value
in an appraisal  proceeding,  stating that "proof of value by any  techniques or
methods which are generally considered acceptable in the financial community and
otherwise  admissible  in court"  should be  considered,  and that  "fair  price
obviously requires  consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this  determination
of fair value,  the court must consider  market value,  asset value,  dividends,
earnings   prospects,   the  nature  of  the  enterprise  and  any  other  facts
ascertainable  as of the date of the merger that throw light on future prospects
of the merged corporation. In Weinberger, the Delaware Supreme Court stated that
"elements of future  value,  including the nature of the  enterprise,  which are
known or  susceptible  of proof as of the date of the merger and not the product
of speculation,  may be considered."  Section 262,  however,  provides that fair
value  is  to  be   "exclusive   of  any  element  of  value  arising  from  the
accomplishment or expectation of the merger."

         The cost of the appraisal  proceeding may be determined by the Delaware
Court and taxed against the parties as the Delaware Court deems equitable in the
circumstances.  Upon  application of a dissenting  stockholder of WellTech,  the
Delaware  Court may order that all or a portion of the expenses  incurred by any
dissenting  stockholder in connection with the appraisal proceeding,  including,
without  limitation,  reasonable  attorney's  fees and the fees and  expenses of
experts,  be charged pro rata against the value of all shares of stock  entitled
to appraisal.

         Any holder of shares of  WellTech  Common  Stock who has duly  demanded
appraisal in compliance  with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or  distributions  payable  to  stockholders  of record  at a date  prior to the
Effective Time.

         At any time within 60 days after the Effective  Time,  any  stockholder
will have the right to withdraw  such demand for  appraisal;  after this period,
the  stockholder may withdraw such demand for appraisal only with the consent of
the  surviving  corporation.  If no  petition  for  appraisal  is filed with the
Delaware Court within 120 days after the Effective Time, stockholders' rights to
appraisal shall cease.  Any stockholder may withdraw such  stockholder's  demand

                                      -92-

<PAGE>

for appraisal by delivering to the surviving corporation a written withdrawal of
his or her demand for  appraisal and  acceptance of the Merger,  except that (i)
any such  attempt to withdraw  made more than 60 days after the  Effective  Time
will require written approval of the surviving corporation and (ii) no appraisal
proceeding  in the  Delaware  Court  shall be  dismissed  as to any  stockholder
without the approval of the Delaware Court, and such approval may be conditioned
upon such terms as the Delaware Court deems just.

Certain Federal Income Tax Considerations

         The  following  is a  discussion  of the  material  federal  income tax
consequences to Key and Key's  stockholders  of the Merger and the  transactions
contemplated thereby. The tax treatment of a stockholder may vary depending upon
his  particular  situation,   and  certain  stockholders   (including  insurance
companies,  tax-exempt organizations,  financial institutions or broker-dealers,
and persons who are neither citizens nor residents of the United States,  or who
are foreign  corporations,  foreign partnerships or foreign estates or trusts as
to the United States) may be subject to special rules not discussed below.

         EACH STOCKHOLDER OF KEY IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR
AS TO THE  PARTICULAR  TAX  CONSEQUENCES  TO HIM, HER OR IT OF THE  TRANSACTIONS
DESCRIBED HEREIN,  INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.


         THIS  DISCUSSION OF CERTAIN  FEDERAL INCOME TAX  CONSEQUENCES  DOES NOT
APPLY TO STOCKHOLDERS OF WELLTECH,  EACH OF WHOM IS URGED TO CONSULT HIS, HER OR
ITS OWN TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE MERGER.


Federal Income Tax Consequences of Certain Transactions

         Consummation of the Merger and the  transactions  contemplated  thereby
are conditioned  upon the receipt by Key of a favorable  opinion from Sullivan &
Worcester LLP its special tax counsel,  with respect to the applicable following
matters:


                  (i) The Merger will qualify as a reorganization  under Section
         368 (a)(1)(A) .


                  (ii) A Key stockholder will not recognize any income,  gain or
         loss as a result of the  Merger  and his tax basis and  holding  period
         will be the same following the Merger as they were preceding; and

                  (iii) Neither Key nor WellTech will recognize any income, gain
         or loss as a result of the Merger.

                                      -93-

<PAGE>

         An opinion of counsel is not binding on the  Internal  Revenue  Service
(the "Service") or the courts. Further, the opinion of tax counsel will be based
on, among other things,  current law and certain  representations  as to factual
matters made by, among others,  WellTech and Key which,  if incorrect in certain
material  respects,  would jeopardize the conclusions  reached by counsel in its
opinion.  Neither  WellTech  nor  Key  is  currently  aware  of  any  facts  and
circumstances  which  would  cause  any such  representations  made by it to tax
counsel to be untrue or incorrect in any material respect.

         If the Merger failed to qualify under Section 368(a)(1)(A) of the Code,
WellTech  would  recognize  gain equal to the excess of the fair market value of
the  Key  Common  Stock  and  New  Key  Warrants  distributed  to  the  WellTech
stockholders  in the  Merger  plus  the  amount  of  WellTech  liabilities  over
WellTech's  basis  in the  assets  transferred  to  Key  pursuant  thereto.  Any
resulting  corporate  income tax on such gain  would be  payable by Key,  as the
successor to WellTech.

Backup Withholding

         Under the backup withholding rules, a holder of Key Common Stock may be
subject to backup  withholding  at the rate of 31% with respect to dividends and
proceeds of redemption,  unless such  stockholder  (a) is a corporation or comes
within certain other exempt  categories  and, when required,  demonstrates  this
fact or (b) provides a correct taxpayer  identification number,  certifies as to
no loss of  exemption  from  backup  withholding  and  otherwise  complies  with
applicable  requirements of the backup  withholding  rules.  Any amount withheld
under these rules will be credited against the stockholder's  federal income tax
liability. Key may require holders of Key Common Stock to establish an exemption
from backup withholding or to make arrangements satisfactory to Key with respect
to the payment of backup  withholding.  A  stockholder  who does not provide Key
with his, her or its current  taxpayer  identification  number may be subject to
penalties imposed by the Service.

                          ITEM 2: KEY CHARTER AMENDMENT

         One of the  purposes of the Key Special  Meeting is the approval of the
Key Charter  Amendment.  The Board of  Directors of Key approved the Key Charter
Amendment at a meeting  held on October 5, 1995 and found that it was  advisable
and in the best interests of Key and its stockholders. The Key Charter Amendment
provides,  among other things, for an increase in the total number of authorized
shares of Key Common Stock from 10,000,000 to 25,000,000.

         After  giving  effect  to the  consummation  of  the  Merger  (and  the
reservation of 750,000 shares of Key Common Stock for issue upon exercise of the
New Key Warrants,  1,150,000  shares of Key Common Stock for issue upon exercise
of  options  granted  or to be granted  under the Key 1995  Stock  Option  Plan,
300,000 shares for issue upon exercise of options granted or to be granted under
the Key Outside  Directors  Stock  Option Plan and 75,000  shares for issue upon

                                      -94-

<PAGE>

exercise of the warrant issued to CIT in connection with the New  Indebtedness),
assuming approval of the Key Charter  Amendment,  Key would have an aggregate of
approximately  12,311,490 shares of Key Common Stock authorized and unissued and
not reserved for issue.  The Board of Directors  believes that it is in the best
interests of Key and its stockholders to have available a significant  number of
shares of Key Common Stock,  which would be available to be issued in connection
with public and private equity financings or mergers and acquisitions,  or other
corporate transactions including benefit programs. Moreover, under the MGCL, the
Board of Directors has the power, without the need of any stockholder action, to
redesignate all or any of the  unauthorized  and unissued shares of Common Stock
into one or more series of preferred or  preference  stock and to establish  the
rights and  preferences  (including  without  limitation  dividend and liquidity
preferences,  voting  rights and  conversion  provisions),  except  that the Key
Articles  provides that no such class of series of shares (i) may have more than
one vote per share, (ii) may be issued in connection with any shareholder rights
plan, "poison pill" or other  anti-takeover  measure, or (iii) may be issued for
less  than  fair  consideration,  as  determined  in good  faith by the Board of
Directors. All of such shares, including any such preferred or preference stock,
could be  issued  by the  Board  of  Directors,  without  the  necessity  of any
stockholder action,  except to the extent otherwise required by the rules of the
American Stock Exchange.  Those rules generally require stockholder  approval if
more than 20% of the outstanding  common stock of a company is to be issued in a
single transaction or group of related transactions.

         The  Charter   Amendment  also  clarifies   certain  other   provisions
including:


         o Dividends on Key Common Stock may be paid in cash or property at such
time and in such amounts as Key Board of Directors  deems  advisable;  under the
terms of the New  Indebtedness,  however,  Key is  prohibited  from  paying cash
dividends  on  its  stock.   (See   "Business  and   Properties  of  Key--Recent
Developments--New Indebtedness.")


         o The holders of Key Common Stock are entitled to one vote per share.

         o Upon  liquidation,  dissolution  or winding up of Key, the holders of
Key Common  Stock are entitled to share  ratably  (based on the number of shares
held) in all assets available for distribution  after payment of debts and other
liabilities  and payment to any holders of a class of stock  having a preference
on distribution.

         o The Key Board of  Directors  will  consist  of six  directors,  which
number may be  increased or  decreased  pursuant to Key  By-Laws,  to the extent
permitted under MGCL.

         o The Board of Directors shall have the power, in its sole  discretion,
to determine  corporate profits,  earnings,  surplus or net assets,  reserves or
retained  earnings,  dividends  and  stockholder  rights to  inspect  the books,
accounts and  documents of Key, as well as the right to adopt,  alter and repeal
Key By-Laws, subject to rights vested in the stockholders under MGCL.

         o The Key Charter  Amendment removes the prohibition on the issuance of
a class of non-voting stock to the extent such prohibition was imposed under the
bankruptcy laws.

                                      -95-

<PAGE>


                     ITEM 3: ELECTION OF BOARD OF DIRECTORS

         Another purpose of the Key Special Meeting is the election of the Board
of Directors of Key, including, assuming consummation of the Merger, two persons
nominated by WellTech.  It is proposed that proxies for the Key Special  Meeting
not limited to the contrary  will be voted to elect  Messrs.  John,  Greenfield,
Manly and Wolkowitz, four of the current members of the Board of Directors, and,
if the Merger is consummated,  to elect Messrs. Collins and Marcum, the WellTech
Nominees. If the Merger is not consummated,  it is proposed that proxies for the
Key Special  Meeting  will be voted to elect Mr.  Edwards in addition to Messrs.
John, Greenfield, Manly and Wolkowitz and Messrs. Collins and Marcum will not be
elected to the Board.

         In connection  with Key's  acquisition of WellTech's West Texas assets,
WellTech was granted the right to designate  one nominee to serve on Key's Board
of Directors.  WellTech's nominee resigned from Key's Board effective August 29,
1995.  If the  Merger is not  consummated,  WellTech  will  retain  the right to
designate one nominee to serve on Key's Board.

         The Board of Directors of Key meets to review significant  developments
affecting Key and to act on matters requiring Board approval.  During the fiscal
year ended June 30,  1995,  the Board of  Directors  held 4 meetings,  including
regular, special and telephonic meetings. Each director attended at least 75% of
the  aggregate  of the total  number of  meetings  of the Board held  during the
period for which he has been a director and any committee on which such director
served during the periods that he served.

         Committees of the Board.  In order to facilitate the various  functions
of the Board of  Directors,  the  Board  has  created  an Audit  Committee,  the
Compensation  Committee  and  an  Executive  Committee.  There  is  no  standing
Nominating Committee of the Board.

         The Audit  Committee  meets with Key's  independent  auditors  at least
twice annually to review  financial  results,  internal  financial  controls and
procedures, audit plans and recommendations. The Audit Committee also recommends
the  selection,  retention or termination  of  independent  public  accountants,
approves  services  provided  by the  independent  public  accountants  prior to
providing such services,  and evaluates the possible effect  performance of such
services will have on their independence. Messrs. Greenfield and Wolkowitz serve
on the  Audit  Committee  with Mr.  Wolkowitz  serving  as  Chairman.  The Audit
Committee  held two  meetings  during  fiscal  year 1995  concerning  audits and
financial  statements  in  conjunction  with  meetings  of the  entire  Board of
Directors.

         The Compensation  Committee recommends to the Board the compensation of
Executive  Officers  and  Directors  and the  adoption  of stock grant and stock
option  plans by Key and  approves  stock  grants  and  stock  options.  Messrs.
Greenfield,  Manly and Wolkowitz serve on the  Compensation and Stock Grant Plan
Committee with Mr.  Wolkowitz  serving as Chairman.  The  Compensation and Stock
Grant Plan  Committee  held six meetings  during fiscal year 1995 in conjunction
with meetings of the entire Board of Directors.

                                      -96-

<PAGE>

         The Executive Committee may take such actions as the Board delegates to
it, consistent with MGCL.  Messrs.  Greenfield,  John and Wolkowitz serve on the
Executive Committee,  with Mr. John serving as Chairman. The Executive Committee
held twelve  meetings during fiscal 1995,  exclusive of the regular  meetings of
the Board of Directors.

         Compensation of Directors.  Compensation for the non-officer  Directors
for fiscal year 1995 was $5,000 per quarter. Directors are reimbursed for travel
and other  expenses  directly  associated  with Company  business.  All fees for
fiscal year 1995 were paid in cash.


         Biographical  Information.  Following  are  summaries  of  biographical
information  about each current  director and director nominee of Key. There are
no family  relationships  among the persons listed or with any Executive Officer
of Key. The summaries list the names and ages of each person,  all positions and
offices with Key, the period(s) during which he has served as such, his business
experience  during the past five years and any other  directorships  held in any
public companies or regulated investment companies. The biographical information
is as of December 15, 1995.  Information with respect to the executive  officers
(other than Messrs. John and Edwards) is set forth under "Management of Key ."


         Francis D. John (42), is the President,  Chief Executive Officer, Chief
Financial  Officer  of Key and,  since  March  1994,  Co-Chair  of the  Board of
Directors. He has been the President,  Chief Financial Officer and a Director of
Key since June 1988.  He is also a director  of Yale E. Key and  Chairman of the
Board of Odessa Exploration and Clint Hurt. Since July 1992, Mr. John has been a
director of Aerosonics Corp., a company which produces components for aircraft.

         Van D.  Greenfield  (50),  has been a  Director  of Key since 1988 and,
since March 1994,  has been  Co-Chair of the Board of  Directors  of Key. He has
been the President of Green-Cohn Group, Inc. ("Green-Cohn"),  a firm involved in
investment  banking,  since  1989.  Green-Cohn  is  a  member  of  the  National
Association of Securities  Dealers.  Mr. Greenfield has also served as President
of  Van D.  Greenfield,  Inc.  since  1980  and as  Chairman  of  the  Board  of
Progressive Savings Bank from 1986 until 1990.


         William Manly (73),  has been a Director of Key since December 1989. He
retired from his position as an Executive Vice President of Cabot Corporation in
1986, a diversified industrial conglomerate,  a position he had held since 1978.
Mr. Manly is a Director and a twenty-five  percent owner of  Metallamics,  Inc.,
which is involved with high performance  metals and also serves as a Director of
Forge Performance Products, Inc.


         Morton  Wolkowitz (66), has been a Director of Key since December 1989.
He also  serves  as a  Director  of Yale E.  Key.  From  1988  through  1991 Mr.
Wolkowitz  served as the President and Chief Executive  Officer of Wolkow Braker
Roofing  Corporation,  a company  that  provides a variety of roofing  services.
Since July 1992, he has served as a Director of Aerosonics Corp, a company which
produces components for aircraft.

                                      -97-

<PAGE>


         D. Kirk Edwards  (36),  has been a Director of Key since July 1993.  He
has  been  the  President,  Chief  Executive  Officer  and  Director  of  Odessa
Exploration  since July 1993.  Mr.  Edwards  formerly  was  President  of Odessa
Exploration Incorporated,  a Texas corporation engaged in development,  drilling
and  operation  of oil and gas  wells and  ownership  and  development  of other
mineral  interests,  a position he had  occupied  since 1986.  Mr.  Edwards will
resign as a Director of Key effective upon  consummation  of the Merger.  If the
Merger is not consummated,  it is anticipated that Mr. Edwards will be reelected
to the Board.

         W. Phillip  Marcum (51),  has been a Director of WellTech since January
19, 1994.  Since  October,  1995, Mr. Marcum has been the  non-executive  acting
Chairman of the Board of Directors  of  WellTech.  He has been a Chairman of the
Board,  President and Chief  Executive  Officer of Marcum  Natural Gas Services,
Inc. since January 1, 1991, and has been a Director of Homefree Village Resorts,
Inc., a  corporation  engaged in the  manufacture  of housing for travel  resort
properties in Arizona and Florida since the late 1970s.

         Kevin P. Collins  (45),  has been a Director of WellTech  since January
19, 1994. He has been the principal of JHP Enterprises, a merchant banking firm,
since 1992.  From 1986 to 1991, Mr. Collins served as a Senior Vice President of
DG Investment Bank, Ltd.

         If some unexpected occurrence should make necessary, in the judgment of
the Board of  Directors,  the  substitution  of some other person for any of the
nominees,  it is the  intention  of the  persons  named in the proxy for the Key
Special  Meeting  to  vote  for the  election  of such  other  person  as may be
designated  by the  Board of  Directors  of Key,  in the case of  Messrs.  John,
Greenfield,  Manly or Wolkowitz,  and of WellTech, in the case of Mr. Collins or
Mr. Marcum.  Each of the Directors elected at the Key Special Meeting will serve
until the 1996 Annual Meeting and until his successor is elected and qualified.

         Compliance  with Section 16(a) of the Securities  Exchange Act of 1934.
Section 16(a) of the Exchange Act requires  officers and directors,  and persons
who own more than 10% of Key Common  Stock,  to file  reports of  ownership  and
changes in ownership  (Form 5) with the Securities  and Exchange  Commission and
the  American  Stock  Exchange.   Officers,   directors  and  greater  than  10%
stockholders  are required by SEC  regulation  to furnish Key with copies of all
Section  16(a)  forms  they file.  Based  solely on review of the copies of such
forms  furnished  to  Key,  or  written  representations  that  no  Forms 5 were
required,  Key  believes  that during the fiscal year ended June 30,  1995,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than 10% beneficial owners were complied with.

         ITEM 4: ADOPTION AND APPROVAL OF THE KEY 1995 STOCK OPTION PLAN

         Adoption and Duration of the Key 1995 Stock Option Plan. If approved by
Key  shareholders,  the Key 1995 Stock Option Plan (hereinafter the "1995 Plan")
shall become effective as of July 1, 1995, and, unless terminated earlier,  will
terminate July 1, 2005. No option may be granted pursuant to the 1995 Plan after
June 30, 2005.  Upon and subject to approval of the 1995 Plan,  Key's Grant Plan
together with all prior awards  thereunder will be canceled and will be replaced
in  its  entirety  by  the  1995  Plan.  (See   "Management  of   Key--Executive
Compensation--Stock Grant Plan.")

                                      -98-

<PAGE>


         Administration. The 1995 Plan is to be administered by a committee (the
"Committee")  consisting  of at least three  directors of Key, each of whom is a
"disinterested  person"  within the meaning of Rule 16b-3 under the Exchange Act
and an "outside  director" within the meaning of Section 162(m) of the Code. The
Committee may include those directors who serve on the Compensation Committee of
the Board.  The Committee has the sole  authority to adopt,  amend,  and rescind
such  rules  and  regulations  as,  in  its  opinion,  may be  advisable  in the
administration of the 1995 Plan. All questions of interpretation and application
of the rules and  regulations of the 1995 Plan and of options will be subject to
the  determination of the Committee,  which  determination is final and binding;
however,  the Committee  will have no  discretionary  or  interpretive  power or
authority  with  respect to any grant  under the 1995 Plan which would cause any
non-employee director to fail to be a "disinterested person." The members of the
Committee, all of whom serve at the pleasure of the Board, are currently Messrs.
Greenfield,  Manly  and  Wolkowitz,  who are  the  members  of the  Compensation
Committee.

         Options.  The total  number of shares of Key  Common  Stock that may be
subject to options under the 1995 Plan may not exceed 1,150,000 in the aggregate
(the "Reserved Shares").  The total amount of Common Stock with respect to which
options  may be granted  over the life of the 1995 Plan to any  single  employee
shall not exceed  500,000 in the  aggregate.  For purposes of  calculating  this
individual limit, options which have been canceled, forfeited or have expired by
their  terms  are  counted  and  options  which  are  repriced  are  treated  as
cancellation  of old options  and  issuance of new  options.  Options  which are
canceled,  forfeited or expire by their terms without being  exercised  shall be
available  for future  grants under the 1995 Plan.  The  Committee may determine
which key  employees of Key or any  subsidiary or other persons shall be granted
options  under the 1995 Plan,  the terms of the  options  (including  whether an
option shall be an ISO or a nonqualified  stock option ("NSO") and the number of
shares which may be purchased under the option.  The Committee may grant options
designated as an ISO to eligible  employees and options that constitute a NSO to
eligible directors,  employees or other persons.  The number of shares of Common
Stock to be covered by any option shall be as determined by the Committee.

         Eligibility. The individuals eligible to receive Options under the 1995
Plan  consist of key  employees  (including  officers  who may be members of the
Board),  directors  who are neither  employees  nor members of the Committee and
other  individuals who render services of special  importance to the management,
operation or development of Key or any subsidiary,  and who have  contributed or
may be expected to contribute  materially to the success of Key or a subsidiary,
provided, however, that only key employees are eligible to receive ISOs.

         Method of Granting  Options.  The Committee shall determine and specify
the  number  of  shares of  Common  Stock  granted  under an Option in an option
agreement which must be signed by the Optionee and by Chief Executive Officer of
Key.


                                      -99-

<PAGE>

         Option  Price.  The  price at  which  shares  of  Common  Stock  may be
purchased  upon  exercise of an Option will be specified by the Committee at the
time the Option is  granted,  but in the case of an ISO,  except as set forth in
the  following  sentence,  may not be less than the fair market  value of Common
Stock  subject to the Option on the date the ISO is  granted.  In the case of an
employee who owns (or is considered to own under Section 424(d) of the Code) Key
Common Stock possessing more than ten percent of the total combined voting power
of stock of Key or any  subsidiary,  the price at which  shares may be purchased
pursuant  to an ISO may not be less  than 110% of the fair  market  value of the
Common Stock on the date the ISO is granted.

         The "fair market  value" of a share of Common  Stock at any  particular
date shall mean (a) the last reported sales price or the average of the reported
closing  bid and asked  prices (i) as reported on the  American  Stock  Exchange
Composite Tape, or (ii) if Key Common Stock is not listed or admitted to trading
on the American Stock Exchange, on the principal national securities exchange on
which such  security  is listed or  admitted  to  trading,  or (iii) if not then
listed or admitted to trading on any national securities exchange, on the NASDAQ
National  Market  System;  or (b) if Key  Common  Stock  is not  quoted  on such
National  Market System,  (i) the average of the closing bid and asked prices on
such date in the  over-the-counter  market as reported by NASDAQ, or (ii) if bid
and asked  prices for such  security  on such date shall not have been  reported
through  NASDAQ,  the  average  of the  bid and  asked  prices  of such  date as
furnished  by any  American or New York Stock  Exchange  member  firm  regularly
making a market in such security selected for such purpose by the Committee;  or
(c) if Key  Common  Stock is not then  listed  or  admitted  to  trading  on any
national  exchange  or quoted in the  over-the-counter  market,  the fair  value
thereof  determined  in good faith by the Committee as of a date which is within
30 days of the date as of which the termination is to be made.

         As of the date of this  Prospectus,  shares  of Key  Common  Stock  are
traded on AMEX.

         Duration of Options.  The duration of any Option is  determined  by the
Committee in its discretion and shall be specified in the Option  Agreement.  No
ISO may be  exercisable  after the  expiration  of 10  years,  and no NSO may be
exercisable  after  the  expiration  of 10 years  and one day,  from the date of
grant, except that in the case of any employee who owns (or is considered to own
under Section 424(d) of the Code) Common Stock  possessing more than ten percent
(10%) of the total  combined  voting power of all classes of stock of Key of any
subsidiary,  no ISO may be  exercisable  after the  expiration of five (5) years
from the date of grant.

         Exercise of Options. Payment of the exercise price may be made in cash,
check made payable to Key, or, at  Committee's  discretion,  in shares of Common
Stock;  provided,  however,  that the Optionee may not make payment in shares of
Common  Stock  previously  acquired by him  pursuant to the  exercise of an ISO,
unless  such  shares  have been held by him for at least two (2) years  from the
date of  grant of the ISO and at  least  one (1) year  from the date the ISO was
exercised.  If the option agreement permits,  payment of the option price may be
made in part by a promissory  note executed by the Optionee and  containing  the
following terms and conditions:  (a) it shall be secured by the shares of Common
Stock  obtained  upon  exercise of the Option;  (b)  repayment  shall be made on

                                     -100-

<PAGE>

demand by Key and,  in any event,  no later  than  three  years from the date of
exercise;  and (c) the note shall bear  interest  at an annual rate equal to the
then applicable  short-term federal rate, payable monthly by payroll deductions;
provided  however,  that an amount  not less than the par value of the shares of
Common Stock with respect to which the Option is being exercised must be paid in
cash, cash equivalents, or shares of Common Stock.

         Alternatively,  if the option agreement permits, a NSO may be exercised
by means of a "cashless  exercise"  procedure in which a broker (i) transmits to
Key the exercise price in cash or cash  equivalents,  either as a margin loan or
against the Optionee's  notice of exercise and  confirmation by Key that it will
issue and deliver to the broker stock  certificates  for at least that number of
shares of Common  Stock  having an  aggregate  fair  market  value  equal to the
exercise  price, or (ii) agrees to pay the exercise price to Key in cash or cash
equivalents  upon its receipt of stock  certificates as described in clause (i),
subject to such conditions as the Committee shall reasonably require.

         Restrictions  on Exercise of Options.  The aggregate  fair market value
(determined  as of the time the  Option is  granted)  of the  Common  Stock with
respect  to which  ISOs may be  exercisable  for the first  time by an  Optionee
during  any  calendar  year  (under the 1995 Plan or any other  incentive  stock
option plan(s) of Key or any subsidiary) shall not exceed $100,000. The Optionee
shall  notify  Key  promptly  in the  event  that  he or she  sells,  transfers,
exchanges  or  otherwise  disposes  of any shares of Common  Stock  issued  upon
exercise of an ISO before the later of (a) the second anniversary of the date of
grant of the ISO,  and (b) the first  anniversary  of the date the  shares  were
issued upon his or her exercise of the ISO.

         The  Committee  may  further  restrict  the  exercise  of any Option by
prohibiting  such  exercise at any time during which and for such period of time
as any Optionee is engaged in any activity  determined by the  Committee,  after
full consideration of the facts presented on behalf of Key and the Optionee,  to
be detrimental to the best interests of Key and its shareholders.  The Committee
shall notify the Optionee in writing of any such  determination and of the scope
and duration of any such  restriction.  The decision of the  Committee as to the
detrimental  nature of the  Optionee's  activities  shall be final,  binding and
conclusive.

         Transferability  of  Options.  Options  are  not  transferable  by  the
Optionee  otherwise than by will or under the laws of descent and  distribution,
and are  exercisable  during his lifetime only by the Optionee.  Optionee may be
able  to  transfer  NSOs  to  members  of his  immediate  family  or  trusts  or
partnerships for the benefit of such person by gift. However,  Key may refuse to
permit transfer of shares of Common Stock or of any Option if, in the opinion of
its legal counsel,  such transfer would violate federal or state securities laws
or subject Key to liability thereunder.

         Effect of Certain  Corporate  Transactions  on  Options.  The number of
Reserved Shares, the number of shares of Common Stock covered by any outstanding
option  and  the  price  per  share  payable  upon  exercise  thereof,   may  be
proportionally adjusted for any increase or decrease in the number of issued and
outstanding   shares  of  Common   Stock   resulting   from  a   reorganization,
recapitalization,  exchange of shares,  stock  split,  combination  of shares or
dividend  payable  in shares or other  securities.  Any  adjustment  made by the
Committee shall be conclusive and binding upon all affected  persons,  including
Key and all Optionees.

                                     -101-

<PAGE>


         If Key merges or  consolidates  with a wholly-owned  subsidiary for the
purpose of reincorporating  itself under the laws of another  jurisdiction,  the
Optionees  will be  entitled  to acquire  shares of stock of the  reincorporated
company upon the same terms and conditions as were in effect  immediately  prior
to such reincorporation  (unless such  reincorporation  involves a change in the
number of shares or  capitalization  of Key) and the 1995 Plan will  remain  the
1995 Plan of the reincorporated Company.

         If Key is merged or consolidated with another  corporation or if Key is
liquidated  or sells or otherwise  disposes of all or  substantially  all of its
assets while unexercised  Options remain  outstanding under the 1995 Plan, or in
other  circumstances as the Board in its sole discretion  deems  appropriate (a)
subject to the provisions of clause (c) below,  after the effective date of such
merger,  consolidation,  liquidation,  sale or other  event  (in each  case,  an
"Applicable  Event"),  each holder of an  outstanding  Option shall be entitled,
upon exercise of such Option, to receive in lieu of shares of Common Stock, such
stock or other securities or property as would have been received had the Option
been exercised  immediately prior to the Applicable Event; (b) the Board may, in
its sole discretion,  waive certain  limitations  imposed under the 1995 Plan so
that some or all Options  from and after a date prior to the  effective  date of
such Applicable  Event shall be exercisable in full; and (c) except as otherwise
provided in any Option Agreement,  all outstanding and unexercised  Options may,
in its sole  discretion be canceled by the Board as of the effective date of any
such Applicable Event.  Notice of any such  cancellation  shall be given to each
holder of an Option not less than 30 days  preceding the effective  date of such
Applicable Event and all such Options shall be fully exercisable  during such 30
day period.

         Other Terms and Conditions of Options. An Optionee shall have no rights
as a stockholder  with respect to any shares covered by an Option until the date
a stock  certificate for the shares is issued,  and, unless  otherwise stated in
the 1995 Plan,  no  adjustment  shall be made for  dividends or other rights for
which the record date is prior to the date of issuance of such certificate.

         Termination of  Employment.  Unless an Option  Agreement  establishes a
longer or shorter period,  an Optionee's  right to exercise the option following
termination of employment will be as follows:  After the Optionee's  termination
of employment with Key, including his retirement in good standing for reasons of
age, the Option shall  terminate on the earlier of the date of its expiration or
three months after the date of such termination or retirement.  If the holder of
any Option  dies before the date of  expiration  of such Option and while in the
employ of Key or during  the  three  month  period  described  in the  preceding
sentence,  or in the event of the  retirement  of the  Optionee  for  reasons of
disability  (within  the meaning of Section  22(e)(3) of the Code),  such Option
shall  terminate on the earlier of such date of expiration or one year following
the  date of such  death  or  disability  retirement.  After  the  death  of the
Optionee, his or her executors, administrators or any persons to whom his or her
Option may be  transferred  by will or by the laws of descent  and  distribution
shall  have the right at any time  prior to such  termination  to  exercise  the
Option to the extent to which the  Optionee  was entitled to exercise the Option
on the date of his or her death.

                                     -102-

<PAGE>


         Forfeiture  as a Result of  Termination  for  Cause.  If the  Committee
determines, after full consideration of the facts presented on behalf of Key and
an Optionee,  that (a) the  Optionee  has been  engaged in fraud,  embezzlement,
theft, commission of a felony or dishonesty, has made unauthorized disclosure of
trade secrets or other  proprietary  information of Key or any subsidiary in the
course of his or her employment,  or has materially  breached any noncompetition
covenant of the Optionee in favor of Key or a subsidiary;  or (b) the Optionee's
employment or involvement was otherwise terminated for "cause" as defined in any
employment  agreement  with  the  Optionee  or as  determined  by Key,  then the
Optionee's  right to exercise an Option  shall,  except to the extent  otherwise
expressly provided in any Option Agreement or in a written employment  agreement
with the Optionee,  terminate as of the date of such act or such termination and
the  Optionee  shall  forfeit  all  unexercised  Options.  The  decision  of the
Committee as to the cause of an Optionee's  discharge and the damage done to Key
or a  subsidiary  shall be final,  binding  and  conclusive.  No decision of the
Committee,  however, shall affect in any manner the finality of the discharge of
such Optionee by Key or a subsidiary.

         Amendments of the 1995 Plan. The Board may modify,  revise or terminate
the 1995 Plan at any time and from time to time; provided, however, that without
the further  approval  of the holders of at least a majority of the  outstanding
shares of Common Stock,  the Board may not (a) materially  increase the benefits
accruing to Optionees  under the 1995 Plan or make any  "modifications"  as that
term is defined under Section 424(h)(3) of the Code if such increase in benefits
or modifications would adversely affect (i) the availability to the 1995 Plan of
the protections of Rule 16b-3 of the Exchange Act, or (ii) the  qualification of
the 1995 Plan or any  Options  for  "incentive  stock  option"  treatment  under
Section  422 of the Code;  (b) change the  aggregate  number of shares of Common
Stock  available  for  Options  under the 1995 Plan or the  aggregate  number of
shares of Common  Stock for which  options may be issued to any single  employee
over the life of the Plan,  or (c) change  the class of  employees  eligible  to
receive Options.  Notwithstanding the preceding sentence, the Board shall in all
events have the power and  authority  to make such changes as, in the opinion of
counsel for Key, may be necessary or appropriate from time to time to enable any
Option granted pursuant to the 1995 Plan to qualify as an incentive stock option
or such other stock  option as may be defined  under the Code,  so as to receive
preferential  federal income tax treatment.  No amendment shall adversely affect
outstanding  Options,  and no  termination  of the  1995  Plan  shall  terminate
outstanding Options, without the consent of the Optionee.

         Tax Status of the 1995  Plan.  The  federal  income  tax  treatment  of
Options is  governed  by Section 83 (as to NSOs) and Section 422 (as to ISOs) of
the Code.  Special rules apply to the taxation of Options  exercised by delivery
of stock.

         Tax  Treatment  of NSOs.  Under  Section  83 of the Code,  an  Optionee
realizes  no taxable  income  when a NSO is  granted.  Instead,  the  difference
between  the  fair  market  value of the  Common  Stock  subject  to NSO and the
exercise price paid is taxed as ordinary  compensation  income,  on or after the
date on which the NSO is exercised.  The  difference is measured and taxed as of
the date of  exercise  if the stock is  "substantially  vested"  as  defined  in
regulations  under Section 83. The stock will be  "substantially  nonvested" for

                                     -103-

<PAGE>

the  purposes of Section 83 while it is both subject to a  "substantial  risk of
forfeiture" and nontransferable. If stock received upon exercise of an option is
substantially  nonvested,  the difference is measured as of the date or dates on
which  the  stock  becomes  substantially  vested.  The 1995  Plan  permits  the
Committee to impose  repurchase rights that should create a "substantial risk of
forfeiture"  on Common  Stock  acquired  upon  exercise of Options and cause the
Common Stock to be  nontransferable.  For  example,  a right to  repurchase  the
Common  Stock for par  value in the event  that the  Optionee's  performance  of
services for Key ceases within two years after the date of exercise of the NSO.

         Common Stock  acquired by exercise of NSOs by insiders is treated under
Section 83(c) of the Code as being subject to a "substantial risk of forfeiture"
and  nontransferable  during the period in which the Common Stock cannot be sold
without  violating  Section 16(b) of the Exchange  Act.  Since the sale of stock
acquired  pursuant  to the  exercise  of a NSO within six months of the date the
Option was granted would violate  Section  16(b),  the income taxed by reason of
the  exercise of a NSO by an Optionee  within six months after the date of grant
of the Option generally would not be measured until six months after the date of
the grant,  and the  Optionee's  holding  period for the Common  Stock would not
begin until that date,  unless he made the election  described in the  following
paragraph.

         An Optionee may elect, in accordance with Section 83(b) of the Code, to
be taxed on the difference  between the exercise price and the fair market value
of the Common  Stock on the date of  exercise,  even  though  some or all of the
Common Stock acquired is subject to a "substantial  risk of forfeiture." Such an
election must be made in writing to the Internal  Revenue Service within 30 days
of the date the Option is exercised,  and an election is  irrevocable at the end
of that period.

         Key receives no tax deduction on the grant of a NSO, but is entitled to
a tax deduction when the Optionee recognizes taxable income on or after exercise
of the  NSO,  in the  same  amount  as the  income  recognized  by the  Optionee
(subject,  in the case of certain  insiders,  to the  limitation on deduction of
executive  compensation  under Section 162(m) of the Code). If an NSO is granted
with an exercise  price at least  equal to the fair  market  value of the Common
Stock  on the  date of the  grant,  it  should  constitute  "performance  based"
compensation  for purposes of Section 162(m);  and Key's deduction on account of
the  exercise  of a NSO by such an  insider  should  not be  limited  under that
provision.

         Tax  Treatment  of  ISOs.   Except  with  respect  to  any   applicable
"alternative  minimum  tax,"  Section 422 of the Code  provides that an Optionee
incurs no federal income tax liability on either the grant or the exercise of an
ISO.  Provided  that the stock  acquired  on  exercise of the ISO is held for at
least one year after the date the ISO is exercised  and at least two years after
the date the ISO was granted,  any gain realized on the  subsequent  sale of the
stock will be taxed as  long-term  capital  gain.  If the stock is  disposed  of
within a shorter period of time (a  "disqualifying  disposition"),  the Optionee
will be taxed as if he had then  received  ordinary  compensation  income  in an
amount equal to the  difference  between the lesser of (i) the fair market value
of the stock on the date of exercise of the Option or (ii) the sale price of the

                                     -104-

<PAGE>

shares received in the disqualifying  disposition,  over the ISO exercise price.
Any  excess of the sale price  over the fair  market  value of the shares on the
exercise date will be taxed as long-term  capital gain if the Option Shares were
held more than one year from the date of  exercise,  and as  short-term  capital
gain if held  for one  year or  less.  Section  424(c)  of the  Code  defines  a
"disposition"  of stock for this purpose as any sale,  gift or transfer of legal
title (except a transfer by will or  inheritance),  and most types of exchanges.
Optionees  will be  advised  that they  should  consult  their own tax  advisors
concerning the implications of the alternative minimum tax.

         Key  receives no tax  deduction on the grant or exercise of an ISO, but
is entitled to a tax  deduction if the  Optionee  recognizes  taxable  income on
account of a  disqualifying  disposition of ISO stock, in the same amount and at
the same time as the Optionee's recognition of ordinary compensation income.

         Alternative  Minimum Tax Treatment of ISOs. The alternative minimum tax
is payable by a taxpayer for a given year only to the extent that it exceeds his
tax liability determined by the regular method. A taxpayer's alternative minimum
taxable income  includes the difference  between the exercise price and the fair
market value of the Key Common Stock as of the time the taxpayer's rights in the
stock are  freely  transferable  or are not  subject  to a  substantial  risk of
forfeiture.  Thus,  if stock  acquired  through  the  exercise  of an ISO is not
subject to any  restrictions,  the  taxpayer  recognizes  this  difference,  for
alternative  minimum tax purposes,  in the year of exercise.  Basis of the stock
for  alternative  minimum  tax  purposes  is adjusted to reflect any income thus
realized.  The portion of a taxpayer's  alternative  minimum tax attributable to
the exercise of ISOs and other items of tax  preference is credited  against the
taxpayer's  regular tax  liability  in later years to the extent that  liability
exceeds the alternative minimum tax in those years.

         Exercise by Delivery of Stock.  In Revenue Ruling  80-244,  the Service
took the position that if an optionee pays part or all of the exercise  price of
an option by delivering  shares of stock already owned, the optionee  recognizes
no taxable gain on the shares delivered. The shares so received upon exercise of
the option are divided into two groups as to their  subsequent tax treatment.  A
number  of  shares  equal to the  number  of  shares  delivered  in  payment  is
considered  to be  received by the  optionee  in an exchange  subject to Section
1036(a) of the Code, so that the optionee's  basis and holding period in the new
shares are identical to his basis and holding  period in the old shares.  If the
optionee receives more shares than he delivers,  the additional shares are taxed
in accordance  with Section 83 (if the option is a NSO) or 422 (if the option is
an ISO). His basis in those shares is equal to the sum of the cash, if any, paid
on  exercise of the  option,  and the amount of  ordinary  income on which he is
taxed with respect to the shares under Section 83 or 422.

         This favorable tax treatment is unavailable with regard to the exercise
of an ISO by delivery  of stock  acquired  pursuant to another  ISO, a qualified
stock option,  an employee stock purchase plan option or a statutory  restricted
stock option,  if the statutory  holding period for the delivered  stock has not
been fulfilled.

         Restrictions  on  Resale  Imposed  by  Securities  Law.   Officers  and
directors  of Key,  and persons who own  beneficially  10% or more of Key Common
Stock are subject to Section  16(b) of the Exchange  Act,  which  requires  that
profits  made by them on any  purchase  and sale or sale and  purchase of equity
securities  of Key within any  six-month  period  inure to Key.  The grant of an

                                     -105-

<PAGE>

Option under the 1995 Plan is not treated as a purchase of stock,  provided that
the Optionee does not dispose of the stock  acquired upon exercise of the Option
within  six  months  after  the date on which the  Option  was  granted.  If the
Optionee  disposes of the stock  acquired  on exercise of the Option  within six
months after the date that the Option was granted,  then the grant of the Option
is treated as a purchase  for  purposes of the  short-swing  profit  rules.  The
exercise of an Option under the 1995 Plan is not treated as a purchase or a sale
for purposes of Section 16(b). An Optionee's delivery of stock in payment of the
exercise  price of an  Option  will not be  considered  a sale of the  delivered
shares. However, a "cashless exercise", does constitute a sale of the stock used
to pay the exercise price.

         The shares to be issued upon exercise of options granted under the 1995
Plan have not been  registered  under  the  Securities  Act are being  issued in
reliance on an exemption from  registration  thereunder,  and may not be sold or
otherwise transferred except pursuant to an effective  registration statement or
an exemption from registration under the Securities Act.

The  following  table sets forth certain  information  relating to option grants
pursuant to Key 1995 Stock Option Plan, effective July 6, 1995.


<TABLE>
<CAPTION>

                         Number of
                         Shares of                                                             Potential Realizable Value
                       Common Stock      % of Total                                            at Assumed Annual Rates of
                        Underlying         Options       Exercise                               Stock Price Appreciation
                          Options         Granted to       Price           Expiration              for Option Term(3)
          Name          Granted(1)      Employees(2)     per Share            Date                   (in thousands)
          ----          ----------      ---------        ---------           ------                  ---------------
                                                                                                   5%              10%
<S>                      <C>             <C>              <C>            <C>                    <C>             <C>
                                                                                                   --              ---
Francis D. John           350,000         36.8%            $5.00           6/30/2005             $1,134          $2,989
                          150,000         15.8%            $5.00           6/30/2005                (4)           1,281
C. Ron Laidley             80,000          8.4%            $5.00           7/1/2005                 259             683
                           45,000          4.7%            $5.00           6/30/2005                146             384
D. Kirk Edwards           100,000         10.5%            $5.00           6/30/2005                324             854
Danny Evatt                50,000          5.3%            $5.00           6/30/2005                162             427

</TABLE>



(1)      With the exception of the options granted to Mr. John, the options vest
         in four annual  installments  commencing upon the effective date of the
         plan.  Of options  granted to Mr.  John,  options to  purchase  350,000
         shares vest in four annual  installments  commencing  on the  effective
         date of the grant and options to purchase  150,000  shares will vest on
         the first date (occurring on or after July 1, 1995 but prior to July 1,
         1999) on which the fair  market  value of Key  Common  Stock  equals at
         least $9.50 per share.

(2)      Based on options to purchase a total of 950,000  shares of Common Stock
         granted under the 1995 Plan.

(3)      Potential Realizable Value is based on the assumed growth rates for the
         ten-year  option term.  5% annual  growth  results in a stock price per
         share of $8.24 and 10%  results  in a stock  price per share of $13.54.
         The actual  value,  if any, an executive may realize will depend on the
         excess  of the  stock  price  over the  exercise  price on the date the
         option is exercised,  so that there is no assurance the value  realized
         by an executive will be at or near the amounts reflected in this table.

(4)      Options to purchase  150,000 shares will not vest until the fair market
         value of Key Common Stock  equals at least $9.50 per share,  therefore,
         Potential  Realizable  Value cannot be calculated at 5% assumed  growth
         rate.


                                      -106-


<PAGE>


      ITEM 5: ADOPTION AND APPROVAL OF OUTSIDE DIRECTORS STOCK OPTION PLAN

         Eligibility.  Individuals  who are "Outside  Directors" are eligible to
participate  in the  Outside  Directors  Stock  Option  Plan  (hereinafter,  the
"Directors  Plan").  "Outside Director" means a member of the Board of Directors
who is not an employee of Key or any of its  subsidiaries.  Under the  Directors
Plan, Outside Directors are divided into three groups:

         "Group A Outside  Directors"  are Outside  Directors  who as of July 1,
1995 were members of the  Executive  Committee of the Board of Directors and are
Outside Directors as of the date of stockholder  approval of the Directors Plan;
"Group B Outside  Directors"  are any Outside  Directors  who as of July 1, 1995
were neither Group A nor Group C Outside  Directors and are Outside Directors as
of the date of the  shareholder  approval of the  Directors  Plan;  and "Group C
Outside  Directors"  means  any  Outside  Directors  who  first  become  Outside
Directors  subsequent to July 1, 1995 but prior to July 1, 1996, and are, or are
designated to become,  Outside Directors as of the date of stockholder  approval
of the Directors Plan.

         Options.  Only NSOs may be granted  under the  Directors  Plan.  An NSO
granted under the  Directors  Plan shall expire 10 years after the date of grant
("Option Period"). An NSO may not be granted under the Directors Plan after July
1,  1998,  but  NSOs  granted  prior  to that  date  shall  continue  to  become
exercisable and may be exercised according to the terms of the Directors Plan.

         Shares  Available.  The Directors  Plan provides for the issuance of an
aggregate  of  300,000  shares of Common  Stock,  which  may be  authorized  but
unissued shares,  treasury shares,  or shares purchased on the open market.  The
number of shares of Common Stock  reserved for awards under the Directors  Plan,
the exercise price and the securities  issuable under any outstanding NSOs shall
be subject to  appropriate  adjustment  by the  Committee  to reflect  any stock
split, stock dividend, recapitalization, merger, consolidation,  reorganization,
combination,  or exchange of shares or other similar event.  All  determinations
made by the Committee with respect to adjustment shall be conclusive and binding
for all purposes of the Directors Plan.

         Grants of Options.  Effective as of July 6, 1995, each individual Group
A Outside Director shall automatically receive an NSO to purchase 50,000 shares,
and each individual Group B Outside Director shall automatically  receive an NSO
to purchase 25,000 shares. Effective as of July 1, 1996, each individual Group A
Outside Director shall  automatically  receive an NSO to purchase 25,000 shares,
each individual  Group B Outside Director shall  automatically  receive a NSO to
purchase  25,000  shares,  and each  individual  Group C Outside  Director shall
automatically receive an NSO to purchase 50,000 shares. If on the effective date
of such grants,  the Board  determines,  in its sole discretion,  that Key is in
possession of material, undisclosed information about Key, then the annual grant
of NSO's to  Outside  Directors  shall be  suspended  until the second day after
public  dissemination of such information.  If Common Stock is not traded on the
American  Stock Exchange on any date a grant would  otherwise be made,  then the
grant shall be made as of the next day  thereafter  on which  Common Stock is so
traded.

                                     -107-

<PAGE>

         The  exercise  price of the NSO shall be the Fair  Market  Value on the
date of the grant. "Fair Market Value" means the mean of the high and low prices
at which the Common Stock is traded on the date in question,  as reported on the
composite  American  Stock  Exchange tape. The exercise price of an NSO shall be
paid in U.S. Dollars on the date of exercise.

         All NSOs  granted  to Group A  Outside  Directors  and  Group B Outside
Directors  effective as of July 6, 1995 shall vest immediately.  NSOs granted to
Group A Outside Directors and Group B Outside Directors as of July 1, 1996 shall
vest in two  installments  of NSOs to purchase  8,333 shares each on July 1 1996
and July 1, 1997 and a third  installment  of NSOs to purchase  8,334  shares on
July 1, 1998. NSOs granted to Group C Outside Directors  effective as of July 1,
1996  shall  vest in four  installments  with the first  installment  of NSOs to
purchase  10,000 shares to vest July 1, 1996, two  installments of 13,333 shares
each to  vest  on July 1,  1997  and  July 1,  1998,  respectively,  and a final
installment to purchase 13,334 shares to vest on July 1, 1999.

         Cessation of Service, Retirement or Death. Upon cessation of service as
an Outside Director (other than for reasons of retirement,  death or removal for
cause),  NSOs  exercisable on the date of cessation of service shall continue to
be exercisable by the grantee for 90 days following cessation of service, but in
no event after the expiration of the Option Period. If a grantee ceases to serve
as an Outside  Director having reached the age of 65 years,  NSOs exercisable on
the date of cessation of service shall continue to be exercisable by the grantee
for 12 months  following the date of retirement from the Board,  but in no event
after the  expiration of the Option  Period.  Upon the death of a grantee,  NSOs
exercisable  on the date of death shall be  exercisable  by the grantee's  legal
representative  or heirs for 12 months from date of death, but in no event after
expiration  of the Option  Period.  If (a) an Outside  Director  is removed as a
director of Key for cause, (b) a NSO is not exercisable on the date on which the
grantee ceases to serve as an Outside Director, or (c) a NSO is not exercised in
full before it ceases to be exercisable,  then, the NSO shall, to the extent not
previously exercised, thereupon be forfeited.

         Administration,  Amendment and  Termination of the Directors  Plan. The
Directors Plan shall be  administered  by the Committee and may be terminated or
amended by the Committee as it deems advisable.  However,  an amendment revising
the size or frequency of awards or the exercise price, date of exercisability or
Option Period of a NSO shall not be made more  frequently  than every six months
unless  necessary to comply with the Code. No amendment may revoke or alter in a
manner  unfavorable  to the  grantees  any NSOs  then  outstanding,  nor may the
Committee  amend the  Directors  Plan  without  stockholder  approval  where the
absence of such approval  would cause the Directors  Plan to fail to comply with
Rule 16b-3 under the Exchange Act, or cause any recipient under the Plan to fail
to be a "disinterested person" under Rule 16b-3.

         Other Terms.  No NSO granted under the Directors  Plan is  transferable
other than by will or the laws of descent and  distribution;  provided  that, at
the discretion of the  Committee,  an NSO may be transferred by a grantee solely
to  members of his or her  immediate  family or trusts or  partnerships  for the
benefit of such persons by gift. During the grantee's lifetime,  an NSO may only
be exercised by the grantee or the grantee's  guardian or legal  representative.
Except as provided in the  Directors  Plan, no Outside  Director  shall have any
claim or right to be  granted  an NSO  under the  Directors  Plan.  Neither  the
Directors  Plan nor any  action  thereunder  shall be  construed  as giving  any
director any right to be retained in the services of Key.

                                     -108-

<PAGE>


         For discussion of tax  considerations  of the Outside  Directors  Stock
Option Plan see discussion under Key 1995 Stock Option Plan.

The  following  table sets forth certain  information  relating to option grants
pursuant to the Outside  Directors  Stock Option  Plan,  effective as of July 6,
1995.


<TABLE>
<CAPTION>

                                                                                                      Potential Realizable Value
                      Number of Shares of                                                             at Assumed Annual Rates of
                         Common Stock                                                                   Stock Price Appreciation
                          Underlying        % of Total Options    Exercise Price     Expiration            for Option Term(3)
         Name         Options Granted(1)        Granted(2)           per Share          Date                (in thousands)
         ----         ------------------       ------------         -----------        ------               ---------------
                                                                                                          5%               10%
                                                                                                          --               ---
<S>                         <C>                  <C>                 <C>            <C>                <C>                <C>

Morton Wolkowitz             50,000               40%                 $5.00           7/6/2005          $162               $427
Van Greenfield               50,000               40%                 $5.00           7/6/2005           162               427
William Manly                25,000               20%                 $5.00           7/6/2005            81               214

</TABLE>


(1)      All options  granted to Group A Outside  Directors  and Group B Outside
         Directors on July 6, 1995 vested immediately upon such date.

(2)      Based on 125,000  shares of Common Stock  granted on July 6, 1995 under
         the Outside Directors Stock Option Plan.

(3)      Potential Realizable Value is based on the assumed growth rates for the
         ten-year  option term.  5% annual  growth  results in a stock price per
         share of $8.24 and 10%  results  in a stock  price per share of $13.54.
         The actual  value,  if any, an executive may realize will depend on the
         excess  of the  stock  price  over the  exercise  price on the date the
         option is exercised,  so that there is no assurance the value  realized
         by an executive will be at or near the amounts reflected in this table

   
                              RESALES OF SECURITIES

         The Key Common Stock,  including the Key Common Stock to be issued upon
exercise of the Warrants, and the Warrants  (collectively,  the "Securities") to
be issued to the  WellTech  stockholders  under this  Prospectus  will be freely
transferable  under the Securities Act, except for Securities  issued to persons
who may be deemed to be  "underwriters"  within the meaning of Section  2(11) of
the Securities Act and Rule 145(c) thereunder. Generally, these are persons, who
are deemed to control,  be controlled  by, or under common control with WellTech
("Affiliates").  The  Securities  issued (or  issuable) in  connection  with the
Merger to persons who  constitute  "underwriters"  within the meaning of Section
2(11) and Rule 145(c) may not be publicly  reoffered  or resold by such  persons
except pursuant to an effective  registration statement under the Securities Act
covering the Securities or, in certain circumstances, pursuant to Rule 145(d) or
any other  applicable  exemption under the Securities Act.  Because the WellTech
stockholders  listed in the table below (the "Selling  Securityholders")  may be
deemed to be underwriters of the Securities, this Prospectus will also cover any
offers or sales of the Securities by the Selling Securityholders.


                                     -109-

<PAGE>

         The   ownership   of  the   Securities   to  be  held  by  the  Selling
Securityholders is described below:


<TABLE>
<CAPTION>

                         Key Common
                         Stock Owned           Key Common               Number of             Number of
Name of                  Prior to              Stock Owned              Warrants Owned        Warrants Owned
Securityholder           Offering(1)           After Offering(2)        Prior to Offering     After Offering(2)
<S>                        <C>                   <C>                    <C>                        <C>   

Belmont Capital             516,821                -0-                    351,438                    -0-
Partners II, L.P.
Belmont Fund,                73,831                -0-                     50,205                    -0-
L.P.
Fidelity Capital             99,865                -0-                     67,908                    -0-
and Income Fund
</TABLE>


- ----------------
(1)      Includes 469,551 shares of Key Common Stock issuable upon exercise of 
         the Warrants.
(2)      Assumes that the Selling Securityholders sell all of the Securities 
         and do not acquire additional Securities.


         The Selling  Securityholders may sell Securities directly to purchasers
as principals or through one or more  underwriters,  brokers,  dealers or agents
from time to time in one or more  transactions  (which  may  involve  crosses or
block  transactions) or (i) on any exchange or in the  over-the-counter  market,
(ii) in  transactions  otherwise  than in the  over-the-counter  market or on an
exchange  or (iii)  through  the writing of options  (whether  such  options are
listed on an options exchange or otherwise) on, or settlement of short sales of,
the  Securities.  Any of such  transactions  may be  effected  at market  prices
prevailing  at the time of sale,  at prices  related to such  prevailing  market
prices,  at varying  prices  determined  at the time of sale or at negotiated or
fixed prices,  in each case as determined by the Selling  Securityholders  or by
agreement between the Selling Securityholders and underwriters,brokers,  dealers
or  agents,  or  purchasers.   If  the  Selling   Securityholders   effect  such
transactions by selling Securities to or through underwriters,  brokers, dealers
or  agents,   such  underwriters,   brokers,   dealers  or  agents  may  receive
compensation  in the form of  discounts,  concessions  or  commissions  from the
Selling  Securityholders  or commissions  from purchasers of Securities for whom
they  may act as  agent  (which  discounts,  concessions  or  commissions  as to
particular  underwriters,  brokers,  dealers or agents may be in excess of those
customary in the types of transactions  involved).  The Selling  Securityholders
and any brokers,  dealers or agents that  participate in the distribution of the
Securities  may be  deemed  to be  underwriters,  and any  profit on the sale of
Securities by them and any discounts, concessions or commissions received by any
such underwriters,  brokers,  dealers or agents may be deemed to be underwriting
discounts and commissions under the Securities Act.

                                     -110-

<PAGE>

         To the extent not  described  herein and as otherwise  required by law,
the  specific  amount of  Securities  being  offered  or sold,  the names of the
Selling  Securityholders,  the respective  purchase  prices and public  offering
prices,  the names of any  agent,  dealer  or  underwriter,  and any  applicable
commissions or discounts with respect to a particular  offer or sale will be set
forth  in  an  accompanying   prospectus   supplement  or,  if  appropriate,   a
post-effective  amendment to the Registration Statement of which this Prospectus
is a part.

         Key will not receive any of the proceeds of the sale of  Securities  by
any Selling Securityholder.

         Under the securities laws of certain states, the Securities may be sold
in such states  only  through  registered  or  licensed  brokers or dealers.  In
addition, in certain states the Securities may not be sold unless the Securities
have been  registered or qualified  for sale in such state or an exemption  from
registration or qualification is available and is complied with.

         Key will pay all of the expenses incident to the registration, offering
and sale of the  Securities,  other  than  commissions,  fees and  discounts  of
underwriters,  brokers,  dealers and  agents.  Key has agreed to  indemnify  the
Selling  Securityholders  and  any  underwriters  against  certain  liabilities,
including liabilities under the Securities Act.
    
                                      

                                     -111-

<PAGE>
                                  MISCELLANEOUS

Independent Accountants


         KPMG Peat Marwick,  LLP has been Key's independent  public  accountants
since 1994. Key is not required to submit the  ratification  and approval of the
selection of its accountants to a vote of stockholders. A representative of KPMG
Peat Marwick LLP is expected to be present at the Key Special Meeting to respond
to questions and to make a statement if he desires to do so.


Stockholder Proposals


         The  1996  Annual  Meeting  of Key is  expected  to be held on or about
November  7, 1996.  Stockholder  proposals  must be received by Key on or before
July 9, 1996 to be considered for inclusion in the proxy statement and presented
at the 1996 Annual Meeting of Key.

                                  LEGAL MATTERS


         Certain  legal  matters  relating to the  validity of the shares of Key
Common  Stock to be  issued in the  Merger  will be passed  upon by  Sullivan  &
Worcester LLP ("Sullivan & Worcester"). Sullivan & Worcester will rely as to all
matters of  Maryland  law on the  opinion of Piper & Marbury  L.L.P.  Sullivan &
Worcester  will also  render an opinion  with  respect to  certain  tax  matters
relating to the Merger


                                     EXPERTS

         The  consolidated  financial  statements of Key and  subsidiaries as of
June 30, 1995 and 1994, and for the years then ended,  have been included herein
and in the  registration  statement  in  reliance  upon the  report of KPMG Peat
Marwick LLP,  independent  certified  public  accountants,  appearing  elsewhere
herein,  and upon the  authority  of said  firm as  experts  in  accounting  and
auditing.

         The  consolidated   statements  of  operations,   stockholders'  equity
(deficit) and cash flows of Key and subsidiaries for the seven months ended June
30, 1993 and the five months ended  November 30, 1992 have been included  herein
and in the  Registration  Statement  in  reliance  upon the  report of Coopers &
Lybrand, L.L.P., independent public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

         The consolidated  financial  statements of WellTech and subsidiaries as
of December  31, 1994 and 1993 and for the three years ended  December 31, 1994,
included in this Proxy Statement  -Prospectus and elsewhere in this Registration
Statement  have  been  audited  by  Arthur  Andersen  LLP,   independent  public
accountants, as indicated in their report with respect thereto, and are included
in  reliance  upon the  authority  of said firm as  experts  in  accounting  and
auditing in giving said report.


                                      -112-


<PAGE>



                          INDEX TO FINANCIAL STATEMENTS


I.   KEY ENERGY GROUP, INC. AND SUBSIDIARIES

     Independent Auditors' Report.........................................F-2
     Report of Independent Accountants....................................F-3
     Consolidated Balance Sheets, June 30, 1995 and 1994..................F-4
     Consolidated Statements of Operations, Years Ended 
       June 30, 1995 and 1994, Seven Months Ended June 30, 
       1993 and Five Months Ended November 30, 1992.......................F-5
     Consolidated Statements of Cash Flows, Years Ended 
       June 30, 1995 and 1994, Seven Months Ended June 30, 
       1993 and Five Months Ended November 30, 1992.......................F-6
     Consolidated Statements of Stockholders' Equity 
       (Deficit), Years Ended June 30, 1995 and 1994, 
       Seven Months Ended June 30, 1993 and Five Months Ended
       November 30, 1992..................................................F-7
     Notes to Consolidated Financial Statements, 
       June 30, 1995, 1994 and 1993.......................................F-8
     Consolidated Balance Sheet,  December 31, 1995 (unaudited)..........F-29
     Consolidated Statements of Operations,  Six Months Ended 
       December 31, 1995 and 1994 (unaudited)............................F-31
     Consolidated Statements of Cash Flows,  Six Months Ended  
       December 31, 1995 and 1994 (unaudited)............................F-32
     Notes to Consolidated Financial Statements,  
       December 31, 1995 (unaudited).....................................F-33


II.  WELLTECH, INC.


     Report of Independent Public Accountants............................F-37
     Consolidated Balance Sheets as of December 31, 1994 and 1993........F-38
     Consolidated Statements of Operations for the Years 
     Ended December 31, 1994, 1993 and 1992..............................F-40
     Consolidated Statements of Changes in Stockholders' 
       Equity for the Years Ended December 31, 1994, 1993 and 1992.......F-41
     Consolidated Statements of Cash Flows for the Years 
       Ended December 31, 1994, 1993 and 1992............................F-42
     Notes to Consolidated Financial Statements..........................F-43
     Unaudited Consolidated Balance Sheet, September 30, 1995............F-55
     Unaudited Consolidated Statements of Operations for the 
       Nine Months Ended September 30, 1995 and 1994.....................F-57
     Unaudited Consolidated Statements of Cash Flows for the 
       Nine Months Ended September 30, 1995 and 1994.....................F-58
     Consolidated Statements of Changes in Stockholders' 
       Equity for the Nine Months Ended September 30, 1995...............F-59
     Notes to Unaudited Consolidated Financial Statements................F-60


III. KEY ENERGY GROUP, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS


     Unaudited Pro Forma Combined Balance Sheet as of  
       December 31, 1995.................................................F-64
     Unaudited Pro Forma Combined Statement of 
       Operations, Twelve Months Ended June 30, 1995.....................F-66
     Unaudited Pro Forma Combined Statement of Operations,
        Six Months Ended December 31, 1995...............................F-67
     Notes to Unaudited Pro Forma Combined Financial Statements..........F-68




                                                        


<PAGE>




                          Independent Auditors' Report



To The Board of Directors and Stockholders
Key Energy Group, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of Key Energy
Group,  Inc.  and  Subsidiaries  as of June 30,  1995 and 1994,  and the related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Key Energy Group,
Inc.  and  Subsidiaries  as of June 30, 1995 and 1994,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.




                                            KPMG PEAT MARWICK LLP

Midland, Texas
September 14, 1995 (except with respect to the matters  

                   discussed in Note 18, as to which the 
                   date is November 28, 1995)



                                       F-2


<PAGE>





                        Report of Independent Accountants



To The Board of Directors
Key Energy Group, Inc.

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity  (deficit)  and cash flows of Key Energy  Group,  Inc. and
Subsidiaries  for the seven months ended June 30, 1993 and the five months ended
November 30, 1992.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As  discussed in Notes 1 and 3 to the  consolidated  financial  statements,  the
Company  emerged from  bankruptcy on December 4, 1992.  The  reorganization  was
accounted  for as of November 30, 1992,  at which time Key adopted  "fresh start
reporting". As a result, the Company's consolidated financial statements for the
seven  months  ended June 30,  1993  representing  the  consolidated  results of
operation  of the  reorganized  entity  are  not  comparable  to  the  Company's
consolidated financial statements for the five months ended November 30, 1992.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Key Energy Group, Inc. and Subsidiaries for the seven months ended June 30, 1993
and the five  months  ended  November  30,  1992 in  conformity  with  generally
accepted accounting principles.



                                        Coopers & Lybrand

Dallas, Texas
September 7, 1993




                                       F-3


<PAGE>

<TABLE>
<CAPTION>


                                          Key Energy Group, Inc. and Subsidiaries
                                                Consolidated Balance Sheets

(in thousands, except share & per share data)                           June 30, 1995    June 30, 1994
===============================================================================================================
<S>                                                                       <C>               <C>    

ASSETS
  Current Assets:
  Cash                                                                      $     865         $    717
  Restricted cash                                                                 410              456
  Restricted marketable securities                                                267              251
  Accounts receivable, net of allowance for doubtful
     accounts ( $133 - 1995, $103 - 1994)                                       8,133            6,674
  Inventories                                                                   1,257              964
  Prepaid expenses and other current assets                                       358              105
===============================================================================================================
  Total Current Assets                                                         11,290            9,167
===============================================================================================================
  Property and Equipment:
  Oilfield service equipment                                                   23,726           12,412
  Oil and gas well equipment                                                    2,014                -
  Motor vehicles                                                                  526              422
  Oil and gas properties and other related equipment,
     successful efforts method                                                  7,652            4,430
  Furniture and equipment                                                         332              157
  Buildings and land                                                            2,086            1,514
===============================================================================================================
                                                                               36,336           18,935
  Accumulated depreciation & depletion                                         (4,394)          (1,776)
===============================================================================================================
  Net Property and Equipment                                                   31,942           17,159
===============================================================================================================
  Other Assets                                                                  2,011            1,769
===============================================================================================================

  Total Assets                                                             $   45,243       $   28,095
===============================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
  Current Liabilities:
    Accounts payable                                                       $    3,930       $    3,117
    Accrued interest                                                              145               89
    Other accrued liabilities                                                   2,612            2,726
    Accrued income taxes                                                          174              447
    Deferred tax liability                                                        118                -
    Current portion of long-term debt                                           2,249            2,004
===============================================================================================================
  Total Current Liabilities                                                     9,228            8,383
===============================================================================================================
  Long-term debt, less current portion                                         13,700            9,497
  Deferred income taxes                                                         2,204              952
  Commitments and contingencies

  Stockholders' equity:
    Common stock, $.10 par value;  10,000,000 shares authorized,  
     6,913, 510 and 5,273,513 shares issued and
     outstanding at June 30, 1995 and 1994, respectively                          691              527
    Additional paid-in capital                                                 15,186            6,680
    Retained earnings                                                           4,234            2,056
  Total Stockholders' Equity                                                   20,111            9,263
===============================================================================================================

  Total Liabilities and Stockholders' Equity                              $    45,243       $   28,095
===============================================================================================================
</TABLE>


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


                                       F-4


<PAGE>


<TABLE>
<CAPTION>

                                              Key Energy Group, Inc. and Subsidiaries
                                               Consolidated Statements of Operations

                                                                                                Seven Months       Five Months
                                                              Year Ended       Year Ended          Ended              Ended
(In thousands, except per share data)                       June 30, 1995     June 30, 1994    June 30, 1993    November 30, 1992
===================================================================================================================================
<S>                                                          <C>                <C>               <C>             <C>  

REVENUES:
   Oilfield services                                          $40,105             $32,616          $14,304         $10,156
   Oil and gas                                                  2,334               1,936                -               -
   Oil and gas well drilling                                    1,932                   -                -               -
   Other, net                                                     318                  69              (48)            277
===================================================================================================================================
                                                               44,689              34,621           14,256          10,433
===================================================================================================================================
COSTS AND EXPENSES:
   Oilfield services                                           30,592              25,992           10,863           7,947
   Oil and gas                                                    757                 593                -               -
   Oil and gas well drilling                                    1,444                   -                -               -
   Depreciation, depletion and amortization                     2,738               1,371              406             505
   General and administrative                                   4,352               3,540            1,587           1,117
   Interest                                                     1,478                 830              276             464
===================================================================================================================================
                                                               41,361              32,326           13,132          10,033
===================================================================================================================================
 Income before reorganization items, income taxes and
   extraordinary item                                           3,328               2,295            1,124             400
===================================================================================================================================
Reorganization items:
   Reorganization costs                                             -                   -                -            (150)
   Adjust accounts to fair value                                    -                   -                -           1,868
===================================================================================================================================
Income before income taxes and extraordinary item               3,328               2,295            1,124           2,118
Income tax expense                                              1,150                 950              413               -
===================================================================================================================================
Income before extraordinary item                                2,178               1,345              711           2,118
Extraordinary gain on discharge of pre-petition liabilities         -                   -                -           2,868
===================================================================================================================================

NET INCOME                                                     $2,178              $1,345             $711          $4,986
===================================================================================================================================

EARNINGS PER SHARE *

Primary:
  Income before reorganization items, income taxes and
   extraordinary item                                           $0.50               $0.44            $0.21           $0.02
  Income before extraordinary item                               0.33                0.26             0.14            0.12
  Extraordinary item                                                -                   -                -            0.16
  Net income                                                     0.33                0.26             0.14            0.28

Assuming full dilution:
  Income before reorganization items, income taxes and
      extraordinary item                                        $0.50               $0.43            $0.21           $0.00**
  Income before extraordinary item                               0.33                0.25             0.14            0.01
  Extraordinary item                                                -                   -                -            0.02
  Net income                                                     0.33                0.25             0.14            0.03

===================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary                                                         6,647               5,274            5,124          17,942
Assuming full dilution                                          6,647               5,288            5,138         176,508
===================================================================================================================================

</TABLE>


 *    - Earnings per common  share for the five months  ended  November 30, 1992
      reflect  the  previous  capital   structure  of  Key  Energy  Group,  Inc.
      (previously  "National  Environmental  Group,  Inc.")  prior  to the  1992
      Reorganization
     Plan (see Note 3).

 ** - Earnings per common share less than $0.01.
See the  accompanying  notes  which are an integral  part of these  consolidated
financial statements.


                                       F-5


<PAGE>

<TABLE>
<CAPTION>

                                              Key Energy Group, Inc. and Subsidiaries
                                               Consolidated Statements of Cash Flows

                                                                                                    Seven           Five Months
                                                              Year Ended        Year Ended       Months Ended           Ended
(In thousands)                                              June 30, 1995      June 30, 1994     June 30, 1993    November 30, 1992
====================================================================================================================================
<S>                                                          <C>                  <C>             <C>               <C>    

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                    $2,178              $1,345             $711             $4,986
  Extraordinary item                                                 -                   -                -             (2,868)
===================================================================================================================================
  Income before extraordinary item                               2,178               1,345              711              2,118
    Adjust accounts to fair value                                    -                   -                -             (1,868)
    Reorganization costs                                             -                   -                -                150

===================================================================================================================================
  Income from operations                                         2,178               1,345              711                400
===================================================================================================================================
  Adjustments to reconcile income from operations to
    net cash provided by operations:
  Depreciation, depletion and amortization                       2,738               1,371              406                505
  Deferred income taxes                                          1,370                 493              382                  -
  Other non-cash items                                            (312)                  -                -               (248)
  Change in assets and liabilities net of effects
     from the acquisitions:
    Increase in accounts receivable                             (1,327)               (389)            (253)              (489)
    Increase in other current assets                              (940)               (613)             (91)                22
    Decrease in accounts payable and
        accrued expenses                                          (154)               (392)          (1,250)              (387)
    (Decrease) increase in accrued interest                         56                  53               (4)               246
    (Decrease) increase in accrued taxes                          (273)                447               31                  -
    Increase in other assets                                       (78)               (473)             (55)               392
===================================================================================================================================
  Net cash (used in) provided by operating activities            3,258               1,842             (123)               441
===================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures - Oilwell service operations             (2,839)             (4,395)          (1,033)              (537)
  Capital expenditures - Oil and gas operations                 (2,823)             (1,253)               -                  -
  Capital expenditures - Oil and gas well drilling operations     (143)                  -                -                  -
  Acquisitions                                                  (1,348)                  -                -                  -
  Purchase of restricted marketable securities and other            (1)                 40             (251)                 -
===================================================================================================================================
  Net cash used in investing activities                         (7,154)             (5,608)          (1,284)              (537)
===================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on debt                                    (2,148)             (1,771)            (538)              (386)
  Principal payments, line-of-credit                                 -                   -          (14,024)            (9,458)
  Proceeds under line-of-credit                                      -                   -           14,159            (10,123)
  Borrowings (payments) under line-of-credit                      (605)              1,551                -                  -
  Decrease in cash overdraft                                         -                   -                -               (129)
  Proceeds from rights offering                                      -                   -                -              1,841
  Proceeds from debt                                             6,751               4,536              330                  -
===================================================================================================================================
  Net cash provided by (used in) financing activities            3,998               4,316              (73)             1,991
===================================================================================================================================
  Net increase (decrease) in cash and restricted cash              102                 550           (1,480)             1,895
  Cash and restricted cash at beginning of period                1,173                 623            2,103                208
===================================================================================================================================

  Cash and restricted cash at end of period                     $1,275              $1,173             $623             $2,103
===================================================================================================================================
</TABLE>

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


                                       F-6


<PAGE>


<TABLE>
<CAPTION>

                                             Key Energy Group, Inc. and Subsidiaries
                                   Consolidated Statements of Stockholders' Equity (Deficit)

                                                  Preferred Stock      Common Stock
                                               Number of            Number of              Additional      Retained
                                                 Shares    Amount    Shares       Amount    Paid-in        Earnings
(In thousands)                                Outstanding  at par Outstanding     at par    Capital       (Deficit)          Total
==================================================================================================================================
<S>                                           <C>         <C>      <C>          <C>      <C>             <C>             <C>

Balance at June 30, 1992                         1,151      $115      17,942      $1,794  $  24,811       $(31,658)       $(4,938)
==================================================================================================================================

1992 Reorganization Plan:
  Exchange of "old" preferred and common
    stock for "new" common stock               (1,151)     (115)     (17,942)    (1,794)      1,757               -           (152)
  Issuance of "new" common stock                     -         -       1,520         152          -               -            152
  Exchange of debt for "new" common stock            -         -       2,634         263      4,985           2,868          8,116
  Issuance of "new" common stock for cash            -         -         970          97          -               -             97
  "Fresh-start" reporting adjustments                -         -           -           -    (25,878)         23,804         (2,074)
Net income (for the five months ended
   November 30, 1992)                                -         -           -           -          -           4,986          4,986
==================================================================================================================================
Balance at November 30, 1992                         -         -       5,124        $512     $5,675               -         $6,187
==================================================================================================================================

Change in valuation allowance related to
  deferred tax assets                                -         -           -           -        382               -            382
 Net income (for the seven months ended
June 30, 1993).                                      -         -           -           -          -             711            711
==================================================================================================================================
Balance at June 30, 1993                             -         -      $5,124        $512     $6,057            $711         $7,280
==================================================================================================================================

Issuance of common stock for Odessa
  Exploration                                        -         -         150          15        623               -            638
Net income                                           -         -           -           -          -           1,345          1,345
==================================================================================================================================
Balance at June 30, 1994                             -         -       5,274        $527     $6,680          $2,056         $9,263
==================================================================================================================================
Issuance of common stock for WellTech
  West Texas assets                                  -         -       1,635         164      8,420               -          8,584
Issuance of warrants for WellTech West
  Texas assets                                       -         -           -           -         63               -             63
Issuance of common stock for Clint Hurt
  Drilling assets                                    -         -           5           -         23               -             23
Net income                                           -         -           -           -          -           2,178          2,178

==================================================================================================================================
Balance at June 30, 1995                             -         -       6,914        $691    $15,186          $4,234        $20,111
==================================================================================================================================
</TABLE>

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

                                      F-7

<PAGE>



                     KEY ENERGY GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 June 30, 1995, June 30, 1994 and June 30, 1993

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Key

Key Energy  Group,  Inc.  ("Key") was  organized  in April 1977,  and  commenced
operations in July 1978.  Results of operations  for the seven months ended June
30, 1993 and the five months ended  November  30, 1992  include  Key's oil field
service operations conducted by Key's wholly-owned subsidiary, Yale E. Key, Inc.
("Yale E. Key"). Results of operations for the twelve months ended June 30, 1995
and 1994  include  Key,  Yale E. Key's oil and gas  exploration  and  production
wholly-owned subsidiary,  Odessa Exploration Incorporated ("OEI"), and Key's oil
and gas well drilling operations conducted by Key's wholly-owned subsidiary, Key
Energy Drilling,  Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling").  Clint
Hurt Drilling was acquired in March of 1995 (see Note 2).

Basis of Presentation

Key's  consolidated  financial  statements  include the  accounts of Key and its
wholly-owned   subsidiaries.   All  significant  intercompany  transactions  and
balances have been eliminated. The accounting policies presented below have been
followed in preparing the accompanying  financial statements.  Subsequent to the
adoption of  "fresh-start  reporting" (see Note 3), Key will continue to utilize
the same  policies.  However,  due to the  material  nature of the  "fresh-start
reporting"  adjustments,  the financial  statements issued prior to November 30,
1992 will not be  comparable  to those issued  subsequent  to November 30, 1992.
Key's ownership of less than 50% owned entities are accounted for by the cost or
equity methods, depending on Key's ownership percentage.

Cash, Restricted Cash and Marketable Securities

Key holds significant cash in certain financial  institutions.  Restricted cash,
$410,000  and  $456,000  at June 30,  1995 and 1994,  respectively,  consists of
monies held in Key's cash lock-box. The cash lock-box is a requirement under the
line of credit with CIT (see Note 5). Restricted marketable securities, $267,000
and $251,000 at June 30, 1995 and 1994,  respectively,  consist  primarily of an
investment in a mutual fund which invests,  mostly,  in short-term  intermediate
government  securities  which are  recorded  at market  value.  The mutual  fund
investment  is held in escrow  for a  letter-of-credit  (issued in the amount of
approximately $244,000) for workers' compensation insurance.

                                      F-8

<PAGE>
Inventories

Inventories,  which consist primarily of parts and supplies, are held for use in
the  operations of Key and are valued at the lower of cost  (first-in  first-out
method) or market.

Property and Equipment

Key provides for  depreciation  and  amortization  of non-oil and gas properties
using the straight-line  method over the following estimated useful lives of the
assets:

                                       Post-confirmation      Pre-confirmation
Description                                 Years                  Years   
- -------------------------------------------------------------------------------
Oil field service equipment                    3 - 15            5 - 10
Oil and gas well drilling equipment            3 - 15              -
Motor vehicles                                 3 - 7             3 - 10
Furniture and equipment                        3 - 7             3 - 15
Buildings and improvements                   10 - 15            15 - 25
Gas processing facilities                         10                -
- -------------------------------------------------------------------------------

Upon  disposition or retirement of property and equipment,  the cost and related
accumulated  depreciation  are removed  from the  accounts  and the gain or loss
thereon,  if any, is included in the results of operations.  OEI's aggregate oil
and gas properties are stated at cost, not in excess of total  estimated  future
net revenues net of related income tax effects.

For Key,  property and equipment  values prior to November 30, 1992 were carried
at cost less accumulated  depreciation.  Property and equipment were adjusted at
November 30, 1992 to their  estimated fair values and  accumulated  depreciation
was eliminated  (see Note 3).  Additions after November 30, 1992 are recorded at
cost.

OEI utilizes the  successful  efforts  method of accounting  for its oil and gas
properties.  Under this method,  all costs  associated with productive wells and
nonproductive development wells are capitalized, while nonproductive exploration
costs and geological and geophysical  costs (if any), are expensed.  Capitalized
costs relating to proved  properties  are depleted using the  unit-of-production
method based on proved  reserves  expressed as net equivalent  Bbls (barrels) as
reviewed by independent petroleum engineers.  The carrying amounts of properties
sold or  otherwise  disposed  of and the related  allowance  for  depletion  are
eliminated  from the  accounts  and any  gain/loss  is  included  in  results of
operations.  OEI's  aggregate oil and gas  properties are stated at cost, not in
excess of total estimated future net revenues net of related income tax effects.

Gas Balancing

Deferred  income   associated  with  gas  balancing  is  accounted  for  on  the
entitlements  method  and  represents  amounts  received  for gas sold under gas
balancing arrangements in excess of OEI's interest in properties covered by such
agreements.  OEI had deferred  income  associated with gas balancing at June 30,
1995 and 1994 (see Note 7).


                                      F-9

<PAGE>

Environmental

Key is subject to  extensive  federal,  state and local  environmental  laws and
regulations.  These laws, which are constantly changing,  regulate the discharge
of materials into the  environment and may require Key to remove or mitigate the
environmental  effects  of the  disposal  or release of  petroleum  or  chemical
substances  at  various  sites.   Environmental  expenditures  are  expensed  or
capitalized depending on their future economic benefit. Expenditures that relate
to an  existing  condition  caused  by past  operations  and that have no future
economic  benefits are expensed.  Liabilities  for  expenditures of a noncapital
nature  are  recorded  when  environmental   assessment  and/or  remediation  is
probable, and the costs can be reasonably estimated.

Goodwill

At June 30, 1995, Key classified as Goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Goodwill is being amortized on
a  straight-line  basis over ten years.  Goodwill is included in other assets in
the consolidated  balance sheet at June 30, 1995. Key evaluates the existence of
Goodwill  impairment on the basis of whether Goodwill is fully  recoverable from
projected, undiscounted net cash flows of the related assets.

Earnings per Share

Primary earnings per share are determined by dividing net earnings applicable to
common  stock  by  the  weighted   average  number  of  common  shares  actually
outstanding  during the period and common  equivalent  shares resulting from the
assumed exercise of stock options and warrants (if any) using the treasury stock
method,  except in periods with reported losses as the inclusion of common stock
equivalents would be antidilutive. Fully diluted earnings per share are based on
the increased number of shares that would be outstanding  assuming conversion of
dilutive outstanding  convertible securities using the "as if converted" method.
Earnings  per share for the five months  ended  November  30,  1992  reflect the
previous  capital  structure of Key prior to the 1992  Reorganization  Plan (see
Note 3).

Income Taxes

On November  30, 1992,  as part of Key's  "fresh-start  reporting",  Key adopted
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for
Income Taxes.  The adoption of SFAS 109 changed  Key's method of accounting  for
income  taxes  from the  deferred  method  (APB 11) to an  asset  and  liability
approach.  Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax  consequences  attributable to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities are measured using enacted tax rates expected to apply to taxable


                                      F-10

<PAGE>

income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  Under SFAS 109,  the effect on  deferred  tax assets and
liabilities  of a change in tax rate is  recognized in income in the period that
includes  the  enactment  date.  Under SFAS 109, a valuation  allowance  for the
deferred  tax assets is  recognized  when it is "more  likely than not" that the
benefit  of  deferred  tax assets  will not be  realized.  Adoption  of SFAS 109
resulted in the recording of a net deferred tax credit of $50,000 as of November
30, 1992 as part of "fresh-start  reporting".  The cumulative effect of SFAS 109
at July 1, 1992 was not material.  Financial statements of Key prior to November
30, 1992 do not reflect the adoption of SFAS 109.

Key and its  wholly-owned  subsidiaries  file a consolidated  federal income tax
return.

2.  ACQUISITIONS

Clint Hurt Drilling

On March 30, 1995, Key and Clint Hurt & Associates, Inc. ("CHA") entered into an
Asset Purchase  Agreement pursuant to which CHA sold to Key all of his assets in
West Texas.  Such assets mainly  consisted of four (4) oil and gas drilling rigs
and  related  equipment.  As  consideration  for the  acquisition,  Key paid CHA
$1,725,000, of which $1,000,000 was paid in cash and the balance in

the form of a 60-day promissory note. Mr. Clint Hurt entered into consulting and
noncompetition  agreements  with Key in  connection  with which Key issued 5,000
shares  of  its  common  stock  to  Mr.  Hurt.  Key  Energy  Drilling,  Inc.,  a
wholly-owned subsidiary of Key, operates as Clint Hurt Drilling. The acquisition
was  accounted  for using the purchase  method and the results of  operations of
Clint Hurt Drilling have been included in those of Key since April 1, 1995.

WellTech West Texas

On December 10, 1993, Key and WellTech,  Inc. ("WellTech") entered into an Asset
Purchase Agreement pursuant to which Key purchased substantially all assets used
by WellTech in its West Texas  operations.  The  transaction  was consummated in
August  1994.  As  consideration  for the  acquisition,  Key issued to  WellTech
1,635,000  shares  of  Common  Stock  of Key and  warrants  to  acquire  250,000
additional shares of Common Stock, at $5.00 per share,  which expire on February
5, 1997.

Commencing December 10, 1993, Key (through Yale E. Key) operated and managed the
operations  of the  WellTech  West Texas  region in  connection  with an interim
operating agreement (the "Interim Operations  Agreement").  In addition, as part
of the Interim  Operations  Agreement,  Key assumed  ownership of WellTech  West
Texas current assets and current liabilities.  The working capital items assumed
were immaterial.  Key's consolidated  statements of operations from December 10,
1993 through August 11, 1994,  include the direct revenues and expenses from the
West Texas  operations  of WellTech.  For the period after August 11, 1994,  the
results of operations include the effects of ownership of WellTech West Texas.


                                       F-11


<PAGE>



Odessa Exploration Incorporated

On August 5, 1993, Key acquired Odessa  Exploration  Incorporated  ("OEI").  The
effective date of the OEI  acquisition was July 1, 1993, when Key took effective
control.  OEI is  engaged  in the  operation  of oil and  natural  gas wells and
exploration  for oil and natural gas. OEI was acquired in  consideration  of the
issuance of 150,000 shares of Key Common Stock (which had a closing market value
of  approximately  $638,000 at July 1, 1993) to Mr. D. Kirk Edwards,  the former
owner  and the now  current  President  and CEO of OEI,  and the  assumption  of
approximately  $1,811,000 in bank debt.  Key  guaranteed  all of the assumed OEI
bank debt. The acquisition was accounted for as a purchase.

The following  unaudited  pro forma results of operations  have been prepared as
though Clint Hurt  Drilling and WellTech West Texas had been acquired on July 1,
1993:

                                                       (unaudited)
                                                       Year Ended
                                              June 30, 1995      June 30, 1994
                                            (In thousands, except  share data)

   Revenues                                      $50,485             $ 48,069
   Net income                                      2,798                2,146
   Earnings per share:
   Net income                                      $0.40                $0.31
   Weighted average shares outstanding:            6,924                6,914

3.  1992 REORGANIZATION PLAN

On October 20,  1992,  Key,  then known as National  Environmental  Group,  Inc.
("NEGI") and several affiliated companies,  filed a Joint Plan of Reorganization
under Chapter 11 of the  Bankruptcy  Code (the  "Prepackaged  Plan").  Under the
Prepackaged Plan, holders of the various debt issues, preferred stockholders and
common stockholders of Key and affiliates received shares of Key Common Stock in
exchange  for their  claims.  On  December  4, 1992,  the  Prepackaged  Plan was
confirmed.  The  Prepackaged  Plan was  implemented by merging Key Energy Group,
Inc.,  a newly  formed,  wholly-owned  subsidiary  of NEGI,  with and into NEGI,
merging  ESKEY  Inc.,  a  wholly-owned   subsidiary  of  NEGI,  into  NEGI,  and
liquidating YFC International,  N.V., another  wholly-owned  subsidiary of NEGI.
The  Articles  of  Incorporation  of  NEGI  were  amended  to (a)  reduce  Key's
authorized  capital  stock to  10,000,000  shares,  (b) prohibit the issuance of
non-voting  equity  securities and (c) change the name to Key Energy Group, Inc.
In connection with the reorganization, a reverse stock split of the common stock
occurred as a result of which each share of NEGI  common  stock  converted  into
 .0178  shares  of Key  Common  Stock,  and each  share of NEGI  preferred  stock
converted into 1.04 shares of Key Common Stock.


                                      F-12

<PAGE>

The confirmation of the Prepackaged Plan converted approximately $7.4 million in
debt, approximately $700,000 in accrued interest,  1,150,664 shares of preferred
stock  and  17,942,108  shares of common  stock of NEGI into  approximately  4.2
million  shares of Key Common  Stock.  In  addition,  Key issued an aggregate of
970,000 shares of Common Stock through a rights offering to former preferred and
common shareholders for approximately $1.8 million in cash.

The sum of the allowed claims plus post-petition  liabilities exceeded the value
of  preconfirmation  assets.  Also,  Key  experienced  a change  in  control  as
pre-reorganization  equity holders  received less than 50% of the new Key Common
Stock issued pursuant to the Prepackaged Plan.

As a result of these  circumstances,  Key was  required  to adopt AICPA SOP 90-7
("SOP  90-7"),  Financial  Reporting  by  Entities in  Reorganization  Under the
Bankruptcy  Code.  SOP 90-7 requires that a new reporting  entity be created and
assets and  liabilities  be  recorded  at their  fair  values.  This  accounting
treatment is referred to in this report as "fresh start reporting". "Fresh start
reporting"   reorganization   value  was  determined   with  the  assistance  of
independent  advisors.  The methodology  employed involved  estimation of values
(i.e., the market values of Key's assets,  liabilities and equity),  taking into
account a discounted  cash flow analysis.  The discounted cash flow analysis was
based on ten-year cash flow projections prepared by management.  Cash flows were
discounted at a debt-free cost of equity of 10.0%.  Terminal  value  calculation
was based on 50% of the discounted ten-year cash flow projection assumed above.

The ten-year cash flow projections were based on estimates and assumptions about
circumstances  and events  that have not yet taken  place.  Such  estimates  and
assumptions  are  inherently  subject to  significant  economic and  competitive
uncertainties and contingencies  beyond the control of Key,  including,  but not
limited to, those with respect to the future courses of Key's business activity.
Accordingly,  there will usually be differences  between  projections and actual
results  because events and  circumstances  frequently do not occur as expected,
and those differences may be material.

The "fresh start  reporting"  referred to above was reflected as of November 30,
1992.  Commencing  with  the  seven  months  ended  June  30,1993,  consolidated
financial  statements have been prepared as if Key is a new reporting  entity. A
black line, therefore, separates the seven month period ended June 30, 1993 from
prior period information since it has not been prepared on a comparable basis of
accounting.

                                      F-13

<PAGE>

4.  OTHER ASSETS

Other assets consist of the following:
                                                                 June 30,
                                                         1995            1994
                                                             (in thousands)

         Investment in insurance company *            $  368          $  368
         Workers compensation security premiums          326             450
         Deferred acquisition costs                      200             800
         Goodwill (net of amortization - $100)           963              --
         Other                                           154             151
                                                      ------          ------
                                                      $2,011          $1,769
                                                      ======          ======
         * Represents approximately 13% ownership.


5.  LONG-TERM DEBT

The components of long-term debt are as follows:
                                                               June 30,
                                                         1995            1994
                                                           (in thousands)
   Term Note - CIT Corporation, interest and
            principal payable monthly (a)             $  6,032       $  4,327
    Revolving Line of Credit - CIT Corporation,
            interest payable monthly (a)                 3,846          4,452
   Revolver Note - Norwest, interest
            payable monthly (b)                          4,237             --
   Term Note - Norwest, interest and principal
            payable monthly (c)                            944             --
   Term Note - NationsBank, interest and principal
            payable monthly                                 --          1,908
   Other notes payable                                     890            814
                                                      --------         ------
                                                        15,949         11,501
   Less current portion                                  2,249          2,004
                                                      --------         ------
   Long-term debt                                     $ 13,700        $ 9,497
                                                      ========        =======

         (a) The CIT term note,  as  amended,  requires  principal  payments  of
         approximately  $95,000, plus interest,  due the first day of each month
         plus a final payment of the unpaid balance of the note due December 31,
         1996.  The interest  rate is two and one-half  percent above the stated
         prime rate, 9.0% at June 30, 1995 and 1994. The note is  collateralized
         by all of the assets  (including  equipment  and  inventory) of Yale E.
         Key.

                                      F-14

<PAGE>

         The CIT line of  credit,  as  amended,  requires  monthly  payments  of
         interest at two and one-half  percent above the stated prime rate (9.0%
         at June 30,  1995 and 1994).  The  expiration  of the line of credit is
         December 31,1996.  The line of credit is collateralized by the accounts
         receivable  of Yale E. Key.  The line of credit has a maximum  limit of
         85% of available accounts receivable or $7 million,  whichever is less.
         At June 30, 1995, there was no credit line availability.

         The agreement with CIT includes certain restrictive covenants, the most
         restrictive of which  prohibits  Yale E. Key from making  distributions
         and declaring dividends on the Key Common Stock.

         (b) In March 1995, OEI entered into a loan agreement,  as amended, with
         Norwest Bank Texas, N.A. ("Norwest"). The loan agreement provides for a
         $7.5 million  revolving line of credit note subject to a borrowing base
         limitation (approximately $5.3 million at June 30, 1995). The borrowing
         base is  redetermined  on at least a semi-annual  basis.  The borrowing
         base is reduced by  approximately  $60,000  per month  through  October
         1997, the maturity of the note.  The note's  interest rate is Norwest's
         prime rate (9.0% at June 30, 1995) plus one-half  percent.  The note is
         secured by  substantially  all of the oil and gas properties of OEI and
         the pledge of certain  collateral  by current and former  officers  and
         directors of Key (see note 13). The note is also guaranteed by Key.

         The  loan  agreement   contains  various   restrictive   covenants  and
         compliance  requirements,  which  include (a)  prohibition  of OEI from
         declaring or paying  dividends on OEI's common stock,  (b) limiting the
         incurrence of  additional  indebtedness  by OEI, (c)  limitation on the
         disposition of assets and (d) various financial covenants.

         (c) In March 1995,  Clint Hurt Drilling  entered into a loan  agreement
         with Norwest.  The loan  agreement  provided for a $1 million term note
         and a $200,000  line of credit note.  The $1 million term note requires
         principal  payments of  approximately  $28,000 per month plus  interest
         with the first  payment due May 5, 1995 and monthly  thereafter  for 36
         months with a maturity date of April 1998.  The $200,000 line of credit
         note requires principal payments of $20,000 per month beginning July 5,
         1995,  plus  interest,  through its maturity in April 1996.  Both notes
         have an interest  rate of Norwest  prime rate (9.0% at June 30,  1995),
         plus 3/4 of one percent.  The notes are secured by all of the equipment
         of Clint Hurt Drilling and are guaranteed by Key. In addition, the loan
         agreement  contains  various   restrictive   covenants  and  compliance
         requirements.


As of June 30, 1995,  Key was not in  compliance  with various  covenants of its
loan  agreements.  Subsequent to June 30, 1995, Key has obtained  waivers of the
events of  non-compliance  from the various lenders.  Such waivers were obtained
either for the remaining term of the related loan or for a period  exceeding one
year.



                                      F-15

<PAGE>

Presented  below is a schedule of the repayment  requirements  of long-term debt
for each of the next five years and thereafter as of June 30, 1995:


                         Fiscal year       Principal
                            Ended            Amount
                                  (in thousands)

                             1996          $   2,249
                             1997              9,527
                             1998              4,125
                             1999                  -
                             2000                  -
                             Thereafter           48
                                           ---------
                                           $  15,949

6.  COMMITMENTS AND CONTINGENCIES


Various suits and claims arising in the ordinary  course of business are pending
against Key.  Management  does not believe that the  disposition of any of these
items will result in a material  adverse  impact on the  consolidated  financial
position or results of operations of Key.


During August 1995, Key entered into  employment  agreements with certain of its
officers.  These employment  agreements generally run to June 30, 1998, but will
automatically  be extended on a yearly  basis  unless  terminated  by Key or the
officer. In addition to providing a base salary for the officer, each employment
agreement  provides  for a  severance  payment in amount  varying  from 12 to 24
months of the officer's  base salary.  The current  annual base salaries for the
officers covered under such employment agreements total approximately $800,000.

7.  OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:


                                                             June 30,
                                                 1995                     1994
                                                         (in thousands)
Accrued payroll and taxes                       $ 624                    $ 597
Workers compensation                              704                      540
State sales and use taxes                         129                      109
Accrued property taxes                             79                       --
Gas imbalance - deferred income                   253                      454
Revenue distribution                              215                      399
Other                                             608                      627
                                                -----                    -----
Total                                          $2,612                   $2,726
                                               ======                   ======


                                      F-16

<PAGE>

8. STOCKHOLDERS' EQUITY

On September  27, 1993, a Stock Grant Plan (the "Plan") was adopted by the Board
and was approved by Key's  stockholders  on July 25, 1994. The Plan authorized a
Compensation  and Stock Grant Plan Committee of the Board (the  "Committee")  to
recommend  to the Board the award of up to 600,000  shares of Key's Common Stock
to key employees  between October 15, 1993 and December 31, 2003.  Subsequent to
June 30, 1995,  the Board has voted to terminate the Plan subject to shareholder
approval of 1995 Stock Option Plan. No shares have been awarded under the Plan.

9. INCOME TAXES

As  discussed  in Note 3, Key adopted  SFAS 109  effective  November 30, 1992 by
recording a net deferred tax liability of $50,000 as part of Key's  "fresh-start
reporting".  The cumulative effect of SFAS 109 at July 1, 1992 was not material.
Financial  statements  of Key prior to  November  30,  1992 do not  reflect  the
adoption of SFAS 109.

Income  tax  expense  for the  fiscal  years  ended  June 30,  1995 and 1994 was
$1,150,000 and $950,000,  respectively,  and $413,000 for the seven months ended
June 30, 1993.

Components of income tax expense (benefit) are as follows:





                                                     Seven Months   Five Months
                            Year Ended                  Ended          Ended
                          June 30,   June 30,         June 30,      November 30,
                            1995      1994               1993            1992
                          -------    --------         -----------   ------------
                                               (in thousands)
Federal and State:
         Current          $  (220)    $  457            $  413         $     -
         Deferred           1,370        493                 -               -
                            -----     ------           -------         -------
                           $1,150     $  950            $  413         $     -
                           ======     ======            ======         =======


                                      F-17

<PAGE>

Income tax expense  (benefit)  differs  from  amounts  computed by applying  the
statutory federal rate as follows:




<TABLE>
<CAPTION>

                                                          Seven Months   Five Months
                                         Year Ended          Ended         Ended
                                      June 30,  June 30,    June 30,     November 30,
                                        1995     1994         1993          1992
                                      -------   --------  -------------  ------------
<S>                                   <C>       <C>        <C>           <C>   

Income tax computed at
   Statutory rate                      34.0%     34.0%       34.0%         34.0%
State taxes net of federal benefit         -       2.4         2.7           2.4
Expiration of capital loss carryover       -       4.4           -             -
Book net operating loss benefit            -         -           -          (2.7)
Reorganization items                       -         -           -         (30.0)
Foreign income tax effects                 -         -           -          (0.3)
Meals and entertainment
  disallowance                           2.2         -           -             -
Accrual to return adjustments           (1.0)        -           -             -
Other                                   (0.7)      0.5           -          (3.4)
                                       -------   -------      ------       ------
                                        34.5%     41.3%       36.7%          0.0%
                                       =======   =======      ======       ======
</TABLE>



Deferred tax assets (liabilities) are comprised of the following :


                                                           June, 30
                                                      1995           1994
                                                ----------------------------
   Net operating loss carry-forwards            $     1,140      $  1,143
   Property and equipment                            (3,437)       (2,095)
   Other                                                (25)            -
                                                  -----------     ---------
   Net deferred tax liability                       $(2,322)       $ (952)
                                                  ===========     =========

A  valuation  allowance  is  provided  when it is more likely than not that some
portion of the deferred tax assets will not be realized.  Based on  expectations
for the future,  management has determined  that taxable income of Key will more
likely than not be sufficient to fully utilize available  carryforwards prior to
their ultimate expiration.

Key estimates that as of June 30, 1995,  Key will have  available  approximately
$3,352,000 of net operating loss carryforwards  (which begin to expire in 2006).
The net  operating  loss  carryforwards  are subject to an annual  limitation of
approximately $270,000,  under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended.

                                      F-18

<PAGE>

10.  LEASING ARRANGEMENTS

Among   other   leases,   Key  leases   certain   automotive   equipment   under
non-cancellable operating leases which expire at various dates through 1998. The
terms  of the  operating  leases  are  36  months  with  varying  payment  dates
throughout  each month.  In addition,  each lease includes an option to purchase
the equipment and an excess mileage charge as defined in the leases.

As of June 30, 1995, the future  minimum lease  payments  under  non-cancellable
operating leases, in thousands, are as follows:
                      Fiscal Year                    Lease
                   Ending June 30,                 Payments
                        1996                       $1,107
                        1997                          509
                        1998                          147
                        1999                           47
                                                   $1,810

Operating  lease expense was  approximately  $1,930,000  and  $1,640,000 for the
fiscal  years  ended June 30,  1995 and 1994,  respectively,  and  $529,000  and
$364,000  for the seven  months  ended June 30, 1993 and the five  months  ended
November 30, 1992, respectively.

11.  EMPLOYEE BENEFIT PLANS

Yale E. Key maintains a 401-(k) plan which plan covers  substantially all of its
employees.  Yale E. Key did not make a  contribution  to the 401-(k) plan during
the fiscal year ended June 30, 1994, the seven months ended June 30, 1993 or the
five months ended  November 30, 1992.  Beginning  July 1, 1994, it has agreed to
match up to 10% of the employees'  contributions,  which  contributions  totaled
approximately $20,000 for the year ended June 30, 1995.

12.  MAJOR CUSTOMERS

Sales to customers  representing  10% or more of  consolidated  revenues for the
years ended June 30, 1995, 1994 and 1993 were as follows:

                                   Fiscal Year Ended
                                        June 30,
                            1995        1994        1993
        Customer A          18%         15%          23%
        Customer B          10%         14%          26%

The  accounts  receivable  balance  for  customer A and B at June 30,  1995 were
$1,807,000 and $243,000, respectively.

                                      F-19

<PAGE>

13.  TRANSACTIONS WITH RELATED PARTIES

In connection with the OEI acquisition  (see Note 2), Key has agreed to grant D.
Kirk  Edwards  (President  and CEO of  OEI) a  percentage  reversionary  working
interest  in five  deep gas  wells  located  in West  Texas  upon  repayment  of
$1,622,000 of the assumed bank debt from Key's earnings from the five wells. The
percentage  reversionary  working  interest  decreases  based  on  the  date  of
repayment of the assumed bank debt and ranges from 20% of the earnings  from the
five  wells  if  repayment  occurs  on or prior  to July 7,  1995,  to 5% of the
earnings from the five wells if repayment  occurs after July 7, 1996.  The value
of the reversionary interest assigned was insignificant at July 1, 1993.

Key leases  automotive  equipment from an independent third party (see Note 10),
which purchases the automotive equipment from an automobile  dealership in which
a former  officer  owns a majority  interest.  Net  proceeds  to the  automobile
dealership  totaled  $399,000 and  $1,058,000  for years ended June 30, 1995 and
1994,  respectively,  and  $449,000 and $132,000 for the seven months ended June
30, 1993 and the five months ended November 30, 1992,  respectively.  The leases
are  considered  operating  leases.  In the opinion of the Board of Directors of
Key,  the net  proceeds  from  automotive  equipment  were on  terms at least as
favorable to Key as could have been obtained from a third party. This opinion is
based on  information  provided by a third party  leasing  company,  that is not
affiliated  with the former officer or Key, to the Board of Directors  regarding
purchase prices and equipment lease rentals offered by third parties.

Key paid  $55,000,  $57,000 and $33,000  for the year ended June 30,  1994,  the
seven months  ended June 30, 1993 and the five months  ended  November 30, 1992,
respectively  (none during  fiscal  1995),  for oil field  related  services and
equipment to two oil field  related  companies in which two officers of Key have
an  interest.  In the  opinion of the Board of  Directors  of Key,  based on the
Board's review of competitive bids, these transactions were on terms at least as
favorable to Key as could have been obtained from a third party.

During  fiscal  1992,  two officers of Key loaned Key $90,000 to purchase a shop
and office  building from a related  party.  The note bears  interest at 8% with
interest payable monthly  beginning  January 19, 1992. The principal  balance is
due and payable on December 19, 1993. Key paid approximately $6,000 in principal
and interest  during fiscal 1992. The principal  balance of the note was $32,000
at November 30, 1992 and June 30, 1992.  At June 30, 1992,  the two officers who
held  the  note  agreed  to  reduce  the  note by  $57,000  in lieu of  accounts
receivable  due to Key from the same two officers.  During fiscal 1994, the same
two officers agreed to forgive $32,000, the balance of the note, due from Key.

On February 27, 1991, Key completed the private placement of $525,000  principal
amount of Senior  Convertible  Notes (the "Notes") due 1995 with  individual and
institutional investors, some of whom are current officers and directors of Key.
The  principal  amount  at June 30,  1994 and 1993  was  $19,000  and  $149,000,
respectively.  The Notes bear interest at 8%, and the principal balance is to be
paid over 20 equal  monthly  installments.  In  addition,  each  $1,000  Note is
accompanied by a warrant to purchase Key's Common Stock for $14.50 per share.

                                      F-20

<PAGE>

In March of 1995, OEI entered into a credit agreement with Norwest (see Note 5).
As part of this arrangement, seven individuals, some of whom are officers and/or
directors of Key,  pledged  approximately  $2.7 million in  collateral to secure
OEI's credit facility.  As compensation  for this, Key paid these  individuals a
one-time fee equal to 1% of the collateral each individual placed and will pay a
monthly fee in the amount of 3% (annual rate) of the collateral  pledged.  As of
December  31, 1995,  Norwest  waived the pledge of  collateral  and released the
collateral to the seven individuals who had pledged it.

14.  BUSINESS SEGMENT INFORMATION

Information about Key's operations by business segment is as follows:


<TABLE>
<CAPTION>

                                                                     Seven Months         Five Months
                                 Year Ended        Year Ended            Ended              Ended
                                  June 30,          June 30,           June 30,          November 30,
                                    1995              1994               1993               1992
                               ---------------------------------------------------------------------
                                                              (in thousands)
  <S>                         <C>               <C>               <C>                  <C>   

   Revenues:
   Oil and gas                 $    2,334         $  1,936          $   -                 $  -
   Oil field services              40,105           32,616              14,304               10,156
   Oil and gas well drilling
      services                      1,932            -                   -                   -
   Other                              318               69                 (48)                 277
                               ------------------------------------------------ -------------------
                                  $44,689          $34,621             $14,256              $10,433
                               ====================================================================

   Income before reorganization item, income taxes
      and extraordinary items:
   Oil and gas                   $    941         $    814         $     -              $      -
   Oil field services               4,105            2,823               2,987                1,981
   Oil and gas well drilling
      services                        367             -                   -                    -
   Interest expense                (1,478)            (830)               (276)                (464)
   General corporate                  607)            (512)             (1,587)              (1,117)
                               ---------------------------------------------------------------------
                                  $ 3,328          $ 2,295              $1,124                $ 400
                               =====================================================================

   Identifiable assets:
   Oil and gas                    $ 8,289          $ 5,258         $      -             $      -
   Oil field services              33,516           22,022              15,906               16,109
   Oil and gas well drilling
      services                      3,160           -                     -                     -
   General corporate                  278              815
                              ----------------------------------------------------------------------
                                  $45,243          $28,095             $15,906              $16,109
                              ======================================================================

</TABLE>

                                      F-21

<PAGE>

<TABLE>
<CAPTION>


                                                                        Seven Months      Five Months
                                     Year Ended         Year Ended         Ended             Ended
                                      June 30,           June 30,         June 30,       November 30,
                                       1995               1994             1993               1992
                                  -----------------------------------------------------------------
                                                              (in thousands)
  <S>                           <C>             <C>                 <C>               <C>    

   Capital Expenditures:
   Oil and gas                   $    3,736      $        4,449       $         -      $            -
   Oil field services                11,422               4,395             1,033                 537
   Oil and gas well drilling
     services                          2,141                  -                 -
                                 --------------------------------------------------------------------
                                 $    17,299     $        8,844       $     1,033      $          537
                                 ====================================================================

   Depreciation, depletion
   and amortization:
   Oil and gas                   $       426     $          412       $         -      $            -
   Oil field services                  2,279                959               406                 505
   Oil and gas well drilling
      services                            33                  -                 -                   -
                                 --------------------------------------------------------------------
                                 $     2,738     $        1,371       $       406      $          505
                                 ====================================================================
</TABLE>


         * - Includes adjustments related to Key's 1992 Reorganization Plan (see
Note 3).

Key operates a variety of oil field service equipment  including  workover rigs,
hot oil units,  transports and various other oil field servicing  equipment.  In
addition,  Key performs a variety of other oil field services  including fishing
tools, frac tanks and blow-out preventers.

OEI is engaged in the  drilling  and  production  of oil and  natural gas in the
United  States.  OEI  acquires and manages  interests  in producing  oil and gas
properties  for  its own  account  and for its  sponsored  investors.  After  an
acquisition,  OEI reworks the acquired well to increase  production and/or forms
drilling partnerships for additional development wells.

Clint Hurt  Drilling  conducts oil and gas well  drilling  services and operates
four drilling rigs which drill for oil and gas in the West Texas area.



                                       F-22


<PAGE>


15.   INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)




CAPITALIZED COSTS:                          June 30, 1995     June 30, 1994
                                            -------------     -------------
Oil and Gas Properties:
Proved properties                            $7,652,000          $4,430,000
Unproven properties                                   -                   -
Less accumulated depletion                     (766,000)           (386,000)
                                               ---------           ---------
Net Capitalized costs                        $6,886,000          $4,044,000
                                             ==========          ==========

                                             Year Ended          Year Ended
COSTS INCURRED:                             June 30, 1995       June 30, 1994
                                           -------------       -------------
Proved property acquisition costs            $1,054,000          $4,390,000
Development costs                             2,581,000              40,000
                                              ---------              ------
Total Costs Incurred                         $3,635,000          $4,430,000
                                             ==========          ==========
RESULTS OF OPERATIONS:
Oil and gas sales                            $1,793,000          $1,483,000
Production costs, including production
  taxes                                        (756,000)           (573,000)
Depletion                                      (398,000)           (386,000)
Income Taxes*                                  (217,000)           (178,000)
                                               ---------           ---------
Results of operations for oil and gas
  producing activities**                     $  422,000          $  346,000
                                             ==========          ==========

*   - Computed at the statutory rate of 34%.
** - Excludes corporate overhead and financing costs.


Oil and Gas Reserve Information

Estimates of OEI's proved oil and gas reserves as of June 30, 1995 and 1994 were
prepared in-house and reviewed by an independent petroleum reservoir engineering
firm. All estimates were made in accordance with  guidelines  established by the
Securities  and  Exchange  Commission.  Proved  oil  and  gas  reserves  are the
estimated  quantities  of  crude  oil  and  natural  gas  which  geological  and
engineering  data  demonstrate  with  reasonable  certainty to be recoverable in
future years from known  reservoirs  under existing  economic  conditions  (i.e.
prices and costs as of the date the estimate is made.) Prices  utilized  reflect
consideration   of  changes  in  existing   prices   provided   by   contractual
arrangements, if any, but not of escalations based upon future conditions.

Proved  developed  oil and gas reserves are reserves  that can be expected to be
recovered through existing equipment and operating methods.

                                      F-23

<PAGE>

Proved undeveloped oil and gas reserves are proved reserves that are expected to
be recovered from new wells on undrilled  acreage or from existing wells where a
relatively  major  expenditure  is required  for  recompletion  or  secondary or
tertiary  recovery.  Reserves assigned to undrilled acreage are limited to those
drilling units that offset  productive  units  reasonably  certain of production
when drilled.

No major  discovery or other  favorable or adverse event has occurred since July
1, 1995 which is believed to have caused a  significant  change in the estimated
proved oil and gas reserves of OEI.

OEI's estimate of reserves has not been filed with or included in reports to any
federal agency other than the Securities and Exchange Commission.

Oil and gas reserve  quantity  estimates  are subject to numerous  uncertainties
inherent  in  the  estimation  of  quantities  of  proved  reserves  and  in the
projection  of  future  rates  of  production  and  the  timing  of  development
expenditures.  The  accuracy of such  estimates  is a function of the quality of
available data and of engineering  and geological  interpretation  and judgment.
Results of subsequent  drilling,  testing and production may cause either upward
or downward revision of previous estimates.  Further,  the volumes considered to
be  commercially  recoverable  fluctuate  with  changes in prices and  operating
costs. Key emphasizes that reserve  estimates are inherently  imprecise and that
estimates  of new  discoveries  are  more  imprecise  than  those  of  currently
producing oil and gas properties.  Accordingly,  these estimates are expected to
change as additional information becomes available in the future.

                                      F-24

<PAGE>


<TABLE>
<CAPTION>

Oil and Gas Producing Activities:

                                                                         Oil and                  Natural
                                                                        Condensate                   Gas
                                                                         (Bbls)                     (Mcf)
Total Proved Reserves:
<S>                                                                   <C>                      <C>

Balance, July 1, 1993                                                       -                        -
         Purchases of minerals-in-place                                   129,291                 7,338,452
         Production                                                       (14,383)                 (552,791)
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 1994                                                    114,908                 6,785,661
         Revisions of previous estimates                                   92,080                 1,945,659
         Purchases of minerals-in-place                                 1,515,559                 6,036,937
         Production                                                       (40,330)                 (770,197)
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 1995                                                  1,682,217                13,998,060
===========================================================================================================
Proved Developed Reserves:
         July 1, 1993                                                           -                         -
         June 30, 1994                                                    114,908                 6,785,661
         June 30, 1995                                                    750,604                11,203,232
===========================================================================================================

</TABLE>


Standardized Measure of Discounted Future Cash Flows

The  following  schedules  present  estimates  of the  standardized  measure  of
discounted future net cash flows from Key's proved reserves as of June 30, 1995,
and an  analysis  of the  changes in these  amounts for the years ended June 30,
1995 and 1994.  Estimated future cash flows are determined using year-end prices
adjusted only for fixed and  determinable  increases for natural gas provided by
contractual  agreement (if any).  Estimated  future  production and  development
costs are based on economic conditions at year-end.  Future federal income taxes
are computed by applying  the  statutory  federal  income tax rate of 34% to the
difference  between the future pretax net cash flows and the tax basis of proved
oil and  gas  properties,  after  considering  investment  tax  credits  and net
operating loss carry forwards (if any), associated with these properties.

Discounted future cash flow estimates like those shown below are not intended to
represent  estimates of the fair value of oil and gas  properties.  Estimates of
fair value should also consider probable  reserves,  anticipated  future oil and
gas prices,  interest  rates,  changes in development  and production  costs and
risks   associated   with  future   production.   Because  of  these  and  other
considerations,  any  estimate  of fair  value  is  necessarily  subjective  and
imprecise.

                                      F-25

<PAGE>
                                                                         
                                                 June 30, 1995    June 30, 1994
                                                          (in thousands)

 Standardized Measure:
         Future cash inflows                          $ 51,830    $ 11,355
         Future production costs                       (11,852)     (3,478)
         Future development costs                       (6,160)       --
         Future income taxes                           (10,477)     (1,318)
_______________________________________________________________________________
         Future after-tax net cash flows                23,341       6,559
         10% annual discount                            (8,183)     (1,820)
_______________________________________________________________________________
Standardized Measure, June 30, 1995 and 1994          $ 15,158    $  4,739
===============================================================================


Changes in Standardized Measure:
Standardized Measure, July 1, 1993                    $   --
         Oil and gas sales, net of production costs       (910)
         Purchases of minerals in place                  6,030
         Net change in income taxes                       (381)
         Accretion of discount                            --
_______________________________________________________________________________
Standardized Measure, June 30, 1994                   $  4,739
         Oil and gas sales, net of production costs     (1,037)
         Purchases of minerals in place                 13,033
         Net change in income taxes                     (5,881)
         Accretion of discount                             512
         Revision of quantity estimates                  1,745
         Change in future development costs              1,227
         Other                                             820
_______________________________________________________________________________
Standardized Measure, June 30, 1995                   $ 15,158
===============================================================================
                                                              
                                      F-26

<PAGE>
16.  CASH FLOW DISCLOSURES

Supplemental  cash flow  disclosures for the years ended June 30, 1995 and 1994,
the seven months ended June 30, 1993 and the five months ended November 30, 1992
are presented below:


                                                      Seven Months  Five Months
                            Year Ended    Year Ended     Ended         Ended
                             June 30,     June 30,      June 30,   November 30,
                              1995          1994         1993          1992  
                         ------------------------------------------------------

  Interest paid             $1,422         $759         $276           $215
  Taxes paid                    53           10            -              -

Supplemental  schedule of non-cash investing and financing  transactions for the
years ended June 30, 1995 and 1994, the seven months ended June 30, 1993 and the
five months ended November 30, 1992, are presented below:


<TABLE>
<CAPTION>

                                                                               Seven Months    Five Months
                                             Year Ended      Year Ended           Ended           Ended
                                              June 30,        June 30,         November 30,     November 30,
                                                1995            1994             1993             1992
                                            ---------------------------------------------------------------
                                                                           ( in thousands)
<S>                                        <C>              <C>            <C>               <C>  

Fair value of Common Stock issued
  for OEI                                    $      -         $     638      $        -        $     -
Assumption of OEI liabilities                       -             2,752               -              -
Acquisition of OEI
  property and equipment                            -             3,196               -              -
Fair value of Common Stock issued
  for Clint Hurt                                   23             -                   -              -
Fair value of Common Stock and
  Warrants  issued for
  WellTech West Texas                           8,647             -                   -              -
Capital lease obligation reduced
  for purchase of assets                          275             -                   -              -
Proceeds on sale of assets
  not received                                    132             -                   -              -
Property and equipment additions
  and acquisition costs not
  paid as of June 30th                          1,015             -                   -              -
Issuance of note payable in Clint
  Hurt Drilling acquisition                       725             -                   -              -

</TABLE>
                                                             

                                      F-27

<PAGE>

17.  CONCENTRATIONS OF CREDIT RISK

Key has a concentration of customers in the oil and gas industry.  Substantially
all of Key's  customers are major  integrated oil companies,  major  independent
producers  of oil and gas and  smaller  independent  producers.  This may affect
Key's overall exposure to credit risk either positively or negatively,  inasmuch
as its  customers  are  effected  by  economic  conditions  in the  oil  and gas
industry, which has historically been cyclical. However, accounts receivable are
well  diversified  among  many  customers  and  a  significant  portion  of  the
receivables are from major oil companies,  which management  believes  minimizes
potential  credit risk.  Historically,  credit  losses have been  insignificant.
Receivables are generally not collateralized,  although Key may generally secure
a receivable at any time by filing a mechanic's  and  materialmans'  lien on the
well serviced.

18.  SUBSEQUENT EVENT


In August  1995,  Key  announced  an  agreement  to  acquire,  through a merger,
WellTech.  A definitive  merger  agreement was reached on November 18, 1995. Key
will be the surviving entity in the Merger. Consideration for the Merger will be
4,929,962  shares of Key Common Stock and warrants to purchase 750,000 shares at
$6.75 per share of Key Common  Stock.  As part of the Merger,  1,429,962  of the
1,635,000  shares of Key Common Stock owned by WellTech and warrants to purchase
an  aggregate  250,000  shares of Key  Common  Stock at $5.00 per share  will be
cancelled.  WellTech  currently operates in the Southwest and Northeast areas of
the United  States and in Russia and  Argentina.  Consummation  of the Merger is
subject to satisfaction of various  conditions  including,  without  limitation,
shareholder  approval  and no  assurance  can be given that the  Merger  will be
consummated.  WellTech's  principal  line  of  business  is  oil  and  gas  well
servicing.




                                       F-28


<PAGE>





                     Key Energy Group, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                   (unaudited)



                                                        December 31,

                                                            1995
                                                       (In thousands)
ASSETS
Current Assets:

   Cash                                                  $     503
   Restricted cash                                             452
   Restricted marketable securities                            267
   Accounts receivable, net                                  8,352
   Inventories                                               1,300
   Prepaid expenses and other current assets                   225
                                                        ----------
Total Current Assets                                        11,099

__________________________________________________________________
Property and Equipment:

   Oilfield service equipment                               25,456
   Oil and gas well drilling equipment                       2,374
   Motor vehicles                                              521

   Oil and gas properties and other related

     equipment, successful efforts method                    9,809
   Furniture and equipment                                     334
   Buildings and land                                        2,086
Total Property and Equipment                                40,580
__________________________________________________________________
Accumulated depreciation & depletion                        (6,188)
Net Property and Equipment                                  34,392

__________________________________________________________________
Other assets                                                 2,020
__________________________________________________________________

TOTAL ASSETS                                               $47,511
==================================================================


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


                                      F-29


<PAGE>



                     Key Energy Group, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                   (unaudited)


                                                         December 31,

                                                             1995
                                                         In thousands, 
                                                except share and per share data)

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:

   Accounts payable                                        $    3,804
   Accrued interest                                               168
   Other accrued liabilities                                    1,931
   Accrued income taxes                                           124
   Deferred tax liability                                         118
   Current portion of long-term debt                            1,590

Total Current Liabilities                                       7,735

Long-term debt, less current portion                           15,237
Deferred income taxes                                           2,934


Commitments and contingencies

Stockholders' Equity:

   Common stock, $.10 par value; 10,000,000 
   shares authorized,  6,913,513 shares
   issued and outstanding                                         691
   Additional paid-in capital                                  15,186
   Retained earnings                                            5,728

Total Stockholders' Equity                                     21,605


TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY                                        $  47,511
=====================================================================

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


                                      F-30


<PAGE>



                     Key Energy Group, Inc. and Subsidiaries
                      Consolidated Statements of Operations
                                   (unaudited)


                                            Six                    Six
                                         Months Ended          Months Ended
                                      December 31, 1995     December 31, 1994
                                          (In thousands except per share data)

REVENUES:

   Oilfield services                        $19,148                 $20,923
   Oil and gas revenues                       1,727                   1,077
   Oil and gas well drilling                  3,659                       -
   Other revenues, net                          258                    (38)
___________________________________________________________________________
                                             24,792                  21,962

___________________________________________________________________________
COSTS AND EXPENSES:

   Oilfield services direct costs            14,153                  16,350
   Oil and gas direct costs                     619                     431
   Oil and gas well drilling                  2,735                       -
   Depreciation and depletion expense         1,794                   1,245
   General and administrative expense         2,390                   1,822
   Interest expense                             877                     627
___________________________________________________________________________
                                             22,568                  20,475
___________________________________________________________________________
Income before income taxes                    2,224                   1,487
Income tax expense                              730                     476

NET INCOME                                $   1,494               $   1,011

===========================================================================

EARNINGS PER SHARE:


   Income before income taxes             $    0.32               $    0.23
   Net income                             $    0.22               $    0.16


WEIGHTED AVERAGE SHARES

OUTSTANDING:                                  6,914                   6,500



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


                                      F-31


<PAGE>



                     Key Energy Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                      Six                    Six
                                                                 Months Ended            Months Ended
                                                              December 31, 1995       December 31, 1994
                                                             (In thousands, except per share data)

<S>                                                              <C>                    <C>    

CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income                                                      $1,494                  $1,011

Adjustments to reconcile net income to
     net cash provided by operations:

   Depreciation, depletion and amortization                         1,794                   1,245
   Deferred income   taxes                                            730                     476

Changes in operating assets and liabilities, net of
     effects from the acquisitions:

   Increase in accounts receivable                                   (219)                   (960)
   Increase (decrease) in other
      current assets                                                   90                     (71)
   Decrease in accounts payable and
      accrued expenses                                               (807)                 (1,564)
   (Decrease) increase in accrued interest                             23                     (16)
   Decrease in accrued taxes                                          (50)                     -
   (Increase) decrease in other assets                                 (9)                     -
                                                                 ---------                 -------
   Net cash provided by operating activities                        3,046                     121
                                                                 ---------                 -------


CASH FLOWS FROM INVESTING ACTIVITIES:

   Capital expenditures - Oilwell service operations               (1,727)                 (1,899)
   Capital expenditures - Oil and gas operations                       (7)                     (7)
   Capital expenditures - Oil and gas well
      drilling operations                                            (360)                      -
Expenditures for oil and gas properties                            (2,150)                 (1,211)
                                                                 ---------                 -------
Net cash used in investing activities                              (4,244)                 (3,117)
                                                                ----------                --------


CASH FLOWS FROM FINANCING ACTIVITIES:

   Principal payments on debt                                      (1,418)                 (1,047)
   Borrowings (payments) under line-of-credit                         (28)                    971
   Proceeds from long-term debt                                     2,324                   2,866
                                                                 --------                 -------
Net cash provided by financing activities                             878                   2,790
                                                                ---------                 -------
Net increase (decrease) in cash and restricted cash                  (320)                   (206)
Cash and restricted cash at beginning of period                     1,275                   1,173
                                                                  -------                --------
Cash and restricted cash at end of period                       $     955               $     967
                                                                =========               =========


Supplemental cash flow disclosures:

   Interest paid                                                $    854                $     611

Supplemental schedule of non-cash
   investing and financing transactions:
   Fair market value of Common Stock
   issued as payment for the WellTech

   West Texas equipment                                        $        -                  $8,584

</TABLE>



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

                                      F-32


<PAGE>




                     KEY ENERGY GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1995

                                   (unaudited)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Key

The consolidated financial information in this report includes Yale E. Key which
is  involved  in  oilwell  service  operations,  OEI  which is  involved  in the
production and  exploration of oil and natural gas and Clint Hurt Drilling which
is involved in the drilling for oil and natural gas.

OEI utilizes the  successful  efforts  method of accounting  for its oil and gas
properties.  Under this method,  all costs  associated with productive wells and
nonproductive development wells are capitalized, while nonproductive exploration
costs and geological and geophysical  costs (if any), are expensed.  Capitalized
costs relating to proved  properties  are depleted using the  unit-of-production
method based on proved reserves  expressed as net equivalent Bbls as reviewed by
independent  petroleum  engineers.  The carrying  amounts of properties  sold or
otherwise  disposed of and the related  allowance for  depletion are  eliminated
from the accounts and any gain/loss is included in results of operations.

OEI's  aggregate  oil and gas  properties  are stated at cost,  not in excess of
total estimated future net revenues net of related income tax effects.


In the opinion of Key Energy Group,  Inc.  ("Key"),  the accompanying  unaudited
condensed   consolidated  financial  statements  contain  all  normal  recurring
adjustments  necessary to present  fairly the financial  position as of December
31, 1995, the statement of cash flows for the six months ended December 31, 1995
and 1994,  and the results of  operations  for the six month periods then ended.
These unaudited  consolidated financial statements should be read in conjunction
with consolidated financial statements and notes thereto included herein for the
year ended June 30, 1995.


The  consolidated  financial  statements of Key have been prepared in accordance
with generally accepted accounting  principles for interim financial information
and with  the  instructions  to Form  10-Q and  Rule  10-01 of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
Operating  results for interim  periods are not  necessarily  indicative  of the
results that may be expected for the full year.

                                      F-33


<PAGE>
2.  ACQUISITIONS

Clint Hurt Drilling


On March 30, 1995, Key and Clint Hurt & Associates, Inc. ("CHA") entered into an
Asset Purchase  Agreement pursuant to which CHA sold to Key all of its assets in
West Texas.  Such assets mainly  consisted of four oil and gas drilling rigs and
related  equipment.   As  consideration  for  the  acquisition,   Key  paid  CHA
$1,725,000,  of which $1,000,000 was paid in cash and the balance in the form of
a $725,000  note  payable to CHA (the note was paid in full in July  1995).  Mr.
Clint Hurt entered into  consulting and  noncompetition  agreements  with Key in
consideration  for which  Key  issued  5,000  shares of Key  Common  Stock.  The
acquisition  was  accounted  for using the  purchase  method and the  results of
operations of Clint Hurt Drilling have been included in those of Key since April
1, 1995.


The Merger


In August  1995,  Key  announced  an  agreement  to  acquire,  through a merger,
WellTech.  Key  will be the  surviving  entity  in the  merger.  In the  merger,
WellTech  stockholders  will receive an  aggregate  of  4,929,962  shares of Key
Common  Stock and  warrants to purchase  750,000  shares of Key Common  Stock at
$6.75 per share. As part of the merger, 1,429,962 of the 1,635,000 shares of Key
Common Stock  currently  owned by WellTech  and  previously  issued  warrants to
purchase  250,000  shares  of Key  Common  Stock  at  $5.00  per  share  will be
cancelled.  Net  consideration  for the merger will be  3,500,000  shares of Key
Common  Stock and warrants to purchase  500,000  additional  shares.  WellTech's
principal  line of  business  is oil and gas  well  servicing  and it  currently
operates in the  Mid-Continent  and Northeast  areas of the United States and in
Argentina.  Until November 1995,  WellTech also conducted certain  operations in
Russia.  Consummation  of the  merger is  subject  to  satisfaction  of  various
conditions including, without limitation,  shareholder approval and no assurance
can be given that the merger will be consummated.


3.  LONG-TERM DEBT


The  Yale E.  Key  C.I.T.  Credit  Finance  ("C.I.T.")  term  note,  ($5,463,000
approximate  principal  balance at December  31,  1995),  as  amended,  requires
principal payments of approximately $95,000, plus interest, due the first day of
each month plus a final  payment of the unpaid  balance of the note due December
31,  1996.  The  interest  rate is 2.5%  above the  stated  prime  rate (8.5% at
December 31, 1995). The note is  collateralized  by all of the assets (including
equipment and inventory) of Yale E. Key.

The Yale E. Key C.I.T. line of credit, ($3,818,000 approximate principal balance
at December 31, 1995), as amended, requires monthly payments of interest at 2.5%
above the stated prime rate (8.5% at December 31, 1995).  The  expiration of the
line of credit is December 31,1996.  The line of credit is collateralized by the
accounts  receivable  of Yale E. Key and has a maximum limit of 85% of available
accounts  receivable  or $7 million,  whichever  is less.  At December 31, 1995,
there was no credit line availability.

                                      F-34

<PAGE>

The agreement  with C.I.T.  includes  certain  restrictive  covenants,  the most
restrictive  of which  prohibits  Key from making  distributions  and  declaring
dividends on Yale E. Key's Common Stock.



The OEI loan agreement,  as amended,  with Norwest Bank Texas, N.A.  ("Norwest")
provides for a $7.5 million revolving line of credit note subject to a borrowing
base limitation (approximately $6.5 million at December 31, 1995). The borrowing
base is  redetermined  on at least a semi-annual  basis.  The borrowing  base is
reduced by approximately $60,000 per month through October 1997 (the maturity of
the note).  The note's  interest rate is Norwest's  prime rate (8.5% at December
31, 1995) plus one-half percent. The note is secured by substantially all of the
oil and gas  properties  of OEI and the pledge of certain  collateral by current
and former  officers and  directors  of Key. As of December  31,  1995,  Norwest
waived  the  pledge of  collateral  and  released  the  collateral  to the seven
individuals who had pledged it. The note is also guaranteed by Key.


The  loan  agreement  contains  various  restrictive  covenants  and  compliance
requirements,  including  covenants  which (a)  prohibit  OEI from  declaring or
paying  dividends on OEI's common stock,  (b) limit the incurrence of additional
indebtedness  by OEI and, (c) limit the  disposition of assets and various other
financial covenants.


The Clint Hurt Drilling loan  agreement  with Norwest  provided for a $1 million
term loan and a $200,000  line of credit.  The $1  million  term loan  ($776,000
approximate principal balance at December 31, 1995), requires principal payments
of  approximately  $28,000 per month plus interest for 36 months with a maturity
date of April 1998. The $200,000 line of credit ($77,000  approximate  principal
balance at December 31, 1995) requires  principal  payments of $20,000 per month
beginning July 5, 1995,  plus interest,  through its maturity in April 1996. The
term loan and line of credit have an interest  rate of Norwest  prime rate (8.5%
at December 31, 1995), plus 3/4 of one percent.  The notes are secured by all of
the equipment of Clint Hurt Drilling and are guaranteed by Key. In addition, the
loan   agreement   contains   various   restrictive   covenants  and  compliance
requirements.

Each of Key (and Yale E. Key and Clint Hurt) and WellTech  recently entered into
new credit facilities of approximately $17.5 million (subject to certain advance
formulas)  the  proceeds of the initial  borrowings  of which were used to repay
substantially  the debt of Key (other than that of OEI) and WellTech (other than
that of certain  affiliates),  respectively.  Key believes  that such a facility
will provide  sufficient funds to finance its operating and capital  expenditure
needs for the foreseeable future. The new indebtedness will be the obligation of
Key, as survivor of the merger,  and Key's  subsidiaries,  Yale E. Key and Clint
Hurt. The cross-guaranty and cross- collateralization  arrangement could, if the
merger is not  consummated,  create  contingent  liabilities for each of Key and
WellTech.  The  failure to  consummate  the merger on or prior to April 30, 1996
will, at the option of the lender,  constitute an event of default under the new
indebtedness  if WellTech  fails to refinance its credit  agreement on or before
July 31,  1996 or Key fails to  continue  to operate  WellTech  pursuant  to the
Interim Operations Agreement.  Key and WellTech have agreed not to terminate the
Interim Operations Agreement without the consent of the lender.


                                      F-35

<PAGE>

4.  COMMITMENTS AND CONTINGENCIES

Various suits and claims arising in the ordinary  course of business are pending
against Key.  Management  does not believe that the  disposition of any of these
suits or claims will  result in a material  adverse  impact on the  consolidated
financial position of Key.

During August 1995, Key entered into  employment  agreements with certain of its
officers.  These employment  agreements generally run to June 30, 1998, but will
automatically  be extended on a yearly  basis  unless  terminated  by Key or the
applicable officer. In addition to providing a base salary for each officer, the
employment  agreements  provide for severance  payments for each officer varying
from 12 to 36 months of the  officer's  base  salary.  The  current  annual base
salaries  for the  officers  covered  under  such  employment  agreements  total
approximately $800,000.



                                      F-36


<PAGE>




 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of WellTech, Inc.:

We have audited the accompanying  consolidated balance sheets of WellTech,  Inc.
(a Delaware Corporation) and subsidiaries (WellTech) as of December 31, 1994 and
1993,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the three years in the period ended December 31, 1994.
These  consolidated  financial  statements are the  responsibility of WellTech's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As further discussed in Note 12 to the consolidated financial statements, during
1995 WellTech was not in compliance with certain of the restrictive covenants of
its loan agreement and received a waiver for such events on  non-compliance.  On
January 19, 1996,  WellTech  entered into a  three-year  term loan  agreement to
refinance  such  indebtedness.  The new  loan  agreement  does not  contain  any
restrictive  covenants  until  WellTech's  merger  with Key Energy  Group,  Inc.
("Key") is completed,  at which time the new indebtedness will be the obligation
of Key, as survivor of the merger. However,  failure to consummate the merger by
April 30,  1996  could  constitute  an event of  default  if  WellTech  fails to
refinance the new  indebtedness by July 31, 1996, or if Key fails to continue to
operate  WellTech  pursuant  to the  Interim  Operations  Agreement  until  such
refinancing is completed. If and when such refinancing becomes necessary,  there
can be no  assurances  that it will be  available  upon  terms  satisfactory  to
WellTech.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of WellTech, Inc. and subsidiaries
as of December 31, 1994 and 1993, and the results of their  operations and their
cash flows for each of the three years in the period ended  December 31, 1994 in
conformity with generally accepted accounting principles.


                                                     ARTHUR ANDERSEN LLP

Houston, Texas
August   31, 1995 (except  with respect to the matters  discussed in Note 12, as

         to which the date is January 19, 1996)

                                      F-37


<PAGE>

                         WELLTECH, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1994 AND 1993

                                 (In Thousands)


                                     ASSETS

                                                       1994        1993

CURRENT ASSETS:
  Cash and cash equivalents                        $    624     $   689
  Accounts receivable, less allowance for            11,375       9,160
   doubtful accounts of $995 and $372,
   respectively
  Prepaid insurance losses                              510       1,570
  Prepaid expenses and other                            271         484
                                                   --------    --------
         Total Current Assets                        12,780      11,903
                                                     ------      ------

INVESTMENT IN UNCONSOLIDATED
WELL SERVICING OPERATIONS:
  Dawson WellTech, LLC                                6,511       4,899
  Key Energy Group, Inc.                              8,401        -
  Servicios WellTech, S.A.                            2,727       1,906
                                                     ------       -----
                                                     17,639       6,805

PROPERTY AND EQUIPMENT:
  Well servicing equipment                           31,733      26,002
    Land, buildings and other                         4,426       3,801
                                                    -------      ------
                                                     36,159      29,803

    Accumulated depreciation                        (11,254)    (11,594)
                                                    -------    --------
      Net Property and Equipment                     24,905      18,209
                                                   --------   ---------

OTHER ASSETS:
  Net assets held for sale                                -       5,323
  Debt restructuring costs                                -         641
  Other                                               2,852       1,682
                                                  ---------       -----

    Total Assets                                    $58,176     $44,563
                                                    =======     =======


                     The accompanying notes are an integral
                      part of these consolidated financial

                                      F-38

<PAGE>
                         WELLTECH, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1994 AND 1993

                                 (In Thousands)

                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                      1994        1993

CURRENT LIABILITIES:
  Current maturities of long-term debt
    and capital lease obligation                  $    798    $    511
  Accounts payable                                   6,371       3,135
  Accrued payroll and related taxes                    680         207
  Accrued casualty insurance                         2,614       1,624
  Income taxes payable                                 557           -
  Other accrued and current liabilities              2,707       1,828
                                                  --------    --------
     Total Current Liabilities                      13,727       7,305
                                                  --------    --------


NON-CURRENT LIABILITIES:
  Long-term debt and capital lease obligation,
   net of current maturities                         6,620      32,782
  Deferred interest                                      -       4,764
  Accrued casualty insurance                         1,640       2,380
                                                    ------     -------
     Total Non-Current Liabilities                   8,260      39,926

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Deficit):
  Common stock, $1.00 par; 500,000 shares
   authorized; 347,471 and 311,256 issued
   and outstanding at December 31, 
   1994 and 1993, respectively                         347         311
  Capital in excess of par value                    92,003      52,971
  Accumulated deficit                              (56,161)    (55,950)
                                                   --------   ---------
     Total Stockholders' Equity (Deficit)           36,189      (2,668)
                                                  --------    ---------
     Total Liabilities and Stockholders' Equity   $ 58,176    $ 44,563
                                                  ========    ========


                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                      F-39


<PAGE>

<TABLE>
<CAPTION>

                         WELLTECH, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992

                                 (In Thousands)



                                                                  1994             1993           1992
                                                                --------         -------        --------
<S>                                                         <C>                <C>             <C>  

REVENUES                                                       $ 49,043          $56,157         $58,680
                                                               --------          -------         -------

OPERATING COSTS AND EXPENSES:

  Direct operating                                               39,050           45,522          45,986
  General and administrative                                      8,474            9,520          11,732
  Depreciation and amortization                                   2,775            3,095           3,572
                                                               --------          -------         -------
      Total operating costs and expenses                         50,299           58,137          61,290
                                                               --------           ------         -------

LOSS FROM OPERATIONS                                             (1,256)          (1,980)         (2,610)
                                                                 -------          -------        --------

OTHER (INCOME) AND EXPENSE

  Interest expense                                                  735            3,218           3,019
  Interest income                                                  (130)             (71)           (203)
  Investment valuation provision                                      -              582           2,369
  Equity in (earnings) losses of
  unconsolidated affiliates                                         492              (88)            (68)
  Gain on disposition of assets                                  (2,943)            (336)            (49)
  Other (income) expense, net                                       801              (78)            142
                                                              ---------           -------         ------
       Total Other (Income) and Expense                          (1,045)           3,227           5,210


LOSS BEFORE INCOME TAXES                                           (211)          (5,207)         (7,820)

INCOME TAX EXPENSE                                                  -                  -              -
                                                               --------         ---------       ---------

NET LOSS                                                       $   (211)         $(5,207)        $(7,820)
                                                               =========        =========        ========
</TABLE>


                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                      F-40


<PAGE>

<TABLE>
<CAPTION>


                         WELLTECH, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992

                                 (In Thousands)




                                                 Common Stock
                                           Shares Issued                      Capital
                                               and             $1.00         in Excess          Accumulated
                                           Outstanding       Par Value      of Par Value           Deficit           Total
<S>                                          <C>             <C>               <C>               <C>             <C>  

BALANCE, DECEMBER 31, 1991                      3,112,617        $3,113           $50,169           $(42,923)       $10,359
10 for 1 reverse stock split                   (2,801,361)       (2,802)            2,802                  -              -
Net loss for year                                       -             -                 -             (7,820)        (7,820)
                                               ----------      --------          --------           ---------      ---------
BALANCE, DECEMBER 31, 1992                        311,256           311            52,971            (50,743)         2,539
Net loss for year                                       -             -                 -             (5,207)        (5,207)
                                               ----------      --------          --------           ---------      ---------
BALANCE, DECEMBER 31, 1993                        311,256           311            52,971            (55,950)        (2,668)
10 for 1 reverse stock split                     (280,430)         (280)              280                  -              -
Conversion of debt to equity, net of              277,436           277            34,037                  -         34,314
costs
Sale of  Common Stock                              39,209            39             4,715                  -          4,754
Net loss for year                                       -             -                 -               (211)          (211)
                                                ---------      --------          --------           ---------      ---------
BALANCE, DECEMBER 31, 1994                        347,471          $347           $92,003           $(56,161)       $36,189
                                                =========       =======           =======           =========       =======
</TABLE>

                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.


                                      F-41

<PAGE>

<TABLE>
<CAPTION>


                         WELLTECH, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992

                                 (In Thousands)



                                                                                 1994              1993               1992
                                                                                ------            ------             -----
<S>                                                                            <C>             <C>                 <C>   

RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss                                                                          $(211)          $(5,207)           $(7,820)
Non-cash charges included in net loss:
   Depreciation and amortization                                                  2,775             3,095              3,572
   Investment valuation provision                                                     -               582              2,369
   Amortization of loan discount                                                      -               668              1,014
   Gain on disposition of assets                                                 (2,943)             (336)               (49)
   Equity in (earnings) losses of unconsolidated affiliates                         492               (88)               (68)
Changes in components of working capital:
   (Increase) decrease in accounts receivable, net                               (2,215)           (1,846)                73
   (Increase) decrease in prepaid insurance losses and expenses and
   other                                                                          1,573               622               (369)
   Increase (decrease) in accounts payable                                        3,236               (99)              (249)
   Increase (decrease) in accrued liabilities                                     1,948             1,484               (662)
   Increase in deferred interest                                                      -             2,020              1,740
   Other, net                                                                       (24)               38               (375)
                                                                                --------           ------              ------
   Net Cash Provided by (Used in) Operating Activities                            4,631               933               (824)
                                                                                -------             -----             -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment                                      2,764             1,942              1,809
Capital expenditures                                                            (13,738)           (1,748)            (1,979)
Cash distributions from Dawson WellTech, LLC                                        412               775                 --
Contributions to unconsolidated operations                                       (3,563)             (970)            (3,107)
                                                                                --------            ------            -------
   Net Cash Used in Investment Activities                                       (14,125)               (1)            (3,277)
                                                                                --------           -------           --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt                                                    5,555                44              2,337
Payments on notes payable and capital lease                                        (680)             (663)              (297)
Sale of common stock and conversion of debt                                       4,554              -                  -
                                                                                 ------           -------            -------
   Net Cash Provided by (Used in) Financing Activities                            9,429              (619)             2,040
                                                                                 ------            -------            ------
Increase (Decrease) in Cash and Cash Equivalents                                    (65)              313             (2,061)
Cash and Cash Equivalents, Beginning of Year                                        689               376              2,437
                                                                                  -----             -----            -------
Cash and Cash Equivalents, End of Year                                          $   624            $  689             $  376
                                                                                =======            ======             ======

</TABLE>


                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.
    
                                      F-42



<PAGE>



                         WELLTECH, INC. AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements


(1)  Organization and Control-

         WellTech, Inc. (a Delaware corporation) and subsidiaries ("WellTech" or
the  "Company")  are engaged in the oil and gas well  servicing  industry in the
United States, South America and Russia.

(2)  Summary of Significant Accounting Policies-

         Principles of  consolidation - The  consolidated  financial  statements
include the accounts of WellTech,  Inc. and its wholly-owned  subsidiaries.  All
significant intercompany accounts and transactions have been eliminated. Certain
reclassifications  have been made to the prior period  financial  statements  to
conform with the current year's presentation.

         Investments - WellTech owns a 39% interest in Dawson WellTech,  LLC and
a 24%  interest  in  Key  Energy  Group,  Inc.,  both  domestic  well  servicing
companies.  WellTech  also owns a 50%  interest in Servicios  WellTech,  S. A. a
joint venture well servicing company operating in Argentina.
These investments are accounted for by the equity method.

         WellTech  also has certain  non-well  servicing  investments  which are
accounted for by the cost method.  During 1993 and 1992 WellTech  reassessed the
carrying value of its non-well servicing  investments and recorded provisions of
$582,000 and 2,369,000,  respectively,  to write these investments down to their
estimated net realizable value.

         Cash and cash equivalents - Cash equivalents  include all highly liquid
short-term investments with maturities of three months or less.

         Property and equipment - Property and equipment consists principally of
well servicing rigs and related equipment.  Additions,  renewals and betterments
that add materially to the  productive  capacity or extend the useful life of an
asset are capitalized.  Expenditures for maintenance and repairs are expensed as
incurred.  Upon  retirement  or disposal,  the asset and related  allowance  for
depreciation  accounts are eliminated.  Any gains or losses on such transactions
are included in income.

         Depreciation  is  provided  for  financial   reporting  purposes  on  a
straight-line basis over the following estimated useful lives:

         Well servicing equipment                     3 to 20 years
         Buildings and other                          3 to 30 years

                                      F-43

<PAGE>

         Debt  restructuring  costs - Debt  restructuring  costs represent costs
associated with the  restructuring  of the Renewal Notes in conjunction with the
June 1991 Recapitalization. The debt restructuring costs were being amortized to
interest  expense over the life of the Renewal  Notes.  During each of the years
1993 and 1992,  WellTech amortized  approximately  $80,000 of debt restructuring
costs. In connection with the January 1994 Recapitalization  discussed in Note 4
below, the remaining  unamortized debt restructuring  costs were included in the
debt converted to equity.

(3)      Financing -

         In January  1994,  WellTech  completed  a financial  restructuring  and
recapitalization  (the "1994  Recapitalization")  with its principal lenders and
shareholders.  As a  result,  WellTech's  $34  million  Renewal  Notes,  with  a
discounted  book  value of  approximately  $30.8  million,  plus the  associated
deferred interest payable, net of unamortized debt issue expense, were converted
into 277,436 shares of WellTech common stock.  Simultaneous with this conversion
of debt to equity,  Welltech sold 39,209 shares of common stock for $4.7 million
and issued a new term note for $3 million.

         A summary of outstanding long-term debt and capital lease obligation is
presented below (in thousands):

                                                       December 31,
                                                 1993             1994

         Renewal Notes                         $    -           $34,231
         Less unamortized discount                  -           ( 3,481)
                                                 ----           --------
                                                    -            30,750
         New Term Debt                          4,900             1,900
          Obligation under capital
            lease through 1995                     65               244
         Notes Payable                          2,453               399
                                               ------         ---------
          Total long-term debt and
            capital lease obligation            7,418            33,293
          Less current maturities                 798               511
                                              -------         ---------
          Long-term debt and capital
            lease obligation, less
             current maturities               $ 6,620           $32,782
                                              =======           =======

         In November 1992, certain lenders, who are also stockholders,  provided
a $2 million  loan to WellTech.  These funds were placed into a cash  collateral
account with WellTech's insurance provider to be used to pay future claims under
WellTech's self insurance  program.  In January 1994, the $1.9 million principal
balance  remaining  on this  note was  rolled  into new notes  with a  principal
balance of $4.9 million.  The accrued interest on the $1.9 million note was paid
through January 19, 1994, the date of the issuance of the new notes. Interest is
payable  semi-annually  on July 6 and  January 6  commencing  July 6, 1995.  All
principal and accrued and unpaid interest is payable in full by January 7, 1998.
The  interest  rate is 12% per  annum.  In  connection  with the bank  financing
concluded in January 1995,  discussed  below,  the accrued  interest on the $4.9
million notes was paid through January 6, 1995 and the terms of these notes were
modified.

                                      F-44

<PAGE>

         The payment of interest on these notes is restricted by the terms of an
intercreditor  agreement  between  these note  holders and Shawmut  (see below).
Interest on $2.0  million of these notes is not  payable  currently  if WellTech
does not achieve certain levels of cash flows. These minimum levels of cash flow
were  not  achieved  and the  related  interest  was not  paid on July 6,  1995.
Interest on the remaining  $2.9 million of these notes is not payable  currently
if  WellTech  is in default  of certain  covenants  of the Loan  Agreement  with
Shawmut.  WellTech was in default on July 6, 1995 and the payment of interest on
these notes has been deferred.

         In November 1991, WellTech entered into a lease agreement to obtain the
necessary financing for a computer system. The lease agreement has been recorded
as a capital lease with the corresponding  property and equipment being included
in the accompanying consolidated balance sheet.

         During 1994,  WellTech used seller  financing to provide the capital to
fund several expansion  opportunities.  These notes payable which are secured by
the  purchased  assets bear  interest at rates  ranging from 5.3% to prime + 2%.
Negotiated  repayment  terms,  which are fixed or based  upon cash flow or asset
utilization, range from 3 to 5 years.

         On  January  6,  1995,  WellTech  entered  into a Loan  Agreement  with
Barclays  Business  Credit,  Inc.  (subsequently  acquired by Shawmut),  whereby
Shawmut  agreed  to  provide  WellTech  with a term loan of $2.5  million  and a
revolving  credit facility of up to $6.5 million.  The Shawmut Term Loan,  which
bears  interest at Shawmut  prime plus 1.75% is generally  secured by WellTech's
rigs and equipment and is payable in 84 equal monthly  installments of principal
plus  interest.  The  availability  under the  revolving  credit  facility  is a
function of available  accounts  receivable  collateral,  as defined in the Loan
Agreement.  The interest rate on the revolver is Shawmut  prime plus 1.75%.  The
original term of the Loan  Agreement is for a three (3) year period and includes
certain  restrictive  covenants relative to the maintenance of certain levels of
tangible net worth,  working  capital,  aged accounts payable and cash flows and
contains  restrictions  on the purchase  and sale of certain  assets and capital
expenditures.  See Note 12 for further  discussion of WellTech's credit facility
and financing arrangements.

         Aggregate  loan  maturities  for the  next  five  fiscal  years  are as
follows: 1995-$798,000; 1996- $353,000; 1997-$273,000;  1998-$5,073,000 and 1999
and thereafter $921,000.

         Letters  of  Credit -  WellTech  had a letter  of  credit  of  $421,000
outstanding  at  December  31,  1994.  In  March  1995,  Shawmut  issued,  under
WellTech's  revolving  credit  facility,  an additional  letter of credit in the
amount of $1,080,000. These letters of credit provide collateral for the payment
of the self-insured  retention under certain of WellTech's  liability  insurance
policies.  The letter of credit in the amount of  $421,000  is  guaranteed  by a
former stockholder of WellTech.

         In addition to the above letters of credit,  WellTech was  contingently
obligated  through  January 6, 1995, to an officer and shareholder in the amount
of $292,000, for securities placed by him as collateral on behalf of WellTech to
further support the self-insured  retention under WellTech's liability insurance
policies.  In connection with the Shawmut  financing,  WellTech paid this amount
into its self-insurance cash collateral account and the officer's collateral was
returned to him.

                                      F-45

<PAGE>

(4)  Investments in Unconsolidated Well Servicing Operations -

         The following is a summary of WellTech's  net investment and the equity
in  the  earnings  (losses)  of  its  unconsolidated   investments  (amounts  in
thousands):


<TABLE>
<CAPTION>


                                 Ownership           Net Investment   Equity in Earnings (Losses)
                                  Percent          1994         1993        1994           1993
<S>                                <C>        <C>             <C>        <C>            <C>   

Dawson WellTech, LLC                39%        $ 6,511         $4,899     $   620        $  711
Key Energy Group, Inc.              24%          8,401              -          47             -
Servicios WellTech, S.A.            50%          2,727          1,906      (1,159)         (623)
                                                 -----          -----      ------          -----
                                               $17,639         $6,805     $ ( 492)       $   88
                                               =======         ======     =========      =======
</TABLE>


         Dawson WellTech,  LLC - Effective November 1, 1992, WellTech and Dawson
Well Servicing,  Inc. formed Dawson WellTech,  LLC ("DWT"),  a limited liability
corporation.  The net book value of the assets contributed  exceeded  WellTech's
share of DWT's net assets at  inception  by $1.1  million.  This amount is being
amortized and charged  against  equity in earnings of DWT over a period of eight
years.

         In January 1995,  WellTech  contributed  an additional  $1.4 million in
cash to  finance  its  share  of the  non-bank  financed  portion  of the  stock
acquisition of Well Solutions, Inc. by DWT for $20 million. Well Solutions, Inc.
is a regional  company  providing  vacuum  truck,  frac tank,  disposal well and
production  testing and rental tool services in Texas.  The  agreement  with the
bank  which  provided  the  financing  for  this  acquisition,  limits  the cash
distributions  from DWT to an amount  equal to  income  before  taxes  times the
statutory tax rate.

         DWT  has  a  fiscal  year  ended  March  31.  The  condensed  financial
information  presented below as of December 31, 1994 and 1993 and for the twelve
month periods then ended is unaudited.  The summary information  presented below
as of March 31, 1995 and 1994 and for the twelve  month  periods  then ended has
been  derived  from  audited  financial  statements.  As stated  above,  DWT was
established  in  November  of 1992.  Its  results of  operations  did not have a
material effect on WellTech's  results of operations for the year ended December
31, 1992. Therefore,  condensed financial information has not been presented for
that period.

                                      F-46

<PAGE>


<TABLE>
<CAPTION>


                                                            (In Thousands)
                                           December 31                              March 31
                                           -----------                              --------
                                 1994                      1993              1995              1994
                                 ----                      ----              ----              ----
                                           (Unaudited)
<S>                             <C>                   <C>                 <C>               <C>   

Balance Sheet Data
Current Assets                   $  6,419              $  4,156            $  8,331           $  4,026
Noncurrent Assets                $ 27,228              $  8,228            $ 26,777           $  8,309
Current Liabilities              $  3,700              $  1,587            $  6,661           $  1,746
Noncurrent Liabilities           $ 15,264              $    263            $ 13,495           $    563

Operating Statement-Data
Revenues                         $ 22,837              $ 22,017            $ 29,763           $ 21,436
Gross Margin                     $  6,597              $  5,017            $ 10,028           $  6,207
Income Before Taxes              $  2,128              $  2,299            $  2,673           $  2,259
Net Income                       $  2,063              $  2,299            $  2,602           $  2,194
</TABLE>


         Key Energy Group,  Inc. - In December  1993,  WellTech  entered into an
agreement to sell its West Texas operations and the working capital attributable
to the West Texas operations,  including the assumption of certain of WellTech's
insurance liabilities, to Key Energy Group, Inc. ("Key") for 1,635,000 shares of
Key common stock and warrants to purchase an additional  250,000 shares of Key's
common stock at $5 per share. The transaction  which was subject to the approval
of Key's  shareholders  was  formally  concluded  in August  1994.  Pending such
approval,  WellTech  entered  into an  Interim  Operations  Agreement  with  Key
effective  December  1, 1993,  whereby Key (i)  assumed  responsibility  for the
operations  and  management of  WellTech's  West Texas  operations,  (ii) leased
WellTech's real estate and equipment employed in the West Texas operations,  and
(iii)  acquired  equal  amounts of the  associated  current  assets and  current
liabilities attributable to the West Texas operations.

         At December 31, 1993,  WellTech  classified  net property and equipment
and certain  non-current assets of its West Texas operations as "Net Assets Held
for Sale" in the accompanying consolidated balance sheets. Additionally, in 1994
and 1993,  $350,000  and  $55,000,  respectively,  is included  in revenues  and
related  to an  amount  billed  to  Key,  pursuant  to  the  Interim  Operations
Agreement,  for the lease of the West  Texas  assets  from  December  1, 1993 to
August 10, 1994.

                                      F-47

<PAGE>

         The following sets forth  selected  financial  information  relative to
WellTech's  West  Texas  operations  which  are  included  in  the  consolidated
financial statements for 1993 (in thousands):


                                                              December 31, 1993
Balance Sheet
         Current Assets                                             $  558
         Total Assets                                             $  5,826
         Current Liabilities                                     $     674

Statement of Operations
         Revenues                                                  $13,591
         Direct Operating Expenses                                 $11,543
         General and Administrative Expenses                     $   1,443
         Depreciation                                            $     669

         In August 1994, the transaction was approved by Key's  shareholders and
1,635,000  shares of Key stock and warrants  were issued to WellTech in exchange
for its West Texas  Operations.  The investment in the Key stock was recorded at
the market value of the stock on the date of the shareholders'  approval ($5.125
per share) and a gain of approximately $3 million was recognized.  On that date,
WellTech's  investment  exceeded  its pro rata  share of  Key's  equity  by $3.9
million.  This amount is being  amortized and charged against equity in earnings
of Key over a period of 10 years.  At December 31, 1994, the market value of the
stock was $4.625 per share.

         Key's condensed financial information presented below (in thousands) as
of December 31, 1994 and for the six months then ended is  unaudited.  As stated
above,  WellTech  acquired  its  ownership  interest  in Key in  August of 1994,
consequently information for periods prior to 1994 has not been presented.


                                                              December 31, 1994
                                                                (Unaudited)
Balance Sheet
Current Assets                                                     $  9,992
Noncurrent Assets                                                   $29,387
Current Liabilities                                                $  6,253
Noncurrent Liabilities                                              $14,265

Statement of Operations
Revenues                                                            $21,962
Gross Margin                                                       $  3,641
Income Before Taxes                                                $  1,487
Net Income                                                         $  1,011

         Servicios  WellTech  - In  July  1992,  WellTech  entered  into a joint
venture agreement with two Argentinean entities to form Servicios WellTech, S.A.
("SWT") to provide oil and gas well servicing in Argentina.

                                      F-48

<PAGE>

         During  1992,  WellTech  made an initial  contribution  of $50,000  and
subsequent  contributions of $1.3 million.  During 1993 and 1994,  WellTech made
additional contributions to SWT of approximately $1.9 million.

         During 1993,  WellTech  sold two rigs and related  equipment to SWT. No
gain  was  recognized  on the  sale of this  equipment.  At  December  31,  1993
receivables  from  equipment  sales of  approximately  $233,000  are included in
WellTech's  investment in SWT. During 1994, the amount of this receivable  along
with an  additional  $1.1 million in cash and cost basis of two rigs and related
equipment were contributed to SWT.

         In April 1995, SWT was recapitalized  and the ownership  interests were
modified based upon previous and agreed upon future  contributions.  As a result
of this  recapitalization,  WellTech's  ownership interest in SWT increased from
50% to 63%.

         SWT  has  a  fiscal  year  ended  March  31.  The  condensed  financial
information  presented below as of December 31, 1994 and 1993 is unaudited.  The
summary  information  presented  below as of March 31, 1995 and 1994 and for the
twelve months then ended has been derived from audited financial statements.  As
stated above, SWT was established in July of 1992. Its results of operations did
not have a material  effect on  WellTech's  results of  operations  for the year
ended December 31, 1992. Therefore condensed financial  information has not been
presented for that period.


   
                                                (In Thousands)
                                   December 31                 March 31
                                    -----------                --------
                               1994           1993        1995          1994
                               ----           ----        ----          ----
                                   (Unaudited)
Balance Sheet
Current Assets               $ 2,977       $ 1,869       $ 3,295       $ 2,296
Noncurrent Assets            $ 7,341       $ 5,471       $ 6,254       $ 5,425
Current Liabilities          $ 7,229       $ 2,802       $ 6,280       $ 3,580
Noncurrent Liabilities       $   630       $ 1,229       $ 2,329       $    38

Statement of Operations
Revenues                     $ 7,881       $ 3,992       $ 9,807       $ 4,985
Gross Margin                 $   623       $ 1,129       $ 2,579       $ 1,138
Net Loss                     $(2,318)      $(1,246)      $(1,978)      $(1,398)

         In  connection  with the audit of the SWT  financial  statements  as of
March 31,  1995 and for the year  then  ended  there  were  certain  adjustments
recorded  in SWT's  fourth  quarter.  These  adjustments  were not  material  to
WellTech and consequently have been recorded in WellTech's 1995 results.

                                      F-49

<PAGE>


(5)  Common Stock-

         In January  1994,  the  Certificate  of  Incorporation  of WellTech was
amended  and  restated  in its  entirety to provide for only one class of stock,
common stock $1 par value. In addition,  pursuant to the 1994  Recapitalization,
WellTech's  Board of Directors  authorized  a  ten-for-one  reverse  stock split
effective January 18, 1994.

(6)  Income Taxes -

         WellTech adopted Statement of Financial Accounting Standards (SFAS) No.
109,  "Accounting for Income Taxes",  effective January 1, 1993. The adoption of
SFAS No. 109 changed  WellTech's  method of accounting for income taxes from the
deferred  approach to an asset and liability  approach.  The asset and liability
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary  differences between the financial
reporting basis and tax basis of assets and liabilities.  The cumulative  effect
of the change in  accounting  principle  on prior years at January 1, 1993,  the
date of  adoption,  was not material to the results of  operations  or financial
position of WellTech.

         During the years ended  December 31, 1994 and 1993,  WellTech  incurred
pre-tax  losses  and had  available  net  operating  loss  (NOL)  carryforwards.
Consequently,  for financial  reporting  purposes WellTech did not record income
tax expense.  In  connection  with the  conversion of debt to equity in the 1994
Recapitalization discussed in Note 4 above, WellTech recognized an approximately
$18 million  taxable gain,  and recorded as a direct charge to capital in excess
of par value an accrual of $360,000 for alternative minimum taxes.

         At December 31, 1994 and 1993, WellTech had a net deferred tax asset of
approximately  $69 million and $77  million,  respectively,  and has provided an
equal  amount for a valuation  allowance  at each date.  Deferred  tax  (assets)
liabilities are comprised of the following (in thousands):

 
                                                          1994           1993
                                                          ----           ----
(Assets) Liabilities
Net tax operating loss carryforwards                 $(57,493)      $(66,262)
General business credits                              (11,335)       (12,144)
AMT credits                                         (     433)              -
Depreciation differences on PP&E                        2,470          2,227
Prepaid Expenses                                          266          1,221
Accrued insurance losses and other liabilities       (  1,563)       ( 2,114)
Allowance for doubtful accounts                     (     338)      (    130)
Differences between book and tax basis
  of partnership interests                           (    236)      (    119)
Other,  net                                          (    189)           224
                                                     ---------        -------
                                                      (68,851)       (77,097)
Valuation Allowance                                    68,851         77,097
                                                       -------        -------
Net Deferred Tax Asset                             $    -         $    -
                                                   ===========    ===========

                                      F-50

<PAGE>


         For tax  purposes  WellTech  had  available,  as of December  31, 1994,
substantial  NOL  carryforwards  which begin to expire in 1998.  Utilization  of
pre-June  1991  Recapitalization  NOL  carryforwards  is  generally  limited  to
approximately  $1.3 million per year  effective as of June 1991.  As a result of
the 1994 recapitalization, utilization of NOL carryforwards from the period June
1991 through December 31, 1993, is expected to be generally  limited to $950,000
per year.  WellTech also has available  investment tax credit  carryforwards  of
approximately  $11  million,  portions of which  expire each year.  As presented
above, a valuation  allowance has been  established for those NOL  carryforwards
and tax credits which have not met the recognition requirements of SFAS No. 109.

(7)  Capital Accumulation 401(k) Plan

         WellTech established a capital accumulation 401(k) plan for the benefit
of its employees during 1987.  Employees may, after the completion of one year's
service, contribute up to 15% of their salaries (subject to certain maximums) to
the plan.  Contributions  to the plan by WellTech are made at the  discretion of
the Board of Directors.  WellTech did not make  contributions to the plan during
1994 or 1993.

         In November 1994, the Board of Directors  authorized  WellTech to begin
making contributions to the plan in 1995. These contributions are limited to 50%
of the employees'  contributions up to a maximum of $1,000.  While employees may
generally contribute up to 15% of their pay, WellTech's matching contribution is
limited to the first 6%.

(8)  Commitments and Contingencies

         At December 31,  1994,  the minimum  future  payments  under  long-term
non-cancelable operating lease obligations amounted to (in thousands):




          1995                  $   359
          1996                      313
          1997                      161
          1998                       94
          1999                       73
          Thereafter                168
                                  -----
                                 $1,168

         Total rentals under operating leases charged against income amounted to
approximately  $1,548,000 and $2,273,000 in 1994 and 1993,  respectively,  which
includes $1,231,000 and $1,727,000 in 1994 and 1993,  respectively,  for vehicle
rentals under cancelable leases.

         WellTech  accrues for the  self-insured  retention  under its  casualty
insurance  policies.  These  amounts  represent  losses  payable  as a result of
WellTech's claims  experience,  subject to certain policy maximums.  A charge to
income is provided  currently  based on the  assessment of the expected costs of
claims incurred. The estimated costs of casualty claims are based on WellTech's
historical  loss   experience,   type  of  claim,   knowledge  of  the  specific
circumstances  of the claim and  judgement  of the  possible  effect that future
economic and legal factors  might have on the ultimate  settlement of the claim.
As of December 31, 1994 and 1993, $4,254,000 and $4,004,000,  respectively,  was
accrued for the estimated  cost of resolving  actual and potential  claims under
casualty insurance policies.

                                      F-51

<PAGE>


         WellTech is involved in disputes and  litigation  arising in the normal
course of business. In management's opinion, the resolution of such disputes and
litigation will not have a material adverse effect on the financial  position or
results of operations of WellTech.

(9)  Concentrations of Credit Risk

         WellTech has a concentration  of customers in the oil and gas industry.
Substantially  all of WellTech's  customers are major  integrated oil companies,
major independent  producers of oil and gas, and smaller independent  producers.
This may affect WellTech's  overall exposure to credit risk either positively or
negatively, inasmuch as its customers are affected by economic conditions in the
oil and gas industry,  which has historically been cyclical.  However,  accounts
receivable are well diversified among many customers,  and a significant portion
of the  receivables  are from major oil  companies,  which  management  believes
minimizes  potential  credit  risk.   Historically,   credit  losses  have  been
insignificant.  Receivables are generally not collateralized,  although WellTech
may  generally  secure a  receivable  at any time by  filing  a  mechanics'  and
materialmans' lien on the well serviced.

(10)  Operations by Geographic Area

         Substantially  all of WellTech's  operations  are in the well servicing
segment. Information about WellTech's operations for the year ended December 31,
1994 by geographic area is shown below.  During 1994,  WellTech did not have any
significant  operations  or separately  identifiable  assets other than from the
United  States and  Russia.  Prior to 1994,  WellTech  did not have  significant
operations in geographic areas other than the United States.



                                      Year Ended December 31, 1994
                                              (in thousands)

                                                  United
                                Total             States           Russia
Revenues                       $49,043            $43,013            $ 6,030
Operating Income (Loss)       $( 1,256)          $( 2,352)           $ 1,096
Identifiable Assets            $58,176            $57,614            $   562


                                      F-52


<PAGE>





(11) Supplemental Cash Flow Information

         Cash paid for interest and income taxes follows (in thousands):


                              1994                1993             1992
                             ------              ------           -----

       Interest               $  400             $  466           $  108
       Income taxes                -                  -                -

Information regarding certain non-cash transactions follows (in thousands):


                                           1994        1993          1992
                                           -----      -----         -----
    Contribution of net assets of
        Gulf Coast operations for equity
        investment in DWT                 $    -      $    -        $4,161
    Contribution of net assets for
        equity investment in Servicios
        WellTech                              90         181           394
    Transfer of current assets and
    current liabilities to Key Energy
    Group, Inc.:
        Accounts receivable, net               -       2,524             -
        Accounts payable                       -       1,605             -
        Accrued payroll and related taxes      -         301             -
        Accrued liabilities                    -         618             -
    Conversion of debt to equity          34,874           -             -

(12)  Subsequent Event -

           Key Energy Group, Inc. Merger

           On August 29,  1995,  WellTech  signed a letter of intent to effect a
merger with Key Energy  Group,  Inc. and on November 18,  1995,  the  definitive
merger  agreement was finalized.  Under the terms of the merger  agreement,  Key
will issue an aggregate of  4,929,962  shares of Key Common Stock and  five-year
warrants to purchase an  aggregate  of 750,000  shares of Key Common Stock at an
exercise price of $6.75.  1,429,962 of the 1,635,000  shares of Key Common Stock
and existing  warrants to purchase an aggregate of 250,000  shares of Key Common
Stock at $5.00 per share presently owned by WellTech will be cancelled. WellTech
stockholders will retain their investment in Dawson WellTech,  LLC. In addition,
WellTech  has  entered  into an Interim  Operations  Agreement  in which Key has
assumed day to day management of WellTech's  operations  until the  shareholders
approve the transaction and the merger is consummated.  Completion of the merger
is subject to customary  closing  conditions  which  include the approval of Key
shareholders which is currently anticipated to be completed in March 1996.


                                      F-53

<PAGE>

           Financing Arrangements

           During  1995,  WellTech  was not in  compliance  with  certain of the
restrictive  covenants of its Loan Agreement  with Shawmut and received  waivers
for such events of non compliance.  On January 19, 1996, WellTech entered into a
credit  agreement with a new lender,  the CIT  Group/Credit  Finance  ("CIT") to
refinance  certain  existing  indebtedness,  which enabled WellTech to repay all
indebtedness to Shawmut  (approximately $5 million).  The new indebtedness is in
the form of a three year revolving credit arrangement and a three year term loan
and is cross guaranteed by Key and cross  collateralized  by their assets.  Upon
consummation of the merger,  the new indebtedness will be the obligation of Key,
as survivor of the merger.  There are no restrictive  financial  covenants until
the merger is completed.  However, failure to consummate the merger by April 30,
1996,  may,  at the option of CIT,  constitute  an event of default if  WellTech
fails to refinance  this credit  facility by July 31,  1996,  or if Key fails to
continue to operate WellTech pursuant to the Interim Operations  Agreement until
such refinancing is completed.



                                      F-54


<PAGE>





                         WELLTECH, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1995

                                 (In Thousands)

                                     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                  $1,013
   Accounts receivable, less allowance                        16,610
          for doubtful accounts of $997
   Prepaid insurance losses                                    1,252
   Prepaid expenses and other                                    794
                                                              ------
         Total Current Assets                                 19,669
                                                              ------
INVESTMENT IN UNCONSOLIDATED
WELL SERVICING OPERATIONS:
   Dawson WellTech, LLC                                        7,158
   Key Energy Group, Inc.                                      8,545
                                                              ------
                                                              15,703
                                                              ------
PROPERTY AND EQUIPMENT:
   Property and equipment                                     44,638
   Less accumulated depreciation                             (13,741)
                                                              ------
         Net Property and Equipment                           30,897
OTHER ASSETS                                                   2,729
                                                              ------
   Total Assets                                              $68,998
                                                             =======

      See accompanying notes to unaudited consolidated financial statements

                                      F-55


<PAGE>



                         WELLTECH, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1995

                                 (In Thousands)


                      LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:
   Current maturities of long-term debt                              $6,769
   Accounts payable                                                   5,931
   Accrued payroll and related taxes                                  1,429
   Accrued casualty insurance                                         2,009
   Other accrued and current liabilities                              2,311
                                                                   --------
         Total Current Liabilities                                   18,449
                                                                   --------
NON-CURRENT LIABILITIES
   Long-term debt, net of current maturities                          9,983
   Accrued casualty insurance                                         2,219
                                                                   --------
         Total Non-Current Liabilities                               12,202
COMMITMENTS AND CONTINGENCIES (Note 5)
MINORITY INTEREST                                                     1,465
                                                                   --------
STOCKHOLDERS' EQUITY:
   Common stock, $1.00 par; 500,000 shares
   authorized; 352,941 issued and outstanding                           353
   Capital in excess of par value                                    92,456
   Accumulated deficit                                              (55,927)
                                                                   ---------
         Total Stockholders' Equity                                  36,882
                                                                   ---------
         Total Liabilities and Stockholders' Equity                 $68,998
                                                                   =========
     See accompanying notes to unaudited consolidated financial statements.

                                      F-56


<PAGE>




                         WELLTECH, INC. AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994

                                 (In Thousands)


                                                      1995           1994
                                                      -----          ----
REVENUES                                             $52,180        $34,974
                                                     -------        -------
OPERATING COSTS AND EXPENSES
Direct operating                                      40,867         27,897
General and administrative                             7,579          5,872
Depreciation and amortization                          2,524          2,228
                                                    --------       --------
   Total operating costs and expenses                 50,970         35,997
                                                    --------       --------
INCOME (LOSS) FROM OPERATIONS                          1,210         (1,023)
                                                    --------       --------
OTHER (INCOME) AND EXPENSE
Interest expense                                       1,414            554
Interest income                                           (4)          (121)
Equity in earnings of unconsolidated investees          (552)          (295)
Gain on disposition of assets                           (390)        (2,499)
Other (income) expense, net                              369            358
                                                    --------       --------
   Total Other (Income) and Expense                      837         (2,003)
                                                    --------       --------
INCOME BEFORE MINORITY INTEREST AND
INCOME TAXES                                             373            980
MINORITY INTEREST                                        139           --
INCOME TAX EXPENSE                                      --             --
                                                    --------       --------
NET INCOME                                          $    234       $    980
                                                    ========       ========

     See accompanying notes to unaudited consolidated financial statements.


                                      F-57


<PAGE>



                         WELLTECH, INC. AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994

                                 (In Thousands)



                                                               1995       1994
                                                              -----       ----
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Net Income                                                      234        980
Non-cash charges included in net income:
   Depreciation and amortization                              2,524      2,228
   Gain on disposition of assets                               (390)    (2,499)
   Equity in earnings of unconsolidated investees              (552)      (295)
   Minority interest net income                                 139       --
Changes in components of working capital:
   Increase in accounts receivable, net                      (2,533)      (595)
   (Increase) decrease in prepaid insurance losses
   and expenses and other                                      (322)     1,301
   Decrease in accounts payable                              (1,570)      (577)
   Increase in accrued liabilities                              503         71
Other, net                                                      164          5
                                                            -------    -------
   Net Cash Provided by (used in) Operating Activities       (1,803)       619
                                                            -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment                  1,038      2,166
Capital expenditures                                         (5,103)    (9,024)
Cash distributions from unconsolidated investees                362        344
Contributions to unconsolidated operations                     --       (1,179)
                                                            -------    -------
   Net Cash Used in Investing Activities                     (3,703)    (7,693)
                                                            -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Equity investment                                           --        4,561
   Additions to long term debt                                9,282      3,678
   Repayments of debt                                        (3,278)      (608)
   Debt issue costs                                            (313)      --
                                                            -------    -------
         Net Cash Provided by Financing Activities            5,691      7,631
                                                            -------    -------
Increase in Cash and Cash Equivalents                           185        557
Cash and Cash Equivalents, Beginning of Year                    828        689
                                                            -------    -------
Cash and Cash Equivalents, End of Year                      $ 1,013    $ 1,246
                                                            =======    =======


     See accompanying notes to unaudited consolidated financial statements.

                                      F-58


<PAGE>



                         WELLTECH, INC. AND SUBSIDIARIES
      UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995

                                 (In Thousands)

<TABLE>
<CAPTION>


                                      Common Stock         Capital
                                   Shares      $1.00      in Excess
                                Issued and      Par          of       Accumulated
                                Outstanding    Value      Par Value      Deficit      Total

<S>                            <C>          <C>          <C>         <C>           <C>   

BALANCE, DECEMBER 31, 1994       347,471     $    347     $ 92,003     $(56,161)     $ 36,189

Exchange of stock for
 property and equipment            5,470            6          453         --             459

Net income for period               --           --           --            234           234
                                --------     --------     --------     --------      --------

BALANCE, SEPTEMBER 30, 1995      352,941     $    353     $ 92,456     $(55,927)     $ 36,882
                                ========     ========     ========     ========      ========
</TABLE>








      See accompanying notes to unaudited consolidated financial statements.

                                      F-59



<PAGE>




                         WELLTECH, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1995


(1)  General

         The  accompanying   unaudited   consolidated  financial  statements  of
WellTech,  Inc.  and  subsidiaries  ("WellTech")  or the  ("Company")  have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and note disclosures
normally  included in annual  financial  statements  prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to  those  rules  and  regulations,  although  the  Company  believes  that  the
disclosures made are adequate to make the information  presented not misleading.
These unaudited  consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included herein for
the year ended December 31, 1994.

         In  Management's  opinion,  the  accompanying   unaudited  consolidated
financial  statements  contain all adjustments  (including all normal  recurring
accruals)  necessary to present fairly the financial  position of the Company at
September 30, 1995 and the results of its  operations and cashflows for the nine
months  ended  September  30,  1994 and  1995.  These  interim  results  are not
necessarily indicative of results for a full year.

(2)  Financing

         On  August  31,  1995,  WellTech  entered  into a loan  agreement  with
Rockport Resources Corporation  ("Rockport Agreement") whereby WellTech borrowed
$1.8 million,  secured by two drilling rigs.  Shawmut released its lien on these
rigs in exchange for a principal  payment of $325,000 on the term loan. The $1.8
million loan is for a term of one year and bears interest at the rate of 15% per
annum payable monthly.  The principal is payable after one year or upon the sale
of the rigs,  which ever occurs first. It is WellTech's  intention to sell these
rigs and retire this debt as quickly as  possible;  consequently,  the  Rockport
Agreement  also provides for the payment of  additional  amounts each 90 days to
retain this right.


         These payments are required as follows:

                  At closing                                     $ 42,850
                  November 30, 1995                                21,425
                  February 28, 1996                                42,850
                  May 31, 1996                                     64,275
                                                               ----------

                                                                 $171,400
                                                               ==========

                                      F-60

<PAGE>

The net proceeds from this  transaction  were used to retire $325,000 of Shawmut
Term Debt, to make additional investments in Servicios WellTech of approximately
$1,000,000 and for additional vendor payments.

         Letter of Credit - In October,  November  and  December  1995,  Shawmut
issued,  under WellTech's  revolving credit facility,  an additional $300,000 in
letters of credit  making the total  outstanding  $1,380,000.  These  letters of
credit provide  collateral for the payment of the  self-insured  retention under
certain of WellTech's  liability insurance policies.  The additional $300,000 is
the complete collateral requirement for WellTech's 95-96 policy year.

         During  1995,  WellTech  was  not in  compliance  with  certain  of the
restrictive  covenants of its Loan Agreement  with Shawmut and received  waivers
for such events of non compliance.  On January 19, 1996, WellTech entered into a
credit  agreement with a new lender,  the CIT  Group/Credit  Finance  ("CIT") to
refinance  certain  existing  indebtedness,  which enabled WellTech to repay all
indebtedness to Shawmut  (approximately $5 million).  The new indebtedness is in
the form of a three year revolving credit arrangement and a three year term loan
and is cross guaranteed by Key and cross  collateralized  by their assets.  Upon
consummation of the merger,  the new indebtedness will be the obligation of Key,
as survivor of the merger.  There are no restrictive  financial  covenants until
the merger is completed.  However, failure to consummate the merger by April 30,
1996,  may,  at the option of CIT,  constitute  an event of default if  WellTech
fails to refinance  this credit  facility by July 31,  1996,  or if Key fails to
continue to operate WellTech pursuant to the Interim Operations  Agreement until
such refinancing is completed.

(3)  Equity Transactions

         On March 31,  1995,  WellTech  issued  5,470  shares of common stock in
exchange for certain  well  servicing  assets.  This  transaction  was valued at
$459,000.

(4)  Investments in Unconsolidated Well Servicing Operations

         Servicios WellTech - In April 1995,  Servicios  WellTech,  S.A. ("SWT")
was recapitalized and WellTech's  ownership  interest increased from 50% to 63%.
Consequently, effective April 1, 1995, WellTech changed its method of accounting
for SWT from the equity method to consolidation with a minority interest.


                                      F-61


<PAGE>



Presented below is certain condensed financial  information for Dawson WellTech,
L.L.C. ("DWT") and Key Energy Group, Inc. ("Key").  WellTech did not acquire its
ownership  interest  in Key until  August  of 1994,  therefore  the  information
presented  below does not include the nine months ended  September  30, 1994 for
Key.

                                       DWT                          Key
                               Nine Months Ended           Nine Months Ended
                                     September 30              September 30
                              ---------------------------   ----------------
                              1995              1994              1995
                              ----             -----              -----

Revenues                      $34,528         $15,458            $35,125
Gross Margins                 $11,464         $ 4,936            $11,777
Income Before Tax             $ 2,980         $ 1,413            $ 2,910
Net Income                    $ 2,909         $ 1,347            $ 1,893


(5)  Commitments and Contingencies

         WellTech is involved in disputes and  litigation  arising in the normal
course of business. In management's opinion, the resolution of such disputes and
litigation will not have a material adverse effect on the financial  position or
results of operations of WellTech.

                                      F-62


<PAGE>





                             KEY ENERGY GROUP, INC.
                UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS


         The Unaudited Pro Forma Combined Financial  Statements of Key have been
prepared to give effect to the acquisition of the West Texas assets of WellTech,
Inc.  ("WellTech  West Texas") in August 1994, the acquisition of certain assets
of Clint Hurt  Drilling  in April  1995,  the Merger  and  WellTech's  increased
ownership of Servicios WellTech S.A.  ("Servicios") in April 1995. The Unaudited
Pro Forma Combined Financial Statements of Key are not necessarily indicative of
the financial results for the periods presented had the acquisitions of WellTech
West Texas and Clint Hurt  Drilling  and the  Merger  and  WellTech's  increased
ownership of Servicios taken place on July 1, 1994. In addition,  future results
may vary significantly from the results reflected in the accompanying  Unaudited
Pro Forma Combined Financial Statements because of, among other factors,  normal
oil and gas  production  declines,  changes in products and services  prices and
future  acquisitions.  This  information  should be read in conjunction with the
consolidated   financial   statements  of  Key  (and  related   notes)  and  the
consolidated  financial statements of WellTech (and related notes), all included
elsewhere in this Proxy Statement-Prospectus.


                                      F-63


<PAGE>




                     Key Energy Group, Inc. and Subsidiaries
                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET

                             as of December 31, 1995

                                 (In thousands)

<TABLE>
<CAPTION>
<S>                                                      <C>           <C>                 <C>            <C>      <C> 
                                                                                              Pro Forma              Pro Forma
                                                                 Key    WellTech, Inc          Entries                Combined
  ASSETS:
  Current Assets:

    Cash                                                  $      503     $    1,267          $  1,200     (c)         $     2,970
    Restricted cash                                              452              -                                           452
    Restricted marketable securities                             267              -                                           267
    Accounts receivable, net                                   8,352         14,477                                        22,829
    Inventories                                                1,300              -                                         1,300
    Prepaid expenses and other current assets                    225          2,333                                         2,558

- -----------------------------------------------------------------------------------                               -----------------
  Total Current Assets                                        11,099         18,077                                        30,376

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

  Equity in Unconsolidated Well Servicing
Operations:

    Dawson WellTech, LLC                                           -          7,175           (7,175)     (b)                   -
    Key Energy Group, Inc.                                         -          8,572           (8,572)     (b)                   -

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

  Total                                                            -         15,747                                             -

- -----------------------------------------------------------------------------------                               -----------------
  Property and Equipment:

    Oilfield service equipment                                25,456         37,631          (12,707)     (a)              50,380
    Oil and gas well drilling equipment                        2,374          2,751             (938)     (a)               4,187
    Motor vehicles                                               521            525                                         1,046

    Oil and gas properties and related equipment,

        successful efforts method                              9,809              -                                         9,809
    Furniture and equipment                                      334          1,026                                         1,360
    Buildings and land                                         2,086          3,231                                         5,317

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

                                                              40,580         45,164                                        72,099
Accumulated depreciation & depletion                         (6,188)       (14,384)           14,384      (a)             (6,188)

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

Net Property and Equipment                                    34,392         30,780                                        65,911

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

Other Assets                                                   2,020          2,928             1,946     (a)               6,994
                                                                                                  100     (c)

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

  Total Assets                                               $47,511        $67,532                                      $103,281

==================================================================================                                =================
</TABLE>


See accompanying notes to unaudited pro forma combined financial statements.

                                      F-64


<PAGE>



                     Key Energy Group, Inc. and Subsidiaries
                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET

                             as of December 31, 1995

                                 (In thousands)


<TABLE>
<CAPTION>
<S>                                                      <C>           <C>                 <C>            <C>      <C> 
                                                                                              Pro Forma              Pro Forma
                                                               Key     WellTech, Inc          Entries                Combined


LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities

      Accounts payable                                    $   3,804     $   5,789           (1,650)     (c)        $    7,943
      Other accrued liabilities                               1,931         5,884             2,000     (a)             9,815
    Accrued interest                                            168           505             (400)     (c)               273
    Accrued income taxes                                        124           257                                         381
    Deferred tax liability                                      118             -                                         118
    Current portion of long-term debt                         1,590         5,697           (4,948)     (c)             2,339

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

  Total Current Liabilities                                   7,735        18,132                                      20,869

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

  Long-term debt, less current portion                       15,237         9,505             8,298     (c)            33,040
  Deferred income taxes                                       2,934             -                                       2,934
  Accrued casualty insurance                                      -         2,219                                       2,219
  Minority interest in consolidated subsidiary                    -         1,364                                       1,364


  Commitments and contingencies
  Stockholders' equity:

    Common stock                                                691           353               (3)     (a)             1,041
    Additional paid-in capital                               15,186        92,456          (55,809)     (a)            36,086
                                                                                           (15,747)     (b)
    Retained earnings (deficit)                               5,728       (56,497)          56,497      (a)             5,728
  Total Stockholders' Equity                                 21,605        36,312                                      42,855

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

  Total Liabilities and Stockholders' Equity                $47,511       $67,532                                    $103,281

==================================================================================                                =================
</TABLE>


See accompanying notes to unaudited pro forma combined financial statements.




                                      F-65


<PAGE>


<TABLE>
<CAPTION>


                                                        Key Energy Group, Inc. and Subsidiaries
                                                 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                                                           Twelve Months Ended June 30, 1995
                                                    (In thousands, except share and per share data)


                                                                WellTech,   Clint Hurt    Servicios    Pro Forma     Pro Forma
                                                     Key            Inc      Drilling      WellTech      Entries      Combined

<S>                                           <C>            <C>          <C>         <C>              <C>            <C>

REVENUES:
   Oilfield service                             $      40,105 $     55,507 $        -  $        7,898                   $ 103,510
   Oil and gas                                          2,334            -          -               -                       2,334
   Oil and gas well drilling                            1,932        3,565      5,797               -                      11,294
   Other, net                                             318        2,587          -            (398)                      2,507
- -----------------------------------------------------------------------------------------------------                 -----------
                                                       44,689       61,659      5,797           7,500                     119,645
- -----------------------------------------------------------------------------------------------------                 ----------- 
COSTS AND EXPENSES

   Oilfield services                                   30,592       43,705          -           5,620    (2,175)  (f)      77,742
   Oil and gas                                            757            -          -               -                         757
   Oil and gas well drilling                            1,444        3,858      4,333               -      (325)  (f)       9,310
   Depreciation, depletion and amortization             2,738        2,863          -             534       100   (d)       6,235
   General and administrative                           4,352        9,557      1,165           2,609    (1,500)  (f)      16,183
   Interest                                             1,478        1,227          -             370      (386)  (c)       2,689
   Equity in (earnings) losses of
      unconsolidated investees
                                                            -          632          -               -      (632)  (b)           -
   Minority interest in net loss (income) 
   of consolidated subsidiary                               -           90          -               -      (604)  (e)       (514)
- -----------------------------------------------------------------------------------------------------                 -----------
                                                       41,361       61,932      5,498           9,133                     112,402
- -----------------------------------------------------------------------------------------------------                 -----------

Income (loss) before income taxes                       3,328        (273)        299          (1,633)                      7,243

Income tax expense                                      1,150           -           -               -      1,218  (g)       2,368

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

NET INCOME  (LOSS)                              $       2,178 $      (273) $      299  $       (1,633)                  $   4,875

=====================================================================================================                 ===========

EARNINGS PER SHARE :

  Income (loss) before income taxes                     $0.50      ($0.78)                                                  $0.70
  Net income (loss)                                     $0.33      ($0.78)                                                  $0.48
WEIGHTED AVERAGE SHARES OUTSTANDING:                    6,647         349                                                  10,106
</TABLE>
 



See accompanying notes to unaudited pro forma combined financial statements


                                      F-66


<PAGE>





                     Key Energy Group, Inc. and Subsidiaries
              UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

                       Six Months Ended December 31, 1995

                 (In thousands, except share and per share data)


<TABLE>
<CAPTION>
<S>                                                     <C>          <C>                  <C>                <C> 
                                                                                              Pro Forma              Pro Forma
                                                               Key     WellTech, Inc          Entries                Combined


REVENUES:

   Oilfield service                                     $    19,148   $     29,471                              $      48,619
   Oil and gas                                                1,727              -                                      1,727
   Oil and gas well drilling                                  3,659          1,558                                      5,217
   Other, net                                                   258              -                                        258
- -------------------------------------------------------------------------------------                           --------------- 

                                                             24,792         31,029                                     55,821
- -------------------------------------------------------------------------------------                           ---------------     
COSTS AND EXPENSES

   Oilfield services                                         14,153         23,014          (1,000)  (f)               36,167
   Oil and gas                                                  619              -                                        619
   Oil and gas well drilling                                  2,735          1,712            (150)  (f)                4,297
   Depreciation, depletion and amortization                   1,794          1,524                                      3,318
   General and administrative                                 2,390          4,523            (750)  (f)                6,163
   Interest                                                     877            716            (250)  (c)                1,343
   Equity in (earnings) losses of
     unconsolidated investees                                     -          (741)              741  (b)                    -
- -------------------------------------------------------------------------------------                           --------------- 
                                                             22,568         30,748                                     51,907
- -------------------------------------------------------------------------------------                           --------------- 


Income before income taxes                                    2,224            281                                      3,914
Income tax expense                                              730              -              582  (g)                1,312

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



NET INCOME                                          $         1,494    $       281                                 $   2,602

=====================================================================================                           ================

EARNINGS PER SHARE :


  Income before income taxes                           $       0.32   $       0.80                              $        0.38
  Net income                                           $       0.22   $       0.80                              $        0.25


WEIGHTED AVERAGE SHARES
OUTSTANDING:                                                  6,914            353                                     10,414
</TABLE>



See accompanying notes to unaudited pro forma combined financial statements.





                                      F-67


<PAGE>




                     KEY ENERGY GROUP, INC. AND SUBSIDIARIES
           NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

                       June 30, 1995 and December 31, 1995




1.   Basis of Presentation

The  accompanying  unaudited pro forma  combined  financial  information  of Key
Energy  Group,  Inc.  and  Subsidiaries  ("Key") is presented to reflect (a) the
acquisition of the West Texas assets of WellTech,  Inc.  ("WellTech West Texas")
in August 1994, (b) the  acquisition of certain assets of Clint Hurt Drilling in
April 1995, and (c) the proposed merger of WellTech, Inc. ("WellTech") into Key,
(items (a), (b) and (c) collectively referred to herein as, "the Acquisitions"),
and  (d)   WellTech's   increase  in  ownership  of  Servicios   WellTech   S.A.
("Servicios")  in April 1995 from a 50% to 63%. The unaudited pro forma combined
balance  sheet is presented as if the  acquisition  of WellTech  occurred at the
balance sheet date.  The unaudited pro forma  combined  statements of operations
are presented as if the Acquisitions and the increase of WellTech's ownership in
Servicios each occurred on July 1, 1994.


         Key - Represents  the  consolidated  balance sheet of Key Energy Group,
Inc. and Subsidiaries as of December 31, 1995 and the consolidated statements of
operations of Key Energy Group,  Inc. and  Subsidiaries  for the year ended June
30, 1995 and the six months ended December 31, 1995.


         WellTech, Inc. - Represents the consolidated balance sheet of WellTech,
Inc.  as of November  30,  1995 and the  unaudited  consolidated  statements  of
operations  of  WellTech,  Inc.  for the year  ended June 30,  1995,  (which was
derived by  subtracting  the statement of operations  amounts for the six months
ended June 30, 1994 from the audited  statement  of  operations  amounts for the
year ended December 31, 1994 and adding the statement of operations  amounts for
the six months ended June 30, 1995) and the six months ended  November 30, 1995.
Prior to the merger, WellTech will distribute 205,038 shares of Key Common Stock
to its  directors  as  compensation.  A charge to earnings for the fair value of
such shares will be made to the earnings of WellTech upon such distribution.

         Servicios  WellTech,  S.A. - Represents  the statement of operations of
Servicios  WellTech,  S.A.  for the nine months  ended March 31, 1995 (which was
derived by subtracting the statement of operations  amounts for the three months
ended June 30, 1994 from the audited  statement  of  operations  amounts for the
year ended March 31, 1995).  For the period from July 1, 1994 to March 31, 1995,
WellTech  recorded its  investment  in Servicios  WellTech,  S.A.  utilizing the
equity  method.  Subsequent  to March 31, 1995,  as a result of  increasing  its
ownership  from 50% to 63%,  WellTech  consolidated  the operations of Servicios
WellTech, S.A. in its consolidated statement of operations.

         Clint Hurt  Drilling  - Reflects  the  historical  revenues  and direct
operating  expenses of certain assets of Clint Hurt Drilling for the nine months
ended March 31,  1995.  Subsequent  to March 31,  1995,  the revenues and direct
operating  expenses of Clint Hurt  Drilling  are  included  in the  consolidated
statement of operations of Key.

                                      F-68

<PAGE>

2.   Pro Forma Entries

         (a) To record the  acquisition of WellTech using the purchase method of
accounting.  The  allocation  of the purchase  price to the acquired  assets and
liabilities of WellTech is preliminary, and therefore, subject to change.

         (b) To  eliminate  the  investment  and equity in earnings  (losses) in
Dawson  WellTech,  LLC,  ("Dawson").  WellTech's  investment  in Dawson  will be
distributed to the  shareholders and directors of WellTech prior to the proposed
merger of WellTech into Key.

         Also, to eliminate the  investment  and equity in earnings  (losses) in
Key for the common  stock of Key  currently  owned by WellTech and the equity in
earnings of Services WellTech prior to its  consolidation  during the year ended
June 30, 1995.


         If the expected distribution to WellTech directors of 205,038 shares of
Key  Common  Stock and 7,280  shares  of  Dawson  common  stock had been made on
December 31, 1995,  WellTech would have recorded a related charge to earnings of
$1,515,000.


         (c)  To  adjust  the  debt  and  accrued   interest  for  certain  debt
instruments  of Key  and  WellTech  as a  result  of  refinancing  certain  debt
instruments.  Key has a  commitment  from a  banking  institution  to  refinance
certain  debt  obligations  of the Company and  WellTech and to provide Key with
approximately $1.2 million in incremental working capital.

         Also, to adjust interest expense and debt issuance costs resulting from
(i) the  borrowings for the  acquisition  of Clint Hurt  Drilling,  and (ii) the
refinancing  of certain debt  instruments of Key and WellTech and the receipt of
working capital.

         (d) To adjust depreciation, depletion and amortization for the WellTech
West Texas assets.

         (e) To  adjust  the  minority  interest  in  losses  of a  consolidated
subsidiary  for the  operations of Servicios for the nine months ended March 31,
1995.

    
         (f) To record  the  estimated  savings in  general  and  administrative
expenses and operating costs due to the  Acquisitions.  The estimated savings in
expenses  is  solely a result  of  changed  circumstances  brought  about by the
consummation  of  the   Acquisitions,   principally  the  closing  of  duplicate
administrative  facilities  and  the  elimination  of  duplicate  administrative
positions, including executive positions.  Duplicative administrative facilities
expected  to be closed  consist of the  leased  executive  offices  of  WellTech
located in  Houston,  Texas.  Approximately  18  employees  are  expected  to be
effected.  Annual  general and  administrative  costs  expected to be eliminated
include salary and related benefits costs associated with the 18  administrative
office  employees  discussed  above of  approximately  $1,125,000 and additional
costs  associated  with  maintenance of that office  including  rental,  travel,
telephone and office supply expenses totaling approximately $375,000.

                                      F-69

<PAGE>

Estimated  annual  savings of  $2,500,000  to  operating  costs for the combined
companies  fall into the following  general  categories  for savings  related to
WellTech and Clint Hurt:

                                                  WellTech         Clint Hurt

     Insurance                                      $775,000         150,000
     Purchasing savings                              500,000          75,000
     Fuel savings                                     75,000              --
     Salaries and wages                              250,000          25,000
     Capitalization policy differences               500,000          50,000
     Other                                            75,000          25,000
                                                  ----------          ------

              Totals                              $2,175,000        $325,000
                                                  ----------        --------

Savings in insurance  costs relate to contract rates for coverage and contracted
administrative  fees to be in  effect  for the  combined  companies.  Purchasing
savings have been  calculated  by applying  product  prices  available to Key to
purchases  made by WellTech  during the prior  fiscal year and for Clint Hurt by
calculating the savings achieved since the acquisition.  Salary and wage savings
will result from  elimination of certain field support  positions.  As result of
implementing the interim operating agreement with WellTech, many of the expected
cost savings are being currently realized.

The  above  savings  in  general  and  administrative  and  operating  costs are
reasonably  assured  and such  savings  are not  expected  to be  offset by cost
increases in the expense categories described above.

Not included is any additional  compensation under the 1995 Stock Option Plan or
the Outside  Directors'  Stock  Option  Plan,  if any.  The  Company  would have
recorded deferred  compensation of approximately  $1,200,000 to be recognized as
expense  over a four-year  period  under the 1995 Stock Option Plan and $187,500
under the Outside  Directors' Stock Option Plan to be recognized over a two-year
period had such plans gone into effect on December 31, 1995. (See "Management of
Key - Executive  Compensation;  - 1995 Stock Option  Plan; - Outside  Directors'
Stock Plan".)
    


         (g)  To adjust income tax expense for each tax jurisdiction.


                                      F-70

<PAGE>

3.  Income Taxes

Key  accounts  for income  taxes  pursuant to the  provisions  of  Statement  of
Financial   Accounting   Standards  No.  109,   "Accounting  for  Income  Taxes"
("Statement  109").  Deferred income taxes have been provided on all significant
difference  between the book and tax basis of the assets and  liabilities of the
Acquisitions.  In  accordance  with  Statement  109, Key  prepares  separate tax
calculations for each tax jurisdiction in which Key is subject to income taxes.

Income taxes are not reflected in the historical financial  information of Clint
Hurt Drilling as it was not a taxable entity.

4.   Income (loss) from Operations per Share

Income  (loss) from  operations  per share is  calculated  based on the weighted
average  number  of  shares  and share  equivalents,  if more than 3%  dilutive,
outstanding during the period. Fully diluted income (loss) per common and common
equivalent  share is not presented since the effect would be  antidilutive.  Pro
forma  income  (loss) per share has been  calculated  taking  into  account  the
issuance of shares of Key's Common Stock in the  Acquisitions  as if such shares
were issued on July 1, 1994.


                                      F-71





<PAGE>


                                                                  Annex I










                          AGREEMENT AND PLAN OF MERGER

                                 By and Between

                             KEY ENERGY GROUP, INC.

                                       and

                                 WELLTECH, INC.

                                   Dated as of

                                November 18, 1995


















                                      AI-1


<PAGE>



 
                               TABLE OF CONTENTS


ARTICLE 1  THE MERGER.....................................................AI-6

  SECTION 1.1  The Merger.................................................AI-6
  SECTION 1.2  Action by Stockholders.....................................AI-6
  SECTION 1.3  Closing....................................................AI-6
  SECTION 1.4  Effective Time.............................................AI-6
  SECTION 1.5  Effect of the Merger.......................................AI-7
  SECTION 1.6  Articles of Incorporation..................................AI-7
  SECTION 1.7  Bylaws.....................................................AI-7
  SECTION 1.8  Directors and Officers.....................................AI-7

ARTICLE 2  CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.............AI-7

  SECTION 2.1  Conversion of Securities...................................AI-7
  SECTION 2.2  Exchange of Certificates...................................AI-8
  SECTION 2.3  Stock Transfer Books.......................................AI-10
  SECTION 2.4  Option Securities and Convertible Securities; 
                 Payment Rights...........................................AI-10
  SECTION 2.5  Dissenting Shares..........................................AI-10

ARTICLE 3  REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................AI-10

  SECTION 3.1  Organization and Business; Power and Authority; 
                 Effect of Transaction....................................AI-11
  SECTION 3.2  Financial and Other Information............................AI-12
  SECTION 3.3  Changes in Condition.......................................AI-13
  SECTION 3.4  Liabilities................................................AI-13
  SECTION 3.5  Title to Properties; Leases................................AI-13
  SECTION 3.6  Compliance with Private Authorizations.....................AI-15
  SECTION 3.7  Compliance with Governmental Authorizations 
                 and Applicable Law.......................................AI-15
  SECTION 3.8  Intangible Assets.  .......................................AI-16
  SECTION 3.9  Related Transactions.......................................AI-16
  SECTION 3.10  Insurance.................................................AI-17
  SECTION 3.11  Tax Matters...............................................AI-17
  SECTION 3.12  Employee Retirement Income Security Act of 1974...........AI-18
  SECTION 3.13  Absence of Sensitive Payments.............................AI-20
  SECTION 3.14  Inapplicability of Specified Statutes.....................AI-20
  SECTION 3.15  Authorized and Outstanding Capital Stock..................AI-20
  SECTION 3.16  Employment Arrangements...................................AI-21
  SECTION 3.17  Material Agreements.......................................AI-21
  SECTION 3.18  Ordinary Course of Business...............................AI-22
  SECTION 3.19  Bank Accounts, Etc........................................AI-23
  SECTION 3.20  Adverse Restrictions......................................AI-23
  SECTION 3.21  Broker or Finder..........................................AI-23
  SECTION 3.22  Personal Injury or Property Damage; 
                  Warranty Claims; Etc....................................AI-24
  SECTION 3.23  Environmental Matters.....................................AI-24
  SECTION 3.24  Solvency..................................................AI-25
  SECTION 3.25  Compliance with Regulations Relating to 
                  Securities Credit.......................................AI-25

                                      AI-2


<PAGE>



  SECTION 3.26  Materiality...............................................AI-25
  SECTION 3.27  Continuing Representation and Warranty....................AI-25

ARTICLE 4  REPRESENTATIONS AND WARRANTIES OF KEY..........................AI-25

  SECTION 4.1  Organization and Business; Power and Authority; 
                Effect of Transaction.....................................AI-26
  SECTION 4.2  Financial and Other Information............................AI-27
  SECTION 4.3  Changes in Condition.......................................AI-28
  SECTION 4.4  Liabilities................................................AI-28
  SECTION 4.5  Title to Properties; Leases................................AI-28
  SECTION 4.6  Compliance with Private Authorizations.....................AI-29
  SECTION 4.7  Compliance with Governmental Authorizations 
                and Applicable Law........................................AI-30
  SECTION 4.8  Intangible Assets..........................................AI-31
  SECTION 4.9  Related Transactions.......................................AI-31
  SECTION 4.10  Insurance.  ..............................................AI-31
  SECTION 4.11  Tax Matters...............................................AI-32
  SECTION 4.12  Employee Retirement Income Security Act of 1974.  ........AI-33
  SECTION 4.13  Absence of Sensitive Payments.............................AI-34
  SECTION 4.14  Inapplicability of Specified Statutes.....................AI-35
  SECTION 4.15  Authorized and Outstanding Capital Stock..................AI-35
  SECTION 4.16  Employment Arrangements.  ................................AI-35
  SECTION 4.17  Material Agreements.......................................AI-36
  SECTION 4.18  Ordinary Course of Business...............................AI-36
  SECTION 4.19  Adverse Restrictions......................................AI-37
  SECTION 4.20  Broker or Finder..........................................AI-38
  SECTION 4.21  Personal Injury or Property Damage; 
                 Warranty Claims; Etc.....................................AI-38
  SECTION 4.22  Environmental Matters.....................................AI-38
  SECTION 4.23  Solvency..................................................AI-39
  SECTION 4.24  Compliance with Regulations Relating 
                  to Securities Credit....................................AI-39
  SECTION 4.25  Materiality...............................................AI-39
  SECTION 4.26  Continuing Representation and Warranty....................AI-39

ARTICLE 5  STOCKHOLDER MEETING COVENANTS..................................AI-40

  SECTION 5.1  SEC Filings................................................AI-40
  SECTION 5.2  Board Recommendation.......................................AI-41
  SECTION 5.3  Meeting of Stockholders of the Company.....................AI-41
  SECTION 5.4  Meeting of Stockholders of Key.............................AI-41

ARTICLE 6  ADDITIONAL COVENANTS...........................................AI-42

  SECTION 6.1  Access to Information; Confidentiality.....................AI-42
  SECTION 6.2  Agreement to Cooperate.....................................AI-43
  SECTION 6.3  Public Announcements.......................................AI-43
  SECTION 6.4  Directors' and Officers' Indemnification...................AI-44
  SECTION 6.5  Notification of Certain Matters............................AI-44
  SECTION 6.6  No Solicitation............................................AI-44
  SECTION 6.7  Termination of Option Securities and 
                Convertible Securities....................................AI-45
  SECTION 6.8  Arrangement of Debt Financing..............................AI-46

                                      AI-3


<PAGE>




ARTICLE 7  CLOSING CONDITIONS.............................................AI-47

  SECTION 7.1  Conditions to Obligations of Each Party to 
                 Effect the Merger........................................AI-47
  SECTION 7.2  Conditions to Obligations of Key...........................AI-47
  SECTION 7.3  Conditions to Obligations of the Company...................AI-51

ARTICLE 8  TERMINATION, AMENDMENT AND WAIVER..............................AI-54

  SECTION 8.1  Termination................................................AI-54
  SECTION 8.2  Effect of Termination......................................AI-55
  SECTION 8.3  Amendment..................................................AI-55
  SECTION 8.4  Waiver.....................................................AI-55
  SECTION 8.5  Fees, Expenses and Other Payments..........................AI-55

ARTICLE 9  GENERAL PROVISIONS.............................................AI-56

  SECTION 9.1  Effectiveness of Representations, etc......................AI-56
  SECTION 9.2  Notices....................................................AI-56
  SECTION 9.3  Specific Performance; Other Rights and Remedies............AI-57
  SECTION 9.4  Severability...............................................AI-57
  SECTION 9.5  Counterparts...............................................AI-58
  SECTION 9.6  Section Headings...........................................AI-58
  SECTION 9.7  Governing Law..............................................AI-58
  SECTION 9.8  Further Acts...............................................AI-58
  SECTION 9.9  Entire Agreement...........................................AI-58
  SECTION 9.10  Assignment................................................AI-58
  SECTION 9.11  Parties in Interest.......................................AI-58
  SECTION 9.12  Mutual Drafting...........................................AI-59

APPENDIX A                 Definitions

EXHIBITS

  EXHIBIT A    Form of New Key Warrants (First Preamble)
  EXHIBIT B    Amended and Restated Articles of Incorporation of Key 
                (Section 1.6)
  EXHIBIT C    By-Laws of Key (Section 1.7)

                                      AI-4


<PAGE>





                          AGREEMENT AND PLAN OF MERGER


         This  Agreement  and Plan of  Merger  (this  "Agreement"),  dated as of
November 18,  1995,  is made by and between Key Energy  Group,  Inc., a Maryland
corporation  ("Key"),  and WellTech Inc., a Delaware  corporation (the "Company"
and, together with Key, the "parties").

                                    RECITALS

         WHEREAS,  upon  the  terms  and  subject  to  the  conditions  of  this
Agreement,  in  accordance  with the  general  corporation  laws of the State of
Delaware (the "DGCL") and of the State of Maryland (the "MGCL"), the Company and
Key will  carry out a business  combination  transaction  pursuant  to which the
Company will merge with and into Key (the "Merger") and the Company stockholders
will receive 4,929,962 shares (the "Key Shares") of Common Stock, par value $.10
per share, of Key (the "Key Stock") and five-year warrants  substantially in the
form of  Exhibit A  attached  hereto  and made a part  hereof to  purchase  at a
purchase  price of $6.75 per share up to an aggregate  of 750,000  shares of Key
Stock (the "New Key Warrants")  and, upon the  consummation  of the Merger,  Key
shall retire the  Existing  Key Shares and the  Existing  Key Warrants  (each as
hereinafter defined); and

         WHEREAS,  the Board of Directors of each of the Company and Key (i) has
unanimously determined that the Merger is advisable and fair to, and in the best
interests of, it and its  respective  stockholders  and has approved and adopted
this  Agreement as a plan of  reorganization  within the  provisions  of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
has approved this Agreement, the Merger and the other transactions  contemplated
hereby or thereby or by any  Collateral  Document  executed  or  required  to be
executed in connection herewith or therewith  (collectively the "Transactions"),
and (iii) has recommended  approval and adoption of this  Agreement,  the Merger
and the Transactions by its respective stockholders; and

         WHEREAS, the Company and Key have simultaneously with the execution and
delivery  of  this  Agreement  executed  and  delivered  an  interim  operations
agreement  (as from time to time  amended  in  accordance  with its  terms,  the
"Interim Operations Agreement"); and

         WHEREAS, Key has simultaneously with the execution and delivery of this
Agreement  executed and delivered a registration  rights agreement (as from time
to  time  amended  in  accordance  with  its  terms,  the  "Registration  Rights
Agreement"); and

         WHEREAS,  capitalized terms used in this Agreement  without  definition
shall have the  meanings  given to such terms in Appendix A attached  hereto and
made a part hereof;

         NOW,  THEREFORE,  in  consideration  of the foregoing  recitals and the
mutual representations,  warranties,  covenants and agreements set forth herein,
the parties hereto,  intending to be legally bound, do hereby covenant and agree
as follows:



                                      AI-5


<PAGE>



                                    ARTICLE 1

                                   THE MERGER

         SECTION  1.1 The Merger.  Upon the terms and subject to the  conditions
set forth in this  Agreement,  and in accordance  with the DGCL and the MGCL, at
the Effective Time the Company shall be merged with and into Key. As a result of
the Merger,  the  separate  existence  of the Company  shall cease and Key shall
continue  as  the   surviving   corporation   of  the  Merger  (the   "Surviving
Corporation").

         SECTION 1.2 Action by Stockholders.

         (a) The  Company,  acting  through its Board of  Directors,  shall,  in
accordance  with  Applicable  Law  and  its  Organic  Documents:  (i) as soon as
practicable,  duly call,  give notice of, convene and hold a special  meeting of
stockholders  for the purpose of adopting  and  approving  this  Agreement,  the
Merger and the Transactions (the "Company Special Meeting"); (ii) include in any
proxy statement the conclusion and  recommendation  of its Board of Directors to
the effect that its Board of Directors,  having  determined that this Agreement,
the Merger and the Transactions are in the best interests of the Company and its
stockholders,  has approved this Agreement,  the Merger and the Transactions and
recommends that its  stockholders  vote in favor of the approval and adoption of
this Agreement,  the Merger and the  Transactions;  and (iii) use its reasonable
business  efforts  to  obtain  the  necessary  approval  and  adoption  of  this
Agreement, the Merger and the Transactions by its stockholders.

           (b) Key, acting through its Board of Directors,  shall, in accordance
with Applicable Law and its Organic Documents: (i) as soon as practicable,  duly
call, give notice of, convene and hold a special meeting of stockholders for the
purpose  of  adopting  and  approving  this   Agreement,   the  Merger  and  the
Transactions  (the "Key Special  Meeting");  (ii) include in any proxy statement
the conclusion and  recommendation  of its Board of Directors to the effect that
its Board of Directors,  having  determined that this Agreement,  the Merger and
the  Transactions  are  advisable  and in the  best  interests  of Key  and  its
stockholders,  has approved this Agreement,  the Merger and the Transactions and
recommends that its  stockholders  vote in favor of the approval and adoption of
this Agreement,  the Merger and the  Transactions;  and (iii) use its reasonable
business  efforts  to  obtain  the  necessary  approval  and  adoption  of  this
Agreement, the Merger and the Transactions by its stockholders.

         SECTION 1.3 Closing.  Unless this Agreement  shall have been terminated
pursuant  to Section  8.1 and the Merger  and the  Transactions  shall have been
abandoned,  and subject to the  satisfaction  or, if permissible,  waiver of the
conditions  set forth in Article 7, the  closing of the Merger  (the  "Closing")
will take place,  on the Closing  Date,  at the offices of Sullivan & Worcester,
One Post Office Square,  Boston,  Massachusetts,  unless  another date,  time or
place is agreed to in writing by the parties.

         SECTION  1.4  Effective  Time.  As promptly  as  practicable  after the
satisfaction or, if permissible, waiver of the conditions set forth in Article 7
(but subject to Section  1.3),  the parties  hereto shall cause the Merger to be
consummated by filing a Certificate of Merger with the Secretary of State of the
State of Delaware  and  Articles of Merger  with the  Secretary  of State of the
State of Maryland, and by making any related filings required under the DGCL and
the MGCL in  connection  with the Merger.  The Merger shall become  effective at
such time (but not prior to the Closing  Date) as such  documents are duly filed
with the  Secretary of State of Delaware and the Secretary of State of the State
of  Maryland,  respectively,  or at  such  later  time as is  specified  in such
documents (the "Effective Time").


                                      AI-6


<PAGE>



         SECTION 1.5 Effect of the Merger.  From and after the  Effective  Time,
the Surviving Corporation shall possess all the rights,  privileges,  powers and
franchises and be subject to all of the restrictions, disabilities and duties of
the Company and Key, and the Merger shall  otherwise have the effects,  provided
for under the DGCL and the MGCL.

         SECTION 1.6 Articles of Incorporation. The Articles of Incorporation of
Key in effect at the Effective  Time shall be the Articles of  Incorporation  of
the Surviving  Corporation  unless amended in accordance  with  Applicable  Law,
except that such Articles of Incorporation shall be amended and restated to read
in their entirety  substantially  as set forth in Exhibit B attached  hereto and
made a part hereof.  The name of the Surviving  Corporation shall be the name of
Key or such other name as Key may elect.

         SECTION 1.7 Bylaws.  The bylaws of Key in effect at the Effective  Time
shall be the bylaws of the Surviving  Corporation  unless  amended in accordance
with  Applicable  Law,  except that such bylaws shall be amended and restated to
read in their entirety  substantially  as set forth in Exhibit C attached hereto
and made a part hereof.

         SECTION 1.8 Directors and Officers.  From and after the Effective Time,
until  successors  are duly  elected or  appointed  and  qualified  (or  earlier
resignation or removal) in accordance  with  Applicable Law (a) the directors of
Key at the  Effective  Time (after  giving  effect to the  provisions of Section
7.3(f)) shall be the directors of the Surviving Corporation and (b) the officers
of Key at the Effective Time shall be the officers of the Surviving Corporation.


                                    ARTICLE 2

               CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES

         SECTION 2.1 Conversion of Securities.  At the Effective Time, by virtue
of the Merger and  without  any  action on the part of Key,  the  Company or the
holders of any of the following securities:

         (a) Each  share of Common  Stock,  par value  $1.00 per  share,  of the
Company (the "Company  Stock") issued and outstanding  immediately  prior to the
Effective  Time  (other  than any  shares of the  Company  Stock to be  canceled
pursuant  to Section  2.1(b) and any  Dissenting  Shares (as  defined in Section
2.5)),  shall be converted into the right to receive 13.9682 shares of Key Stock
and New Key  Warrants  to  purchase  2.125  shares  of Key  Stock  (the  "Merger
Consideration").  At the  Effective  Time,  all  shares of  Company  Stock  (the
"Company  Shares") shall no longer be  outstanding  and shall  automatically  be
canceled  and  retired  and shall cease to exist,  and  certificates  previously
evidencing  any such Company  Shares (each, a  "Certificate")  shall  thereafter
represent  the right to  receive,  upon the  surrender  of such  Certificate  in
accordance  with  the  provisions  of  Section  2.2,  the  Merger  Consideration
multiplied by the number of Company Shares represented by such Certificate,  and
a holder of more than one Certificate shall have the right to receive the Merger
Consideration multiplied by the number of Company Shares represented by all such
Certificates  (the  "Exchange  Merger  Consideration").   The  holders  of  such
Certificates  previously evidencing Company Shares outstanding immediately prior
to the  Effective  Time  shall  cease to have any  rights  with  respect to such
Company Shares except as otherwise provided herein or by Applicable Law.

         (b) Each Company Share held in the treasury of the Company or by any of
its  Subsidiaries and each Company Share owned by Key or any of its Subsidiaries


                                      AI-7


<PAGE>


immediately  prior to the  Effective  Time shall  automatically  be canceled and
extinguished  without any  conversion  thereof and no payment shall be made with
respect thereto.

         (c) Each share of Key Stock and all  Convertible  Securities and Option
Securities of Key issued and outstanding  immediately prior to the Merger (other
than  those  owned  directly  or  indirectly  by  the  Company  or by any of its
Subsidiaries) shall remain  outstanding.  Each share of Key Stock owned directly
or indirectly by the Company or by any of its  Subsidiaries  (including  without
limitation the Existing Key Shares) shall become  treasury  shares of Key or, at
Key's sole and  absolute  discretion,  be  canceled  and  extinguished,  and all
Convertible Securities and Option Securities of Key owned directly or indirectly
by the Company or by any of its Subsidiaries  (including  without limitation the
Existing Key Warrants) shall be canceled and extinguished, and in no event shall
any payment be made with  respect to any such  shares of Key Stock,  Convertible
Securities or Option Securities.

         (d) In lieu of issuing  fractional  shares,  Key may convert a holder's
right to receive  shares of Key Stock and New Key  Warrants  pursuant to Section
2.1(a) into a right to receive the highest  whole  number of shares of Key Stock
and of New Key Warrants constituting the Exchange Merger Consideration plus cash
equal  to the  fraction  of a share  of Key  Stock to  which  the  holder  would
otherwise be entitled multiplied by the Key Share Price, and the Exchange Merger
Consideration to which a holder is entitled shall be deemed to be such number of
shares of Key Stock plus such  number of New Key  Warrants  and such  cash.  For
purposes  of  carrying  out the  intent  of  this  Section,  Key  may  aggregate
Certificates  so that  fractional  shares of Key Stock  and  fractional  New Key
Warrants due in exchange for  multiple  Certificates  may be combined to yield a
number  of  whole  shares  and  whole  New Key  Warrants  thereof  plus a single
fraction.

         SECTION 2.2 Exchange of Certificates.

         (a) At least  twenty-four  (24) hours prior to the Effective  Time, Key
shall deposit or cause to be deposited  with a bank or trust company  designated
by Key (the "Exchange Agent"),  for the benefit of the holders of Company Shares
(other than  Dissenting  Shares),  for exchange in accordance with this Article,
through the Exchange Agent, the Merger Consideration multiplied by the number of
Company Shares issued and  outstanding  immediately  prior to the Effective Time
(other than  Company  Shares to be canceled  pursuant to Section  2.1(b) and any
Dissenting  Shares),  plus  cash in an amount  sufficient  to make  payment  for
fractional  shares,  in exchange for all of the outstanding  Company Shares (the
"Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions
from Key,  deliver the Exchange  Merger  Consideration  to be issued pursuant to
Section  2.1(a) out of the  Exchange  Fund to holders  of  Company  Shares  upon
transmittal  of  Certificates  for  exchange as provided  therein and in Section
2.2(b). The Exchange Fund shall not be used for any other purpose. Any interest,
dividends or other income  earned by the Exchange  Fund shall be for the account
of Key.

         (b)  Immediately  after  the  Effective  Time,  Key will  instruct  the
Exchange Agent to deliver (by instructions from each holder of record reasonably
satisfactory  to Key and the Exchange  Agent,  and otherwise by mail to the most
recent  address of such holder as shown on the  Company's  books and records) to
each holder of a Certificate  or  Certificates  which  immediately  prior to the
Effective Time evidenced  outstanding  Company Shares (other than Company Shares
to be canceled  pursuant to Section  2.1(b) and any  Dissenting  Shares),  (i) a
letter of transmittal (which shall specify that delivery shall be effected,  and
risk of loss and title to the Certificates shall pass, only upon proper delivery
of the  Certificates  to the  Exchange  Agent and shall be in such form and have
such other  provisions as Key may reasonably  specify) and (ii)  instructions to
effect the  surrender of the  Certificates  in exchange for the Exchange  Merger
Consideration.  Upon surrender of a Certificate for cancellation to the Exchange


                                      AI-8


<PAGE>


Agent or to such other agent or agents as may be appointed by Key together  with
such letter of transmittal, duly executed, and such other customary documents as
may be required  pursuant to such instructions  (collectively,  the "Transmittal
Documents"),  the holder of such  Certificate  shall be  entitled  to receive in
exchange  therefor the Exchange Merger  Consideration  which such holder has the
right to receive pursuant to Sections 2.1(a) and 2.1(d),  and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of  Company  Shares  which is not  registered  in the  transfer  records  of the
Company,  the Exchange Merger Consideration may be issued and paid in accordance
with this Article to a transferee  if the  Certificate  evidencing  such Company
Shares is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any  applicable  stock
transfer  taxes  have been  paid.  The  Exchange  Merger  Consideration  will be
delivered by the Exchange Agent as promptly as practicable  following  surrender
of a Certificate and the related  Transmittal  Documents,  and cash payments for
fractional  shares  may be made by check.  No  interest  will be  payable on the
Exchange Merger Consideration  regardless of any delay in making payments. Until
surrendered as contemplated by this Section, each Certificate shall be deemed at
any time after the Effective  Time to evidence  only the right to receive,  upon
such surrender, the Exchange Merger Consideration, without interest.

         (c) In the event  any  Certificate  shall  have  been  lost,  stolen or
destroyed,  upon the making of an affidavit of that fact by the person  claiming
such  Certificate  to be lost,  stolen or  destroyed  and  subject to such other
reasonable  conditions as Key may impose, the Surviving  Corporation shall issue
in exchange for such lost,  stolen or destroyed  Certificate the Exchange Merger
Consideration  deliverable in respect  thereof as determined in accordance  with
Sections  2.1(a) and 2.1(d).  Key may,  in its  reasonable  discretion  and as a
condition   precedent  to  authorizing  the  issuance  of  the  Exchange  Merger
Consideration,  require the owner of such lost, stolen or destroyed  Certificate
to provide a bond or other surety to Key and the Surviving  Corporation  in such
sum as Key may reasonably direct as indemnity against any claim that may be made
against Key or the Surviving  Corporation (and their Affiliates) with respect to
the Certificate alleged to have been lost, stolen or destroyed.

         (d) Any portion of the Exchange Fund which remains undistributed to the
holders of the Company Stock for thirty (30) days after the Effective Time shall
be delivered to Key upon demand by Key, and any holders of Certificates who have
not theretofore complied with this Article shall thereafter look only to Key for
the Exchange Merger  Consideration  to which they are entitled  pursuant to this
Article.

         (e) None of Key, the Company, the Surviving Corporation or the Exchange
Agent  shall be liable to any  holder of  Company  Shares  for any shares of Key
Stock, any New Key Warrants or cash from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.

         (f) Each of Key, the Surviving Corporation and the Exchange Agent shall
be  entitled  to deduct and  withhold  from the  Exchange  Merger  Consideration
otherwise  payable  pursuant to this  Agreement to any holder of Company  Shares
such amounts as Key, the Surviving Corporation or the Exchange Agent is required
to deduct and  withhold  with  respect to the making of such  payment  under the
Code,  or any  provision of state,  local or foreign tax law. To the extent that
amounts are so withheld by Key, the Surviving Corporation or the Exchange Agent,
such  withheld  amounts  shall be treated for all purposes of this  Agreement as
having  been paid to the holder of the  Company  Shares in respect of which such
deduction  and  withholding  was made by Key, the Surviving  Corporation  or the
Exchange Agent.


                                      AI-9


<PAGE>



         SECTION 2.3 Stock  Transfer  Books.  At the Effective  Time,  the stock
transfer  books of the  Company  shall be closed,  and there shall be no further
transfer of Company Shares thereafter on the records of the Company. On or after
the Effective Time, any Certificate  presented to the Exchange Agent, Key or the
Surviving Corporation shall be converted into the Exchange Merger Consideration.

         SECTION  2.4 Option  Securities  and  Convertible  Securities;  Payment
Rights.  At the Effective  Time, (a) each  outstanding  Option Security and each
outstanding  Convertible Security exercisable or convertible to purchase Company
Shares immediately prior to the Effective Time, shall be canceled and the holder
thereof  shall be entitled to receive,  and shall  receive,  upon payment of the
consideration  required to exercise or convert, and termination of such holder's
rights to exercise or convert,  as the case may be, all other Option  Securities
or Convertible Securities issued to such holder, shares of Key Stock and New Key
Warrants  in the  respective  amounts  issuable  with  respect  to the number of
Company Shares issuable pursuant to such Option Security or Convertible Security
so exercised or  converted,  as the case may be, as provided in Section  2.1(a),
plus cash in lieu of receipt of a fractional  share in an amount  determined  as
provided in Section 2.1(d),  and (b) each Option  Security  outstanding not then
exercisable or exercised and the conversion rights of each Convertible  Security
outstanding not then convertible or converted shall be canceled.

         SECTION 2.5 Dissenting Shares.

         (a)  Notwithstanding  any  other  provision  of this  Agreement  to the
contrary, Company Shares that are outstanding immediately prior to the Effective
Time and which are held by stockholders who shall have not voted in favor of the
Merger or  consented  thereto in writing  and who shall be entitled to and shall
have demanded  properly in writing  appraisal  rights for such Company Shares in
accordance  with Section 262 of the DGCL and who shall not have  withdrawn  such
demand  or  otherwise  have  forfeited  appraisal  rights   (collectively,   the
"Dissenting  Shares")  shall not be  converted  into or  represent  the right to
receive the Exchange Merger  Consideration.  Such stockholders shall be entitled
to receive payment of the appraised value of such Company Shares held by them in
accordance  with the provisions of the DGCL,  except that all Dissenting  Shares
held by stockholders  who shall have failed to perfect or who effectively  shall
have withdrawn,  forfeited or lost their  appraisal  rights with respect to such
Company  Shares under the DGCL shall  thereupon be deemed to have been converted
into and to have become exchangeable for, as of the Effective Time, the right to
receive,  without any interest thereon, the Exchange Merger Consideration,  upon
surrender,  in the  manner  provided  in  Section  2.2,  of the  Certificate  or
Certificates that formerly evidenced such Company Shares.

         (b) The  Company  shall  give Key  prompt  notice  of any  demands  for
appraisal  rights  received by it,  withdrawals  of such demands,  and any other
instruments served pursuant to the DGCL and received by the Company and relating
thereto.  The  Company  and  Key  shall  jointly  direct  all  negotiations  and
proceedings with respect to demands for appraisal rights under the provisions of
the DGCL. The Company shall not,  except with the prior written  consent of Key,
make any payment with respect to any demands for appraisal  rights,  or offer to
settle, or settle, any such demands.


                                    ARTICLE 3

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company  hereby  represents,  warrants and covenants to, and agrees
with, Key as follows:


                                      AI-10


<PAGE>



         SECTION 3.1 Organization and Business;  Power and Authority;  Effect of
Transaction.

         (a)  The Company:

                  (i) is a corporation  duly organized,  validly existing and in
         good standing under the laws of its  jurisdiction of  incorporation  as
         set forth in Section 3.1(a) of the Company Disclosure Schedule,

                  (ii) has all  requisite  power and  authority  (corporate  and
         other) to own or hold under  lease its  properties  and to conduct  its
         business as now  conducted  and as presently  proposed to be conducted,
         and has in full force and effect all  Governmental  Authorizations  and
         Private  Authorizations and has made all Governmental  Filings,  to the
         extent  required  for such  ownership  and  lease of its  property  and
         conduct of its business, and

                  (iii) has duly  qualified and is authorized to do business and
         is in good standing as a foreign  corporation in each  jurisdiction  (a
         true,  accurate  and  complete  list of which is set  forth in  Section
         3.1(a) of the Company  Disclosure  Schedule) in which the  character of
         its property or the nature of its business or operations  requires such
         qualification or authorization.

         (b) The Company has all requisite  power and authority  (corporate  and
other)  and has in full force and effect  all  Governmental  Authorizations  and
Private  Authorizations  in order to enable it to execute  and  deliver,  and to
perform its  obligations  under,  this  Agreement and each  Collateral  Document
executed or required to be executed  pursuant hereto or thereto or to consummate
the Merger and the Transactions;  and the execution, delivery and performance of
this Agreement and each Collateral  Document executed or required to be executed
pursuant hereto or thereto have been duly authorized by all requisite  corporate
or other action, other than that of the Company's  stockholders.  This Agreement
has been duly  executed and delivered by the Company and  constitutes,  and each
Collateral  Document  executed or required  to be  executed  pursuant  hereto or
thereto or to  consummate  the Merger and the  Transactions  when  executed  and
delivered by the Company will constitute,  legal, valid and binding  obligations
of the Company,  enforceable  in accordance  with their  respective  terms.  The
affirmative  vote or action by written  consent of a majority  of the votes that
the holders of the  outstanding  shares of Company Stock are entitled to cast is
the only vote of the holders of any class or series of the capital  stock of the
Company  necessary to approve the Merger and the  Transactions  under Applicable
Law and the Company's  Organic  Documents.  The provisions of Section 203 of the
DGCL will not apply to this Agreement, the Merger or the Transactions.

         (c) Except as set forth in  Section  3.1(c) of the  Company  Disclosure
Schedule, neither the execution and delivery of this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto, nor the
consummation of the Transactions,  nor compliance with the terms, conditions and
provisions hereof or thereof by the Company:

                  (i) will conflict with, or result in a breach or violation of,
         or constitute a default  under,  any  Applicable Law on the part of the
         Company or any Subsidiary, or will conflict with, or result in a breach
         or  violation  of,  or  constitute  a  default  under,  or  permit  the
         acceleration  of  any  obligation  or  liability  in,  or but  for  any
         requirement  of  giving  of notice  or  passage  of time or both  would
         constitute  such a conflict  with,  breach or violation  of, or default
         under, or permit any such  acceleration in, any Contractual  Obligation
         of the Company or any Subsidiary,


                                      AI-11


<PAGE>



                  (ii) will result in or permit the  creation or  imposition  of
         any Lien upon any  property  now owned or leased by the  Company or any
         Subsidiary, or

                  (iii)  will   require  any   Governmental   Authorization   or
         Governmental  Filing  or  Private  Authorization,   except  for  filing
         requirements under Applicable Law in connection with the Merger and the
         Transactions.

         (d) The  Company  does not have any  Subsidiaries  other than those set
forth on Section 3.1(d) of the Company Disclosure Schedule, each of which is (i)
wholly-owned  unless noted otherwise in Section 3.1(d) of the Company Disclosure
Schedule,  (ii) a corporation  which is duly organized,  validly existing and in
good standing under the laws of the respective state of incorporation  set forth
opposite  its name on Section  3.1(d) of the Company  Disclosure  Schedule,  and
(iii) duly qualified and in good standing as a foreign corporation in each other
jurisdiction (as shown on Section 3.1(d) of the Company Disclosure  Schedule) in
which the  character of its property or the nature of its business or operations
requires  such  qualification  or  authorization,  with full power and authority
(corporate  and other) to carry on the  business  in which it is  engaged.  Each
Subsidiary  has in full  force and effect all  Governmental  Authorizations  and
Private  Authorizations  and has made all  Governmental  Filings,  to the extent
required  for such  ownership  and  lease of its  property  and  conduct  of its
business.  The Company owns all of the  outstanding  capital  stock (as shown in
Section 3.1(d) of the Company Disclosure Schedule) of each Subsidiary,  free and
clear of all Liens  (except to the  extent  set forth in  Section  3.1(d) of the
Company  Disclosure  Schedule),  and all such stock has been duly authorized and
validly  issued and is fully paid and  nonassessable.  There are no  outstanding
Option  Securities or Convertible  Securities,  or agreements or  understandings
with respect to any of the foregoing,  of any nature whatsoever  relating to the
authorized and unissued or outstanding capital stock of any Subsidiary.

         SECTION 3.2       Financial and Other Information.

         (a) The Company has heretofore furnished to Key copies of the financial
statements of the Company and its  Subsidiaries  listed in Section 3.2(a) of the
Company Disclosure  Schedule (the "Company Financial  Statements").  The Company
Financial  Statements,  including  in each  case the  notes  thereto,  have been
prepared in accordance  with GAAP applied on a consistent  basis  throughout the
periods  covered  thereby,  except as otherwise noted therein or as set forth in
Section  3.2(a) of the  Company  Disclosure  Schedule,  are true,  accurate  and
complete,  do not contain any untrue  statement of a material fact or, except as
set forth in Schedule 3.2(a) of the Company Disclosure Schedule, omit to state a
material  fact  required by GAAP to be stated  therein or  necessary in order to
make the statements  contained  therein not  misleading,  and fairly present the
financial   condition   and  results  of  operations  of  the  Company  and  its
Subsidiaries,  on the bases therein stated,  as of the respective dates thereof,
and for the respective periods covered thereby subject, in the case of unaudited
financial  statements,  to normal year-end audit  adjustments and accruals.  The
Company will,  within  fifteen (15) business days of the date hereof  supplement
Section  3.2(a) of the  Company  Disclosure  Schedule  so as to  include a true,
accurate  and  complete  description  of  the  business,  operations,  financial
condition,   properties,  prospects  and  management  of  the  Company  and  its
Subsidiaries  of the nature and in the detail  required by  Regulation  S-K with
respect to a registration  statement filed under the Securities Act on Form S-4.
Such supplement will not contain any information (i) required to be set forth in
any Section of the Company  Disclosure  Schedule or (ii) which Adversely Affects
the Company and its Subsidiaries taken as a whole, or the ability of the Company
to perform any of the  obligations set forth in this Agreement or any Collateral
Document  executed or required to be executed  pursuant  hereto or thereto or to
consummate the Merger and the  Transactions,  except to the extent  specifically
described in Section 3.3 of the Company Disclosure Schedule.

                                      AI-12


<PAGE>



           (b)  Neither  the  Company  Disclosure  Schedule  (including  without
limitation  the  information  set  forth or to be set forth in  Schedule  3.2(a)
thereof),  the Company Financial Statements or this Agreement nor any Collateral
Document,  data,  information or statement furnished or to be furnished by or on
behalf of the Company  pursuant to this  Agreement  or any  Collateral  Document
executed or  required  to be  executed  by or on behalf of the Company  pursuant
hereto or thereto or to consummate the Merger and the Transactions,  contains or
will contain any untrue  statement  of a material  fact or omits or will omit to
state a material  fact  required to be stated  herein or therein or necessary in
order to make the statements  contained herein or therein not misleading and all
such Collateral Documents, data, information or statements are and will be true,
accurate and complete.

         (c) The Company does not own any capital stock or equity or proprietary
interest in any other Entity or enterprise,  however  organized and however such
interest may be denominated or evidenced,  except as set forth in Section 3.1(d)
or 3.2(c) of the Company Disclosure Schedule.  None of the Entities,  if any, so
set forth in Section 3.2(c) of the Company  Disclosure  Schedule is a Subsidiary
of the Company except as so set forth.  The Company owns all of the  outstanding
capital stock or equity or proprietary  interests (as shown on Section 3.2(c) of
the Company Disclosure  Schedule) of each such Entity or other enterprise,  free
and clear of all Liens (except to the extent set forth in Section  3.2(c) of the
Company  Disclosure  Schedule),  and all such  stock or  equity  or  proprietary
interests  has been duly  authorized  and  validly  issued and is fully paid and
nonassessable.  There  are  no  outstanding  Option  Securities  or  Convertible
Securities,  or  agreements  or  understandings  with  respect  to  any  of  the
foregoing,  of any nature  whatsoever,  except as described in Section 3.2(c) of
the Company Disclosure Schedule.

         SECTION  3.3  Changes in  Condition.  Since the date of the most recent
financial statements forming part of the Company Financial Statements, except to
the extent  specifically  described  in Section  3.3 of the  Company  Disclosure
Schedule,  there has been no Adverse Change in the Company and its  Subsidiaries
taken  as a  whole.  There is no Event  known  to the  Company  which  Adversely
Affects,  or in the  future  might  (so far as the  Company  can now  reasonably
foresee) Adversely Affect, the Company and its Subsidiaries taken as a whole, or
the ability of the Company to perform any of the  obligations  set forth in this
Agreement  or any  Collateral  Document  executed  or  required  to be  executed
pursuant  hereto or thereto or to  consummate  the Merger and the  Transactions,
except to the  extent  specifically  described  in  Section  3.3 of the  Company
Disclosure Schedule.

         SECTION 3.4  Liabilities.  At the date of the most recent balance sheet
forming part of the Company  Financial  Statements,  neither the Company nor any
Subsidiary  had any  obligations  or  liabilities,  past,  present or  deferred,
accrued or unaccrued, fixed, absolute,  contingent or other, except as disclosed
in such balance  sheet,  or the notes  thereto,  and since such date neither the
Company nor any  Subsidiary has incurred any such  obligations  or  liabilities,
other than  obligations  and  liabilities  incurred  in the  ordinary  course of
business  consistent  with past  practice of the  Company and its  Subsidiaries,
which  do  not,  in  the  aggregate,   Adversely  Affect  the  Company  and  its
Subsidiaries  taken as a whole  except to the extent set forth in Section 3.4 of
the Company  Disclosure  Schedule.  Neither the Company nor any  Subsidiary  has
Guaranteed  or is otherwise  primarily or  secondarily  liable in respect of any
obligation  or  liability  of any  other  Person,  except  for  endorsements  of
negotiable  instruments  for  deposit in the  ordinary  course of business or as
disclosed in the most recent balance sheet,  or the notes thereto,  forming part
of the Company Financial  Statements or in Section 3.4 of the Company Disclosure
Schedule.

         SECTION 3.5 Title to Properties; Leases.

         (a) Each of the  Company and each of its  Subsidiaries  has good legal,
indefeasible,  insurable  and  marketable  title (in fee simple if owned) to all
real  property,  if any,  reflected as an asset on the most recent balance sheet


                                      AI-13


<PAGE>


forming part of the Company Financial Statements, or owned by the Company or any
of its  Subsidiaries  for use in its  business  if not so  reflected,  and  good
indefeasible  and  merchantable   title  to  all  other  assets,   tangible  and
intangible,  reflected on such balance sheet,  or owned by the Company or any of
its  Subsidiaries  for use in its business if not so reflected,  or purported to
have been  acquired by the Company or any of its  Subsidiaries  since such date,
except  inventory  sold,  or  property,  plant  and other  equipment  used up or
retired,  since  such  date,  in each case in the  ordinary  course of  business
consistent  with past  practice of the Company  and its  Subsidiaries,  free and
clear  of all  Liens,  except  (i)  Liens  reflected  in the  Company  Financial
Statements,  (ii) Liens for current  taxes not yet due and payable,  (iii) Liens
set forth on Section 3.5(a) of the Company  Disclosure  Schedule,  and (iv) such
imperfections of title, easements, encumbrances and mortgages or other Liens, if
any, as are not,  individually  or in the  aggregate,  substantial in character,
amount or extent and do not materially detract from the value, or interfere with
the present  use,  of the  property  subject  thereto or  affected  thereby,  or
otherwise materially impair business operations. Except for financing statements
evidencing  Liens  referred to in the preceding  sentence (a true,  accurate and
complete  list and  description  of which is set forth in Section  3.5(a) of the
Company  Disclosure  Schedule),   no  financing  statements  under  the  Uniform
Commercial  Code and no other  filing  which  names  the  Company  or any of its
Subsidiaries  as debtor or which covers or purports to cover any of the property
of the  Company  or any of its  Subsidiaries  is on file in any  state  or other
jurisdiction, and neither the Company nor any Subsidiary has signed or agreed to
sign any such  financing  statement or filing or any agreement  authorizing  any
secured party thereunder to file any such financing statement or filing.  Except
as otherwise set forth in Schedule  3.5(a) of the Company  Disclosure  Schedule,
each Lease or other  occupancy or other agreement under which the Company or any
of its  Subsidiaries  holds real or personal  property has been duly authorized,
executed  and  delivered by the Company or one of its  Subsidiaries  and, to the
Company's knowledge,  information and belief, each of the other parties thereto,
and is a legal,  valid and binding  obligation of each of them,  enforceable  in
accordance with its terms.  Each of the Company and its Subsidiaries has a valid
leasehold  interest in and enjoys peaceful and undisturbed  possession under all
Leases  pursuant  to which  it holds  any real  property  or  tangible  personal
property, none of which contains any unusual or burdensome provision,  except as
described  in Section  3.5(a) of the Company  Disclosure  Schedule.  All of such
Leases are valid and  subsisting  and in full force and effect;  and neither the
Company nor any of its Subsidiaries nor, to the Company's knowledge, information
and  belief,  any  other  party  thereto,  is in  default  in  the  performance,
observance or fulfillment of any obligation,  covenant or condition contained in
any such Lease.

         (b) Section 3.5(b) of the Company Disclosure  Schedule contains a true,
accurate  and  complete  description  of all real estate  owned or leased by the
Company or any of its Subsidiaries and all Leases and an  identification  of all
material  items of fixed assets and machinery and  equipment.  None of the fixed
assets and machinery and equipment is subject to contracts of sale,  and none is
held by the Company or any of its Subsidiaries as lessee or as conditional sales
vendee under any Lease or conditional  sales contract and none is subject to any
title retention agreement,  except as set forth in Section 3.5(b) of the Company
Disclosure Schedule. The real property (other than land), fixtures, fixed assets
and all other  material  items of personal  property,  including  machinery  and
equipment,  are in a state  of  reasonable  repair  and  maintenance  and are in
serviceable operating condition.

         (c) Except as set forth in  Section  3.5(c) of the  Company  Disclosure
Schedule, to the Company's knowledge,  information and belief, all real property
owned or  leased  by the  Company  or any of its  Subsidiaries  conforms  to and
complies with all  applicable  title  covenants,  conditions,  restrictions  and
reservations and all applicable zoning,  wetlands, land use and other Applicable
Laws.


                                      AI-14


<PAGE>



         SECTION 3.6 Compliance with Private Authorizations.  Section 3.6 of the
Company  Disclosure  Schedule sets forth a true,  accurate and complete list and
description of each Private  Authorization which individually is material to the
Company and its  Subsidiaries  taken as a whole,  all of which are in full force
and effect.  Each of the Company and each  Subsidiary  has  obtained all Private
Authorizations  which are  necessary  for the  ownership  by the Company or each
Subsidiary of its properties and the conduct of its business as now conducted or
as presently  proposed to be conducted or which, if not obtained and maintained,
could,  singly  or in the  aggregate,  Adversely  Affect  the  Company  and  its
Subsidiaries  taken as a whole.  Neither the Company  nor any  Subsidiary  is in
breach or  violation  of, or is in default  in the  performance,  observance  or
fulfillment of, any Private Authorization,  and no Event exists or has occurred,
which constitutes,  or but for any requirement of giving of notice or passage of
time or both would constitute,  such a breach,  violation or default,  under any
Contractual  Obligation  or Private  Authorization,  except  for such  defaults,
breaches or violations, as do not and will not have in the aggregate any Adverse
Effect on the  Company and its  Subsidiaries  taken as a whole or the ability of
the Company to perform any of the obligations set forth in this Agreement or any
Collateral  Document  executed or required  to be  executed  pursuant  hereto or
thereto  or  to  consummate  the  Merger  and  the   Transactions.   No  Private
Authorization  is the  subject of any pending  or, to the  Company's  knowledge,
information or belief, threatened attack, revocation or termination.

         SECTION 3.7 Compliance with Governmental  Authorizations and Applicable
Law.

         (a)  Section  3.7(a) of the  Company  Disclosure  Schedule  contains  a
description of:

                  (i) all  Legal  Actions  which  are  pending  or in which  the
         Company or any of its  Subsidiaries or any of its business,  operations
         or  properties,  or any of its  officers  or  directors  in  connection
         therewith, is, or, to the Company's knowledge,  information and belief,
         at any time during the past three (3) years has been, engaged, or which
         involves,  or, to the Company's  knowledge,  information and belief, at
         any time during such  period  involved,  the  business,  operations  or
         properties  of  the  Company  or any of  its  Subsidiaries  or,  to the
         Company's  knowledge,  information  and belief,  which is threatened or
         contemplated against, or in any other manner relating Adversely to, the
         Company or any of its Subsidiaries or any of their business, operations
         or  properties,  or any of their  officers or directors  in  connection
         therewith; and

                  (ii) each  Governmental  Authorization  which  relates  to the
         business, operations,  properties,  prospects,  condition, financial or
         other,  or  results  of  operations  of  the  Company  or  any  of  its
         Subsidiaries, all of which are in full force and effect.

         (b) Each of the Company and each of its  Subsidiaries  has obtained all
Governmental Authorizations which are necessary for the ownership or uses of its
properties  and the conduct of its  business as now  conducted  or as  presently
proposed to be conducted and which, if not obtained and maintained, could singly
or in the aggregate, have any Adverse Effect on the Company and its Subsidiaries
taken as a whole.  No Governmental  Authorization  is the subject of any pending
or, to the  Company's  knowledge,  information  and belief,  threatened  attack,
revocation  or  termination.  Neither  the Company  nor any  Subsidiary  nor any
officer or director (in connection with the business,  operations and properties
of the Company or any  Subsidiary) is in or is charged with or, to the Company's
knowledge,  information and belief,  at any time during the past three (3) years
has been in or has been charged with,  or is  threatened or under  investigation
with  respect  to,  breach or  violation  of,  or  default  in the  performance,
observance or fulfillment of, any  Governmental  Authorization or any Applicable
Law,  and no Event exists or has  occurred,  which  constitutes,  or but for any
requirement  of giving of notice or passage  of time or both  would  constitute,
such a breach, violation or default, under

                                      AI-15


<PAGE>



                  (x) any  Governmental  Authorization  or any  Applicable  Law,
         except for such breaches, violations or defaults as do not and will not
         have  in the  aggregate  any  Adverse  Effect  on the  Company  and its
         Subsidiaries  taken as a whole or the ability of the Company to perform
         any of the  obligations  set forth in this  Agreement or any Collateral
         Document executed or required to be executed pursuant hereto or thereto
         or to consummate the Merger and the Transactions, or

                  (y) any  requirement of any insurance  carrier,  applicable to
         its business, operations or properties,

except as  otherwise  specifically  described  in Section  3.7(b) of the Company
Disclosure Schedule.

         (c) With respect to matters, if any, of a nature referred to in Section
3.7(a)  or 3.7(b)  of the  Company  Disclosure  Schedule,  except  as  otherwise
specifically  described in Schedule 3.7(c) of the Company  Disclosure  Schedule,
all such information and matters set forth in the Company  Disclosure  Schedule,
if adversely determined against the Company or any Subsidiary,  will not, in the
aggregate,  Adversely Affect the Company and its Subsidiaries  taken as a whole,
or the ability of the Company to perform its obligations under this Agreement or
any Collateral  Documents executed or required to be executed pursuant hereto or
thereto or to consummate the Merger and the Transactions.

         SECTION 3.8 Intangible Assets.

         (a)  Each of the  Company  and each  Subsidiary  owns or  possesses  or
otherwise  has  the  right  to use all  Governmental  Authorizations  and  other
Intangible  Assets  necessary for the present and planned  future conduct of its
business,  without  any  conflict  with the rights of others.  The  present  and
planned  future  conduct of business by the Company and each  Subsidiary  is not
dependent upon any one or more, or all, of such Governmental  Authorizations and
other Intangible  Assets or rights with respect to any of the foregoing,  except
as set forth on Section 3.8(a) of the Company Disclosure Schedule.

         (b) Section  3.8(b) of the  Company  Disclosure  Schedule  sets forth a
true,   accurate  and  complete   description   of  all  of  such   Governmental
Authorizations  and other  Intangible  Assets or rights  with  respect  thereto,
including  without  limitation the nature of the Company's and each Subsidiary's
interest in each and the extent to which the same have been duly  registered  in
the offices as indicated therein.

         SECTION 3.9 Related Transactions. Section 3.9 of the Company Disclosure
Schedule sets forth a true, accurate and complete description of any Contractual
Obligation or transaction between the Company or any of its Subsidiaries and any
of its officers,  directors,  employees,  stockholders,  or any Affiliate of any
thereof (other than reasonable compensation for services as officers,  directors
and employees),  now existing or which, to the Company's knowledge,  information
and belief,  at any time during the past three (3) years,  existed or  occurred,
including without  limitation any providing for the furnishing of services to or
by,  providing for rental of property,  real,  personal or mixed, to or from, or
providing  for the  lending  or  borrowing  of  money  to or  from or  otherwise
requiring payments to or from, any officer,  director,  stockholder or employee,
or  any  Affiliate  of  any  thereof.  All  such  Contractual   Obligations  and
transactions are and, to the Company's  knowledge,  information and belief, were
on  terms  and  conditions  no  less  favorable  to  the  Company  or any of its
Subsidiaries  than  would be  customary  for such  between  Persons  who are not
Affiliates or upon terms and conditions on which similar Contractual Obligations
and transactions with Persons who are not Affiliates could fairly and reasonably
be expected to be entered into,  except as otherwise  specifically  described in
Section 3.9 of the Company Disclosure Schedule.


                                      AI-16


<PAGE>



         SECTION 3.10  Insurance.

         (a) Section  3.10(a) of the Company  Disclosure  Schedule  includes the
insurers' names,  policy numbers,  expiration  dates,  amounts of coverage,  the
annual  premiums,  Best  policy  holder's  and  financial  size  ratings  of the
insurers,  exclusions,  deductibles and self-insured  retention and describes in
reasonable detail any  retrospective  rating plan,  fronting  arrangement or any
other  self-insurance  or  risk  assumption  agreed  to by  the  Company  or any
Subsidiary or imposed upon the Company or any  Subsidiary by any such  insurers,
as well as any self-insurance program that is in effect.

         (b) Neither the Company nor any Subsidiary is in breach or violation of
or in default  under any such  policy,  and all  premiums  due thereon have been
paid,  and each such  policy  will  continue to be in force and effect up to and
including the Closing Date. The insurance  policies so listed and identified are
sufficient in nature, scope and amounts to insure adequately (and, in any event,
in amounts  sufficient to prevent the Company or any Subsidiary  from becoming a
coinsurer  within the terms of such policies) the Company's or any  Subsidiary's
business, operations and properties.

         SECTION 3.11 Tax Matters.

         (a) Each of the Company and each of its  Subsidiaries has in accordance
with all  Applicable  Laws filed all Tax Returns which are required to be filed,
except with respect to failures to file which in the aggregate would not have an
Adverse  Effect on the Company and its  Subsidiaries  taken as a whole,  and has
paid, or made adequate provision for the payment of, all Taxes which have or may
become due and  payable  pursuant  to said  Returns  and all other  governmental
charges and assessments  received to date other than those Taxes being contested
in good  faith for which  adequate  provision  has been made on the most  recent
balance sheet forming part of the Company Financial Statements.  The Tax Returns
of the Company and each  Subsidiary  have been prepared in  accordance  with all
Applicable  Laws  and  generally  accepted  principles  applicable  to  taxation
consistently  applied.  All Taxes  which the  Company  and each  Subsidiary  are
required by law to withhold and collect have been duly  withheld and  collected,
and have been paid over, in a timely  manner,  to the proper  Authorities to the
extent due and payable.  Neither the Company nor any Subsidiary has executed any
waiver to extend,  or  otherwise  taken or failed to take any action  that would
have the effect of extending,  the applicable  statute of limitations in respect
of any Tax  liabilities  of the Company or any  Subsidiary  for the fiscal years
prior to and including the most recent fiscal year.  Adequate provision has been
made on the most recent  balance  sheet  forming  part of the Company  Financial
Statements  for all Taxes of any  kind,  including  interest  and  penalties  in
respect thereof, whether disputed or not, and whether past, current or deferred,
accrued  or  unaccrued,  fixed,  contingent,  absolute  or  other,  and  to  the
knowledge,  information  and belief of the Company there are no  transactions or
matters or any basis  which  might or could  result in  additional  Taxes of any
material nature to the Company and its  Subsidiaries  taken as a whole for which
an  adequate  reserve  has not been  provided  on such  balance  sheet.  Without
limiting the  generality  of the  foregoing,  the Company will not incur any tax
liability as a consequence of the conversion of its interest in Dawson WellTech,
L.C. or the distribution of the proceeds of such conversion to its stockholders.
Neither the Company nor any Subsidiary is a "consenting  corporation" within the
meaning of Section 341(f) of the Code.  Each of the Company and each  Subsidiary
has at all times been  taxable as a  Subchapter  C  corporation  under the Code,
except as  otherwise  set forth in  Section  3.11(a) of the  Company  Disclosure
Schedule.  Neither the Company nor any  Subsidiary has ever been a member of any
consolidated  group (other than with the Company and its  Subsidiaries)  for Tax
purposes.

         (b) Each of the  Company and each  Subsidiary  has paid all Taxes which
have  become  due  pursuant  to its  Returns  and has paid all  installments  of
estimated Taxes due and payable.

                                      AI-17


<PAGE>



         (c) From  the end of its most  recent  fiscal  year to the date  hereof
neither the Company  nor any  Subsidiary  has made any payment on account of any
Taxes except regular  payments  required in the ordinary course of business with
respect to current operations or property presently owned.

         (d) The  information  shown on the  Federal  Income Tax  Returns of the
Company and its Subsidiaries  (true,  accurate and complete copies of which have
been furnished by the Company to Key) is true,  accurate and complete and fairly
and accurately reflects the information purported to be shown. Federal and State
Income Tax Returns of the Company and its Subsidiaries have not been examined by
the  IRS or  applicable  state  Authority,  and  neither  the  Company  nor  any
Subsidiary  has been  notified of any proposed  examination,  except as shown in
Section 3.11(d) of the Company Disclosure Schedule.

         (e) Neither the Company or any Subsidiary is a party to any tax sharing
agreement or arrangement  except as set forth in Section  3.11(e) of the Company
Disclosure Schedule.

         (f) Neither the Company nor any Subsidiary is, or within five (5) years
of the date hereof has been, a "United States real property holding corporation"
as defined in Section 897 of the Code.

         SECTION 3.12  Employee Retirement Income Security Act of 1974.

         (a) Neither the Company nor any Subsidiary  (which for purposes of this
Section  shall  include any ERISA  Affiliate)  has been or is making at any time
since its  organization  any contribution to any Plans or has sponsored any Plan
or Benefit  Arrangement  except as set forth in Section  3.12(a) of the  Company
Disclosure Schedule.  As to all Plans and Benefit Arrangements listed in Section
3.12(a) of the Company Disclosure Schedule:

                  (i) all Plans and  Benefit  Arrangements  comply and have been
         administered  in form and in operation  with all  Applicable  Laws, and
         neither the Company nor any Subsidiary has received any notice from any
         Authority questioning or challenging such compliance;

                  (ii) all Plans  maintained  or  previously  maintained  by the
         Company or any  Subsidiary  that are or were  intended  to comply  with
         Sections  401 and 501 of the Code  comply and  complied  in form and in
         operation with all  applicable  requirements  of such sections,  and no
         event has occurred which will or could give rise to disqualification of
         any such Plan under such  sections or to a tax under Section 511 of the
         Code;

                  (iii) none of the assets of any Plan are  invested in employer
         securities or employer real property;

                  (iv)  there  have  been  no  "prohibited   transactions"   (as
         described  in Section  406 of ERISA or  Section  4975 of the Code) with
         respect to any Plan and  neither the  Company  nor any  Subsidiary  has
         otherwise engaged in any prohibited transaction;

                  (v) there have been no acts or omissions by the Company or any
         Subsidiary  which have  given rise to or may give rise to any  material
         fines,  penalties,  taxes or related  charges  under  Sections  502(c),
         502(i) or 4071 or ERISA or Chapter 43 of the Code for which the Company
         or any Subsidiary may be liable;

                  (vi)  there are no  Claims  (other  than  routine  claims  for
         benefits)  pending or threatened  involving such Plans or the assets of
         such Plans, and, to the Company's knowledge, information

                                      AI-18


<PAGE>



         and  belief,  no facts  exist  which could give rise to any such Claims
         (other than routine claims for benefits);

                  (vii) no such Plan is  subject  to Title IV of  ERISA,  or, if
         subject,  there  have been no  "reportable  events"  (as  described  in
         Section 4043 of ERISA),  and no steps have been taken to terminate  any
         such Plan;

                  (viii) all group health Plans of the Company or any Subsidiary
         have  been   operated  in   compliance   with  the  group  health  plan
         continuation coverage requirements of COBRA;

                  (ix) actuarially  adequate  accruals for all obligations under
         the Plans are  reflected in the most recent  balance sheet forming part
         of the Company Financial  Statements and such obligations include a pro
         rata amount of the  contributions  which would otherwise have been made
         in accordance  with past practices for the Plan years which include the
         Closing Date;

                  (x)  neither the  Company  nor any  Subsidiary  nor any of its
         respective  directors,  officers,  employees or any other fiduciary has
         committed  any breach of fiduciary  responsibility  imposed by ERISA or
         any  similar  Applicable  Law that  would  subject  the  Company or any
         Subsidiary or any of its respective directors, officers or employees to
         liability under ERISA or any similar Applicable Law;

                  (xi) no Plan which is subject to Part 3 of Subtitle B of Title
         I of  ERISA or  Section  412 of the  Code  had an  accumulated  funding
         deficiency  (as  defined in Section 302 of ERISA and Section 412 of the
         Code),  whether or not  waived,  as of the last day of the most  recent
         fiscal  year of such Plan to which  Part 3 of  Subtitle B of Title I of
         ERISA  or  Section  412 of the  Code  applied,  nor  would  have had an
         accumulated funding deficiency on such date if such year were the first
         year of such Plan to which Part 3 of  Subtitle B of Title I of ERISA or
         Section 412 of the Code applied;

                  (xii)  no  material  liability  to the  PBGC  has  been  or is
         expected by the Company to be incurred by the Company or any Subsidiary
         with  respect  to any Plan,  and  there has been no event or  condition
         which presents a material risk of termination of any Plan by the PBGC;

                  (xiii)  neither the Company nor any  Subsidiary is or ever has
         been a party to any  Multiemployer  Plan or made  contributions  to any
         such Plan;

                  (xiv)  except  as set  forth in  Section  3.12(a)(xiv)  of the
         Company Disclosure Schedule (which entry, if applicable, shall indicate
         the present  value of  accumulated  plan  liabilities  calculated  in a
         manner  consistent  with FAS 106 and  actual  annual  expense  for such
         benefits  for each of the  last  two (2)  years)  and  pursuant  to the
         provisions of COBRA,  neither the Company nor any Subsidiary  maintains
         any Plan that provides  benefits  described in Section 3(1) of ERISA to
         any former employees or retirees of the Company or any Subsidiary; and

                  (xv) the Company has made  available  to Key a copy of the two
         most recently filed Federal Form 5500 series and accountant's  opinion,
         if  applicable,  for  each  Plan  (and the two  most  recent  actuarial
         valuation reports for each Plan, if any, that is subject to Title IV of
         ERISA),  and all information  provided by the Company to any actuary in
         connection with the preparation of any such actuarial  valuation report
         was true, accurate and complete in all material respects.


                                      AI-19


<PAGE>



         (b) The execution,  delivery and  performance of this Agreement and the
Collateral  Documents  executed or required to be executed  pursuant  hereto and
thereto will not involve any prohibited  transaction within the meaning of ERISA
or Section 4975 of the Code.

         SECTION 3.13 Absence of Sensitive Payments.  Neither the Company or any
Subsidiary nor, to the Company's  knowledge,  information and belief, any of its
or any of their officers, directors, employees, agents or other representatives,
has (a) made any  contributions,  payments or gifts to or for the private use of
any  governmental  official,  employee or agent where  either the payment or the
purpose of such  contribution,  payment or gift is illegal under the laws of the
United States or the  jurisdiction  in which made, (b) established or maintained
any  unrecorded  fund or asset for any  purpose or made any false or  artificial
entries on its books,  or (c) made any payments to any person with the intention
or  understanding  that any part of such  payment was to be used for any purpose
other than that described in the documents supporting the payment.

         SECTION 3.14 Inapplicability of Specified Statutes. Neither the Company
nor any  Subsidiary  is a "holding  company",  or a  "subsidiary  company" or an
"affiliate"  of a "holding  company",  as such  terms are  defined in the Public
Utility Holding Company Act of 1935, as amended, or an "investment company" or a
company  "controlled"  by or acting on behalf  of an  "investment  company",  as
defined in the Investment  Company Act of 1940, as amended,  or a "carrier" or a
person which is in control of a "carrier",  as defined in section 11301 of Title
49, U.S.C.

         SECTION 3.15  Authorized and Outstanding Capital Stock.

         (a) The authorized and  outstanding  capital stock of the Company is as
set forth in Section 3.15(a) of the Company Disclosure Schedule,  including that
there are an aggregate of 352,941  shares of Company Stock  outstanding.  All of
such outstanding  capital stock has been duly authorized and validly issued,  is
fully paid and  nonassessable  and is not subject to any  preemptive  or similar
rights.  Except  as set  forth in  Section  3.15(a)  of the  Company  Disclosure
Schedule, (i) there is neither outstanding nor has the Company or any Subsidiary
agreed to grant or issue any shares of its capital stock or any Option  Security
or  Convertible  Security,  and (ii) neither the Company nor any Subsidiary is a
party to or is bound by any agreement, put or commitment pursuant to which it is
obligated to purchase,  redeem or otherwise  acquire any shares of capital stock
or any Option Security or Convertible Security.  Between the date hereof and the
Closing,  the Company will not, and will not permit any  Subsidiary  to,  issue,
sell or purchase or agree to issue,  sell or purchase  any capital  stock or any
Option Security or Convertible Security of the Company or any Subsidiary, except
as set forth in Section 3.15(a) of the Company  Disclosure  Schedule.  As of the
Effective  Time,  the  rights  of the  holders  of  all  Option  Securities  and
Convertible  Securities  issued by the  Company  to  exercise  or  convert  such
Securities shall have been terminated pursuant to the terms thereof.

         (b) All of the outstanding capital stock of the Company is owned by the
stockholders as set forth in Section 3.15(b) of the Company Disclosure Schedule,
to the Company's knowledge, information and belief, free and clear of all Liens.
To the Company's  knowledge,  information and belief, no Person, and no group of
Persons  acting in concert,  owns as much as five percent (5%) of the  Company's
outstanding Common Stock, and the Company is not controlled by any other Person,
except as set forth in Section 3.15(b) of the Company Disclosure Schedule.


                                      AI-20


<PAGE>



         SECTION 3.16 Employment Arrangements.

         (a)  Neither  the  Company nor any  Subsidiary  has any  obligation  or
liability,  contingent or other,  under any Employment  Arrangement,  other than
those listed or described in Section 3.16(a) of the Company Disclosure Schedule.
Except as described in Section 3.16(a) of the Company Disclosure  Schedule,  (i)
none of the  employees  of the  Company  or any  Subsidiary  is now,  or, to the
Company's knowledge,  information and belief, during the past five (5) years has
been,  represented  by any labor union or other employee  collective  bargaining
organization, or are now, or, to the Company's knowledge, information and belief
during  the  past  five (5)  years  have  been,  parties  to any  labor or other
collective bargaining agreement, (ii) there are no pending grievances,  disputes
or controversies  with any union or any other employee or collective  bargaining
organization  of such  employees,  or  threats of  strikes,  work  stoppages  or
slowdowns or any pending demands for collective bargaining by any union or other
such organization,  and (iii) neither the Company or any Subsidiaries nor any of
their employees is now, or, to the Company's knowledge,  information and belief,
during the past five (5) years has been,  subject to or  involved  in or, to the
Company's  knowledge,   information  and  belief,  threatened  with,  any  union
elections, petitions therefore or other organizational or recruiting activities.
The Company and each Subsidiary  have performed all  obligations  required to be
performed under all Employment  Arrangements  and are not in breach or violation
of or in default or arrears  under any of the terms,  provisions  or  conditions
thereof. Section 3.16(a) of the Company Disclosure Schedule sets forth the basis
of funding,  and the current status of, any past service  liability with respect
to each Employment Arrangement to which the same is applicable.

         (b) Except as set forth on Schedule  3.16(b),  no employee shall accrue
or receive  additional  benefits,  service or accelerated  rights to payments of
benefits  under any Employment  Arrangement,  including the right to receive any
parachute payment, as defined in Section 280G of the Code, or become entitled to
severance,  termination  allowance or similar payments as a result,  directly or
indirectly, of the transactions contemplated by this Agreement.

         (c)  The  Company   considers   its  and  each  of  its   Subsidiaries'
relationships with employees to be good.

         SECTION 3.17 Material Agreements.

         (a) Listed on Section  3.17(a) of the Company  Disclosure  Schedule are
all Material  Agreements  relating to the ownership or operation of the business
and property of the Company or any of its Subsidiaries presently held or used by
the  Company  or any  such  Subsidiary  or to  which  the  Company  or any  such
Subsidiary is a party or to which it or any of its property is subject or bound.
True,  accurate and complete copies of each of the Material Agreements have been
furnished by the Company to Key (or true,  accurate  and  complete  descriptions
thereof  have  been set  forth in  Section  3.17(a)  of the  Company  Disclosure
Schedule,  if any  such  Material  Agreements  are  oral).  All of the  Material
Agreements are valid, binding and legally enforceable obligations of the parties
thereto,  and the Company or one of its  Subsidiaries  is validly  and  lawfully
operating  its  business  and owning  its  property  under each of the  Material
Agreements.  The Company and each  Subsidiary have duly complied with all of the
terms and conditions of each Material  Agreement and have not done or performed,
or  failed to do or  perform  (and  there is no  pending  or, to the  knowledge,
information and belief of the Company,  threatened Claim that the Company or any
Subsidiary  has not so complied,  done and  performed or fail to do and perform)
any act which would invalidate or provide grounds for the other party thereto to
terminate  (with or  without  notice,  passage  of time or both)  such  Material
Agreement  or impair the  rights or  benefits,  or  increase  the costs,  of the
Company or any Subsidiary, under any of the Material Agreements.

                                      AI-21


<PAGE>



         (b) Each Material  Agreement,  if any, set forth in Section  3.17(a) of
the Company Disclosure Schedule calling for the delivery of goods or merchandise
or the  performance  of services can be satisfied or performed by the Company or
one of its Subsidiaries at margins providing an operating profit,  except as set
forth in Section 3.17(b) of the Company Disclosure Schedule.

         SECTION 3.18 Ordinary Course of Business.  Each of the Company and each
of its  Subsidiaries,  from the end of its most  recent  fiscal year to the date
hereof,  and until the Closing  Date,  except (i) as may be described on Section
3.18 of the Company  Disclosure  Schedule,  (ii) as may be required expressly by
the terms of this  Agreement,  (iii) as are  reflected in the Company  Financial
Statements,  or (iv) as may be consented to by Key,  which  consent shall not be
unreasonably withheld, conditioned or delayed:

                  (a) has operated,  and will continue to operate,  its business
         in the normal,  usual and customary  manner in the ordinary and regular
         course of business, consistent with prior practice;

                  (b) has not sold or  otherwise  disposed of or  contracted  to
         sell or otherwise dispose of, and will not sell or otherwise dispose of
         or contract to sell or otherwise  dispose of, any of its  properties or
         assets,  other than in the ordinary  course of business,  or any of the
         Existing Key Shares or Existing Key Warrants;

                  (c)  except in each case in the ordinary course of business,

                           (i)  has  not   incurred   and  will  not  incur  any
                  obligations or liabilities (fixed, contingent or other);

                           (ii) has not  entered  and will  not  enter  into any
                  commitments; and

                           (iii) has not  canceled and will not cancel any debts
                  or claims;

                  (d) has not made or  committed  to make,  and will not make or
         commit to make,  any  additions  to its  property or any  purchases  of
         machinery or equipment, except for normal maintenance and replacements;

                  (e) has not  discharged or satisfied and will not discharge or
         satisfy any Lien,  and has not paid and will not pay any  obligation or
         liability  (absolute or contingent)  other than current  liabilities or
         obligations under contracts then existing or thereafter entered into in
         the ordinary course of business and  commitments  under Leases existing
         on that date or  incurred  since  that date in the  ordinary  course of
         business;

                  (f)  has not created or permitted to be created, and will not 
         create or permit to be created, any Lien on any of its tangible 
         property;

                  (g)  has not transferred or created or permitted to be 
         created, and will not transfer or create or permit to be created, any 
         Lien on any Intangible Assets;

                  (h) has not increased  and will not increase the  compensation
         payable  or to  become  payable  to  any of  its  directors,  officers,
         employees,  advisers,  consultants,  salesmen  or agents  or  otherwise
         alter, modify or change the terms of their employment or engagement;


                                      AI-22


<PAGE>



                  (i) has not suffered and will not suffer any material  damage,
         destruction  or loss  (whether  or not  covered  by  insurance)  or any
         acquisition or taking of property by any Authority;

                  (j)  has not waived and will not waive any rights of material
         value without fair and adequate consideration;

                  (k)  has not experienced any work stoppage;

                  (l) has not entered into, amended or terminated,  and will not
         enter into, amend or terminate, any Lease, Governmental  Authorization,
         Private Authorization,  Material Agreement or Employment Arrangement or
         any Contractual Obligation or transaction with any Affiliate;

                  (m) has not  amended  or  terminated  and  will  not  amend or
         terminate,  and  has  kept  and  will  keep in full  force  and  effect
         including  without  limitation  renewing  to the  extent the same would
         otherwise expire or terminate, all insurance policies and coverage;

                  (n)  has not, and will not have, declared, made or paid, or 
         agreed to declare, make or pay, any Distribution; and

                  (o) has not  entered  into and will not  enter  into any other
         transaction or series of related  transactions which individually or in
         the aggregate is material to the Company and its Subsidiaries  taken as
         a whole, except in the ordinary course of business.

         SECTION 3.19 Bank Accounts, Etc. Section 3.19 of the Company Disclosure
Schedule  contains a true,  accurate and complete  list as of the date hereof of
all banks, trust companies, savings and loan associations and brokerage firms in
which the Company or any Subsidiary has an account or a safe deposit box and the
names of all Persons authorized to draw thereon,  to have access thereto,  or to
authorize transactions therein, the names of all Persons, if any, holding powers
of attorney from the Company or any Subsidiary and a summary statement as to the
terms  thereof.  The Company  agrees that prior to the Closing  Date it will not
make or permit to be made any change affecting any bank, trust company,  savings
and loan association,  brokerage firm or safe deposit box or in the names of the
Persons  authorized  to draw  thereon,  to have access  thereto or to  authorize
transactions  therein  or in such  powers of  attorney,  or open any  additional
accounts or boxes or grant any  additional  powers of attorney,  without in each
case obtaining the prior written consent of Key.

         SECTION  3.20  Adverse  Restrictions.   Neither  the  Company  nor  any
Subsidiary  is a party to or subject to, nor is any of its property  subject to,
any  Applicable  Law,  Governmental   Authorization,   Contractual   Obligation,
Employment  Arrangement,  Material  Agreement or Private  Authorization,  or any
other  obligation or restriction of any kind or character,  which now or, as far
as the  Company can now  reasonably  foresee,  at any time in the future  could,
individually  or  in  the  aggregate,  be  unduly  burdensome  or  which  could,
individually or in the aggregate, have any Adverse Effect on the Company and its
Subsidiaries  taken as a whole,  except  as set  forth  in  Section  3.20 of the
Company Disclosure Schedule.

         SECTION 3.21 Broker or Finder.  No Person  assisted in or brought about
the  negotiation  of this  Agreement,  the Merger or the  subject  matter of the
Transactions  in the  capacity  of  broker,  agent or finder  or in any  similar
capacity on behalf of the Company or to the knowledge, information and belief of
the Company or any stockholder of the Company.


                                      AI-23


<PAGE>



         SECTION 3.22 Personal Injury or Property Damage;  Warranty Claims; Etc.
Except as set forth in Section 3.22 of the Company Disclosure Schedule,  neither
the  Company  nor any  Subsidiary  or any Person  acting  for or on its  behalf,
including without limitation any insurance carrier,  has paid, to the knowledge,
information  and belief of the  Company,  at any time  during the past three (3)
years, and there is not now pending or, to the knowledge, information and belief
of the Company,  threatened or existing any basis for any Claim relating to, any
damages to any third party for injuries to Persons or damage to property, or for
breach  of  warranty,  which  if  determined  adversely  to the  Company  or any
Subsidiary,  individually  or in the aggregate  (taking into account  unasserted
Claims of a similar  nature),  could have any Adverse  Effect on the Company and
its Subsidiaries taken as a whole.

         SECTION 3.23 Environmental Matters.

         (a) Except as set forth in Section  3.23(a) of the  Company  Disclosure
Schedule, the Company and each Subsidiary:

                  (i) to the knowledge,  information  and belief of the Company,
         has not been notified  that it is  potentially  liable  under,  has not
         received any request for information or other correspondence concerning
         its potential liability with respect to any site or facility under, and
         is not a  "potentially  responsible  party"  under,  the  Comprehensive
         Environmental  Response,  Compensation  and  Liability  Act of 1980, as
         amended,  the Resource  Conservation  Recovery Act, as amended,  or any
         similar state law;

                  (ii) has not  entered  into or received  any  consent  decree,
         compliance   order  or   administrative   order   issued   pursuant  to
         Environmental Laws;

                  (iii) is not a party  in  interest  or in  default  under  any
         judgment,  order, writ,  injunction or decree of any final order issued
         pursuant to Environmental Laws;

                  (iv) is,  to the  knowledge,  information  and  belief  of the
         Company,  in substantial  compliance in all material  respects with all
         Environmental  Laws,  has,  to  Company's  knowledge,  information  and
         belief,  obtained all Environmental  Permits, and is not the subject of
         or, to the Company's knowledge, information and belief, threatened with
         any Legal  Action  involving  a demand for  damages or other  potential
         liability  including  any Lien with respect to material  violations  or
         material breaches of any Environmental Law.

                  (v) the Company has no knowledge of any past or present  Event
         related  to the  Company  or  any  Subsidiary  or  its or any of  their
         business,  operations or property which Event,  individually  or in the
         aggregate,  may interfere with or prevent continued material compliance
         with  all  Environmental  Laws,  or  which,   individually  or  in  the
         aggregate, will form the basis of any material Claim for the release or
         threatened release into the environment, of any Hazardous Material.

         (b) Except as set forth in Section  3.23(b) of the  Company  Disclosure
Schedule:

                  (i) no unauthorized disposal,  release, burial or placement of
         Hazardous  Materials  which to  Company's  knowledge,  information  and
         belief and due to the  activities  of the Company  could form the basis
         for a material Claim has occurred:


                                      AI-24


<PAGE>



                           (A) on any  property or  facility  owned or leased by
                  the  Company or any  Subsidiary  during  the period  that such
                  facilities and properties were owned or leased by it or,

                           (B) to the knowledge,  information  and belief of the
                  Company, at any other time or at any other facility or site to
                  which  Hazardous  Materials from the Company or any Subsidiary
                  may have been taken.

                  (ii) to the knowledge,  information and belief of the Company,
         neither  the  Company  nor  any  Subsidiary  has  any  above-ground  or
         underground fuel storage tanks on property owned or leased by it.

         SECTION  3.24  Solvency.  As of the  execution  and  delivery  of  this
Agreement,  and after giving  effect to the  consummation  of the Merger and the
Transactions,  the Company and the Company and its Subsidiaries taken as a whole
are and, as of the Closing Date, will be solvent. The Company will not incur any
tax liability as a consequence of the Merger to the extent, if any, that the tax
basis of its assets may be less than its liabilities.

         SECTION 3.25 Compliance with Regulations Relating to Securities Credit.
None of the  borrowings,  if any, of the Company  were  incurred or used for the
purpose  of  purchasing  or  carrying  any  security  which  at the  date of its
acquisition  was, or any  security  which now is,  margin  stock or other margin
security  within the meaning of  Regulation T of the Margin Rules or a "security
that is publicly held," within the meaning of the Margin Rules,  and neither the
Company nor any Subsidiary owns any margin stock or other margin security,  or a
"security that is publicly held", and neither the Company nor any Subsidiary has
any present intention of acquiring any margin stock or other margin security, or
any "security that is publicly held".

         SECTION 3.26 Materiality.  The representations and warranties set forth
in this  Article  would in the  aggregate  be true and correct  even without the
materiality  exceptions or qualifications  contained therein or set forth in the
Company  Disclosure  Schedule,  except for such  exceptions  and  qualifications
including without limitation those set forth in the Company Disclosure  Schedule
which, in the aggregate for all such representations and warranties, are not and
could  not  reasonably  be  expected  to be  Adverse  to  the  Company  and  its
Subsidiaries taken as a whole.

         SECTION 3.27 Continuing  Representation and Warranty.  Except for those
representations  and  warranties  which speak as of a specific  date, all of the
representations and warranties of the Company set forth in this Article shall be
true and  correct on the  Closing  Date with the same force and effect as though
made on and as of that date and those, if any, which speak as of a specific date
shall be true and correct on the Closing Date.


                                    ARTICLE 4

                      REPRESENTATIONS AND WARRANTIES OF KEY

         Key represents, warrants and covenants to, and agrees with, the Company
as follows:


                                      AI-25


<PAGE>



         SECTION 4.1 Organization and Business;  Power and Authority;  Effect of
Transaction.

         (a)  Key

                  (i) is a corporation  duly organized,  validly existing and in
         good standing under the laws of its  jurisdiction of  incorporation  as
         set forth in Section 4.1(a) of the Key Disclosure Schedule,

                  (ii) has all  requisite  power and  authority  (corporate  and
         other) to own or hold under  lease its  properties  and to conduct  its
         business as now  conducted  and as presently  proposed to be conducted,
         and has in full force and effect all  Governmental  Authorizations  and
         Private  Authorizations and has made all Governmental  Filings,  to the
         extent  required  for such  ownership  and  lease of its  property  and
         conduct of its business, and

                  (iii) has duly  qualified and is authorized to do business and
         is in good standing as a foreign  corporation in each  jurisdiction  (a
         true,  accurate  and  complete  list of which is set  forth in  Section
         4.1(a) of the Key  Disclosure  Schedule) in which the  character of its
         property or the nature of its  business  or  operations  requires  such
         qualification or authorization.

         (b) Key has all requisite power and authority (corporate and other) and
has in full  force  and  effect  all  Governmental  Authorizations  and  Private
Authorizations in order to enable it to execute and deliver,  and to perform its
obligations  under,  this  Agreement and each  Collateral  Document  executed or
required to be executed  pursuant  hereto or thereto or to consummate the Merger
and the  Transactions;  and the  execution,  delivery  and  performance  of this
Agreement  and each  Collateral  Document  executed  or  required to be executed
pursuant hereto or thereto have been duly authorized by all requisite  corporate
or other action, other than that of Key's stockholders.  This Agreement has been
duly executed and delivered by Key and constitutes, and each Collateral Document
executed or required to be executed  pursuant hereto or thereto or to consummate
the  Merger  and the  Transactions  when  executed  and  delivered  by Key  will
constitute,  legal,  valid  and  binding  obligations  of  Key,  enforceable  in
accordance  with  their  respective  terms.  The  affirmative  vote or action by
written  consent of  two-thirds  (2/3rds)  of the votes that the  holders of the
outstanding  shares of Key Stock  are  entitled  to cast is the only vote of the
holders of any class or series of the capital  stock of Key necessary to approve
the  Merger  and  the  Transactions  under  Applicable  Law  and  Key's  Organic
Documents.  The  provisions  of Section 3-602 of the MGCL will not apply to this
Agreement, the Merger or the Transactions.

         (c)  Except  as set  forth  in  Section  4.1(c)  of the Key  Disclosure
Schedule, neither the execution and delivery of this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto, nor the
consummation of the Transactions,  nor compliance with the terms, conditions and
provisions hereof or thereof by Key or any Subsidiary:

                  (i) will conflict with, or result in a breach or violation of,
         or constitute a default under, any Applicable Law on the part of Key or
         any  Subsidiary  or will  conflict  with,  or  result  in a  breach  or
         violation of, or constitute a default under, or permit the acceleration
         of any obligation or liability in, or but for any requirement of giving
         of notice or passage of time or both would  constitute  such a conflict
         with,  breach or  violation  of, or default  under,  or permit any such
         acceleration in, any Contractual Obligation of Key or any Subsidiary,

          (ii) will result in or permit the creation or  imposition  of any Lien
     upon any property now owned or leased by Key or any Subsidiary, or


                                      AI-26


<PAGE>



                  (iii)  will   require  any   Governmental   Authorization   or
         Governmental  Filing  or  Private  Authorization,   except  for  filing
         requirements under Applicable Law in connection with the Merger and the
         Transactions  and as the  Securities  Act  and  the  Exchange  Act  and
         applicable  state  securities  laws may apply to compliance by Key with
         the provisions of this Agreement and the Registration  Rights Agreement
         relating to stockholder approval and registration rights, respectively.

         (d) Key does not have any  Subsidiaries  other  than those set forth on
Section 4.1(d) of the Key Disclosure Schedule, each of which is (i) wholly-owned
unless noted otherwise in Section 4.1(d) of the Key Disclosure Schedule,  (ii) a
corporation which is duly organized, validly existing and in good standing under
the laws of the respective state of incorporation set forth opposite its name on
Section 4.1(d) of the Key Disclosure  Schedule,  and (iii) duly qualified and in
good standing as a foreign  corporation in each other  jurisdiction (as shown on
Section  4.1(d) of the Key  Disclosure  Schedule) in which the  character of its
property or the nature of its business or operations requires such qualification
or authorization,  with full power and authority  (corporate and other) to carry
on the business in which it is engaged.  Each  Subsidiary  has in full force and
effect all Governmental  Authorizations and Private  Authorizations and has made
all Governmental Filings, to the extent required for such ownership and lease of
its  property  and  conduct  of its  business.  Key owns all of the  outstanding
capital  stock (as shown on Section  4.1(d) of the Key  Disclosure  Schedule) of
each Subsidiary,  free and clear of all Liens (except to the extent set forth in
Section 4.1(d) of the Key Disclosure Schedule), and all such stock has been duly
authorized and validly issued and is fully paid and nonassessable.  There are no
outstanding  Option  Securities  or  Convertible  Securities,  or  agreements or
understandings  with respect to any of the foregoing,  of any nature  whatsoever
relating to the  authorized  and unissued or  outstanding  capital  stock of any
Subsidiary.

     SECTION 4.2 Financial and Other Information.

         (a) Key has heretofore furnished to the Company copies of the financial
statements  of Key and its  Subsidiaries  listed  in  Section  4.2(a) of the Key
Disclosure  Schedule  (the  "Key  Financial  Statements").   The  Key  Financial
Statements,  including  in each case the notes  thereto,  have been  prepared in
accordance  with GAAP  applied on a  consistent  basis  throughout  the  periods
covered  thereby,  except as otherwise  noted therein or as set forth in Section
4.2(a) of the Key Disclosure Schedule,  are true, accurate and complete,  do not
contain any untrue statement of a material fact or omit to state a material fact
required  by GAAP to be  stated  therein  or  necessary  in  order  to make  the
statements  contained  therein not misleading,  and fairly present the financial
condition and results of operations  of Key and its  Subsidiaries,  on the bases
therein  stated,  as of the  respective  dates  thereof,  and for the respective
periods covered thereby subject, in the case of unaudited  financial  statements
to normal  year-end audit  adjustments  and accruals.  Section 4.2(a) of the Key
Disclosure  Schedule contains a true,  accurate and complete  description of the
business, operations,  financial condition, properties, prospects and management
of Key  and  its  Subsidiaries  of the  nature  and in the  detail  required  by
Regulation  S-K  with  respect  to a  registration  statement  filed  under  the
Securities Act on Form S-4.

         (b) Neither the Key Disclosure  Schedule  (including without limitation
the  information  set  forth in  Schedule  4.2(a)  thereof),  the Key  Financial
Statements or this Agreement nor any Collateral Document,  data,  information or
statement  furnished  or to be furnished by or on behalf of Key pursuant to this
Agreement or any Collateral  Document  executed or required to be executed by or
on behalf of Key pursuant  hereto or thereto or to consummate the Merger and the
Transactions,  contains or will contain any untrue  statement of a material fact
or omits or will omit to state a material  fact  required to be stated herein or
therein or necessary in order to make the statements contained herein or therein


                                      AI-27


<PAGE>


not  misleading  and  all  such  Collateral  Documents,   data,  information  or
statements are and will be true, accurate and complete.

         (c) Key  does  not own any  capital  stock  or  equity  or  proprietary
interest in any other Entity or enterprise,  however  organized and however such
interest may be denominated or evidenced,  except as set forth in Section 4.1(d)
or 4.2(c) of the Key Disclosure Schedule.  None of the Entities,  if any, so set
forth in Section  4.2(c) of the Key  Disclosure  Schedule is a Subsidiary of Key
except as so set forth. Key owns all of the outstanding  capital stock or equity
or  proprietary  interests  (as shown on  Section  4.2(c) of the Key  Disclosure
Schedule) of each such Entity or other  enterprise,  free and clear of all Liens
(except  to the  extent  set  forth  in  Section  4.2(c)  of the Key  Disclosure
Schedule),  and all such stock or equity or proprietary  interests has been duly
authorized and validly issued and is fully paid and nonassessable.  There are no
outstanding  Option  Securities  or  Convertible  Securities,  or  agreements or
understandings  with respect to any of the foregoing,  of any nature whatsoever,
except as described in Section 4.2(c) of the Key Disclosure Schedule.

         SECTION  4.3  Changes in  Condition.  Since the date of the most recent
financial statements forming part of the Key Financial Statements, except to the
extent  specifically  described in Section 4.3 of the Key  Disclosure  Schedule,
there has been no Adverse Change in Key and its  Subsidiaries  taken as a whole.
There is no Event known to Key which Adversely  Affects,  or in the future might
(so far as Key can now reasonably  foresee) Adversely Affect, Key or Key and its
Subsidiaries  taken as a whole,  or the  ability  of Key to  perform  any of the
obligations set forth in this Agreement or any Collateral  Document  executed or
required to be executed  pursuant  hereto or thereto or to consummate the Merger
and the Transactions, except to the extent specifically described in Section 4.3
of the Key Disclosure Schedule.

         SECTION 4.4  Liabilities.  At the date of the most recent balance sheet
forming part of the Key Financial Statements, neither Key nor any Subsidiary had
any obligations or liabilities, past, present or deferred, accrued or unaccrued,
fixed, absolute, contingent or other, except as disclosed in such balance sheet,
or the notes  thereto,  and since such date neither Key nor any  Subsidiary  has
incurred  any such  obligations  or  liabilities,  other  than  obligations  and
liabilities  incurred in the ordinary  course of business  consistent  with past
practice of Key and its Subsidiaries,  which do not, in the aggregate, Adversely
Affect Key and its Subsidiaries  taken as a whole except to the extent set forth
in Section 4.4 of the Key  Disclosure  Schedule.  Neither Key nor any Subsidiary
has Guaranteed or is otherwise primarily or secondarily liable in respect of any
obligation  or  liability  of any  other  Person,  except  for  endorsements  of
negotiable  instruments  for  deposit in the  ordinary  course of business or as
disclosed in the most recent balance sheet,  or the notes thereto,  forming part
of the  Key  Financial  Statements  or in  Section  4.4 of  the  Key  Disclosure
Schedule.

         SECTION 4.5 Title to Properties; Leases.

         (a)  Each  of  Key  and  each  of  its  Subsidiaries  has  good  legal,
indefeasible,  insurable  and  marketable  title (in fee simple if owned) to all
real  property,  if any,  reflected as an asset on the most recent balance sheet
forming  part of the Key  Financial  Statements,  or  owned by Key or any of its
Subsidiaries for use in its business if not so reflected,  and good indefeasible
and merchantable title to all other assets,  tangible and intangible,  reflected
on such balance sheet, or owned by Key or any of its Subsidiaries for use in its
business if not so  reflected,  or purported to have been acquired by Key or any
of its Subsidiaries  since such date, except inventory sold, or property,  plant
and other  equipment  used up or retired,  since such date,  in each case in the
ordinary  course  of  business  consistent  with  past  practice  of Key and its
Subsidiaries, free and clear of all Liens, except (i) Liens reflected in the Key
Financial Statements, (ii) Liens for current taxes not yet due and payable, (ii)


                                      AI-28


<PAGE>


Liens set forth on Section 4.5(a) of the Key Disclosure Schedule,  and (iv) such
imperfections of title, easements, encumbrances and mortgages or other Liens, if
any, as are not,  individually  or in the  aggregate,  substantial in character,
amount or extent and do not materially detract from the value, or interfere with
the present  use,  of the  property  subject  thereto or  affected  thereby,  or
otherwise materially impair business operations. Except for financing statements
evidencing  Liens  referred to in the preceding  sentence (a true,  accurate and
complete list and description of which is set forth in Section 4.5(a) of the Key
Disclosure Schedule),  no financing statements under the Uniform Commercial Code
and no other  filing  which  names Key or any of its  Subsidiaries  as debtor or
which  covers  or  purports  to cover any of the  property  of Key or any of its
Subsidiaries is on file in any state or other jurisdiction,  and neither Key nor
any  Subsidiary  has signed or agreed to sign any such  financing  statement  or
filing or any agreement  authorizing  any secured  party  thereunder to file any
such financing  statement or filing.  Except as set forth in Schedule  4.5(a) of
the Key Disclosure  Schedule,  each Lease or other  occupancy or other agreement
under which Key or any of its Subsidiaries  holds real or personal  property has
been duly  authorized,  executed and delivered by Key or one of its Subsidiaries
and,  to Key's  knowledge,  information  and belief,  each of the other  parties
thereto,  and is a  legal,  valid  and  binding  obligation  of  each  of  them,
enforceable in accordance with its terms. Each of Key and its Subsidiaries has a
valid leasehold interest in and enjoys peaceful and undisturbed possession under
all Leases  pursuant to which it holds any real  property  or tangible  personal
property,  none of which contains any unusual or burdensome  provision except as
described in Section 4.5(a) of the Key Disclosure  Schedule.  All of such Leases
are valid and subsisting  and in full force and effect;  and neither Key nor any
of its Subsidiaries nor, to Key's knowledge,  information and belief,  any other
party thereto,  is in default in the  performance,  observance or fulfillment of
any obligation, covenant or condition contained in any such Lease.

         (b)  Section  4.5(b) of the Key  Disclosure  Schedule  contains a true,
accurate and complete  description  of all real estate owned or leased by Key or
any of its  Subsidiaries  and all Leases and an  identification  of all material
items of fixed assets and machinery and equipment.  None of the fixed assets and
machinery and equipment is subject to contracts of sale, and none is held by Key
or any of its  Subsidiaries  as lessee or as conditional  sales vendee under any
Lease or conditional  sales contract and none is subject to any title  retention
agreement, except as set forth in Section 4.5(b) of the Key Disclosure Schedule.
The real  property  (other  than  land),  fixtures,  fixed  assets and all other
material items of personal property, including machinery and equipment, are in a
state of reasonable  repair and  maintenance  and are in  serviceable  operating
condition.

         (c)  Except  as set  forth  in  Section  4.5(c)  of the Key  Disclosure
Schedule, to Key's knowledge, information and belief, all real property owned or
leased  by Key or any of its  Subsidiaries  conforms  to and  complies  with all
applicable  title covenants,  conditions,  restrictions and reservations and all
applicable zoning, wetlands, land use and other Applicable Laws.

         SECTION 4.6 Compliance with Private Authorizations.  Section 4.6 of the
Key  Disclosure  Schedule  sets forth a true,  accurate  and  complete  list and
description of each Private  Authorization which individually is material to Key
and its  Subsidiaries  taken as a  whole,  all of which  are in full  force  and
effect. Each of Key and each Subsidiary has obtained all Private  Authorizations
which  are  necessary  for  the  ownership  by Key  or  each  Subsidiary  of its
properties  and the conduct of its  business as now  conducted  or as  presently
proposed to be conducted or which, if not obtained and maintained, could, singly
or in the aggregate, Adversely Affect Key or Key and its Subsidiaries taken as a
whole.  Neither Key nor any  Subsidiary  is in breach or violation  of, or is in
default  in  the   performance,   observance  or  fulfillment  of,  any  Private
Authorization,  and no Event exists or has occurred,  which constitutes,  or but
for any  requirement  of  giving  of notice  or  passage  of time or both  would
constitute,   such  a  breach,  violation  or  default,  under  any  Contractual


                                      AI-29


<PAGE>


Obligation  or Private  Authorization,  except for such  defaults,  breaches  or
violations,  as do not and will not have in the aggregate any Adverse  Effect on
Key and its  Subsidiaries  taken as a whole or the ability of Key to perform any
of the  obligations  set  forth in this  Agreement  or any  Collateral  Document
executed or required to be executed  pursuant hereto or thereto or to consummate
the Merger and the Transactions.  No Private Authorization is the subject of any
pending  or, to Key's  knowledge,  information  or  belief,  threatened  attack,
revocation or termination.

     SECTION 4.7 Compliance with Governmental Authorizations and Applicable Law.

     (a) Section  4.7(a) of the Key Disclosure  Schedule  contains a description
of:

                  (i) all Legal Actions which are pending or in which Key or any
         of its  Subsidiaries or any of its business,  operations or properties,
         or any of its officers or directors in connection therewith, is, or, to
         Key's  knowledge,  information and belief,  at any time during the past
         three  (3) years has been,  engaged,  or which  involves,  or, to Key's
         knowledge,  information  and  belief,  at any time  during  such period
         involved,  the business,  operations or properties of Key or any of its
         Subsidiaries or, to Key's knowledge,  information and belief,  which is
         threatened or  contemplated  against,  or in any other manner  relating
         Adversely to, Key or any of its  Subsidiaries or any of their business,
         operations  or  properties,  or any of their  officers or  directors in
         connection therewith; and

                  (ii) each  Governmental  Authorization  which  relates  to the
         business, operations,  properties,  prospects,  condition, financial or
         other, or results of operations of Key or any of its Subsidiaries,  all
         of which are in full force and effect.

         (b)  Each  of  Key  and  each  of its  Subsidiaries  has  obtained  all
Governmental Authorizations which are necessary for the ownership or uses of its
properties  and the conduct of its  business as now  conducted  or as  presently
proposed to be conducted and which, if not obtained and maintained, could singly
or in the aggregate,  have any Adverse Effect on Key and its Subsidiaries  taken
as a whole. No Governmental  Authorization  is the subject of any pending or, to
Key's  knowledge,  information  and belief,  threatened  attack,  revocation  or
termination.  Neither Key nor any  Subsidiary  nor any  officer or director  (in
connection  with  the  business,   operations  and  properties  of  Key  or  any
Subsidiary)  is in or is charged with or, to Key's  knowledge,  information  and
belief,  at any time  during  the past  three  (3) years has been in or has been
charged with, or is threatened or under investigation with respect to, breach or
violation of, or default in the  performance,  observance or fulfillment of, any
Governmental  Authorization  or any  Applicable  Law, and no Event exists or has
occurred,  which constitutes,  or but for any requirement of giving of notice or
passage of time or both would constitute,  such a breach,  violation or default,
under

                  (x) any  Governmental  Authorization  or any  Applicable  Law,
         except for such breaches, violations or defaults as do not and will not
         have in the  aggregate any Adverse  Effect on Key and its  Subsidiaries
         taken  as a  whole  or  the  ability  of  Key  to  perform  any  of the
         obligations  set forth in this  Agreement  or any  Collateral  Document
         executed or required  to be executed  pursuant  hereto or thereto or to
         consummate the Merger and the Transactions, or

               (y) any requirement of any insurance  carrier,  applicable to its
          business, operations or properties,

except  as  otherwise  specifically  described  in  Section  4.7(b)  of the  Key
Disclosure Schedule.


                                      AI-30


<PAGE>



         (c) With respect to matters, if any, of a nature referred to in Section
4.7(a)  or  4.7(b)  of  the  Key  Disclosure   Schedule,   except  as  otherwise
specifically  described in Section  4.7(c) of the Key Disclosure  Schedule,  all
such  information  and  matters  set forth in the Key  Disclosure  Schedule,  if
adversely determined against Key or any Subsidiary,  will not, in the aggregate,
Adversely  Affect Key and its  Subsidiaries  taken as a whole, or the ability of
Key to perform its obligations under this Agreement or any Collateral  Documents
executed or required to be executed  pursuant hereto or thereto or to consummate
the Merger and the Transactions.

         SECTION 4.8 Intangible Assets.

         (a) Each of Key and each  Subsidiary owns or possesses or otherwise has
the right to use all Governmental  Authorizations  and other  Intangible  Assets
necessary for the present and planned  future  conduct of its business,  without
any conflict with the rights of others.  The present and planned  future conduct
of business by Key and each Subsidiary is not dependent upon any one or more, or
all, of such Governmental  Authorizations  and other Intangible Assets or rights
with respect to any of the  foregoing,  except as set forth on Section 4.8(a) of
the Key Disclosure Schedule.

         (b) Section  4.8(b) of the Key  Disclosure  Schedule sets forth a true,
accurate and complete description of all of such Governmental Authorizations and
other  Intangible  Assets or rights  with  respect  thereto,  including  without
limitation  the nature of Key's and each  Subsidiary's  interest in each and the
extent to which the same have been duly  registered  in the offices as indicated
therein.

         SECTION 4.9  Related  Transactions.  Section 4.9 of the Key  Disclosure
Schedule sets forth a true, accurate and complete description of any Contractual
Obligation or transaction  between Key or any of its Subsidiaries and any of its
officers,  directors,  employees,  stockholders, or any Affiliate of any thereof
(other than  reasonable  compensation  for services as officers,  directors  and
employees),  now existing or which, to Key's knowledge,  information and belief,
at any time  during  the past three (3) years,  existed or  occurred,  including
without  limitation  any  providing  for the  furnishing  of  services to or by,
providing  for rental of  property,  real,  personal  or mixed,  to or from,  or
providing  for the  lending  or  borrowing  of  money  to or  from or  otherwise
requiring payments to or from, any officer,  director,  stockholder or employee,
or  any  Affiliate  of  any  thereof.  All  such  Contractual   Obligations  and
transactions are and, to Key's knowledge,  information and belief, were on terms
and conditions no less favorable to Key or any of its Subsidiaries than would be
customary  for such  between  Persons who are not  Affiliates  or upon terms and
conditions  on which  similar  Contractual  Obligations  and  transactions  with
Persons who are not  Affiliates  could fairly and  reasonably  be expected to be
entered into, except as otherwise  specifically described in Schedule 4.9 of the
Key Disclosure Schedule.

         SECTION 4.10  Insurance.

         (a)  Section  4.10(a)  of the  Key  Disclosure  Schedule  includes  the
insurers' names,  policy numbers,  expiration  dates,  amounts of coverage,  the
annual  premiums,  Best  policy  holder's  and  financial  size  ratings  of the
insurers,  exclusions,  deductibles and self-insured  retention and describes in
reasonable detail any  retrospective  rating plan,  fronting  arrangement or any
other  self-insurance  or risk assumption  agreed to by Key or any Subsidiary or
imposed  upon  Key or any  Subsidiary  by any  such  insurers,  as  well  as any
self-insurance program that is in effect.

         (b) Neither Key nor any  Subsidiary  is in breach or violation of or in
default under any such policy,  and all premiums due thereon have been paid, and
each such policy will continue to be in force and effect up to and including the
Closing Date. The insurance policies so listed and identified are

                                      AI-31


<PAGE>



sufficient in nature, scope and amounts to insure adequately (and, in any event,
in amounts sufficient to prevent Key or any Subsidiary from becoming a coinsurer
within  the  terms  of  such  policies)  Key's  or  any  Subsidiary's  business,
operations and properties.

         SECTION 4.11 Tax Matters.

         (a) Each of Key and each of its Subsidiaries has in accordance with all
Applicable  Laws filed all Tax Returns  which are  required to be filed,  except
with  respect  to  failures  to file  which in the  aggregate  would not have an
Adverse Effect on Key and its  Subsidiaries  taken as a whole,  and has paid, or
made  adequate  provision for the payment of, all Taxes which have or may become
due and payable pursuant to said Returns and all other governmental  charges and
assessments  received  to date other than those Taxes  being  contested  in good
faith for which  adequate  provision  has been made on the most  recent  balance
sheet forming part of the Key Financial  Statements.  The Tax Returns of Key and
each  Subsidiary  have been prepared in accordance  with all Applicable Laws and
generally accepted principles  applicable to taxation  consistently applied. All
Taxes which Key and each  Subsidiary are required by law to withhold and collect
have been duly  withheld  and  collected,  and have been paid over,  in a timely
manner, to the proper Authorities to the extent due and payable. Neither Key nor
any Subsidiary has executed any waiver to extend,  or otherwise  taken or failed
to take any  action  that would have the  effect of  extending,  the  applicable
statute  of  limitations  in  respect  of  any  Tax  liabilities  of  Key or any
Subsidiary  for the fiscal years prior to and  including  the most recent fiscal
year.  Adequate provision has been made on the most recent balance sheet forming
part of the Key  Financial  Statements  for all  Taxes  of any  kind,  including
interest and penalties in respect thereof,  whether disputed or not, and whether
past, current or deferred, accrued or unaccrued, fixed, contingent,  absolute or
other,  and to the  knowledge,  information  and  belief  of  Key  there  are no
transactions  or matters or any basis which might or could result in  additional
Taxes of any material  nature to Key and its  Subsidiaries  taken as a whole for
which an adequate  reserve has not been provided on such balance sheet.  Neither
Key nor any  Subsidiary  is a  "consenting  corporation"  within the  meaning of
Section  341(f) of the Code.  Each of Key and each  Subsidiary  has at all times
been taxable as a Subchapter C corporation  under the Code,  except as otherwise
set forth in Section 4.11(a) of the Key Disclosure Schedule. Neither Key nor any
Subsidiary has ever been a member of any consolidated group (other than with Key
and its Subsidiaries) for Tax purposes during the past five (5) years.

         (b) Each of Key and each  Subsidiary  has paid  all  Taxes  which  have
become due  pursuant to its Returns and has paid all  installments  of estimated
Taxes due and payable.

         (c) From  the end of its most  recent  fiscal  year to the date  hereof
neither  Key nor any  Subsidiary  has made any  payment  on account of any Taxes
except regular payments required in the ordinary course of business with respect
to current operations or property presently owned.

         (d) The information  shown on the Federal Income Tax Returns of Key and
its  Subsidiaries  (true,  accurate  and  complete  copies  of which  have  been
furnished  by Key to  Key)  is  true,  accurate  and  complete  and  fairly  and
accurately  reflects the  information  purported to be shown.  Federal and State
Income Tax Returns of Key and its Subsidiaries have not been examined by the IRS
or any applicable state  Authority,  and neither Key nor any Subsidiary has been
notified of any proposed examination,  except as shown in Section 4.11(d) of the
Key Disclosure Schedule.

         (e)  Neither  Key or any  Subsidiary  is a  party  to any  tax  sharing
agreement  or  arrangement  except as set forth in  Section  4.11(e)  of the Key
Disclosure Schedule.


                                      AI-32


<PAGE>



         (f) Neither Key nor any  Subsidiary is, or within five (5) years of the
date hereof has been, a "United  States real property  holding  corporation"  as
defined in Section 897 of the Code.

         SECTION 4.12  Employee Retirement Income Security Act of 1974.

         (a) Neither Key nor any Subsidiary  (which for purposes of this Section
shall include any ERISA  Affiliate)  has been or is making at any time since its
organization  any contribution to any Plans or has sponsored any Plan or Benefit
Arrangement  except  as set  forth  in  Section  4.12(a)  of the Key  Disclosure
Schedule.  As to all Plans and Benefit Arrangements listed in Section 4.12(a) of
the Key Disclosure Schedule:

                  (i) all Plans and  Benefit  Arrangements  comply and have been
         administered  in form and in operation  with all  Applicable  Laws, and
         neither  Key nor any  Subsidiary  has  received  any  notice  from  any
         Authority questioning or challenging such compliance;

                  (ii) all Plans  maintained or previously  maintained by Key or
         any  Subsidiary  that are or were  intended to comply with Sections 401
         and 501 of the Code comply and complied in form and in  operation  with
         all applicable requirements of such sections, and no event has occurred
         which  will or could  give  rise to  disqualification  of any such Plan
         under such sections or to a tax under Section 511 of the Code;

               (iii) none of the  assets of any Plan are  invested  in  employer
          securities or employer real property;

                  (iv)  there  have  been  no  "prohibited   transactions"   (as
         described  in Section  406 of ERISA or  Section  4975 of the Code) with
         respect to any Plan and neither Key nor any  Subsidiary  has  otherwise
         engaged in any prohibited transaction;

                  (v)  there  have  been  no  acts  or  omissions  by Key or any
         Subsidiary  which have  given rise to or may give rise to any  material
         fines,  penalties,  taxes or related  charges  under  Sections  502(c),
         502(i) or 4071 or ERISA or  Chapter 43 of the Code for which Key or any
         Subsidiary may be liable;

                  (vi)  there are no  Claims  (other  than  routine  claims  for
         benefits)  pending or threatened  involving such Plans or the assets of
         such Plans,  and, to Key's knowledge,  information and belief, no facts
         exist  which could give rise to any such  Claims  (other  than  routine
         claims for benefits);

                  (vii) no such Plan is  subject  to Title IV of  ERISA,  or, if
         subject,  there  have been no  "reportable  events"  (as  described  in
         Section 4043 of ERISA),  and no steps have been taken to terminate  any
         such Plan;

                  (viii) all group  health Plans of Key or any  Subsidiary  have
         been  operated in  compliance  with the group health plan  continuation
         coverage requirements of COBRA;

                  (ix) actuarially  adequate  accruals for all obligations under
         the Plans are  reflected in the most recent  balance sheet forming part
         of the Key Financial Statements and such obligations include a pro rata
         amount of the  contributions  which would  otherwise  have been made in
         accordance  with past  practices  for the Plan years which  include the
         Closing Date;

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<PAGE>



                  (x) neither Key nor any  Subsidiary  nor any of its respective
         directors, officers, employees or any other fiduciary has committed any
         breach of  fiduciary  responsibility  imposed  by ERISA or any  similar
         Applicable  Law that would subject Key or any  Subsidiary or any of its
         respective directors, officers or employees to liability under ERISA or
         any similar Applicable Law;

                  (xi) no Plan which is subject to Part 3 of Subtitle B of Title
         I of  ERISA or  Section  412 of the  Code  had an  accumulated  funding
         deficiency  (as  defined in Section 302 of ERISA and Section 412 of the
         Code),  whether or not  waived,  as of the last day of the most  recent
         fiscal  year of such Plan to which  Part 3 of  Subtitle B of Title I of
         ERISA  or  Section  412 of the  Code  applied,  nor  would  have had an
         accumulated funding deficiency on such date if such year were the first
         year of such Plan to which Part 3 of  Subtitle B of Title I of ERISA or
         Section 412 of the Code applied;

                  (xii)  no  material  liability  to the  PBGC  has  been  or is
         expected by Key to be incurred by Key or any Subsidiary with respect to
         any Plan,  and there has been no event or  condition  which  presents a
         material risk of termination of any Plan by the PBGC;

               (xiii) neither Key nor any Subsidiary is or ever has been a party
          to any Multiemployer Plan or made contributions to any such Plan;

                  (xiv) except as set forth in Section  4.12(a)(xiv)  of the Key
         Disclosure  Schedule  (which entry,  if applicable,  shall indicate the
         present value of accumulated  plan  liabilities  calculated in a manner
         consistent with FAS 106 and actual annual expense for such benefits for
         each of the last two (2)  years)  and  pursuant  to the  provisions  of
         COBRA,  neither Key nor any Subsidiary maintains any Plan that provides
         benefits  described in Section 3(1) of ERISA to any former employees or
         retirees of Key or any Subsidiary; and

                  (xv)  Key has  made  available  to Key a copy of the two  most
         recently filed Federal Form 5500 series and  accountant's  opinion,  if
         applicable,  for each Plan (and the two most recent actuarial valuation
         reports for each Plan,  if any,  that is subject to Title IV of ERISA),
         and all  information  provided by Key to any actuary in connection with
         the  preparation  of any such  actuarial  valuation  report  was  true,
         accurate and complete in all material respects.

         (b) The execution,  delivery and  performance of this Agreement and the
Collateral  Documents  executed or required to be executed  pursuant  hereto and
thereto will not involve any prohibited  transaction within the meaning of ERISA
or Section 4975 of the Code.

         SECTION  4.13  Absence  of  Sensitive  Payments.  Neither  Key  or  any
Subsidiary nor, to Key's knowledge, information and belief, any of its or any of
their officers,  directors,  employees,  agents or other representatives has (a)
made any  contributions,  payments  or gifts  to or for the  private  use of any
governmental official, employee or agent where either the payment or the purpose
of such  contribution,  payment or gift is illegal  under the laws of the United
States or the  jurisdiction  in which made,  (b)  established  or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on its books,  or (c) made any  payments  to any person  with the  intention  or
understanding that any part of such payment was to be used for any purpose other
than that described in the documents supporting the payment.


                                      AI-34


<PAGE>



         SECTION 4.14 Inapplicability of Specified Statutes. Neither Key nor any
Subsidiary is a "holding company",  or a "subsidiary  company" or an "affiliate"
of a "holding company",  as such terms are defined in the Public Utility Holding
Company  Act of 1935,  as  amended,  or an  "investment  company"  or a  company
"controlled"  by or acting on behalf of an "investment  company",  as defined in
the Investment Company Act of 1940, as amended, or a "carrier" or a person which
is in control of a "carrier", as defined in section 11301 of Title 49, U.S.C.

         SECTION 4.15  Authorized and Outstanding Capital Stock.

         (a) The  authorized  and  outstanding  capital  stock of Key are as set
forth in Section 4.15(a) of the Key Disclosure Schedule. All of such outstanding
capital stock has been duly  authorized  and validly  issued,  is fully paid and
nonassessable and is not subject to any preemptive or similar rights.  Except as
set  forth in  Section  4.15(a)  of the Key  Disclosure  Schedule,  (i) there is
neither  outstanding nor has Key or any Subsidiary  agreed to grant or issue any
shares of its capital stock or any Option Security or Convertible Security,  and
(ii) neither Key nor any  Subsidiary is a party to or is bound by any agreement,
put or  commitment  pursuant to which it is  obligated  to  purchase,  redeem or
otherwise  acquire  any  shares  of  capital  stock or any  Option  Security  or
Convertible Security. Between the date hereof and the Closing, Key will not, and
will not permit any  Subsidiary  to, issue,  sell or purchase or agree to issue,
sell or  purchase  any  capital  stock or any  Option  Security  or  Convertible
Security  of the  Company  or any  Subsidiary,  except as set  forth in  Section
4.15(a) of the Key Disclosure Schedule.

         (b) To Key's knowledge, information and belief, no Person, and no group
of  Persons  acting  in  concert,  owns as much as five  percent  (5%) of  Key's
outstanding  Common  Stock  except as set forth in  Section  4.15(b)  of the Key
Disclosure Schedule.

         SECTION 4.16 Employment Arrangements.

         (a) Neither Key nor any  Subsidiary  has any  obligation  or liability,
contingent or other, under any Employment  Arrangement,  other than those listed
or  described  in Section  4.16(a)  of the Key  Disclosure  Schedule.  Except as
described in Section  4.16(a) of the Key  Disclosure  Schedule,  (i) none of the
employees of Key or any Subsidiary is now, or, to Key's  knowledge,  information
and belief,  during the past five (5) years has been,  represented  by any labor
union or other employee collective bargaining  organization,  or are now, or, to
Key's  knowledge,  information  and belief,  during the past five (5) years have
been, parties to any labor or other collective bargaining agreement,  (ii) there
are no pending grievances, disputes or controversies with any union or any other
employee or collective bargaining  organization of such employees, or threats of
strikes,  work  stoppages  or slowdowns  or any pending  demands for  collective
bargaining by any union or other such organization, and (iii) neither Key or any
Subsidiaries  nor  any  of  their  employees  is now  or,  to  Key's  knowledge,
information  and belief,  during the past five (5) years has been  subject to or
involved in or, to Key's knowledge, information and belief, threatened with, any
union  elections,  petitions  therefore or other  organizational  or  recruiting
activities.  Key and each Subsidiary have performed all obligations  required to
be  performed  under  all  Employment  Arrangements  and  are not in  breach  or
violation  of or in  default or arrears  under any of the terms,  provisions  or
conditions  thereof.  Section 4.16(a) of the Key Disclosure  Schedule sets forth
the basis of funding, and the current status of, any past service liability with
respect to each Employment Arrangement to which the same is applicable.

         (b) Except as set forth on Schedule  4.16(b),  no employee shall accrue
or receive  additional  benefits,  service or accelerated  rights to payments of
benefits  under any Employment  Arrangement,  including the right to receive any


                                      AI-35


<PAGE>


parachute payment, as defined in Section 280G of the Code, or become entitled to
severance,  termination  allowance or similar payments as a result,  directly or
indirectly, of the transactions contemplated by this Agreement.

         (c) Key considers its and each of its Subsidiaries'  relationships with
employees to be good.

         SECTION 4.17 Material Agreements.

         (a) Listed on Section  4.17(a) of the Key  Disclosure  Schedule are all
Material  Agreements  relating to the ownership or operation of the business and
property of Key or any of its Subsidiaries  presently held or used by Key or any
Subsidiary  or to which Key or any such  Subsidiary is a party or to which it or
any of its property is subject or bound.  True,  accurate and complete copies of
each of the Material  Agreements  have been  furnished by Key to the Company (or
true, accurate and complete  descriptions thereof have been set forth in Section
4.17(a) of the Key  Disclosure  Schedule,  if any such Material  Agreements  are
oral). All of the Material Agreements are valid, binding and legally enforceable
obligations  of the  parties  thereto,  and  Key or one of its  Subsidiaries  is
validly and lawfully  operating its business and owning its property  under each
of the Material Agreements.  Key and each Subsidiary have duly complied with all
of the terms and  conditions  of each  Material  Agreement  and have not done or
performed,  or failed  to do or  perform  (and  there is no  pending  or, to the
knowledge,  information  and  belief of Key,  threatened  Claim  that Key or any
Subsidiary  has not so complied,  done and  performed or fail to do and perform)
any act which would invalidate or provide grounds for the other party thereto to
terminate  (with or  without  notice,  passage  of time or both)  such  Material
Agreement or impair the rights or benefits, or increase the costs, of Key or any
Subsidiary, under any of the Material Agreements.

         (b) Each Material  Agreement,  if any, set forth in Section  4.17(a) of
the Key Disclosure  Schedule calling for the delivery of goods or merchandise or
the  performance  of services can be satisfied or performed by Key or one of its
Subsidiaries at margins  providing an operating  profit,  except as set forth in
Section 4.17(b) of the Key Disclosure Schedule.  No Material Agreement calls for
the  delivery  of goods or  merchandise  in which Key or any  Subsidiary  has an
interest.

         SECTION 4.18 Ordinary  Course of Business.  Each of Key and each of its
Subsidiaries,  from the end of its most recent  fiscal year to the date  hereof,
and until the Closing  Date,  except (i) as may be  described on Section 4.18 of
the Key Disclosure  Schedule,  (ii) as may be required expressly by the terms of
this Agreement,  (iii) as are reflected in Key Financial Statements,  or (iv) as
may be consented  to by the Company,  which  consent  shall not be  unreasonably
withheld, conditioned or delayed:

                  (a) has operated,  and will continue to operate,  its business
         in the normal,  usual and customary  manner in the ordinary and regular
         course of business, consistent with prior practice;

                  (b) has not sold or  otherwise  disposed of or  contracted  to
         sell or otherwise dispose of, and will not sell or otherwise dispose of
         or contract to sell or otherwise  dispose of, any of its  properties or
         assets, other than in the ordinary course of business;

                  (c)  except in each case in the ordinary course of business,

                           (i)  has not incurred and will not incur any 
                  obligations or liabilities (fixed, contingent or other);

                           (ii)  has not entered and will not enter into any
                  commitments; and


                                      AI-36


<PAGE>



                           (iii)  has not canceled and will not cancel any 
                   debts or claims;

                  (d) has not made or  committed  to make,  and will not make or
         commit to make,  any  additions  to its  property or any  purchases  of
         machinery or equipment, except for normal maintenance and replacements;

                  (e) has not  discharged or satisfied and will not discharge or
         satisfy any Lien,  and has not paid and will not pay any  obligation or
         liability  (absolute or contingent)  other than current  liabilities or
         obligations under contracts then existing or thereafter entered into in
         the ordinary course of business and  commitments  under Leases existing
         on that date or  incurred  since  that date in the  ordinary  course of
         business;

                  (f)  has not created or permitted to be created, and will not 
         create or permit to be created, any Lien on any of its tangible 
         property;

                  (g)  has not transferred or created or permitted to be
         created, and will not transfer or create or permit to be created, 
         any Lien on any Intangible Assets;

                  (h) has not increased  and will not increase the  compensation
         payable  or to  become  payable  to  any of  its  directors,  officers,
         employees,  advisers,  consultants,  salesmen  or agents  or  otherwise
         alter, modify or change the terms of their employment or engagement;

                  (i) has not suffered and will not suffer any material  damage,
         destruction  or loss  (whether  or not  covered  by  insurance)  or any
         acquisition or taking of property by any Authority;

                  (j)  has not waived and will not waive any rights of material 
         value without fair and adequate consideration;

                  (k)  has not experienced any work stoppage;

                  (l) has not entered into, amended or terminated,  and will not
         enter into, amend or terminate, any Lease, Governmental  Authorization,
         Private Authorization,  Material Agreement or Employment Arrangement or
         any Contractual Obligation or transaction with any Affiliate;

                  (m) has not  amended  or  terminated  and  will  not  amend or
         terminate,  and  has  kept  and  will  keep in full  force  and  effect
         including  without  limitation  renewing  to the  extent the same would
         otherwise expire or terminate, all insurance policies and coverage;

                  (n)  has not, and will not have, declared, made or paid, or 
         agreed to declare, make or pay, any Distribution; and

                  (o) has not  entered  into and will not  enter  into any other
         transaction or series of related  transactions which individually or in
         the aggregate is material to Key and its Subsidiaries taken as a whole,
         except in the ordinary course of business.

         SECTION 4.19 Adverse Restrictions.  Neither Key nor any Subsidiary is a
party to or subject to, nor is any of its  property  subject to, any  Applicable
Law, Governmental Authorization, Contractual Obligation, Employment Arrangement,
Material  Agreement  or  Private  Authorization,  or  any  other  obligation  or
restriction  of any  kind or  character,  which  now  or,  as far as Key can now


                                      AI-37


<PAGE>


reasonably  foresee,  at any time in the future  could,  individually  or in the
aggregate,  be  unduly  burdensome  or  which  could,  individually  or  in  the
aggregate, have any Adverse Effect on Key or Key and its Subsidiaries taken as a
whole, except as set forth in Section 4.19 of the Key Disclosure Schedule.

         SECTION 4.20 Broker or Finder.  No Person  assisted in or brought about
the  negotiation  of this  Agreement,  the Merger or the  subject  matter of the
Transactions  in the  capacity  of  broker,  agent or finder  or in any  similar
capacity  on behalf  of Key,  except  as set  forth in  Section  4.20 of the Key
Disclosure Schedule.

         SECTION 4.21 Personal Injury or Property Damage;  Warranty Claims; Etc.
Except as set forth in Section 4.21 of the Key Disclosure Schedule,  neither Key
nor any Subsidiary or any Person acting for or on its behalf,  including without
limitation any insurance  carrier,  has paid, to the knowledge,  information and
belief of Key, at any time during the past three (3) years, and there is not now
pending  or, to the  knowledge,  information  and belief of Key,  threatened  or
existing any basis for any Claim relating to, any damages to any third party for
injuries to Persons or damage to property,  or for breach of warranty,  which if
determined adversely to Key or any Subsidiary,  individually or in the aggregate
(taking  into account  unasserted  Claims of a similar  nature),  could have any
Adverse Effect on Key and its Subsidiaries taken as a whole.

         SECTION 4.22 Environmental Matters.

         (a)  Except  as set  forth in  Section  4.22(a)  of the Key  Disclosure
Schedule, Key and each Subsidiary:

                  (i) to the knowledge,  information  and belief of Key, has not
         been notified that it is potentially liable under, has not received any
         request  for  information  or  other   correspondence   concerning  its
         potential  liability with respect to any site or facility under, and is
         not  a  "potentially   responsible   party"  under,  the  Comprehensive
         Environmental  Response,  Compensation  and  Liability  Act of 1980, as
         amended,  the Resource  Conservation  Recovery Act, as amended,  or any
         similar state law;

                  (ii) has not  entered  into or received  any  consent  decree,
         compliance   order  or   administrative   order   issued   pursuant  to
         Environmental Laws;

                  (iii) is not a party  in  interest  or in  default  under  any
         judgment,  order, writ,  injunction or decree of any final order issued
         pursuant to Environmental Laws;

                  (iv) is, to the knowledge,  information  and belief of Key, in
         substantial  compliance in all material respects with all Environmental
         laws, has, to Key's  knowledge,  information  and belief,  obtained all
         Environmental  Permits,  and  is  not  the  subject  of  or,  to  Key's
         knowledge,  information  and belief,  threatened  with any Legal Action
         involving a demand for damages or other potential  liability  including
         any Lien with respect to material  violations  or material  breaches of
         any Environmental Law.

                  (v) Key has no knowledge of any past or present  Event related
         to Key or any Subsidiary or its or any of their business, operations or
         property which Event,  individually or in the aggregate,  may interfere
         with or prevent  continued  material  compliance with all Environmental
         Laws, or which,  individually or in the aggregate,  will form the basis
         of any material  Claim for the release of  threatened  release into the
         environment, of any Hazardous Material.

                                      AI-38


<PAGE>



         (b)  Except  as set  forth in  Section  4.22(b)  of the Key  Disclosure
Schedule:

                  (i) no unauthorized disposal,  release, burial or placement of
         Hazardous  Materials which to Key's  knowledge,  information and belief
         and due to the  activities  of Key could  form the basis for a material
         Claim has occurred:

                           (A) on any  property or  facility  owned or leased by
                  Key or any Subsidiary  during the period that such  facilities
                  and properties were owned or leased by it or,

                           (B) to the knowledge,  information and belief of Key,
                  at any other  time or at any other  facility  or site to which
                  Hazardous  Materials  from Key or any Subsidiary may have been
                  taken.

                  (ii) to the knowledge,  information and belief of Key, neither
         Key nor any Subsidiary has any above-ground or underground fuel storage
         tanks on property owned or leased by it.

         SECTION  4.23  Solvency.  As of the  execution  and  delivery  of  this
Agreement,  and after giving  effect to the  consummation  of the Merger and the
Transactions,  Key and Key and its Subsidiaries  taken as a whole are and, as of
the Closing Date, will be solvent.

         SECTION 4.24 Compliance with Regulations Relating to Securities Credit.
None of the borrowings,  if any, of Key were incurred or used for the purpose of
purchasing or carrying any security which at the date of its acquisition was, or
any security  which now is,  margin stock or other  margin  security  within the
meaning of  Regulation  T of the Margin  Rules or a  "security  that is publicly
held,"  within  the  meaning  of the  Margin  Rules,  and  neither  Key  nor any
Subsidiary owns any margin stock or other margin  security,  or a "security that
is publicly held", and neither Key nor any Subsidiary has any present  intention
of acquiring any margin stock or other margin security, or any "security that is
publicly held".

         SECTION 4.25 Materiality.  The representations and warranties set forth
in this  Article  would in the  aggregate  be true and correct  even without the
materiality  exceptions or qualifications  contained therein or set forth in the
Key Disclosure Schedule, except for such exceptions and qualifications including
without limitation those set forth in the Key Disclosure  Schedule which, in the
aggregate for all such  representations  and  warranties,  are not and could not
reasonably be expected to be Adverse to Key or Key and its Subsidiaries taken as
a whole.

         SECTION 4.26 Continuing  Representation and Warranty.  Except for those
representations  and  warranties  which speak as of a specific  date, all of the
representations  and  warranties  of Key set forth in this Article shall be true
and correct on the Closing Date with the same force and effect as though made on
and as of that date and those,  if any,  which speak as of a specific date shall
be true and correct on the Closing Date.



                                      AI-39


<PAGE>



                                    ARTICLE 5

                          STOCKHOLDER MEETING COVENANTS


         SECTION 5.1 SEC Filings.

         (a) As promptly as  practicable  after the date  hereof,  Key (with all
necessary  assistance and cooperation of the Company) will prepare and file with
the SEC a registration  statement on Form S-4 (the "Registration  Statement") in
connection with the registration under the Securities Act of the Exchange Merger
Consideration to be issued pursuant to the Merger, which Registration  Statement
shall  contain a joint  proxy  statement  to be mailed by the Company and Key to
their respective  stockholders in connection with the vote of such  stockholders
with respect to the Merger (the "Joint Proxy Statement/Prospectus").

         (b) Key and the Company will thereafter use their  reasonable  business
efforts to respond to any comments of the SEC with  respect to the  Registration
Statement and to have the Registration  Statement declared effective as promptly
as  practicable,  and also will take any other action required to be taken under
federal or state securities laws (including, without limitation, the delivery to
Key and the  Company,  as  appropriate,  of a letter  from  each  other  party's
independent  auditors in form and substance  reasonably  satisfactory to Key and
the  Company,  as the case may be,  and  customary  in scope and  substance  for
letters  delivered  by  independent   public   accountants  in  connection  with
registration statements similar to the Registration Statement).

         (c) As  promptly  as  practicable  after the date  hereof,  Key and the
Company shall  prepare and file any other  filings  required to be filed by each
under the  Securities  Act, the Exchange Act or any other  federal or state laws
relating to the Transactions  (collectively  "Other Filings") and will use their
reasonable  business  efforts to respond to any comments of the SEC or any other
appropriate government official with respect thereto.

         (d)  As  promptly  as  practicable   after  the  effectiveness  of  the
Registration  Statement,  Key (with all necessary  assistance and cooperation of
the Company) will prepare and file with the SEC a  registration  statement  (the
"Shelf  Registration  Statement") in connection with the registration for resale
under the Securities Act of (i) the Exchange Merger  Consideration  to be issued
pursuant to the Merger to the stockholders of the Company who are parties to the
Registration  Rights  Agreement,  and  (ii)  shares  of Key  Stock  held  on the
Effective Date by affiliates of the majority  stockholder of the Company,  which
Shelf  Registration  Statement shall be supplemented  and amended,  from time to
time, in accordance with the provisions of the Registration Rights Agreement.

         (e) Key and the Company shall  cooperate with each other and provide to
each  other all  information  necessary  in order to  prepare  the  Registration
Statement,  the  Joint  Proxy   Statement/Prospectus,   the  Shelf  Registration
Statement and the Other Filings  (collectively  "SEC Filings") and shall provide
promptly  to the other  party any  information  that such party may obtain  that
could necessitate amending any such document.

         (f) Key and the Company will notify each other  promptly of the receipt
of any comments  from the SEC or its staff or any other  appropriate  government
official  and of any  requests by the SEC or its staff or any other  appropriate
government  official for  amendments or supplements to any of the SEC Filings or
for  additional  information  and will supply the other party with copies of all


                                      AI-40


<PAGE>


correspondence between Key or any of its representatives, and the Company or any
of its representatives,  as the case may be, on the one hand, and the SEC or its
staff or any other  appropriate  government  official,  on the other hand,  with
respect  thereto.  If at any time prior to the Effective  Time,  any event shall
occur that should be set forth in an amendment  of, or a  supplement  to, any of
the SEC  Filings,  Key and the Company  agree  promptly to prepare and file such
amendment or  supplement  and to  distribute  such  amendment or  supplement  as
required by Applicable Law, including, in the case of an amendment or supplement
to the Joint Proxy Statement/Prospectus, mailing such supplement or amendment to
the Company's stockholders and Key's stockholders, as the case may be.

         (g) The information  provided and to be provided by Key and the Company
for use in SEC Filings  shall at all times prior to the  Effective  Time be true
and correct in all  material  respects  and shall not omit to state any material
fact  required  to be  stated  therein  or  necessary  in  order  to  make  such
information  not false or  misleading,  and Key and the  Company  each  agree to
correct any such  information  provided  by it for use in the SEC  Filings  that
shall have become false or misleading in any material respect.  Each SEC Filing,
when  filed with the SEC or any other  appropriate  government  official,  shall
comply as to form in all material respects with all Applicable Law.

         SECTION 5.2 Board Recommendation.  The Joint Proxy Statement/Prospectus
shall  include the  recommendation  of the  Company's  Board of Directors to the
Company's  stockholders  to vote in  favor of the  Merger  and the  Joint  Proxy
Statement/Prospectus   shall  include  the  recommendation  of  Key's  Board  of
Directors  to  Key's  stockholders  to vote in favor  of the  Merger;  provided,
however,  that the Company's  Board of Directors or Key's Board of Directors may
each  modify  or  withdraw  such  Board  of  Directors'   recommendation  if  it
determines, with the written advice of outside counsel, to do so in the exercise
of its fiduciary duties.

         SECTION 5.3 Meeting of Stockholders  of the Company.  The Company shall
take all action  necessary,  in accordance  with  Applicable Law and its Organic
Documents,  to duly  call,  give  notice of,  convene  and hold a meeting of its
stockholders  as promptly as  practicable to consider and vote upon the adoption
and  approval  of this  Agreement,  the  Merger and the  Transactions.  The only
stockholder  vote  required  for the  adoption  and  approval  of the Merger and
Transactions  by the Company is the vote required  under Section  3.1(b) hereof.
Subject  to the  fiduciary  duty  of the  Company's  Board  of  Directors  under
Applicable Law, as advised in writing by outside counsel,  the Company shall use
its reasonable business efforts to solicit from stockholders proxies in favor of
adoption and approval of the Merger and the  Transactions  and to take all other
action  necessary to secure the vote of stockholders  required by Applicable Law
and the Company's Organic Documents to effect the Merger and the Transactions.

         SECTION 5.4 Meeting of  Stockholders  of Key. Key shall take all action
necessary,  in accordance  with Applicable Law and Key's Organic  Documents,  to
duly call,  give notice of,  convene and hold a meeting of its  stockholders  as
promptly  as  practicable  to  consider  and  vote  upon  the  adoption  of this
Agreement,  the Merger and the Transactions.  The only stockholder vote required
for the adoption and approval of the Merger and the  Transactions  by Key is the
vote required under Section 4.1(b) hereof.  Subject to the fiduciary duty of the
Key Board of Directors  under  Applicable  Law, as advised in writing by outside
counsel,  Key  shall  use  its  reasonable  business  efforts  to  solicit  from
stockholders  proxies in favor of  adoption  and  approval of the Merger and the
Transactions  and to take all  other  action  necessary  to  secure  the vote of
stockholders  required by Applicable  Law and Key's Organic  Documents to effect
the Merger and the Transactions. At any such meeting, the Company shall vote, or
cause to be voted,  all  shares of Key Stock  then  owned by the  Company or any
Subsidiary  of the  Company or subject  to  proxies  held by the  Company or any


                                      AI-41


<PAGE>


Subsidiary  in  favor  of the  adoption  and  approval  of the  Merger  and  the
Transactions  unless the Company's Board of Directors  determines that voting in
favor of the  approval  of the Merger and the  Transactions  would  violate  its
fiduciary duties to the Company's stockholders.


                                    ARTICLE 6

                              ADDITIONAL COVENANTS

         SECTION 6.1 Access to Information; Confidentiality.

         (a) Each of the parties shall afford to the other and its  accountants,
counsel,  financial advisors and other  representatives (the  "Representatives")
full access  during normal  business  hours  throughout  the period prior to the
Effective  Time  to  all of  its  (and  its  Subsidiaries')  properties,  books,
contracts,  commitments and records  (including  without limitation Tax Returns)
and, during such period,  shall furnish promptly upon request (i) a copy of each
report, schedule and other document filed or received by any of them pursuant to
the requirements of any Applicable Law (including  without limitation federal or
state  securities laws) or filed by any of them with any Authority in connection
with the  Transactions or which may have a material  effect on their  respective
businesses,  operations, properties, prospects, personnel, condition, (financial
or other),  or  results of  operations,  (ii) to the  extent  not  provided  for
pursuant to the preceding clause, (A) all financial records, ledgers, workpapers
and other sources of financial information possessed or controlled by such party
or its accountants deemed by the other party or its Representatives necessary or
useful for the purpose of performing an audit of such party and its Subsidiaries
and certifying financial statements and financial information, and (B) all other
information  relating to such party and its Subsidiaries that the other party or
its Representatives  requires,  in either case for inclusion in or in support of
the Registration Statement or the Shelf Registration  Statement,  and (iii) such
other  information  concerning  any of  the  foregoing  as  either  party  shall
reasonably request. All non-public  information furnished by either party to any
other party  pursuant to the  provisions of this  Agreement,  including  without
limitation this Section,  will be kept  confidential  and shall not, without the
prior written consent of the party disclosing such information,  be disclosed by
in any  manner  whatsoever,  in whole or in part,  and shall not be used for any
purposes,  other than in connection with the Merger and the Transactions.  In no
event shall either party or any of its  Representatives  use such information to
the detriment of the party  disclosing  such  information.  Each party agrees to
reveal such  information only to those of its  Representatives  who need to know
such  the  information  for  the  purpose  of  evaluating  the  Merger  and  the
Transactions,  who are informed of the  confidential  nature of such information
and who shall  undertake  in writing  (a copy of which,  if  requested,  will be
furnished  to the  disclosing  party)  to act in  accordance  with the terms and
conditions of this Agreement.

         (b) Subject to the terms and conditions of Section 6.1(a),  Key and the
Company may disclose such  information  as may be necessary in  connection  with
seeking  all  Governmental  and  Private  Authorizations  or that is required by
Applicable  Law to be disclosed.  In the event that this Agreement is terminated
in accordance with its terms, Key and the Company shall each promptly  redeliver
all non-public  written material  provided pursuant to this Section or any other
provision of this  Agreement or otherwise in connection  with the Merger and the
Transactions and shall not retain any copies, extracts or other reproductions in
whole or in part of such  written  material  other than one copy  thereof  which
shall be delivered to independent counsel for such party.

         (c) No  investigation  pursuant to this Section 6.1 or otherwise  shall
affect any  representation  or warranty in this Agreement of either party or any
condition to the obligations of the parties hereto.


                                      AI-42


<PAGE>



         SECTION 6.2 Agreement to Cooperate.

         (a) Each of the parties hereto shall use reasonable business efforts to
take,  or cause to be taken,  all  actions  and to do, or cause to be done,  all
things  necessary,  proper or advisable  under  Applicable Law to consummate the
Merger and make  effective  the  Transactions,  including  using its  reasonable
business  efforts (i) to prepare  and file with the  applicable  Authorities  as
promptly as  practicable  after the  execution of this  Agreement  all requisite
applications and amendments thereto, together with related information, data and
exhibits,  necessary to request  issuance of orders approving the Merger and the
Transactions by all such applicable Authorities,  each of which must be obtained
or become final in order to satisfy the condition  applicable to it set forth in
Section  7.1(c)  hereof;  (ii) to obtain all necessary or  appropriate  waivers,
consents and approvals, (iii) to effect all necessary registrations, filings and
submissions  (including without limitation filings under the Securities Act, the
Exchange Act and any other  submissions  requested by the SEC), (iv) to lift any
injunction or other legal bar to the Merger and the  Transactions  (and, in such
case,  to proceed  with the  Merger and the  Transactions  as  expeditiously  as
possible),  subject,  however, to the requisite votes of the stockholders of the
parties,  and  (v) to  comply  with  all of the  terms  and  provisions  of this
Agreement  and each of the  Collateral  Documents to which it is or may become a
party.

         (b) Each of the parties  hereto  agrees to take such  actions as may be
necessary to obtain any  Governmental  Authorizations  legally  required for the
consummation  of the Merger and the  Transactions,  including  the making of any
Governmental Filings, publications and requests for extensions and waivers.

         (c) The Company will use its reasonable business efforts on or prior to
the Closing Date (i) to obtain the  satisfaction of the conditions  specified in
Sections  7.1 and 7.2 hereof;  (ii) if  requested by Key, to obtain the consents
(to the extent  required) to the continued  existence of all  long-term  debt of
each of the Company and each of its  Subsidiaries;  and (iii) to cause those key
employees of the Company and its  Subsidiaries  designated by Key to execute and
deliver  non-competition   agreements   substantially  conforming  in  form  and
substance to the non-competition agreements currently maintained by Key with its
key employees.  Key will use its reasonable  business efforts on or prior to the
Closing  Date to obtain the  satisfaction  of the  conditions  applicable  to it
specified in Sections 7.1 and 7.3 hereof.

         (d) The parties shall  cooperate  with one another in the  preparation,
execution  and filing of all  Returns,  questionnaires,  applications,  or other
documents  regarding any real property transfer or gains,  sales, use, transfer,
value  added,   stock  transfer  and  stamp  Taxes,  any  transfer,   recording,
registration  and other fees,  and any similar  Taxes  which  become  payable in
connection with the  Transactions  that are required or permitted to be filed on
or before the Effective Time.

         SECTION 6.3 Public Announcements. Until the Closing, or in the event of
termination  of this  Agreement,  each party shall consult with the other before
issuing any press release or otherwise making any public statements with respect
to this  Agreement,  the Merger or any  Transaction and shall not issue any such
press release or make any such public statement without the prior consent of the
other and the written  advice of legal  counsel that such press  release or such
public  statement will not affect the  registration of Key Stock and the New Key
Warrants under the Securities  Act or the timing of the  effectiveness  thereof.
Notwithstanding the foregoing, the Company acknowledges and agrees that Key may,
without the prior consent of the Company,  issue such press release or make such
public  statement as may be required by Applicable Law or any listing  agreement
or  arrangement to which Key is a party with a national  securities  exchange or
the National Association of Securities Dealers, Inc. Automated Quotation System,
in which case, to the extent practicable, Key will consult with, and exercise in


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<PAGE>


good faith,  all reasonable  business efforts to mutually agree with the Company
regarding the nature, extent and form of such press release or public statement,
and, in any event, with prior notice to the Company.

         SECTION 6.4 Directors' and Officers' Indemnification.

         (a) From and after the Effective Time, the Surviving  Corporation shall
indemnify,  defend and hold  harmless the present  officers and directors of the
Company  against all Claims or amounts that are paid in settlement  of, with the
approval of the Surviving Corporation, or otherwise in connection with any Claim
based in whole or in part on the fact that such  Person is or was a director  or
officer of the Company and arising out of actions or  omissions  occurring at or
prior to the Effective Time (including,  without limitation,  the Merger and the
Transactions),  in each case to the fullest extent permitted under the MGCL (and
shall pay any expenses in advance of the final disposition of any such action or
proceeding to each such Person to the fullest extent  permitted  under the MGCL,
upon receipt from the Person to whom expenses are advanced of an  undertaking to
repay such  advances  to the extent  required  under the  MGCL).  The  Surviving
Corporation shall observe and comply with the Company's  obligations pursuant to
the indemnification  agreements, if any, listed in Section 6.4(a) of the Company
Disclosure Schedule.

         (b) This  Section is  intended  to be for the  benefit of, and shall be
enforceable by, the present  officers and directors of the Company,  their heirs
and personal  representatives and shall be binding on the Surviving  Corporation
and its respective successors and assigns.

         SECTION 6.5  Notification  of Certain  Matters.  The Company shall give
prompt  notice to Key, and Key shall give prompt  notice to the Company,  of (a)
the occurrence or  non-occurrence  of any Event the occurrence or non-occurrence
of which  would be likely to cause (i) any  representation  or  warranty  of the
Company or Key, as the case may be,  contained in this Agreement to be untrue or
inaccurate,  or (ii) any  covenant,  condition  or  agreement  contained in this
Agreement not to be complied  with or satisfied,  or (iii) any change to be made
in such party's Disclosure Schedule,  and (b) any failure of the Company or Key,
as the case may be,  to comply  with or  satisfy,  or be able to comply  with or
satisfy,  any covenant,  condition or agreement to be complied with or satisfied
by it hereunder;  provided, however, that the delivery of any notice pursuant to
this  Section  shall  not  limit or  otherwise  affect  the  remedies  available
hereunder to the party receiving such notice.

         SECTION 6.6 No Solicitation.

         (a) The Company shall not, nor shall it permit any  Subsidiary,  or any
of  the  Company's  or  any  Subsidiary's  Representatives  (including,  without
limitation,  any investment banker,  attorney or accountant  retained by it) to,
initiate,  solicit or facilitate,  directly or indirectly,  any inquiries or the
making of any  proposal  with  respect to any Other  Transaction,  engage in any
discussions  or  negotiations  concerning,  or provide  to any other  person any
information  or data relating to, it or any  Subsidiary  for the purposes of, or
otherwise  cooperate in any way with or assist or participate  in, or facilitate
any inquiries or the making of any proposal which constitutes, or may reasonably
be expected to lead to, a proposal to seek or effect any Other  Transaction,  or
agree to or endorse  any Other  Transaction;  provided,  however,  that  nothing
contained in this Section  shall  prohibit the Company or its Board of Directors
from making any disclosure to its stockholders that, in the reasonable  judgment
of its Board of Directors in accordance  with, and based upon the written advice
of,  outside  counsel,  is required  under  Applicable  Law.  The Company  shall
promptly  advise Key of, and  communicate  the  material  terms of, any proposal
relating to any Other  Transaction it may receive,  or any inquiries it receives
which may reasonably be expected to lead to such a proposal, and the identity of


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<PAGE>


the Person  making it. The Company  shall  further  advise Key of the status and
changes in the material  terms of any such proposal or inquiry (or any amendment
to any of them). During the term of this Agreement,  the Company shall not enter
into any agreement,  oral or written,  and whether or not legally binding,  with
any Person that provides for, or in any way facilitates,  any Other Transaction,
or affects any other obligation of the Company under this Agreement.

         (b) Key shall not, nor shall it permit any Subsidiary,  or any of Key's
or  any  Subsidiary's   Representatives  (including,   without  limitation,  any
investment banker, attorney or accountant retained by it) to, initiate,  solicit
or  facilitate,  directly  or  indirectly,  any  inquiries  or the making of any
proposal with respect to any Other  Transaction,  engage in any  discussions  or
negotiations concerning,  or provide to any other person any information or data
relating to, it or any Subsidiary for the purposes of, or otherwise cooperate in
any way with or assist or  participate  in, or  facilitate  any inquiries or the
making of any proposal which constitutes,  or may reasonably be expected to lead
to, a proposal to seek or effect any Other  Transaction,  or agree to or endorse
any Other Transaction; provided, however, that nothing contained in this Section
shall  prohibit Key or its Board of Directors  from making any disclosure to its
stockholders  that,  in the  reasonable  judgment of its Board of  Directors  in
accordance  with,  and based upon the written  advice of,  outside  counsel,  is
required under  Applicable  Law. Key shall  promptly  advise the Company of, and
communicate  the  material  terms  of,  any  proposal   relating  to  any  Other
Transaction it may receive, or any inquiries it receives which may reasonably be
expected to lead to such a proposal,  and the identity of the Person  making it.
Key shall  further  advise the Company of the status and changes in the material
terms of any such proposal or inquiry (or any amendment to any of them).  During
the term of this  Agreement,  Key shall not enter  into any  agreement,  oral or
written, and whether or not legally binding,  with any Person that provides for,
or in  any  way  facilitates,  any  Other  Transaction,  or  affects  any  other
obligation of Key under this Agreement.

         (c)  "Other  Transaction"  means a  transaction  or series  of  related
transactions  (other than the Merger and the Transactions)  resulting in (a) any
change of control of the Company or Key, (b) any merger or  consolidation of the
Company or Key, or any of either of their  Subsidiaries,  regardless  of whether
the Company or Key (or any such  Subsidiary) is the surviving  corporation,  (c)
any tender offer or exchange offer for, or any  acquisitions  of, any securities
of the  Company  or Key,  (d) any sale or other  disposition  of  assets  of the
Company or Key or any Subsidiary of either of them not otherwise permitted under
Section 3.18 or 4.18 hereof, or (e) so long as this Agreement remains in effect,
any  issue or sale,  or any  agreement  to issue  or sell,  any  capital  stock,
Convertible  Securities or Option Securities by the Company or Key not otherwise
permitted under Section 4.15 hereof.

         SECTION  6.7   Termination  of  Option   Securities   and   Convertible
Securities.  The  Company  will  take all  action  necessary  to  terminate  all
outstanding  Option  Securities  and the  conversion  rights of all  Convertible
Securities  issued by the Company as of the Effective Time and to provide timely
notice to all holders of Option Securities and Convertible  Securities notifying
them of such  termination.  Without the prior written  consent of Key, except as
set forth in  Section  3.15(a)  of the  Company  Disclosure  Schedule,  (a) such
termination  will not  cause an  acceleration  of the  exercise,  conversion  or
vesting schedule of any Option Security or of any Convertible Security,  and (b)
the Company will not  otherwise  accelerate,  or cause an  acceleration  of, the
exercise,  conversion or vesting  schedule of any Option Security or Convertible
Security.  Prior to the Closing,  the Company  shall issue  Certificates  to all
holders  of  properly   exercised  Option  Securities  and  properly   converted
Convertible Securities;  such Certificates shall accurately represent the number
of Company Shares to which such holder is entitled by virtue of such exercise or
conversion and the Company shall amend Section 3.15(b) of the Company Disclosure
Schedule accordingly.


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<PAGE>



         SECTION 6.8  Arrangement  of Debt  Financing.  The Company and Key will
cooperate with one another and use their respective  reasonable business efforts
to  negotiate,   execute  and  consummate  the  transaction  contemplated  by  a
definitive secured credit facility meeting the requirements of the provisions of
this Section 6.8 (the "New Debt  Facility").  Without limiting the generality of
the foregoing, the parties agree that the definitive agreements, instruments and
other documents relating to the New Debt Facility  (collectively,  the "New Debt
Facility Documents") will provide, among other things, as follows:

                  (a)  The  New  Credit   Facility   Documents   will  be  based
         substantially  on the  terms  and  conditions  of one of the  following
         commitment  letters (true,  accurate and complete  copies of which have
         heretofore  been delivered to the Company) with respect to the New Debt
         Facility:

                           (i) The letter,  dated October 24, 1995, from The CIT
                  Group/Credit Finance, Inc. to Key Energy Group, Inc.; and

                           (ii) The letter, dated November 3, 1995, from Norwest
                  Bank Texas to Key Energy Group, Inc.

         Key shall have the sole power and  authority,  in its sole and absolute
         discretion,  to determine which of the financial  institutions  issuing
         such two letters to pursue with respect to  negotiating  the New Credit
         Facility;

                  (b) Subject to the other  provisions  of this Section 6.8, all
         of the  material  terms  and  conditions  of the  New  Credit  Facility
         Documents shall be reasonably satisfactory to the parties;

                  (c) The New  Credit  Facility  Documents  may not be  amended,
         modified  or changed in any manner  Adverse to either of the parties or
         terminated by the Company or Key without the express written consent of
         the Company and Key;

                  (d) All existing long-term indebtedness of the Company and its
         Subsidiaries  and,  to the  extent it shall,  in its sole and  absolute
         discretion,  determine,  of Key and its  Subsidiaries  shall be  repaid
         simultaneously  with the initial  borrowings to be incurred pursuant to
         the New Debt Facility;

                  (e) Subject to the provisions of subparagraph  (d) immediately
         preceding,  Key shall have the sole power and authority (i) to make all
         decisions with respect to the New Credit Facility and the incurrence of
         indebtedness thereunder,  including,  without limitation, to determine,
         from time to time,  the amount of  indebtedness  to be incurred and the
         use of the  proceeds  thereof,  and (ii) to execute  all  documents  in
         connection with the incurrence of such indebtedness; provided, however,
         that Key shall cause such borrowings to be made as are sufficient, from
         time to time, to enable the Company to satisfy its  obligations  in the
         ordinary course of business; and

                  (f) The parties  agree to execute and deliver an  amendment to
         this Agreement to the extent reasonably requested by the banks or other
         financial institutions providing the New Credit Facility.



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<PAGE>



                                    ARTICLE 7

                               CLOSING CONDITIONS

         SECTION  7.1  Conditions  to  Obligations  of Each  Party to Effect the
Merger.  The respective  obligations of each party to effect the Merger shall be
subject to the  satisfaction  at or prior to the Effective Time of the following
conditions,  any or all of which  may be  waived,  in  whole or in part,  to the
extent permitted by Applicable Law:

                  (a) This Agreement, the Merger and the Transactions shall have
         been approved and adopted in  accordance  with the DGCL and the MGCL by
         the  affirmative  vote or, to the extent  permitted  by Law, by written
         consent,  of the  stockholders  holding at least the minimum  number of
         shares of the Company  Stock and Key Stock then issued and  outstanding
         as are required by Applicable Law and the Company's  Organic  Documents
         and Key's Organic Documents,  as the case may be, for such approval and
         adoption;

                  (b) As of the Closing  Date,  no Legal Action shall be pending
         before or threatened by any  Authority  seeking to restrain,  prohibit,
         make illegal or delay  materially,  or seeking  material  damages or to
         impose any Adverse  conditions in connection  with, the consummation of
         the Merger and the Transactions,  or which is likely to have an Adverse
         Effect  on  Key  and  its  Subsidiaries   taken  as  a  whole  assuming
         consummation of the Merger;

                  (c) Other than the filing of merger  documents  in  accordance
         with the DGCL and the  MGCL,  all  authorizations,  consents,  waivers,
         orders  or  approvals  required  to  be  obtained,   and  all  filings,
         submissions, registrations, notices or declarations required to be made
         by Key and the Company prior to the  consummation of the Merger and the
         Transactions shall have been obtained from, and made with, all required
         Authorities, except for such authorizations, consents, waivers, orders,
         approvals, filings, registrations,  notices or declarations the failure
         to obtain or make would not, assuming  consummation of the Merger, have
         an Adverse Effect on Key and its Subsidiaries taken as a whole;

                  (d) Key and one or more banks or other financial  institutions
         shall have entered into the New Credit  Facility  substantially  on the
         terms and conditions described in Section 6.8, all Collateral Documents
         required  in  connection   therewith   shall  have  been  executed  and
         delivered,  and the  closings  with  respect  thereto  shall  have been
         authorized  by Key and  such  banks  or  other  financial  institutions
         subject to the consummation of the Merger;

                  (e) The  Registration  Statement  shall have become  effective
         under the Securities Act and no stop order suspending its effectiveness
         or any part thereof  shall have been issued and remain in effect and no
         proceedings for that purpose shall be pending or contemplated under the
         Securities Act; and

                  (f)  The  shares  of Key  Stock  constituting  a  part  of the
         Exchange Merger Consideration and the shares of Key Stock issuable upon
         exercise of the New Key Warrants  shall have been  approved for listing
         on the American Stock Exchange, subject to official notice of issuance.

         SECTION 7.2  Conditions to Obligations of Key. The obligation of Key to
effect  the  Merger  shall be  subject  to the  satisfaction  at or prior to the
Effective Time of the following  conditions,  any or all of which may be waived,
in whole or in part, to the extent permitted by Applicable Law:

                                      AI-47


<PAGE>



                  (a) All agreements, certificates, opinions and other documents
         shall be reasonably  satisfactory  in form,  scope and substance to Key
         and its  counsel,  and Key and its  counsel  shall  have  received  all
         information and copies of all documents, including records of corporate
         proceedings, which they may reasonably request in connection therewith,
         such documents  where  appropriate to be certified by proper  corporate
         officers;

                  (b) The  Company  shall  have  furnished  Key  and,  at  Key's
         request,  any bank or other financial  institution  providing credit to
         the  Company or any  Subsidiary,  with  favorable  opinions,  dated the
         Closing  Date of Porter & Hedges,  counsel  for the  Company  or,  when
         appropriate,  local  counsel of the  Company,  that shall  address  the
         following:

                           (i)  Due  organization,   valid  existence,   foreign
                  qualification  and  good  standing  of the  Company  and  each
                  Subsidiary;

                           (ii) Requisite  corporate power and authority to own,
                  lease and operate its  properties and to carry on its business
                  as it is now being conducted;

                            (iii) In respect of the Company and each Subsidiary,
                  the  number  of  shares  of  capital  stock  or  other  voting
                  securities  authorized,   issued,  reserved  for  issuance  or
                  outstanding  as of the date hereof and the Effective  Time and
                  number  of  Option   Securities   and  amount  of  Convertible
                  Securities outstanding as of such dates;

                           (iv) Due authorization,  valid issuance, full payment
                  and nonassessability of outstanding shares of capital stock of
                  the  Company and each  Subsidiary  and,  upon  issuance on the
                  terms and  conditions  specified in the Option  Securities and
                  Convertible  Securities  pursuant to which they are  issuable,
                  all shares of such capital stock subject to issuance;

                           (v) To the  knowledge  of  counsel,  (A) there are no
                  Contractual  Obligations  to  repurchase,  redeem or otherwise
                  acquire  any  shares  of  Company  Stock  or any  stock of any
                  Subsidiary,   or  any  Option   Securities   and   Convertible
                  Securities, (B) the Merger and the Transactions will not cause
                  an  acceleration  of the  exercise or vesting  schedule of any
                  Option  Securities  and  Convertible  Securities,  and (C) all
                  outstanding  shares of stock of each  Subsidiary  are owned by
                  the  Company or by another  Subsidiary,  free and clear of any
                  Lien  except as set forth in  Schedule  3.1(d) of the  Company
                  Disclosure Schedule;

                           (vi) Corporate  power and authority of the Company to
                  execute  and  deliver  this   Agreement  and  all   Collateral
                  Documents  executed or required to be executed pursuant hereto
                  or thereto or to consummate  the Merger and the  Transactions,
                  to perform its  obligations  thereunder  and to consummate the
                  Merger and the Transactions;

                           (vii) Due and valid  authorization  by the Company by
                  all necessary corporate action of its execution,  delivery and
                  performance  of this  Agreement and the  Collateral  Documents
                  executed or required to be executed pursuant hereto or thereto
                  or to  consummate  the  Merger  and the  Transactions  and the
                  consummation by it of the Merger and the Transactions;

                           (viii) Due and valid  execution  and delivery by, and
                  enforceability  against, the Company of this Agreement and the
                  Collateral Documents executed or required to be

                                      AI-48


<PAGE>



                  executed  pursuant  hereto or  thereto  or to  consummate  the
                  Merger and the Transactions, except as such enforceability may
                  be   subject   to    bankruptcy,    moratorium,    insolvency,
                  reorganization, arrangement and other similar laws relating to
                  or  affecting  the  rights of  creditors  and to the effect of
                  general principles of equity;

                           (ix) The execution and delivery of this Agreement and
                  the Collateral  Documents  executed or required to be executed
                  pursuant hereto or thereto or to consummate the Merger and the
                  Transactions  by the Company do not,  and the  performance  of
                  this Agreement and such  Collateral  Documents by it will not,
                  (A)  conflict  with or violate  the Organic  Documents  of the
                  Company or any  Subsidiary,  (B) conflict  with or violate any
                  Applicable  Law, or (C) to counsel's  knowledge,  constitute a
                  default under, result in the loss of a material benefit under,
                  or  give  to  others  any  right  of  termination,  amendment,
                  acceleration, increased payments or cancellation of, or result
                  in the  creation  of a Lien on any  property  or  asset of the
                  Company or any Subsidiary  pursuant to, any Material Agreement
                  to which the Company or any  Subsidiary is a party or by which
                  the Company or any  Subsidiary or any property or asset of the
                  Company or any Subsidiary is bound or affected;

                           (x) No consents  from or filings  with any  Authority
                  (other than filings of a Certificate of Merger and Articles of
                  Merger)  are  required  by  the  Company  for  its  execution,
                  delivery and  performance of this Agreement and the Collateral
                  Documents  executed or required to be executed pursuant hereto
                  or thereto or to  consummate  the Merger and the  Transactions
                  and its consummation of the Merger and the Transactions;

                           (xi)  Effectiveness  of the  Merger  upon  making  of
                  required  filings  with  Secretaries  of State of Delaware and
                  Maryland;

                           (xii) To the knowledge of counsel, absence of pending
                  or threatened material Legal Action;

                           (xiii) The  information  provided  by the Company for
                  use in the Registration  Statement and the Shelf  Registration
                  Statement; and

                           (xiv)  Nonapplicability of Section 203 of the DGCL;

         and such other matters  incident to the Merger and the  Transactions as
         Key or its counsel may  request or which may be  requested  by any such
         bank or financial institution or their respective counsel;

                  (c) Key shall have  received a  favorable  opinion,  dated the
         Closing  Date of Sullivan & Worcester,  its tax counsel,  to the effect
         that this  Agreement  constitutes a plan of  reorganization  within the
         provisions  of  Section   368(a)(1)(A)  of  the  Code  and  as  to  the
         consequences  thereof to Key and its stockholders  and the Company.  In
         order to enable such firm to render such opinion,  the  stockholders of
         the Company, by approving this Agreement,  agree to execute and deliver
         to Key and such  counsel  agreements,  in form,  scope  and  substance,
         reasonably  satisfactory to Key and such counsel, with respect to their
         intentions  as to  disposition,  to assure the  continuity of ownership
         requirements  of  Section  368(a)(1)(A)  of the  Code  and the  related
         regulations promulgated thereunder;


                                      AI-49


<PAGE>



                  (d) The representations,  warranties, covenants and agreements
         of the Company contained in this Agreement or otherwise made in writing
         by it or on its behalf  pursuant hereto or otherwise made in connection
         with  the  Transactions  shall  be true  and  correct  in all  material
         respects at and as of the  Closing  Date with the same force and effect
         as though made on and as of such (including  without  limitation giving
         effect to any later  obtained  knowledge,  information or belief of the
         Company or Key) date  except  those  which  speak as of a certain  date
         which  shall  continue  to be true and  correct  as of such date on the
         Closing  Date;  each and all of the  agreements  and  conditions  to be
         performed  or  satisfied  by the Company  hereunder  at or prior to the
         Closing  Date  shall  have  been duly  performed  or  satisfied  in all
         material  respects;  and the Company shall have furnished Key with such
         certificates   and  other  documents   evidencing  the  truth  of  such
         representations,   warranties,   covenants  and   agreements   and  the
         performance  of such  agreements  or  conditions  as Key or its counsel
         shall have reasonably requested;

                  (e) Key shall have  received  from the  Company's  independent
         accountants,  a certificate  or letter,  dated the Closing Date, to the
         effect that, on the basis of a limited  review in  accordance  with the
         standards  for such reviews  promulgated  by the American  Institute of
         Certified  Public  Accountants as outlined in Statement of Standards of
         Accounting  and Review  Services  No. 1, they have no reason to believe
         that  the  unaudited  Company  Financial  Statements  set  forth in the
         Registration  Statement  were not prepared in accordance  with GAAP and
         practices  consistent  with those  followed in the  preparation  of the
         audited Company Financial Statements so set forth, or that any material
         modifications  of  such  unaudited  Company  Financial  Statements  are
         required for a fair  presentation of the financial  position or results
         of operations  or changes in financial  position of the Company or that
         during the period from the last day covered by the most recent  Company
         Financial Statements set forth in the Registration  Statement to a date
         not more than five (5) days prior to the Closing  Date,  there has been
         any  Adverse  Change  in  the  financial  position  or  results  of the
         operations of the Company and its  Subsidiaries  taken as a whole which
         is not described in the Registration Statement.

                  (f) All actions  taken by the  stockholders  of the Company to
         approve and adopt this Agreement, the Merger and the Transactions shall
         comply  in all  respects  with and  shall  be  legal,  valid,  binding,
         enforceable and effective  under the Law of the State of Delaware,  the
         Company's Organic Documents and all Material  Agreements to which it or
         any of its Subsidiaries is a party or by which it or any of them or any
         of its or any of their property or assets is bound;

                  (g) As of the Closing Date, except as set forth in the Company
         Disclosure  Schedule,  there shall not have  occurred and be continuing
         any Adverse Change affecting the Company and its Subsidiaries  taken as
         a whole from  those  reflected  in the most  recent  Company  Financial
         Statements;

                  (h) Each of the officers and directors of the Company and each
         of its  Subsidiaries and each trustee under each Plan of the Company or
         any of its  Subsidiaries  shall have  submitted his or her  unqualified
         written  resignation,  dated  as of the  Closing  Date,  from  all such
         positions held with the Company and each of its  Subsidiaries  and as a
         trustee for each such Plan;

                  (i) All  Contractual  Obligations  set forth in Section 3.9 of
         the  Company  Disclosure   Schedule  shall  have  been  terminated  and
         satisfied  and  discharged  in full,  except as otherwise  set forth in
         Section 7.2(i) of the Key Disclosure Schedule;


                                      AI-50


<PAGE>



                  (j) All  Existing  Key  Warrants and Existing Key Shares shall
         have been  delivered  to Key,  without the payment of any amount by it,
         marked canceled and discharged in full; and

                  (k) The Interim  Operations  Agreement  shall have remained in
         full  force and  effect at all times up to the  Effective  Time and the
         Company  shall not be in breach or default,  in any respect which would
         be Adverse to the Company.

         SECTION 7.3 Conditions to Obligations of the Company. The obligation of
the Company and the  stockholders  of the Company to effect the Merger  shall be
subject to the  satisfaction  at or prior to the Effective Time of the following
conditions,  any or all of which  may be  waived,  in  whole or in part,  to the
extent permitted by Applicable Law:

                  (a) All agreements, certificates, opinions and other documents
         shall be reasonably  satisfactory  in form,  scope and substance to the
         Company and its  counsel,  and the  Company and its counsel  shall have
         received all information and copies of all documents, including records
         of  corporate  proceedings,   which  they  may  reasonably  request  in
         connection therewith,  such documents where appropriate to be certified
         by proper corporate officers;

                  (b) Key shall have furnished the Company and its  stockholders
         with  favorable  opinions,   dated  the  Closing  Date  of  Sullivan  &
         Worcester, A Registered Limited Liability Partnership, counsel for Key,
         or, where appropriate, of local counsel for Key, that shall address the
         following:

                           (i)  Due  organization,   valid  existence,   foreign
                  qualifications and good standing of Key and each Subsidiary;

                           (ii) Requisite  corporate power and authority to own,
                  lease and operate its  properties and to carry on its business
                  as it is now being conducted;

                           (iii) In  respect  of Key,  the  number  of shares of
                  capital stock or other voting securities  authorized,  issued,
                  reserved  for issuance or  outstanding  as of the date of such
                  opinion  and  number  of  Option   Securities  and  amount  of
                  Convertible Securities outstanding as of such date;

                           (iv) Due authorization,  valid issuance, full payment
                  and nonassessability of outstanding shares of capital stock of
                  Key,  upon issuance on the terms and  conditions  specified in
                  the Option Securities and Convertible  Securities  pursuant to
                  which  they are  issuable,  all shares of such  capital  stock
                  subject to  issuance,  and the shares of Key Stock and the New
                  Key  Warrants  constituting  a  part  of the  Exchange  Merger
                  Consideration  and  the  shares  of Key  Stock  issuable  upon
                  exercise of such New Key Warrants;

                           (v) To the  knowledge  of  counsel,  (A) there are no
                  Contractual  Obligations  to  repurchase,  redeem or otherwise
                  acquire   any  shares  of  Key  Stock  or  any  stock  of  any
                  Subsidiary,   or  any  Option   Securities   and   Convertible
                  Securities issued by Key or any Key Subsidiary, (B) the Merger
                  and the  Transactions  will not cause an  acceleration  of the
                  exercise or vesting schedule of any such Option Securities and
                  Convertible  Securities,  and (C) all  outstanding  shares  of
                  stock  of  each  Subsidiary  are  owned  by Key or by  another
                  Subsidiary,  free and clear of any Lien, except, in each case,
                  as  set  forth  in  Schedule  4.1(d)  of  the  Key  Disclosure
                  Schedule;


                                      AI-51


<PAGE>



                           (vi) Corporate  power and authority of Key to execute
                  and  deliver  this  Agreement  and  the  Collateral  Documents
                  executed or required to be executed pursuant hereto or thereto
                  or to consummate the Merger and the  Transactions,  to perform
                  its  obligations  thereunder  and to consummate the Merger and
                  the Transactions;

                           (vii)  Due  and  valid  authorization  by  Key by all
                  necessary  corporate  action of its  execution,  delivery  and
                  performance  of this  Agreement and the  Collateral  Documents
                  executed or required to be executed pursuant hereto or thereto
                  or to  consummate  the  Merger  and the  Transactions  and the
                  consummation by it of the Merger and the Transactions;

                           (viii) Due and valid  execution  and delivery by, and
                  enforceability   against,   Key  of  this  Agreement  and  the
                  Collateral  Documents  executed  or  required  to be  executed
                  pursuant hereto or thereto or to consummate the Merger and the
                  Transactions, except (A) as such enforceability may be subject
                  to   bankruptcy,   moratorium,   insolvency,   reorganization,
                  arrangement  and other  similar laws  relating to or affecting
                  the  rights  of  creditors   and  to  the  effect  of  general
                  principles of equity and (B) that no opinion need be expressed
                  as  to  the  enforceability  of   indemnification   provisions
                  included in the Registration Rights Agreement;

                           (ix) The execution and delivery of this Agreement and
                  the Collateral  Documents  executed or required to be executed
                  pursuant hereto or thereto or to consummate the Merger and the
                  Transactions  by Key do  not,  and  the  performance  of  this
                  Agreement  and such  Collateral  Documents by it will not, (A)
                  conflict  with or violate the Organic  Documents of Key or any
                  Subsidiary,  (B) conflict with or violate any Applicable  Law,
                  or (C) to counsel's  knowledge,  constitute  a default  under,
                  result in the loss of a  material  benefit  under,  or give to
                  others  any  right of  termination,  amendment,  acceleration,
                  increased  payments  or  cancellation  of,  or  result  in the
                  creation  of a Lien on any  property  or  asset  of Key or any
                  Subsidiary pursuant to, any Material Agreement to which Key or
                  any Subsidiary is a party or by which Key or any Subsidiary or
                  any  property  or asset of Key or any  Subsidiary  is bound or
                  affected;

                           (x) No consents from or filings with any Governmental
                  Authority  (other than filings of a Certificate  of Merger and
                  Articles  of Merger) are  required  by Key for the  execution,
                  delivery and  performance of this Agreement and the Collateral
                  Documents  executed or required to be executed pursuant hereto
                  or thereto or to  consummate  the Merger and the  Transactions
                  and the  consummation  of the  Merger  and  the  Transactions,
                  except as contemplated by the Registration Rights Agreement;

                           (xi)  Effectiveness  of the  Merger  upon  making  of
                  required  filings  with  Secretaries  of State of Delaware and
                  Maryland;

                           (xii) To the knowledge of counsel, absence of pending
                  or threatened material Legal Action;

                           (xiii) The information provided by Key for use in the
                  Registration  Statement and the Shelf Registration  Statement;
                  and

                           (xiv) Nonapplicability of Section 3-602 of the MGCL;

                                      AI-52


<PAGE>



         and such other matters incident to the Merger and the Transactions as 
         the Company or its counsel may reasonably request;

                  (c) The representations,  warranties, covenants and agreements
         of Key contained in this  Agreement or otherwise  made in writing by it
         or on its behalf  pursuant  hereto or otherwise made in connection with
         the Transactions  shall be true and correct in all material respects at
         and as of the  Closing  Date with the same  force and  effect as though
         made on and as of such date  except  those  which speak as of a certain
         date  which  shall  continue  to be true and  correct  as of such  date
         (including  without  limitation  giving  effect to any  later  obtained
         knowledge,  information or belief of Key or the Company) on the Closing
         Date;  each and all of the agreements and conditions to be performed or
         satisfied  by Key  hereunder at or prior to the Closing Date shall have
         been duly  performed or satisfied  in all  material  respects;  and Key
         shall have  furnished  the  Company  with such  certificates  and other
         documents  evidencing  the truth of such  representations,  warranties,
         covenants and  agreements  and the  performance  of such  agreements or
         conditions  as  the  Company  or  its  counsel  shall  have  reasonably
         requested;

                  (d) The Company  shall have  received  from Key's  independent
         accountants,  a certificate  or letter,  dated the Closing Date, to the
         effect that, on the basis of a limited  review in  accordance  with the
         standards  for such reviews  promulgated  by the American  Institute of
         Certified  Public  Accountants as outlined in Statement of Standards of
         Accounting  and Review  Services  No. 1, they have no reason to believe
         that  the  unaudited  Key  Financial   Statements   set  forth  in  the
         Registration  Statement  were not prepared in accordance  with GAAP and
         practices  consistent  with those  followed in the  preparation  of the
         audited Key  Financial  Statements  so set forth,  or that any material
         modifications  of such unaudited Key Financial  Statements are required
         for a fair  presentation  of  the  financial  position  or  results  of
         operations  or changes in financial  position of Key or that during the
         period  from the last day  covered  by the most  recent  Key  Financial
         Statements set forth in the  Registration  Statement to a date not more
         than  five  (5) days  prior to the  Closing  Date,  there  has been any
         Adverse  Change in the financial  position or results of the operations
         of Key and its Subsidiaries  taken as a whole which is not described in
         the Registration Statement;

                  (e) Two (2)  additional  nominees  of the  Company  shall,  if
         proposed, have been elected as members of the Board of Directors of Key
         to hold office until the next annual meeting of stockholders of Key and
         until  their   respective   successors  shall  have  been  elected  and
         qualified, or the earlier resignation or removal of such nominees, as a
         consequence  of which the Board of  Directors  of Key shall  consist of
         three (3) nominees of the Company and five (5) other directors;

                  (f) All actions  taken by the  stockholders  of Key to approve
         and adopt this Agreement,  the Merger and the Transactions shall comply
         in all respects with and shall be legal,  valid,  binding,  enforceable
         and  effective  under the Law of the State of Maryland,  Key's  Organic
         Documents  and  all  Material  Agreements  to  which  it or  any of its
         Subsidiaries  is a party or by which it or any of them or any of its or
         any of their property or assets is bound;

                  (g) As of the  Closing  Date,  except  as set forth in the Key
         Disclosure  Schedule,  there shall not have  occurred and be continuing
         any Adverse Change affecting Key and its Subsidiaries  taken as a whole
         from those reflected in the most recent Key Financial Statements; and

                  (h)  The  Shelf  Registration   Statement  shall  have  become
         effective  under the  Securities  Act and no stop order  suspending its
         effectiveness or any part thereof shall have been issued and

                                      AI-53


<PAGE>



         remain in effect and no  proceedings  for that purpose shall be pending
         or contemplated under the Securities Act.


                                    ARTICLE 8

                        TERMINATION, AMENDMENT AND WAIVER

         SECTION 8.1  Termination.  This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement,
the Merger and the Transactions by the stockholders of the parties:

         (a)  by mutual consent of the Company and Key;

         (b)  by either Key or the Company:

                           (i) if any permanent  injunction,  decree or judgment
                  by any Authority  preventing  the  consummation  of the Merger
                  shall have become final and nonappealable; or

                           (ii) if the Merger and the Transactions have not been
                  consummated prior to the Termination Date; or

         (c)  by the Company:

                  (i) in the  event  (A) the  Company  is not in  breach of this
         Agreement and none of its material  representations or warranties shall
         have become and continue to be untrue in any material respect,  and (B)
         Key is in breach of this  Agreement  or any of its  representations  or
         warranties  shall have become and  continue to be untrue in any respect
         which could, in the aggregate,  have an Adverse Effect on Key,  unless,
         in either case, such breach or untruth is capable of being cured by and
         will not prevent or delay  consummation  of the Merger by or beyond the
         Termination Date; or

                  (ii) if (A) the Board of Directors of Key shall (I)  withdraw,
         modify or change its  recommendation so that it is not in favor of this
         Agreement, the Merger or the Transactions, or shall have resolved to do
         any of the foregoing, or (II) have recommended or resolved to recommend
         to its  stockholders  any  Other  Transaction,  or (B) Key  shall  have
         entered into or agreed to enter into any Other Transaction; or

         (d)  by Key:

                  (i) in the event  (A) Key is not in  breach of this  Agreement
         and none of its  material  representations  or  warranties  shall  have
         become and continue to be untrue in any material  respect,  and (B) the
         Company is in breach of this Agreement or any of its representations or
         warranties  shall have become and  continue to be untrue in any respect
         which could,  in the aggregate,  have an Adverse Effect on the Company,
         unless,  in either  case,  such  breach or  untruth is capable of being
         cured by and will not prevent or delay consummation of the Merger by or
         beyond the Termination Date; or


                                      AI-54


<PAGE>



                  (ii) if (A) the Board of  Directors  of the Company  shall (I)
         withdraw,  modify or  change  its  recommendation  so that it is not in
         favor of this Agreement, the Merger or the Transactions,  or shall have
         resolved  to do any of the  foregoing,  or  (II)  have  recommended  or
         resolved to recommend to its stockholders any Other Transaction, or (B)
         the Company  shall have  entered into or agreed to enter into any Other
         Transaction.

         The term "Termination  Date" shall mean February 29, 1996 or such other
date as the parties may, from time to time, mutually agree;  provided,  however,
that  notwithstanding the foregoing,  either Key or the Company may, in its sole
discretion,  elect to extend such date, from time to time, to not later than May
31, 1996 in the event that (a) in its  reasonable  business  judgment not all of
the  conditions of the  obligations  of the parties to consummate the Merger and
the  Transactions  set forth in Article 7 are likely to be satisfied by the then
current  Termination  Date  and  (b)  either  (i) it is not in  breach  of  this
Agreement and none of its  representations  and  warranties has become untrue in
any respect which could, in the aggregate, have an Adverse Effect on it, or (ii)
if such a breach or untruth  exists,  such breach or untruth is capable of being
cured by and will not prevent or delay  consummation  of the Merger by or beyond
the date to which it proposes to extend the Termination Date.

         The right of either party to terminate this Agreement  pursuant to this
Section shall remain  operative  and in full force and effect  regardless of any
investigation  made by or on behalf of either party, any Person  controlling any
such party or any of their respective  Representatives whether prior to or after
the execution of this Agreement.

         SECTION  8.2 Effect of  Termination.  Except as  provided  in  Sections
2.2(a),  2.2(d),  6.1(b)  and  8.5,  in the  event  of the  termination  of this
Agreement  pursuant to Section 8.1, this Agreement shall forthwith  become void,
there  shall  be no  liability  on the  part of  either  party,  or any of their
respective officers or directors, to the other and all rights and obligations of
either party shall cease;  provided,  however,  that such termination  shall not
relieve either party from  liability for any  intentional  misrepresentation  or
intentional  breach of any of its warranties,  covenants or agreements set forth
in this Agreement.

         SECTION 8.3  Amendment.  This  Agreement  may be amended by the parties
hereto by action taken by or on behalf of their  respective  Boards of Directors
at any time prior to the Effective Time; provided, however, that, after approval
of this Agreement and the Merger by the  stockholders of a particular  party, no
amendment,  which under  Applicable  Law may not be made without the approval of
such stockholders,  may be made without such approval. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.

         SECTION 8.4 Waiver.  At any time prior to the Effective Time, except to
the extent not  permitted by  Applicable  Law, Key or the Company may (a) extend
the time for the  performance  of any of the  obligations  or other  acts of the
other,  subject,  however,  to the  provisions  of  Section  8.1,  (b) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any document  delivered  pursuant hereto,  and (c) waive compliance by the
other with any of the agreements,  covenants or conditions contained herein. Any
such  extension or waiver shall be valid only if set forth in an  instrument  in
writing signed by the party or parties to be bound thereby.

         SECTION  8.5  Fees,  Expenses  and  Other  Payments.  (a) All costs and
expenses,  incurred  in  connection  with this  Agreement,  the  Merger  and the
Transactions,  and compliance with Applicable Law and Contractual Obligations as
a  consequence  hereof and  thereof,  including,  without  limitation,  fees and
disbursements of counsel,  financial  advisors and accountants,  incurred by the


                                      AI-55


<PAGE>


parties  hereto  shall be borne  solely  and  entirely  by the  party  which has
incurred such costs and expenses (with respect to such party,  its  "Expenses").
Anything herein to the contrary notwithstanding, Key agrees that the Company may
pay the costs and  expenses of its  stockholders  up to an  aggregate  amount of
$150,000.  Key  agrees  to take all  action  necessary  to cause  the  Surviving
Corporation to pay promptly any of the foregoing  reasonable  Expenses incurred,
but not paid, by the Company prior to the Effective Time.

         (b) The Company  agrees that if this  Agreement  shall be terminated by
Key pursuant to the  provisions of Section  8.1(d)(iii)  hereof,  and Key agrees
that if this  Agreement is terminated by the Company  pursuant to the provisions
of Section  8.1(c)(iii) hereof, and if, prior to such termination or within nine
(9) months thereafter, the Company or Key consummates any Other Transaction (the
first party to consummate any Other  Transaction being herein referred to as the
"Indemnitor" and the other party being herein referred to as the  "Indemnitee"),
then the  Indemnitor  will pay to the  Indemnitee  an amount  equal to $500,000,
which  amount is in  recognition  of,  among  other  things,  the  out-of-pocket
Expenses  of the  Indemnitee  related to this  Agreement,  the  reliance  of the
Indemnitee on the  Indemnitor's  fulfillment of its obligations  hereunder,  the
costs  in  delayed  opportunity  to  the  Indemnitee  and  the  benefit  to  the
Indemnitor. Anything in this Section 8.5(b) to the contrary notwithstanding, the
Indemnitee shall, after the Indemnitor has consummated any Other Transaction, be
released  from all further  obligations  under this Section,  including  without
limitation  the  right,  without  being  required  to make  any  payment  to the
Indemnitor, to consummate any Other Transaction.


                                    ARTICLE 9

                               GENERAL PROVISIONS

         SECTION 9.1 Effectiveness of Representations,  etc. Except as set forth
in Section 8.2 hereof, the representations, warranties, covenants and agreements
of each party shall remain  operative and in full force and effect to the extent
hereinafter set forth,  regardless of any investigation  made by or on behalf of
either party, any Person  controlling  such party or any of its  Representatives
whether prior to or after the execution of this Agreement.  Notwithstanding  the
foregoing,  the representations and warranties of the parties shall terminate as
of the Closing and shall  expire and cease to be of any further  force or effect
upon the Closing.

         SECTION 9.2 Notices.  All notices and other communications which by any
provision of this Agreement are required or permitted to be given shall be given
in  writing  and shall be (a)  mailed by  first-class  or  express  mail,  or by
recognized  courier  service,  postage  prepaid,  (b) sent by  telex,  telegram,
telecopy  or other form of rapid  transmission,  confirmed  by mailing (by first
class or express  mail,  or by  recognized  courier  service,  postage  prepaid)
written  confirmation at substantially the same time as such rapid transmission,
or (c)  personally  delivered  to the  receiving  party  (which if other than an
individual  shall be an  officer  or other  responsible  party of the  receiving
party). All such notices and communications  shall be mailed,  sent or delivered
as follows:

         (a)  If to Key:

                  257 Livingston Avenue
                  New Brunswick, New Jersey 08901
                  Attention:  Francis D. John, Chief Executive Officer
                  Telecopier No.:  (908) 247-5148


                                      AI-56


<PAGE>



                  with a copy to:

                  Sullivan & Worcester
                  A Registered Limited Liability Partnership
                  One Post Office Square
                  Boston, Massachusetts 02109
                  Attention:  Lena G. Goldberg, Esq.
                  Telecopier No.:  (617) 338-2880

         (b)  If to the Company:

                  3535 Briarpark, Suite 200
                  Houston, Texas 77042
                  Attention:  W. Clarke Gormley, Vice President-Legal
                  Telecopier No.: (713) 977-7331

                  with a copy to:

                  Porter & Hedges
                  700 Louisiana, 35th Floor
                  Houston, Texas 77002-2764
                  Attention: T. William Porter, Esq.
                  Telecopier No.: (713) 228-1331

                  and

                  Goodwin, Procter & Hoar
                  Exchange Place
                  Boston, Massachusetts 02109
                  Attention:  Robert P. Whalen, Jr., Esq.
                  Telecopier No.: (617) 523-1231

or to such other person(s),  telex or facsimile  number(s) or address(es) as the
party to receive any such communication or notice may have designated by written
notice to the other party.

         SECTION 9.3 Specific Performance; Other Rights and Remedies. Each party
recognizes and agrees that the other party's remedy at law for any breach of the
provisions of this  Agreement  would be inadequate and agrees that for breach of
such provisions,  such party shall, in addition to such other remedies as may be
available  to it at law or in  equity  or as  provided  in  this  Agreement,  be
entitled  to  injunctive  relief  and to  enforce  its  rights by an action  for
specific  performance  to the extent  permitted by  Applicable  Law.  Each party
hereby waives any  requirement  for security or the posting of any bond or other
surety in  connection  with any  temporary  or  permanent  award of  injunctive,
mandatory or other equitable relief. Nothing herein contained shall be construed
as prohibiting either party from pursuing any other remedies available to it for
such breach or threatened  breach,  including without limitation the recovery of
damages.

         SECTION 9.4  Severability.  If any term or provision of this  Agreement
shall be held or  deemed  to be,  or shall  in fact  be,  invalid,  inoperative,
illegal or  unenforceable  as applied to any particular case in any jurisdiction
or  jurisdictions,  or in all  jurisdictions  or in all  cases,  because  of the


                                      AI-57


<PAGE>


conflicting of any provision with any  constitution or statute or rule of public
policy or for any other reason,  such circumstance  shall not have the effect of
rendering the provision or provisions in question invalid, inoperative,  illegal
or unenforceable in any other  jurisdiction or in any other case or circumstance
or of rendering any other  provision or  provisions  herein  contained  invalid,
inoperative,  illegal or  unenforceable to the extent that such other provisions
are not themselves actually in conflict with such constitution,  statute or rule
of public policy, but this Agreement shall be reformed and construed in any such
jurisdiction or case as if such invalid,  inoperative,  illegal or unenforceable
provision had never been contained herein and such provision reformed so that it
would be valid,  operative and  enforceable to the maximum  extent  permitted in
such jurisdiction or in such case.  Notwithstanding the foregoing,  in the event
of any such  determination  the  effect of which is to Affect  Adversely  either
party,  the parties shall negotiate in good faith to modify this Agreement so as
to effect the  original  intent of the  parties as  closely as  possible  to the
fullest extent  permitted by Applicable  Law in an acceptable  manner to the end
that the  Transactions  are  fulfilled  and  consummated  to the maximum  extent
possible.

         SECTION 9.5  Counterparts.  This  Agreement  may be executed in several
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same  instrument,  binding upon all of the
parties. In pleading or proving any provision of this Agreement, it shall not be
necessary to produce more than one of such counterparts.

         SECTION 9.6 Section Headings.  The headings contained in this Agreement
are for  reference  purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.

         SECTION 9.7 Governing Law. The validity,  interpretation,  construction
and  performance  of this  Agreement  shall be  governed  by, and  construed  in
accordance  with,  the  applicable  laws of the United States of America and the
laws of The  Commonwealth  of  Massachusetts  applicable  to contracts  made and
performed in such State and, in any event,  without  giving effect to any choice
or  conflict  of laws  provision  or rule that would  cause the  application  of
domestic  substantive laws of any other jurisdiction,  except to the extent that
the DGCL or the MGCL apply to the Merger.

         SECTION 9.8 Further Acts.  Each party agrees that at any time, and from
time to time, before and after the consummation of the transactions contemplated
by this  Agreement,  it will do all such things and execute and deliver all such
Collateral  Documents  and other  assurances,  as any other party or its counsel
reasonably  deems  necessary  or  desirable  in order to carry out the terms and
conditions of this  Agreement  and the  transactions  contemplated  hereby or to
facilitate  the enjoyment of any of the rights  created  hereby or to be created
hereunder.

         SECTION 9.9 Entire Agreement. This Agreement (together with the Company
Disclosure  Schedule,  the Key  Disclosure  Schedule  and the  other  Collateral
Documents delivered in connection herewith), constitutes the entire agreement of
the parties and supersede all prior  agreements and  undertakings,  both written
and oral,  between  the  parties,  with  respect to the subject  matter  hereof,
including  without  limitation  that certain letter of intent,  dated August 29,
1995, between the parties.

         SECTION  9.10  Assignment.  This  Agreement  shall not be  assigned  by
operation of law or otherwise  and any  purported  assignment  shall be null and
void.

         SECTION 9.11 Parties in Interest.  This Agreement shall be binding upon
and inure  solely to the benefit of each party,  and nothing in this  Agreement,
express or implied (other than the  provisions of Section 6.4, which  provisions


                                      AI-58


<PAGE>


are intended to benefit and may be enforced by the  beneficiaries  thereof),  is
intended to or shall confer upon any person any right,  benefit or remedy of any
nature whatsoever under or by reason of this Agreement.

         SECTION 9.12 Mutual Drafting. This Agreement is the result of the joint
efforts of Key and the Company,  and each  provision  hereof has been subject to
the mutual  consultation,  negotiation  and  agreement  of the parties and there
shall be no  construction  against either party based on any presumption of that
party's involvement in the drafting thereof.

         IN WITNESS  WHEREOF,  Key and the Company have caused this Agreement to
be  executed as of the date first  written  above by their  respective  officers
thereunto duly authorized.

                            Key Energy Group, Inc.


                            By: /s/ Francis D. John
                                Name:  Francis D. John
                                Title:  President and  Chief Executive Officer

                            WellTech, Inc.


                            By: /s/ W. Clarke Gormley
                                Name:  W. Clarke Gormley
                                Title:  Vice President - Legal

         Schedules to the Merger  Agreement  have been omitted from this filing,
but will be provided upon request.

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<PAGE>



                                                                   APPENDIX A

                                   DEFINITIONS

         As used in this Agreement,  unless the context otherwise requires,  the
following  terms  (or any  variant  in the  form  thereof)  have  the  following
respective  meanings.  Terms  defined in the  singular  shall have a  comparable
meaning when used in the plural, and vice versa, and the reference to any gender
shall be deemed to include all genders.  Unless otherwise defined or the context
otherwise clearly  requires,  terms for which meanings are provided herein shall
have  such  meanings  when  used in the  Company  Disclosure  Schedule,  the Key
Disclosure  Schedule  and each  Collateral  Document  executed or required to be
executed pursuant hereto or thereto or otherwise  delivered,  from time to time,
pursuant  hereto or thereto.  References to "hereof",  "herein" or similar terms
are intended to refer to the Agreement as a whole and not a particular  section,
and references to "this Section" are intended to refer to the entire section and
not a particular subsection thereof.

         Adverse,  Adversely, when used alone or in conjunction with other terms
(including  without  limitation  "Affect," "Change" and "Effect") shall mean any
Event which is reasonably likely, in the reasonable  business judgment of Key or
the  Company,  as the case may be,  be  expected  to (a)  adversely  affect  the
validity or  enforceability  of this Agreement or the likelihood of consummation
of the Merger,  or (b) adversely  affect the business,  operations,  management,
properties or prospects,  or the  condition,  financial or other,  or results of
operation  of the Company and its  Subsidiaries  taken as a whole or Key and its
Subsidiaries  taken as a whole,  as the case may be, or (c) impair the Company's
or Key's, as the case may be, ability to fulfill its obligations under the terms
of this Agreement,  or (d) adversely affect the aggregate rights and remedies of
Key or the  Company,  as the case may be,  under this  Agreement,  in all cases,
unless  otherwise  specifically set forth, in a material manner or to a material
degree.  Notwithstanding the foregoing,  for purposes of determining whether one
or more  conditions,  including  without  limitation those set forth in Sections
7.1(b), 7.1(c),  7.2(e), 7.2(g) and 7.3(g), shall have been satisfied,  the term
"Adverse" when used alone or in conjunction with other terms (including  without
limitation  "Affect,"  "Change"  and  "Effect")  shall mean any Event which when
considered  with all other Changes  would  reasonably be expected to result in a
"loss" having the effect of so fundamentally adversely affecting the business or
financial prospects of the Company or Key, as the case may be, that the benefits
reasonably expected to be obtained by such party as a result of the Merger would
be  jeopardized  in a material  manner or to a  material  degree  with  relative
certainty;  provided, however, that in no event shall either (a) a change in the
oil and gas industry  generally or in the particular  geographic  areas in which
the Company or Key are  engaged in  business or (b) in the trading  price of the
Key  Stock on the  American  Stock  Exchange  between  the date  hereof  and the
Effective  Date,  in and of  itself,  constitute  an Adverse  Change,  Affect or
Effect.  The term  "loss"  shall mean any and all direct or  indirect  payments,
obligations, assessments, losses, loss of income, liabilities, fines, penalties,
costs  and  expenses  paid or  incurred  or more  likely  than not to be paid or
incurred, or diminutions in value of any kind or character (whether or not known
or unknown,  conditional  or  unconditional,  choate or inchoate,  liquidated or
unliquidated,  secured or unsecured, accrued, absolute, contingent or otherwise)
that are more likely than not to occur,  including without limitation penalties,
interest on any amount payable to a third party as a result of the foregoing and
any legal or other  expenses  reasonably  incurred or more likely than not to be
reasonably  incurred in  connection  with  investigating  or defending any Legal
Actions or other Claims that,  if adversely  determined,  would likely result in
losses,  and all amounts paid in  settlement  of Legal  Actions or other Claims;
provided,  however,  that  losses  shall  be net of (i) any  insurance  proceeds
entitled to be received  from a  nonaffiliated  insurance  company on account of
such losses  (after  taking into account any costs  incurred in  obtaining  such


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<PAGE>


proceeds  and any  increase  in  insurance  premiums as a result of a claim with
respect to such  proceeds) and (ii) the reasonably  determined  present value of
any tax benefits  reasonably  likely to be recognized  as a consequence  of such
losses.

         Affiliate,  Affiliated shall mean, with respect to any Person,  (a) any
other Person at the time  directly or indirectly  controlling,  controlled by or
under direct or indirect  common control with such Person,  (b) any other Person
of which such Person at the time owns, or has the right to acquire,  directly or
indirectly,  twenty  percent  (20%) or more of any class of the capital stock or
beneficial  interest,  (c) any other Person  which at the time owns,  or has the
right to acquire,  directly or  indirectly,  twenty percent (20%) or more of any
class of the  capital  stock or  beneficial  interest  of such  Person,  (d) any
executive  officer  or  director  of  such  Person,  (e)  with  respect  to  any
partnership,  joint venture or similar Entity, any general partner thereof,  and
(f) when used with respect to an  individual,  shall  include any member of such
individual's immediate family or a family trust.

         Agreement shall mean this Agreement as originally in effect,  including
unless  the  context  otherwise  specifically  requires,  this  Appendix  A, all
schedules,  including the Company  Disclosure  Schedule,  and the Key Disclosure
Schedule,  and all exhibits hereto, and as any of the same may from time to time
be supplemented,  amended,  modified or restated in the manner herein or therein
provided.

         Applicable Law shall mean any Law of any Authority, whether domestic or
foreign,  including  without  limitation  all federal and state  securities  and
Environmental  Laws,  to which a Person is  subject or by which it or any of its
business or operations is subject or any of its property or assets is bound.

         Authority shall mean any governmental or quasi-governmental  authority,
whether  administrative,  executive,  judicial,  legislative  or  other,  or any
combination   thereof,   including  without   limitation  any  federal,   state,
territorial,   county,   municipal  or  other   government  or  governmental  or
quasi-governmental agency, arbitrator,  authority,  board, body, branch, bureau,
central bank or comparable  agency or Entity,  commission,  corporation,  court,
department,  instrumentality,  master, mediator, panel, referee, system or other
political unit or  subdivision or other Entity of any of the foregoing,  whether
domestic or foreign.

         Benefit Arrangement shall mean any material benefit arrangement that is
not a Plan,  including  (a)  any  employment  or  consulting  agreement  (b) any
arrangement providing for insurance coverage or workers' compensation  benefits,
(c) any  incentive  bonus or deferred  bonus  arrangement,  (d) any  arrangement
providing termination  allowance,  severance or similar benefits, (e) any equity
compensation plan, (f) any deferred  compensation plan, and (g) any compensation
policy and practice.

         Certificate shall have the meaning given to it in Section 2.1(a).

         Claims shall mean any and all debts, liabilities,  obligations, losses,
damages,  deficiencies,  assessments  and  penalties,  together  with all  Legal
Actions, pending or threatened, claims and judgments of whatever kind and nature
relating  thereto,  and all fees, costs,  expenses and disbursements  (including
without  limitation  reasonable  attorneys'  and  other  legal  fees,  costs and
expenses) relating to any of the foregoing.

         Closing shall have the meaning given to it in Section 1.3.

         Closing Date shall mean the date on which the transactions contemplated
by this Agreement are consummated and the Merger becomes effective.


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         COBRA shall mean the Consolidated Omnibus Budget  Reconciliation Act of
1985, as amended,  as set forth in Section 4980B of the Code and Part 6 of Title
I of ERISA.

         Code shall have the meaning given to it in the Second Recital.

         Collateral  Document shall mean any agreement,  certificate,  contract,
instrument,  notice,  opinion  or other  document  executed  or  required  to be
executed  pursuant to the  provisions of this Agreement or any of the Collateral
Documents,  including without limitation the Interim Operations  Agreement,  the
New Debt Facility  Documents,  the New Key Warrants and the Registration  Rights
Agreement.

         Company shall have the meaning given to it in the Preamble.

         Company Disclosure  Schedule shall mean the Company Disclosure Schedule
dated as of the date of this Agreement delivered by the Company to Key.

         Company  Financial  Statements  shall have the  meaning  given to it in
Section 3.2.

         the  Company's  knowledge   (including  the  term  "to  the  knowledge,
information  and belief of the  Company")  means the  knowledge  of any  Company
director or executive  officer,  and that such  director or  executive  officer,
after reasonable inquiry of appropriate  Company personnel and reasonable review
of appropriate  company records,  shall have reason to believe and shall believe
that the subject representation or warranty is true and accurate as stated.

         Company Shares shall have the meaning given to it in Section 2.1(a).

         Company  Special  Meeting shall have the meaning given to it in Section
1.2(a).

         Company Stock shall have the meaning given to it in Section 2.1(a).

         Contract,  Contractual  Obligation  shall  mean  any  term,  condition,
provision,   representation,   warranty,   agreement,   covenant,   undertaking,
commitment,  indemnity or other obligation set forth in the Organic Documents of
the obligee or which is outstanding or existing under any Instrument  (including
without limitation any Instrument relating to or evidencing any Indebtedness) to
which the obligee is a party or by which it or any of its business is subject or
property or assets is bound.

         control (including the terms  "controlled,"  "controlled by" and "under
common control with") means the possession, directly or indirectly or as trustee
or executor,  of the power to direct or cause the direction of the management or
policies of a Person,  or the disposition of such Person's assets or properties,
whether through the ownership of stock, equity or other ownership,  by contract,
arrangement or understanding,  or as trustee or executor,  by contract or credit
arrangement or otherwise;

         Convertible Securities shall mean any evidences of indebtedness, shares
of capital  stock  (other than  common  stock) or other  securities  directly or
indirectly  convertible into or exchangeable for shares of common stock, whether
or not the right to convert or exchange thereunder is immediately exercisable or
is conditioned  upon the passage of time, the  occurrence or  non-occurrence  or
existence or non-existence of some other Event, or both.

         DGCL shall have the meaning given to it in the First Recital.


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<PAGE>



         Dissenting Shares shall have the meaning given to it in Section 2.5(a).

         Distribution   shall  mean,  with  respect  to  any  Person,   (a)  the
declaration or payment of any dividend (except dividends payable in common stock
of such Person) on or in respect of any shares of any class of capital  stock of
such Person or any shares of capital stock of any  Subsidiary  owned by a Person
other than the Company or a Subsidiary,  (b) the  purchase,  redemption or other
retirement  of any  shares of any class of capital  stock of such  Person or any
shares of capital stock of any Subsidiary of such Person owned by a Person other
than such Person or a Subsidiary of such Person,  and (c) any other distribution
on or in respect of any shares of any class of capital  stock of such  Person or
any shares of capital  stock of any  Subsidiary of such Person owned by a Person
other than such Person or a Subsidiary of such Person.

         Effective Time shall have the meaning given to it in Section 1.4.

         Employment  Arrangement  shall mean,  with  respect to any Person,  any
employment,  consulting,  retainer,  severance or similar  contract,  agreement,
plan,  arrangement or policy (exclusive of any which is terminable within thirty
(30) days  without  liability,  penalty or payment of any kind by such Person or
any  Affiliate),  or providing for severance,  termination  payments,  insurance
coverage  (including  any  self-insured  arrangements),   workers  compensation,
disability benefits, life, health, medical, dental or hospitalization  benefits,
supplemental unemployment benefits,  vacation or sick leave benefits, pension or
retirement benefits or for deferred compensation, profit-sharing, bonuses, stock
options,  stock  purchase or  appreciation  rights or other  forms of  incentive
compensation  or  post-retirement  insurance,  compensation  or  post-retirement
insurance, compensation or benefits, or any collective bargaining or other labor
agreement,  whether or not any of the foregoing is subject to the  provisions of
ERISA.

         Encumber  shall  mean  to  suffer,  accept,  agree  to  or  permit  the
imposition of an Lien.

         Entity shall mean any corporation,  firm, unincorporated  organization,
association,  partnership,  limited  liability  company,  trust  (inter vivos or
testamentary),  estate of a deceased, insane or incompetent individual, business
trust,  joint stock  company,  joint  venture or other  organization,  entity or
business,  whether acting in an individual,  fiduciary or other capacity, or any
Authority.

         Environmental Law shall mean any Law relating to or otherwise  imposing
liability or  standards of conduct  concerning  pollution or  protection  of the
environment or occupational health and safety, including without limitation Laws
relating to emissions,  discharges, releases or threatened releases of Hazardous
Materials  or  other  chemicals,   noises,  orders  or  industrial   pollutants,
substances,  materials  or  wastes  into  the  environment  (including,  without
limitation,  ambient air, surface water,  ground water, mining or reclamation or
mined land,  land surface or  subsurface  strata) or  otherwise  relating to the
manufacture,  processing,  generation,  distribution,  use, treatment,  storage,
disposal, cleanup, transport or handling of pollutants,  contaminants, chemicals
or industrial, toxic or hazardous substances, materials or wastes. Environmental
Laws shall include without limitation the Comprehensive  Environmental Response,
Compensation  and Liability Act (42 U.S.C.  Section 6901 et seq.), the Hazardous
Material  Transportation  Act (49 U.S.C.  Section  1801 et seq.),  the  Resource
Conservation  and  Recovery Act (42 U.S.C.  Section  6901 et seq.),  the Federal
Water Pollution Control Act (33 U.S.C.  Section 1251 et seq.), the Clean Air Act
(42 U.S.C.  Section 7401 et seq.), the Toxic  Substances  Control Act (15 U.S.C.
Section 2601 et seq.), the Occupational Safety and Health Act (29 U.S.C. Section
651 et seq.),  the Federal  Insecticide  Fungicide and Rodenticide Act (7 U.S.C.
Section 136 et seq.), and the Surface Mining Control and Reclamation Act of 1977
(30 U.S.C.  Section 1201 et seq.), and any analogous  federal,  state,  local or
foreign, Laws, and the rules and regulations  promulgated thereunder all as from


                                      AI-63


<PAGE>


time  to time in  effect,  and any  reference  to any  statutory  or  regulatory
provision  shall be deemed  to be a  reference  to any  successor  statutory  or
regulatory provision.

         Environmental Permit shall mean any Governmental Authorization required
by or pursuant to any Environmental Law.

         ERISA shall mean the Employee  Retirement  Income Security Act of 1974,
and the rules and regulations thereunder, all as from time to time in effect, or
any successor law, rules or  regulations,  and any reference to any statutory or
regulatory  provision  shall  be  deemed  to be a  reference  to  any  successor
statutory or regulatory provision.

         ERISA  Affiliate  shall  mean any  Person  that is  treated as a single
employer with the Company under Sections 414(b),  (c), (m) or (o) of the Code or
Section 4001(b)(1) of ERISA.

         Event  shall  mean the  existence  or  occurrence  of any act,  action,
activity,  circumstance,  condition,  event,  fact,  failure  to act,  omission,
incident or practice, or any set or combination of any of the foregoing.

         Exchange Act shall mean the  Securities  Exchange Act of 1934,  and the
rules and regulations of the SEC thereunder, all as from time to time in effect,
or any successor law, rules or  regulations,  and any reference to any statutory
or  regulatory  provision  shall be deemed to be a  reference  to any  successor
statutory or regulatory provision.

         Exchange Agent shall have the meaning given to it in Section 2.2(a).

         Exchange Fund shall have the meaning given to it in Section 2.2(a).

         Exchange  Merger  Consideration  shall have the meaning  given to it in
Section 2.1(a).

         Existing  Key  Shares  shall  mean an  aggregate  of  1,429,962  of the
1,635,000  shares of Key Stock  issued to the  Company  by Key  pursuant  to the
agreement dated as of December 10, 1993.

         Existing Key Warrants  shall mean the warrants to purchase an aggregate
of 250,000  shares of Key Stock at $5.00 per share issued by Key pursuant to the
agreement dated as of December 10, 1993.

         Expenses shall have the meaning set forth in Section 8.5.

         Final  Determination  (a) shall mean with respect to federal  Taxes,  a
"determination" as defined in Section 1313(a) of the Code or execution of an IRS
Form 870AD and,  with  respect to Taxes  other  than  federal  Taxes,  any final
determination  of liability in respect of a Tax which,  under Applicable Law, is
not subject to further  appeal,  review or modification  through  proceedings or
otherwise,   including  without  limitation  the  expiration  of  a  statute  of
limitations or a period for the filing of claims for refunds, amended returns or
appeals from adverse determinations; and (b) shall include the payment of Tax by
or whichever is responsible  for payment of such Tax under  Applicable Law, with
respect to any item disallowed or adjusted by a Taxing Authority,  provided that
the other party is notified  of such  payment and the party that is  responsible
for such Tax under this Agreement  determines  that no action should be taken to
recoup such payment from such Taxing Authority.


                                      AI-64


<PAGE>



         GAAP shall mean generally accepted  accounting  principles as in effect
from time to time in the United States of America.

         Governmental  Authorizations  shall  mean all  approvals,  concessions,
consents,   franchises,   licenses,  permits,  plans,  registrations  and  other
authorizations of all Authorities.

         Governmental  Filings shall mean all filings,  including  franchise and
similar Tax  filings,  and the payment of all fees,  assessments,  interest  and
penalties associated with such filings, with all Authorities.

         Guaranty  or  Guaranteed  shall  mean  any  agreement,  undertaking  or
arrangement by which the Company guarantees, endorses or otherwise becomes or is
liable, directly or indirectly, contingently or otherwise, upon any Indebtedness
of any other Person  including  without  limitation the payment of amounts drawn
down by  beneficiaries  of  letters of credit  (other  than by  endorsements  of
negotiable  instruments  for deposit or  collection  in the  ordinary  course of
business).  The amount of the obligor's  obligation  under any Guaranty shall be
deemed to be the outstanding  amount (or maximum permitted amount, if larger) of
the  Indebtedness  directly or  indirectly  guaranteed  thereby  (subject to any
limitation set forth therein).

         Hazardous  Materials  shall mean and include any substance (in whatever
state of  matter):  (a)  that is  defined  as a  "hazardous  waste",  "hazardous
material" or "hazardous  substance",  under any  Environmental  Law; (b) that is
radioactive and is regulated under any  Environmental  Law; (c) that contains or
consists  of  gasoline,  diesel  fuel or  other  petroleum  hydrocarbons  in any
unconfined manner; or (d) that contains or consists of PCBs,  asbestos,  or urea
formaldehyde foam insulation.

         Indebtedness  shall mean,  with  respect to any Person,  (a) all items,
except  items of  capital  stock or of  surplus  or of  general  contingency  or
deferred tax reserves or any minority  interest in any Subsidiary of such Person
to the extent such interest is treated as a liability with indeterminate term on
the  consolidated  balance sheet of such Person,  which in accordance  with GAAP
would be included in  determining  total  liabilities  as shown on the liability
side of a balance sheet of such Person, (b) all obligations  secured by any Lien
to which any property or asset owned or held by such Person is subject,  whether
or not the obligation secured thereby shall have been assumed,  and (iii) to the
extent not  otherwise  included,  all  Contractual  Obligations  of such  Person
constituting  capitalized leases and all obligations of such Person with respect
to Leases constituting part of a sale and leaseback arrangement.

         Instrument shall mean, with respect to any Person, any agreement, bond,
certificate,  commitment,  contract,  debenture,  indenture,  lease,  letter  of
credit,  memorandum,  mortgage,  note, notice,  permit,  plan, purchase or sales
order,  document  or other  writing  (whether  by  formal  agreement,  letter or
otherwise),  or any oral arrangement,  understanding or commitment,  under which
any debt, liability or other obligation is evidenced,  assumed or undertaken, or
any Lien (or right or interest therein) is granted, perfected or exists.

         Intangible  Assets shall mean all assets and property  lacking physical
properties the evidence of ownership of which must  customarily be maintained by
independent  registration,  documentation,  certification,  recordation or other
means,  and  shall  include,   without  limitation,   concessions,   copyrights,
franchises,  license, patents, permits, service marks, trademarks,  trade names,
and applications with respect to any of the foregoing, technology and know-how.

         Interim Operations  Agreement shall have the meaning given to it in the
Third Recital.


                                      AI-65


<PAGE>



         Joint Proxy  Statement/Prospectus shall have the meaning given to it in
Section 5.1(a).

         Key shall have the meaning given to it in the Preamble.

         Key Disclosure Schedule shall mean the Key Disclosure Schedule dated as
of the date of this Agreement delivered by Key to the Company.

         Key Financial  Statements shall have the meaning given to it in Section
4.2.

         Key's knowledge (including the term "to the knowledge,  information and
belief of Key") means the  knowledge of any Key  director or executive  officer,
and that such  director  or  executive  officer,  after  reasonable  inquiry  of
appropriate Key personnel and reasonable review of appropriate  company records,
shall have reason to believe and shall  believe that the subject  representation
or warranty is true and accurate as stated.

         Key Share Price shall mean the closing price per share for Key Stock on
the  American  Stock  Exchange on the Closing  Date or, if no shares  shall have
traded on such date,  the mean  between the closing bid and asking price on such
date.

         Key Shares shall have the meaning given to it in the First Recital.

         Key  Special  Meeting  shall  have the  meaning  given to it in Section
1.2(b).

         Key Stock shall have the meaning given to it in the First Recital.

         Law shall mean any (a) administrative,  judicial,  legislative or other
action,  code,  consent  decree,  constitution,  decree,  directive,  enactment,
finding, guideline, law, injunction, interpretation, judgment, order, ordinance,
policy statement,  proclamation,  promulgation,  regulation,  requirement, rule,
rule of law, rule of public policy,  settlement  agreement,  statute, or writ or
any  Authority,  domestic  or  foreign;  (b) the common  law,  or other legal or
quasi-legal  precedent;  or (c)  arbitrator's,  mediator's  or referee's  award,
decision,  finding or recommendation;  including, in each such case or instance,
any interpretation,  directive,  guideline or request, whether or not having the
force of law including, in all cases, without limitation any particular section,
part or provision thereof.

         Lease  shall mean any lease of  property,  whether  real,  personal  or
mixed, and all amendments thereto.

         Legal Action shall mean, with respect to any Person,  any litigation or
legal   or   other   actions,   arbitrations,   counterclaims,   investigations,
proceedings,  requests for material  information  by or pursuant to the order of
any Authority or suits, at law or in arbitration,  equity or admiralty,  whether
or not purported to be brought on behalf of such Person affecting such Person or
any of such Person's business, property or assets.

         Lien shall mean any of the  following:  mortgage;  lien  (statutory  or
other);  preference,  priority  or  other  security  agreement,  arrangement  or
interest;  hypothecation,  pledge  or  other  deposit  arrangement;  assignment;
charge; levy; executory seizure; attachment; garnishment; encumbrance (including
any easement,  exception,  variance,  reservation or  limitation,  right of way,
zoning  restriction,  building or use  restriction,  and the like);  conditional
sale,  title  retention  or other  similar  agreement,  arrangement,  device  or
restriction;   preemptive  or  similar  right;  any  financing  lease  involving


                                      AI-66


<PAGE>


substantially  the same economic  effect as any of the foregoing;  the filing of
any financing  statement under the Uniform  Commercial Code or comparable law of
any  jurisdiction;  restriction on sale,  transfer,  assignment,  disposition or
other alienation; or any option, equity, claim or right of or obligation to, any
other Person, of whatever kind and character.

         Margin  Rules  shall  mean  Regulations  G, T, U or X of the  Board  of
Governors of the Federal Reserve System, 12 C.F.R., parts 207, 220, 221 and 224,
as now in effect.

         material or  materiality  for the  purposes of this  Agreement,  shall,
unless specifically stated to the contrary,  be determined without regard to the
fact  that  various  provisions  of this  Agreement  set forth  specific  dollar
amounts.

         Material  Agreement or Material  Commitment shall mean, with respect to
any Person,  any  Contractual  Obligation  which (a) was not entered into in the
ordinary  course of business,  (b) was entered  into in the  ordinary  course of
business  which (i) involved the purchase,  sale or lease of goods or materials,
or purchase of services,  aggregating more than Fifty Thousand Dollars ($50,000)
during any of the last three fiscal years,  (ii) extends for more than three (3)
months,  or (iii) is not  terminable on thirty (30) days or less notice  without
penalty or other payment, (c) involves  Indebtedness for Money Borrowed,  (d) is
or otherwise  constitutes a written agency,  dealer,  license,  distributorship,
sales  representative  or similar written  agreement,  or (e) accounted for more
than three  percent (3%) of revenues in any of the last three fiscal years or is
likely to  account  for more than  three  percent  (3%) of  revenues  during the
current fiscal year.

         MGCL shall have the meaning given to it in the First Recital.

         Merger shall have the meaning given to it in the First Recital.

         Merger  Consideration  shall  have the  meaning  given to it in Section
2.1(a).

         Multiemployer  Plan shall mean a Plan which is a  "multiemployer  plan"
within the meaning of Section 4001(a)3 of ERISA.

         New Debt Facility shall have the meaning given to it in Section 6.8.

         New Debt  Facility  Documents  shall  have the  meaning  given to it in
Section 6.8.

         New Key  Warrants  shall  have the  meaning  given  to it in the  First
Recital.

         Option  Securities  shall mean all rights,  options and  warrants,  and
calls or  commitments  evidencing  the right,  to  subscribe  for,  purchase  or
otherwise acquire shares of capital stock or Convertible Securities,  whether or
not the right to subscribe  for,  purchase or otherwise  acquire is  immediately
exercisable  or is  conditioned  upon the  passage of time,  the  occurrence  or
non-occurrence or the existence or non-existence of some other Event.

         Organic  Document  shall  mean,  with  respect  to a Person  which is a
corporation,  its charter,  its by-laws and all stockholder  agreements,  voting
trusts and similar arrangements applicable to any of its capital stock and, with
respect to a Person which is a  partnership,  its agreement and  certificate  of
partnership,  any  agreements  among  partners,  and any  management and similar
agreements  between the partnership  and any general  partners (or any Affiliate
thereof).

                                      AI-67


<PAGE>



         Other Filings shall have the meaning given to it in Section 5.1(c).

         Other Transaction shall have the meaning given to it in Section 6.6(c).

         parties shall have the meaning given to it in the Preamble.

         PBGC shall mean the Pension Benefit Guaranty Corporation and any Entity
succeeding to any or all of its functions under ERISA.

         Person shall mean any natural individual or any Entity.

         Plan shall mean, with respect to the Company and at a particular  time,
any employee  benefit plan which is covered by ERISA and in respect of which the
Company or an ERISA Affiliate is (or, if such plan were terminated at such time,
would under  Section 4069 of ERISA be deemed to be) an  "employer" as defined in
Section 3(5) of ERISA.

         Private Authorizations shall mean all approvals, concessions, consents,
franchises,  licenses,  permits,  and other authorizations of all Persons (other
than Authorities) including without limitation those with respect to copyrights,
computer software programs,  patents,  service marks,  trademarks,  trade names,
technology and know-how.

         Registration Rights Agreement shall have the meaning given to it in the
Fourth Recital.

         Registration  Statement  shall have the meaning  given to it in Section
5.1(a).

         Representatives shall have the meaning given to it in Section 6.1(a).

         SEC shall mean the United States Securities and Exchange Commission, or
any successor Authority.

         SEC Filings shall have the meaning given to it in Section 5.1(e).

         Securities Act shall mean the Securities Act of 1933, and the rules and
regulations of the SEC  thereunder,  all as from time to time in effect,  or any
successor  law,  rules or  regulations,  and any  reference to any  statutory or
regulatory  provision  shall  be  deemed  to be a  reference  to  any  successor
statutory or regulatory provision.

         Shelf  Registration  Statement  shall mean the  registration  statement
(including the prospectus or preliminary  prospectus included therein),  and all
amendments  thereof  (including  post-effective  amendments),  filed  under  the
Securities Act pursuant to the provisions of Section 5.1(d).

         Subsidiary shall mean, with respect to a Person,  any Entity a majority
of the capital stock  ordinarily  entitled to vote for the election of directors
of which,  or if no such voting stock is  outstanding,  a majority of the equity
interests of which, is owned directly or indirectly, legally or beneficially, by
such Person or any other Person controlled by such Person.

         Surviving Corporation shall have the meaning given to it in Section 1.1


                                      AI-68


<PAGE>


         Tax (and "Taxable",  which shall mean subject to Tax), shall mean, with
respect to the Company,  (a) all taxes (domestic or foreign),  including without
limitation any income (net, gross or other including  recapture of any tax items
such as  investment  tax  credits),  alternative  or add-on  minimum tax,  gross
income,  gross receipts,  gains,  sales, use, leasing,  lease, user, ad valorem,
transfer, recording, franchise, profits, property (real or personal, tangible or
intangible),  fuel, license, withholding on amounts paid to or by the Company or
any of its Subsidiaries,  payroll,  employment,  unemployment,  social security,
excise, severance, stamp, occupation,  premium, environmental or windfall profit
tax,  custom,  duty or other tax,  governmental  fee or other like assessment or
charge of any kind whatsoever,  together with any interest, levies, assessments,
charges,  penalties,  addition to tax or additional amount imposed by any Taxing
Authority,  (b) any joint or  several  liability  of the  Company  or any of its
Subsidiaries  with any other  Person for the  payment of any amounts of the type
described in (a) and (c) any liability of the Company or any of its Subsidiaries
for the payment of any amounts of the type  described  in (a) as a result of any
express or implied obligation to indemnify any other Person.

         Tax  Claim  shall  mean any Claim  which  relates  to Taxes,  including
without limitation the representations and warranties set forth in Sections 3.11
and 4.11.

         Tax Return or Returns shall mean all returns, consolidated or otherwise
(including without limitation  information  returns),  required to be filed with
any Authority with respect to Taxes.

         Taxing   Authority  shall  mean  any  Authority   responsible  for  the
imposition of any Tax.

         Termination Date shall have the meaning given to it in Section 8.1.

         Transactions shall have the meaning given to it in the Second Recital.

         Transmittal  Documents  shall have the  meaning  given to it in Section
2.2(b).






                                      AI-69






<PAGE>

                                                            Exhibit A to Annex I

         THIS WARRANT HAS BEEN  ACQUIRED FOR  INVESTMENT  AND NOT WITH A VIEW TO
THE DISTRIBUTION HEREOF OR OF THE COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON
EXERCISE  HEREOF WITHIN THE MEANING OF THE  SECURITIES ACT OF 1933 AND THE RULES
AND REGULATIONS  THEREUNDER.  NEITHER THIS WARRANT NOR THE COMMON STOCK OR OTHER
SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE  REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933 OR UPON RECEIPT BY THE COMPANY OF AN OPINION SATISFACTORY AS TO FORM, SCOPE
AND SUBSTANCE OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO AN EXEMPTION THEREFROM.


                          Common Stock Purchase Warrant


[Number of Shares]                                                   [Date]


          KEY ENERGY GROUP,  INC., a Maryland  corporation (the "Company"),  for
value received,  hereby certifies that , or registered  assigns,  is entitled to
purchase,  except to the extent  hereinafter  referred to, from the Company duly
authorized,  validly issued,  fully paid and nonassessable  shares (the "Warrant
Shares") of Common Stock, par value $.10 per share (the "Common Stock"),  of the
Company at the purchase price per share of $6.75 (the "Exercise Price"),  at any
time or from time to time prior to 5:00 P.M., Boston,  Massachusetts  time, on ,
2001 (the "Expiration  Date"), all subject to the terms and conditions set forth
below in this Warrant.

         This Warrant  (this  "Warrant"  and,  together  with any such  warrants
issued in  substitution  therefor  or  issued  pursuant  to the  Asset  Purchase
Agreement, the "Warrants") referred to in the Agreement and Plan of Merger dated
as of  November  , 1995 (as from time to time in  effect,  the  "Asset  Purchase
Agreement") between the Company and WellTech, Inc.

         SECTION 1.  Registration.  The Company  shall number and register  this
Warrant (and any other warrants issued in substitution herefor) in a register as
they are issued.  The Company may deem and treat the  registered  holders of the
Warrants  as the  absolute  owners  thereof  (notwithstanding  any  notation  of
ownership  or other  writing  thereon made by anyone) for all purposes and shall
not be affected by any notice to the contrary.  Notwithstanding the foregoing, a
Warrant,  if properly  assigned,  may be exercised by a new holder without a new
Warrant first having been issued.

          SECTION 2.  Registration of Transfer and Exchanges.  The Company shall
from time to time register the transfer of the Warrants in a Warrant register to
be maintained by the Company upon surrender thereof accompanied by a written 

                                       AI-70


<PAGE>



instrument or instruments  of transfer in form  reasonably  satisfactory  to the
Company,  duly executed by the  registered  holder or holders  thereof or by the
duly appointed legal representative thereof or by a duly authorized attorney and
upon receipt of any applicable  transfer taxes or evidence  satisfactory  to the
Company that no such tax is due. Upon any such  registration of transfer,  a new
Warrant shall be issued to the transferee(s)  and the surrendered  Warrant shall
be canceled and disposed of by the Company.

         If such a transfer is not made  pursuant to an  effective  Registration
Statement under the Securities Act of 1933, as amended (the  "Securities  Act"),
the Warrant holder will, if requested by the Company,  deliver to the Company an
opinion of counsel,  which  counsel and opinion shall be  satisfactory  in form,
scope and  substance  to the Company,  that the  Warrants  may be sold  publicly
without registration under the Securities Act, as well as:

                  (a)  an investment covenant satisfactory to the Company 
         signed by the proposed transferee;

                  (b)  an agreement by such transferee to the impression of the 
         restrictive investment legend set forth at the beginning of this 
         Warrant; and

                  (c)  an agreement by such transferee to be bound by the 
         provisions of this Warrant.

         This Warrant may be exchanged  at the option of the  holder(s)  hereof,
when  surrendered to the Company at its office  designated for such purpose (the
address  of which is set  forth  in  Section  8) for  another  Warrant  or other
Warrants  of like  tenor and  representing  in the  aggregate  a like  number of
Warrants,  including,  without  limitation,  upon an adjustment in the number of
Warrant Shares purchasable upon exercise of this Warrant.  Warrants  surrendered
for exchange shall be canceled and disposed of by the Company.

         SECTION 3. Warrants: Exercise of Warrants. Subject to the terms of this
Warrant,  the  holder  of this  Warrants  shall  have the  right,  which  may be
exercised at any time prior to the Expiration  Date, to receive from the Company
the number of fully paid and  nonassessable  Warrant Shares which the holder may
at the time be entitled to receive on such  exercise and payment of the Exercise
Price then in effect for such Warrant  Shares.  No  adjustments  as to dividends
will be made upon exercise of the Warrants.

          This Warrant may be exercised upon surrender  hereof to the Company at
its office  designated  for such  purpose  (the address of which is set forth in
Section 8) with the form of election to purchase  attached hereto duly filled in
and signed, upon payment to the Company of the Exercise Price per Warrant Share,
for the  number of  Warrant  Shares in  respect  of which  this  Warrant is then
exercised.  Payment of the aggregate Exercise Price shall be made (a) in cash or
by certified or bank cashier's check payable to the order of the Company, or (b)
by delivery to the  Company of that  number of shares of Common  Stock  having a
Fair Market Value (as hereinafter defined) equal to the then applicable Exercise
Price  multiplied by the number of Warrant Shares then being  purchased.  In the
alternative,  this Warrant may be exercised on a net basis,  such that,  without
the exchange of any funds, the holder of this Warrant receives that number of

                                       AI-71


<PAGE>



Warrant  Shares  subscribed to less that number of shares of Common Stock having
an aggregate  Fair Market Value at the time of exercise  equal to the  aggregate
Exercise Price that would otherwise have been paid by such holder for the number
of Warrant Shares subscribed to. As used herein the term "Fair Market Value", on
a per share  basis,  means the Closing  Price of the Common Stock on the Date of
Exercise.  As used  herein,  the term  "Date of  Exercise"  with  respect to any
Warrant  means the date on which such Warrant is  exercised as provided  herein.
For purposes of this  Warrant,  the "Closing  Price" for any date shall mean the
last sale price reported in the Wall Street  Journal or other trade  publication
regular  way or, in case no such  reported  sale takes  place on such date,  the
average of the last reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is admitted
to trading on any national  securities  exchange or if such national  securities
exchange is not the principal  market for the Common Stock,  the last sale price
as reported by the National  Association of Securities  Dealers,  Inc. Automated
National  Market System  ("NASDAQ") or its  successor,  if any, or if the Common
Stock is not so  reported,  the average of the  reported bid and asked prices in
the  over-the-counter  market,  as furnished by the National  Quotation  Bureau,
Inc.,  or if such firm is not then  engaged in the  business of  reporting  such
prices,  as  furnished  by any similar  firm then  engaged in such  business and
selected by the Company or, if there is no such firm,  as  furnished by any NASD
member  selected  by the  Company  or, if the Common  Stock is not quoted in the
over-the-counter  market, the fair value thereof determined in good faith by the
Company's  Board of Directors as of a date which is within  fifteen (15) days of
the date as of which the determination is to be made.

         Subject to the  provisions  of Section 4, upon such  surrender  of this
Warrant and payment of the Exercise Price,  the Company shall issue and cause to
be delivered  with all  reasonable  dispatch  (and in any event within three (3)
business  days) to or upon the written  order of the holder,  and in the name of
this Warrant holder or its nominee, a certificate or certificates for the number
of full Warrant  Shares  issuable  upon such  exercise  together with such other
property  (including  cash) and securities as may be then  deliverable upon such
exercise.  Such certificate or certificates  shall be deemed to have been issued
and the  person so named  therein  shall be  deemed  to have  become a holder of
record of such  Warrant  Shares as of the date of the  surrender of this Warrant
and payment of the Exercise Price.

         This  Warrant  shall be  exercisable,  at the  election  of the  holder
hereof, either in full or from time to time in part, and, in the event that this
Warrant is exercised in respect of fewer than all of the Warrant Shares issuable
on such  exercise  at any  time  prior to the  Expiration  Date,  a new  Warrant
evidencing  the  remaining  Warrant or  Warrants  will be issued  and  delivered
pursuant to the provisions of this Section and of Section 4.

         The Company shall not be required to issue fractional Warrant Shares on
the  exercise of  Warrants.  If more than one  Warrant  shall be  presented  for
exercise in full at the same time by the same holder, the number of full Warrant
Shares which shall be issuable  upon the exercise  thereof  shall be computed on
the basis of the aggregate  number of Warrant Shares  purchasable on exercise of
the Warrants so presented.  If any fraction of a Warrant Share would, except for
the provisions of this Section,  be issuable on the exercise of any Warrants (or
specified portion thereof), the Company  shall  pay an  amount in cash  equal to

                                       AI-72


<PAGE>


the  Exercise  Price on the day  immediately  preceding  the date the Warrant is
presented for exercise, multiplied by such fraction.

         All Warrants  surrendered  upon exercise shall be canceled and disposed
of by the Company. The Company shall keep copies of this Warrant and any notices
received hereunder  available for inspection by the normal business hours at its
office.

         SECTION 4.  Payment of Taxes.  The Company  will pay all stamp taxes in
connection  with the issuance,  sale,  delivery or transfer of the Warrants,  as
well as all such taxes  attributable  to the initial  issuance of Warrant Shares
upon the exercise of this Warrant and payment of the Exercise Price.

         SECTION 5. Mutilated or Missing  Warrants.  In case any of the Warrants
shall be mutilated,  lost,  stolen or  destroyed,  upon delivery of an indemnity
agreement or security satisfactory to the Company in form, scope,  substance and
amount,  the Company  shall  issue,  in exchange and  substitution  for and upon
cancellation of the mutilated  Warrants or in lieu of and  substitution  for the
Warrant lost, stolen or destroyed,  a new Warrant of like tenor and representing
an equivalent number of Warrants .

         SECTION 6. Reservation of Warrant Shares. The Company will at all times
reserve and keep available,  free from preemptive or similar rights,  out of the
aggregate of its  authorized  but unissued  capital stock or its  authorized and
issued  capital  stock held in its  treasury,  for the purpose of enabling it to
satisfy any  obligation to issue Warrant  Shares upon exercise of Warrants,  the
maximum  number of shares of each class of capital stock  constituting a part of
the  Warrant  Shares  which may then be  deliverable  upon the  exercise  of all
outstanding  Warrants.  The Company shall cause all Warrant Shares of each class
of Common Stock or other  securities  reserved for issuance upon exercise of the
Warrants to be listed (or to be listed  subject to notice of  issuance)  on each
securities  exchange  on which  such  shares of Common  Stock or any such  other
securities are listed.

         The Company or, if  appointed,  the  transfer  agent for shares of each
class of Common Stock (the "Transfer Agent") and every subsequent transfer agent
for any shares of the Company's  capital stock issuable upon the exercise of the
Warrants  will be  irrevocably  authorized  and directed at all times to reserve
such number of  authorized  shares as shall be required  for such  purpose.  The
Company  will keep a copy of this  Warrant on file with the  Transfer  Agent and
with every subsequent transfer agent for any shares of the Company capital stock
issuable  upon  the  exercise  of the  rights  of  purchase  represented  by the
Warrants.  The Company will furnish such Transfer Agent a copy of all notices of
adjustments,  and  certificates  related  thereto,  transmitted  to each  holder
pursuant to Section 7.

         The Company  covenants that all Warrant Shares which may be issued upon
exercise of Warrants  will,  upon  payment of the  Exercise  Price  therefor and
issue,  be validly  issued,  fully paid,  nonassessable,  free of  preemptive or
similar rights and free from all taxes,  liens,  charges and security  interests
with respect to the issue thereof.


                                       AI-73


<PAGE>



         SECTION 7.  Adjustments, Notices and Other Events.

                  (a)  Adjustment of Exercise Price.  Subject to the provisions 
         of this Section 7, the Exercise Price in effect from time to time 
         shall be subject to adjustment, as follows:

                           (i) In case the Company  shall (x) declare a dividend
                  or make a distribution on the outstanding shares of its Common
                  Stock  in  shares  of  its  Common  Stock,  (y)  subdivide  or
                  reclassify the  outstanding  shares of its Common Stock into a
                  greater  number of shares,  or (z) combine or  reclassify  the
                  outstanding  shares of its Common Stock into a smaller  number
                  of shares,  the Exercise Price in effect immediately after the
                  record date for such dividend or distribution or the effective
                  date  of such  subdivision,  combination  or  reclassification
                  shall be adjusted so that it shall equal the price  determined
                  by multiplying the Exercise Price in effect  immediately prior
                  thereto by a fraction, of which (A) the numerator shall be the
                  number  of  shares of  Common  Stock  outstanding  immediately
                  before such dividend, distribution,  subdivision,  combination
                  or reclassification, and of which (B) the denominator shall be
                  the number of shares of Common Stock  outstanding  immediately
                  after such dividend, distribution, subdivision, combination or
                  reclassification.  Any shares of Common  Stock of the  Company
                  issuable in payment of a dividend shall be deemed to have been
                  issued  immediately prior to the record date for such dividend
                  for purposes of calculating  the number of outstanding  shares
                  of Common  Stock of the Company  under  Section  7(a)(ii)  and
                  7(a)(iii)  hereof.  Such adjustment shall be made successively
                  whether any event specified above shall occur.

                           (ii) In case the Company  shall fix a record date for
                  the issuance of rights,  options,  warrants or  convertible or
                  exchangeable  securities  to all  holders of its Common  Stock
                  entitling them (for a period expiring  within  forty-five (45)
                  days after such  record  date) to  subscribe  for or  purchase
                  shares of its Common  Stock at a price per share less than the
                  Current  Market  Price (as such  term is  defined  in  Section
                  7(a)(iv)  hereof) of a share of Common Stock of the Company on
                  such  record  date,  the  Exercise  Price  shall  be  adjusted
                  immediately  thereafter  so  that it  shall  equal  the  price
                  determined  by  multiplying   the  Exercise  Price  in  effect
                  immediately  prior  thereto  by a  fraction,  of which (A) the
                  numerator  shall be the  number  of  shares  of  Common  Stock
                  outstanding  on such  record date plus the number of shares of
                  Common Stock which the aggregate  offering  price of the total
                  number of shares of Common Stock so offered would  purchase at
                  the  Current  Market  Price  per  share,  and of which (B) the
                  denominator  shall be the  number of  shares  of Common  Stock
                  outstanding  on such record date plus the number of additional
                  shares of Common Stock offered for  subscription  or purchase.
                  Such  adjustment  shall be made  successively  whenever such a
                  record  date is fixed.  To the  extent  that any such  rights,
                  options,  warrants or convertible or  exchangeable  securities
                  are not so issued or expire  unexercised,  the Exercise  Price
                  then in effect shall be readjusted to the Exercise Price which
                  would  then be in  effect  if  such  unissued  or  unexercised
                  rights,  options,  warrants  or  convertible  or  exchangeable
                  securities had not been issuable.

                                      AI-74


<PAGE>



                           (iii) In case the Company shall fix a record date for
                  the making of a  distribution  to all holders of shares of its
                  Common  Stock (A) of shares of any class other than its Common
                  Stock or (B) of evidences of its indebtedness or (C) of assets
                  (excluding  cash  dividends  or   distributions   (other  than
                  extraordinary cash dividends or distributions),  and dividends
                  or distributions  referred to in Subsection 7(a)(i) hereof) or
                  (D)  of  rights,   options,   warrants   or   convertible   or
                  exchangeable  securities  (excluding  those  rights,  options,
                  warrants or convertible or exchangeable securities referred to
                  in  Section  7(a)(ii)  hereof),  then in each  such  case  the
                  Exercise  Price  in  effect  immediately  thereafter  shall be
                  determined  by  multiplying   the  Exercise  Price  in  effect
                  immediately  prior  thereto  by a  fraction,  of which (x) the
                  numerator  shall be the total number of shares of Common Stock
                  outstanding  on such  record  date  multiplied  by the Current
                  Market  Price (as such term is  defined  in  Section  7(a)(iv)
                  hereof) per share on such record date, less the aggregate fair
                  market  value as  determined  in good  faith  by the  Board of
                  Directors  of the  Company  of said  shares  or  evidences  of
                  indebtedness  or  assets  or  rights,  options,   warrants  or
                  convertible or exchangeable securities so distributed,  and of
                  which (y) the denominator  shall be the total number of shares
                  of Common Stock  outstanding on such record date multiplied by
                  such Current Market Price per share.  Such adjustment shall be
                  made successively whenever such a record date is fixed. In the
                  event  that such  distribution  is not so made,  the  Exercise
                  Price then in effect shall be readjusted to the Exercise Price
                  which would then be in effect if such record date had not been
                  fixed.

                           (iv) For the purpose of any computation under Section
                  7(a)(ii) or 7(a)(iii)  hereof,  the "Current Market Price" per
                  share at any date (the "Computation  Date") shall be deemed to
                  be the average of the daily Closing Prices of the Common Stock
                  for twenty (20)  consecutive  Trading  Days ending the Trading
                  Day  immediately  preceding the  Computation  Date;  provided,
                  however,  that if  there  shall  have  occurred  prior  to the
                  Computation  Date any event  described in Subsection  7(a)(i),
                  7(a)(ii) or 7(a)(iii)  which shall have become  effective with
                  respect to market transactions at any time (the "Market-Effect
                  Date") on or within such 20-day period,  the Closing Price for
                  each Trading Day  preceding  the  Market-Effect  Date shall be
                  adjusted,   for  purposes  of  calculating  such  average,  by
                  multiplying such Closing Price by a fraction, of which (A) the
                  numerator shall be the Exercise Price as in effect immediately
                  prior to the Computation Date and of which (B) the denominator
                  shall be the Exercise Price as in effect  immediately prior to
                  the  Market-Effect  Date, it being understood that the purpose
                  of this  proviso is to ensure that the effect of such event on
                  the  market  price of the  Common  Stock  shall,  as nearly as
                  possible,  be eliminated  in order that the  distortion in the
                  calculation of the Current Market Price may be minimized.

                  (b) No  Adjustments  to Exercise  Price.  No adjustment in the
         Exercise Price in accordance  with the  provisions of Section  7(a)(i),
         7(a)(ii) or 7(a)(iii)  hereof need be made unless such adjustment would
         amount to a change  of at least 1% in such  Exercise  Price;  provided,
         however,  that the amount by which any adjustment is not made by reason
         of the provisions of this Section 7(b) shall be carried forward and

                                       AI-75


<PAGE>



         taken into account at the time of any subsequent adjustment in the 
         Exercise Price.

                  (c)  Adjustment of Number of Shares.  Upon each  adjustment of
         the Exercise Price pursuant to Section  7(a)(i),  7(a)(ii) or 7(a)(iii)
         hereof,  each Warrant  shall  thereupon  evidence the right to purchase
         that number of Warrant Shares (calculated to the nearest hundredth of a
         share) obtained by multiplying the number of Warrant Shares purchasable
         immediately  prior to such  adjustment  and  dividing  the  product  so
         obtained  by the  Exercise  Price  in  effect  immediately  after  such
         adjustment.

                  (d)  Reorganizations.  In case of any capital  reorganization,
         other than in the cases  referred  to in Section  7(a)  hereof,  or the
         consolidation or merger of the Company with or into another corporation
         (other  than a merger  or  consolidation  in which the  Company  is the
         continuing   corporation   and   which   does   not   result   in   any
         reclassification  of the  outstanding  shares  of  Common  Stock or the
         conversion  of such  outstanding  shares of Common Stock into shares of
         other stock or other securities or property), or the sale or conveyance
         of the  property of the Company as an entirety or  substantially  as an
         entirety  (collectively  such actions being hereinafter  referred to as
         "Reorganizations"), there shall thereafter be deliverable upon exercise
         of any  Warrant  (in lieu of the number of Warrant  Shares  theretofore
         deliverable)  the  number  of shares  of stock or other  securities  or
         property to which a holder of the number of Warrant  Shares which would
         otherwise have been deliverable upon the exercise of such Warrant would
         have been  entitled upon such  Reorganization  if such Warrant had been
         exercised in full immediately prior to such Reorganization.  In case of
         any Reorganization, appropriate adjustment, as determined in good faith
         by the  Board  of  Directors  of the  Company,  shall  be  made  in the
         application  of the  provisions  herein set forth  with  respect to the
         rights  and  interests  of the  holder  of this  Warrant  so  that  the
         provisions set forth herein shall  thereafter be applicable,  as nearly
         as  possible,  in relation to any shares or other  property  thereafter
         deliverable upon exercise of the Warrants.  Any such adjustments  shall
         be made by and set forth in a  supplemental  agreement  prepared by the
         Company or any successor thereto, between the Company, or any successor
         thereto, and shall for all purposes hereof conclusively be deemed to be
         an  appropriate  adjustment.  The  Company  shall not  effect  any such
         Reorganization,  unless upon or prior to the  consummation  thereof the
         successor  corporation,  or if  the  Company  shall  be  the  surviving
         corporation  in any such  Reorganization  and is not the  issuer of the
         shares of stock or other  securities  or  property to be  delivered  to
         holders of shares of the Common Stock outstanding at the effective time
         thereof,  then such  issuer,  shall  assume by written  instrument  the
         obligation  to  deliver to the holder of any  Warrants  such  shares of
         stock,  securities,  cash or other  property  as such  holder  shall be
         entitled to purchase in accordance with the foregoing provisions.

                  (e)  Verification of  Computation.  The Company shall select a
         firm of independent accountants, which selection (i) may be its regular
         firm of  independent  accountants  and (ii) may be changed from time to
         time, to verify each computation  and/or  adjustment made in accordance
         with this Section 7. The certificate, report or other written statement
         of any such firm shall be conclusive evidence of the correctness of any
         computation made under this Section 7.  Promptly  upon its receipt of 

                                      AI-76


<PAGE>



         such  certificate,  report or statement from such firm of independent 
         accountants,  the Company shall deliver a copy thereof to the holder 
         of this Warrant.

                (f)  Notice of Certain Actions.  In the event the Company shall:

                           (i)  declare  any  dividend  payable  in stock to the
                  holders of its Common Stock or make any other  distribution in
                  property  other than cash to the holders of its Common  Stock;
                  or

                           (ii) offer to the holders of its Common Stock rights
                  to subscribe for or purchase any shares of any class of stock 
                  or any other rights or options; or

                           (iii) effect any reclassification of its Common Stock
                  (other   than  a   reclassification   involving   merely   the
                  subdivision or  combination  of  outstanding  shares of Common
                  Stock) or any capital  reorganization  or any consolidation or
                  merger  (other  than a  merger  in which  no  distribution  of
                  securities  or other  property  is made to  holders  of Common
                  Stock),  or any sale,  transfer  or other  disposition  of its
                  property, assets and business substantially as an entirety, or
                  the liquidation, dissolution or winding up of the Company;

         then in each such case, the Company shall cause notice of such proposed
         action to be mailed to the holder of this  Warrant as  hereinafter  set
         forth in this Section 7(f). Such notice shall specify the date on which
         the  books of the  Company  shall  close,  or a record  be  taken,  for
         determining  the holders of Common Stock entitled to receive such stock
         dividend or other  distribution or such rights or options,  or the date
         on which such reclassification,  reorganization, consolidation, merger,
         sale, transfer, other disposition, liquidation, dissolution, winding up
         or exchange  shall take place or commence,  as the case may be, and the
         date as of which it is expected  that holders of record of Common Stock
         shall be entitled to receive  securities or other property  deliverable
         upon such action, if any such date has been fixed. Such notice shall be
         mailed in the case of any action  covered by  paragraph  (i) or (ii) of
         this Section  7(f), at least ten (10) days prior to the record date for
         determining  holders of the Common Stock for purposes of receiving such
         payment or offer,  and, in the case of any action  covered by paragraph
         (iii),  at least ten (10) days  prior to the  earlier  of the date upon
         which  such  action is to take place or any  record  date to  determine
         holders of Common Stock  entitled to receive such  securities  or other
         property.

                  (g) Certificate of Adjustments.  Whenever any adjustment is to
         be made  pursuant  to this  Section  7, the  Company  shall  prepare  a
         Certificate  executed by the Chief  Financial  Officer of the  Company,
         setting  forth  such  adjustment  to be  mailed  to the  holder of this
         Warrant  at least  fifteen  (15) days  prior  thereto,  such  notice to
         include  in  reasonable   detail  (i)  the  events   precipitating  the
         adjustment,  (ii) the  computation  of any  adjustments,  and (iii) the
         Exercise  Price and the  number of  shares or the  securities  or other
         property purchasable upon exercise of each Warrant after giving effect

                                       AI-77


<PAGE>


         to such  adjustment.  Such Certificate  shall  be  accompanied  by the
         accountant's  verification  required by Section 7(e) hereof.

         SECTION 8. Notices.  Any notice or demand authorized by the Warrants to
be given or made by the  registered  holder of any  Warrant to or on the Company
shall be  sufficiently  given or made when received at the office of the Company
expressly  designated  by the Company at its office for purposes of the Warrants
(until Warrant holders are otherwise notified in accordance with this Section by
the Company), as follows:

                          Key Energy Group, Inc.
                          257 Livingston Avenue
                          New Brunswick, NJ  08901
                          Attention:  Francis D. John, President

         Any notice  pursuant to the  Warrants to be given by the Company to the
registered holder(s) of any Warrant shall be sufficiently given when received by
such holder at the  address  appearing  on the  Warrant  register of the Company
(until the Company is otherwise notified in accordance with this Section by such
holder).

         SECTION 9. Cash  Distributions  and  Dividends.  If the Company  pays a
dividend  or makes a  distribution  to the  holders of its  Common  Stock of any
securities (other than Common Stock) or property  (including cash and securities
of other  companies)  of the  Company,  or any  rights,  options or  warrants to
purchase securities (other than Common Stock) or property (including  securities
of other  companies) of the Company,  then,  simultaneously  with the payment of
such dividend or the making of such distribution,  and as a condition  precedent
to its right to do so, the Company will pay or  distribute to the holders of the
Warrants  an amount of  property  (including  without  limitation  cash)  and/or
securities  (including without limitation  securities of other companies) of the
Company as would have been received by such holders had they exercised  (whether
or not the Warrants were then exercisable) all of the Warrants immediately prior
to the record date (or other applicable date) used for determining  stockholders
of the Company entitled to receive such dividend or distribution.

         SECTION  10. No  Rights or  Liabilities  as  Stockholder;  Information.
Nothing  contained in this Warrant  shall be  construed as  conferring  upon the
holder hereof the right to vote or to consent as  stockholders in respect of the
meetings of stockholders or the election of members of the Board of Directors of
the Company or any other matter, or any rights whatsoever as stockholders of the
Company or as imposing any  obligation on such holder to purchase any securities
or as imposing any  liabilities  on such holder as a stockholder sf the Company,
whether  such  obligation  or  liabilities  are  asserted  by the  Company or by
creditors  of the  Company.  Notwithstanding  the  foregoing,  the Company  will
furnish to each holder of any Warrants,  promptly upon their becoming available,
copies of all financial statements,  reports,  notices and proxy statements sent
or made  available  generally  by the Company to its  stockholders  or otherwise
filed  pursuant  to the  provisions  of  the  Securities  Act or the  Securities
Exchange Act of 1934, as amended.  The Company shall give to each Warrant holder
written notice of any  determination  to register any of its Common Stock at the
same

                                       AI-78


<PAGE>



time that it gives notice to any holder of securities of the Company entitled to
rights to register securities under the Securities Act.

         SECTION 11. Amendment and Modification; Waiver. This Warrant may not be
amended or modified except by a written instrument signed by the Company and the
registered  holder of this Warrant at the time such amendment or modification is
sought.  Any waiver of any term or condition of this Warrant in any one instance
shall not operate as or be deemed to be or construed as a further or  continuing
waiver of such term or condition,  nor shall any failure at any time or times to
enforce or require performance of any provision hereof operate as a waiver of or
affect in any  manner  any  party's  right at a later time to enforce or require
performance of such provision or any other provision hereof.

         SECTION 12.  Severability.  If any  provision of this Warrant  shall be
held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable
as applied to any particular case in any  jurisdiction or  jurisdictions,  or in
all jurisdictions or in all cases, because of the conflict of any provision with
any  constitution or statute or rule of public policy,  or for any other reason,
such  circumstance  shall not have the  effect of  rendering  the  provision  or
provisions  in  question  invalid,  inoperative  or  unenforceable  in any other
jurisdiction  or in any other case or  circumstance  or if  rendering  any other
provision or provisions herein contained  invalid,  inoperative or unenforceable
to the extent that such other provisions are not themselves actually in conflict
with such constitution, statute or rule of public policy, but this Warrant shall
be reformed and construed in any such  jurisdiction  or case as if such invalid,
inoperative or unenforceable  provision had never been contained herein and such
provision  were formed so that it would be valid,  operative and  enforceable to
the maximum extent permitted in such jurisdiction or in such case.

          SECTION 13.  Successors.  All the  covenants  and  provisions  of this
Warrant by or for the benefit of the Company or the  Warrant  holder  shall bind
and inure to the benefit of their respective successors and assigns.

          SECTION  14.  Governing  Law.  This  Warrant  shall be governed by and
construed in accordance  with the laws of the State of New York,  without giving
effect to principles or conflicts of laws.

          SECTION 15.  Headings.  The  headings  contained  in this  Warrant are
inserted for convenience only and shall not constitute a part hereof.

         IN WITNESS WHEREOF,  the Company has caused this Warrant to be executed
by the signature of its duly authorized  officer and the corporate seal hereunto
affixed.

                                           KEY ENERGY GROUP, INC.


                                           By:
[Seal]                                        Francis D. John, President

                                      AI-79


<PAGE>



                          FORM OF ELECTION TO PURCHASE

                    (To Be Executed Upon Exercise of Warrant)


         The  undersigned  holder  hereby  represents  that he, she or it is the
registered holder of this Warrant, and hereby irrevocably elects to exercise the
right,  represented by this Warrant, to receive shares of Common Stock, $.10 par
value, of KEY ENERGY GROUP,  INC., and herewith tenders payment for such shares,
to the  order of KEY  ENERGY  GROUP,  INC.,  the  amount  of  $_____________  in
accordance with the terms hereof.  The  undersigned  requests that a certificate
for  such  shares  be  registered  in the  name of the  undersigned  or  nominee
hereinafter  set forth,  and further that such  certificate  be delivered to the
undersigned  at the  address  hereinafter  set forth or to such other  person or
entity as is hereinafter set forth. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder,  the undersigned requests that
a new Warrant representing the remaining balance of such shares be registered in
the name of the undersigned or nominee  hereinafter set forth,  and further that
such certificate be delivered to the undersigned at the address  hereinafter set
forth or to such other person or entity as is hereinafter set forth.

                           Certificate to be registered as follows:







                           Certificate to be delivered as follows:






Date:_________________________                      
                                                     __________________________
                                                     (Signature  must conform in
                                                     all respects to the name of
                                                     the holder as  specified on
                                                     the  face  of the  Warrant,
                                                     unless  Form of  Assignment
                                                     has been executed)


                                      AI-80


<PAGE>


                               FORM OF ASSIGNMENT
                    [To be executed upon Transfer of Warrant]


         For value  received,  the undersigned  registered  holder of the within
Warrant hereby sells,  assigns and transfers unto the right  represented by such
Warrant to purchase  ________  shares of Common Stock of KEY ENERGY GROUP,  INC.
(the "Company") to which such Warrant relates, and appoints its Attorney to make
such transfer on the books of the Company maintained for such purpose, with full
power of substitution in the premises.



                                     ------------------------------------------
                                     (Signature must conform in all respects to
                                     name of holder as specified on the face of
                                     Warrant)


                                     ------------------------------------------
                                     (Street Address)



                                     ------------------------------------------
                                     (City), (State)   (Zip Code)




                                      AI-81


<PAGE>

                                                            Exhibit B to Annex I

                      ARTICLES OF AMENDMENT AND RESTATEMENT

                                       OF

                             KEY ENERGY GROUP, INC.

         Key Energy Group,  Inc., a Maryland  corporation  (the  "Corporation"),
certifies to the Maryland Department of Assessments and Taxation as follows:

         (1) The  Corporation  desires  to amend and  restate  its  Articles  of
Incorporation as are currently in effect in accordance with Section 2-609 of the
Maryland General Corporation Law.

         (2) These Articles of Amendment and Restatement restate,  integrate and
amend provisions of Articles of Incorporation of the Corporation,  as heretofore
amended.

         (3) The Board of  Directors  of the  Corporation,  at a meeting held on
November  __, 1995,  unanimously  adopted a  resolution  that these  Articles of
Amendment and Restatement  shall be submitted for shareholder  approval as being
advisable and in the best interests of the Corporation.

         (4) The  Articles of  Amendment  and  Restatement  were duly adopted by
shareholders  in  accordance   with  Section  2-604  of  the  Maryland   General
Corporation Law.

         (5) The  address  of the  principal  office of the  Corporation  is 257
Livingston Avenue, New Brunswick, New Jersey 08901.

         (6) The name and the address of the resident  agent of the  Corporation
within the State of Maryland is The Prentice-Hall  Corporation System, Maryland,
11 East Chase Street, Baltimore, Maryland 21202.

         The Articles of  Incorporation  are hereby amended and restated to read
in their entirety as follows:

         FIRST:  The original  Articles of Incorporation of the Corporation were
filed with the State  Department  of  Assessments  and  Taxation of the State of
Maryland on April 22,  1977,  and the  Corporation  is duly  incorporated  under
Maryland General Corporation Law.

         SECOND: The name of the corporation is:

                                    Key Energy Group, Inc.

          THIRD:  The purpose of the  Corporation is to engage in any lawful act
or activity for which  corporations  may be organized under the Maryland General
Corporation Law.

                                                       
                                     AI-82

<PAGE>



         FOURTH:  The present address of the principal office of the Corporation
within  the  State of  Maryland  is c/o The  Prentice-Hall  Corporation  System,
Maryland, 11 East Chase Street, Baltimore, Maryland 21202.

         FIFTH: (a) The total number of shares of stock of all classes which the
Corporation has authority to issue is Twenty Five Million (25,000,000) shares of
capital stock amounting in aggregate par value to $2,500,000. All of such shares
are initially  classified as "Common Stock"(par value $.10 per share). The Board
of Directors may classify and reclassify any unissued shares of capital stock by
setting or changing in any one or more respects the  preferences,  conversion or
other  rights,  voting  powers,  restrictions,   limitations  as  to  dividends,
qualifications  or terms or  conditions  of  redemption of such shares of stock,
provided,  however,  that,  notwithstanding  anything  to the  contrary in these
Articles,  no such  classification or  reclassification  shall create a class of
stock  which  shall  (i) have more  than one vote per  share,  (ii) be issued in
connection with any so-called  "shareholder rights plan", "poison pill" or other
anti-takeover  measure,  or (iii) be issued for consideration which is less than
fair  consideration  as determined in good faith by the  Corporation's  Board of
Directors.

                  (b)  The  following  is  a  description  of  the  preferences,
conversion  and other rights,  voting  powers,  restrictions,  limitations as to
dividends,  qualifications  and terms and conditions of redemption of the Common
Stock of the Corporation:

                  (1) Each  share of Common  Stock  shall  have one  vote,  and,
         except as otherwise provided in respect of any class of stock hereafter
         classified or reclassified, the exclusive voting power for all purposes
         shall be vested in the holders of the Common Stock.

                  (2) Subject to the  provisions of law and any  preferences  of
         any class of stock  hereafter  classified or  reclassified,  dividends,
         including   dividends  payable  in  shares  of  another  class  of  the
         Corporation's stock, may be paid on the Common Stock of the Corporation
         at such time and in such  amounts  as the Board of  Directors  may deem
         advisable.

                  (3) In the event of any liquidation, dissolution or winding up
         of the Corporation,  whether  voluntary or involuntary,  the holders of
         the Common  Stock shall be entitled to share  ratably in the net assets
         of the Corporation  remaining after payment or provision for payment of
         the debts and other  liabilities of the  Corporation  and the amount to
         which  the  holders  of any  class of  stock  hereafter  classified  or
         reclassified  having a preference on  distributions in the liquidation,
         dissolution  or  winding  up of  the  Corporation  shall  be  entitled,
         together  with the  holders  of any  other  class  of  stock  hereafter
         classified or reclassified  having a preference on distributions in the
         liquidation, dissolution or winding up of the Corporation.

         (c) Subject to the  foregoing,  the power of the Board of  Directors to
classify  and  reclassify  any of the shares of  capital  stock  shall  include,
without limitation, subject to the provisions of these Articles of Amendment and
Restatement, as from time to time amended (the "Charter"), authority to classify
or  reclassify  any  unissued  shares of such  stock  into a class or classes of
preferred stock,  preference stock,  special stock or other stock, and to divide

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and  classify  shares of any class  into one or more  series of such  class,  by
determining, fixing, or altering one or more of the following:

                  (1) The  distinctive  designation  of such class or series and
         the number of shares to  constitute  such  class or  series;  provided,
         however,  that, unless otherwise prohibited by the terms of such or any
         other class or series,  the number of shares of any class or series may
         be  decreased  by  the  Board  of  Directors  in  connection  with  any
         classification or reclassification of unissued shares and the number of
         shares  of such  class  or  series  may be  increased  by the  Board of
         Directors   in   connection   with   any   such    classification    or
         reclassification, and any shares of any class or series which have been
         redeemed,  purchased,  otherwise  acquired or converted  into shares of
         Common  Stock or any other  class or series  shall  become  part of the
         authorized   capital  stock  and  be  subject  to  classification   and
         reclassification as provided in this sub-paragraph.

                  (2) Whether or not and, if so, the rates, amounts and times at
         which,  and the conditions  under which,  dividends shall be payable on
         shares of such class or series,  whether any such dividends  shall rank
         senior or junior to or on a parity  with the  dividends  payable on any
         other class or series of stock, and the status of any such dividends as
         cumulative,  cumulative to a limited  extent or  non-cumulative  and as
         participating or non-participating.

                  (3)  Whether or not shares of such class or series  shall have
         voting rights, in addition to any voting rights provided by law and, if
         so, the terms of such voting rights.

                  (4)  Whether or not shares of such class or series  shall have
         conversion or exchange  privileges and, if so, the terms and conditions
         thereof,  including  provision  for  adjustment  of the  conversion  or
         exchange rate in such events or at such times as the Board of Directors
         shall determine.

                  (5)  Whether or not  shares of such  class or series  shall be
         subject to  redemption  and,  if so, the terms and  conditions  of such
         redemption,  including the date or dates upon or after which they shall
         be redeemable  and the amount per share payable in case of  redemption,
         which  amount  may vary under  different  conditions  and at  different
         redemption dates; and whether or not there shall be any sinking fund or
         purchase account in respect thereof, and if so, the terms thereof.

                  (6) The  rights of the  holders  of  shares  of such  class or
         series upon the  liquidation,  dissolution or winding up of the affairs
         of, or upon any distribution of the assets of, the  Corporation,  which
         rights may vary depending upon whether such liquidation, dissolution or
         winding up is voluntary or involuntary  and, if voluntary,  may vary at
         different dates, and whether such rights shall rank senior or junior to
         or on a parity with such rights of any other class or series of stock.

                  (7) Whether or not there shall be any limitations  applicable,
         while shares of such class or series are outstanding,  upon the payment
         of dividends or making of distributions on, or the  acquisition of, or

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         the use of moneys for purchase or redemption of,  any  stock of the  
         Corporation,  or upon any  other  action of the Corporation, including
         action under this sub- paragraph,  and, if so, the terms and conditions
         thereof.

                  (8) Any other  preferences,  rights,  restrictions,  including
         restrictions on  transferability,  and qualifications of shares of such
         class or series, not inconsistent with the Maryland General Corporation
         Law or any other  statutory or decisional law of the State of Maryland,
         now or hereafter in force ("Maryland Law") and the Charter.

         (d) For the purposes  hereof and of any articles  supplementary  to the
Charter providing for the  classification or  reclassification  of any shares of
capital  stock or of any  other  charter  document  of the  Corporation  (unless
otherwise  provided in any such  articles or  document),  any class or series of
stock of the Corporation shall be deemed to rank:

                  (1) prior to another class or series either as to dividends or
         upon  liquidation,  if the  holders  of such  class or series  shall be
         entitled to the receipt of  dividends  or of amounts  distributable  on
         liquidation,  dissolution  or  winding  up,  as the  case  may  be,  in
         preference or priority to holders of such other class or series;

                  (2) on a  parity  with  another  class  or  series  either  as
         dividends  or upon  liquidation,  whether  or not the  dividend  rates,
         dividend  payment dates or redemption  or  liquidation  price per share
         thereof be different from those of such others,  if the holders of such
         class or series of stock shall be entitled to receipt of  dividends  or
         amounts  distributable upon liquidation,  dissolution or winding up, as
         the case may be, in proportion to their  respective  dividend  rates or
         redemption or liquidation  prices,  without preference or priority over
         the holders of such other class or series; and

                  (3) junior to another  class or series  either as to dividends
         or upon  liquidation,  if the  rights of the  holders  of such class or
         series shall be subject or  subordinate to the rights of the holders of
         such other  class or series in respect of the receipt of  dividends  or
         the amounts distributable upon liquidation,  dissolution or winding up,
         as the case may be.

         (e) Anything in this Article FIFTH to the contrary notwithstanding,  in
no event shall any shares of capital stock entitle the holder  thereof,  and the
Board of Directors  shall have no power or  authority to authorize  the issue of
any shares of capital stock entitling the holder thereof,  to more than (1) vote
per share.

         SIXTH: The number of directors of the Corporation  shall be five, which
number may be increased or decreased pursuant to the By-Laws of the Corporation,
but shall never be less than the minimum  number  permitted by Maryland Law. The
names of the  directors  who will serve until the next annual  meeting and until
their successors are elected and qualify are as follows:



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                                    Francis D. John
                                    Van D. Greenfield
                                    William Manly
                                    Morton Wolkowitz
                                    D. Kirk Edwards

          SEVENTH:  (a) The  following  provisions  are hereby  adopted  for the
purpose of defining,  limiting and regulating the powers of the  Corporation and
of the directors and stockholders.

                  (1) The Board of  Directors  is hereby  empowered to authorize
         the issuance from time to time of shares of the Corporation's  stock of
         any  class,  whether  now  or  hereafter   authorized,   or  securities
         convertible  into or  exchangeable  for,  or  evidencing  the  right to
         purchase or otherwise acquire, shares of the Corporation's stock of any
         class  or  classes,  whether  now or  hereafter  authorized,  for  such
         consideration  as may be deemed advisable by the Board of Directors and
         without any action by the stockholders.

                  (2) No  holder of any  stock or any  other  securities  of the
         Corporation,  whether  now or  hereafter  authorized,  shall  have  any
         preemptive  right to  subscribe  for or purchase any stock or any other
         securities of the Corporation  other than such, if any, as the Board of
         Directors,  in its sole discretion,  may determine and at such price or
         prices and upon such other terms as the Board of Directors, in its sole
         discretion,  may fix; and any stock or other securities which the Board
         of Directors may determine to offer for subscription  may, as the Board
         of Directors in its sole discretion shall determine,  be offered to the
         holders of any class,  series or type of stock or other  securities  at
         the time  outstanding  to the  exclusion  of the  holders of any or all
         other classes, series or types of stock or other securities at the time
         outstanding.

                  (3)  The  Board  of  Directors  of  the   Corporation   shall,
         consistent  with  Maryland  Law,  have power in its sole  discretion to
         determine  from  time to  time  in  accordance  with  sound  accounting
         practice or other reasonable  valuation methods what constitutes annual
         or other net  profits,  earnings,  surplus  or net  assets in excess of
         capital; to fix and vary from time to time the amount to be reserved as
         working capital,  or determine that retained  earnings or surplus shall
         remain in the hands of the  Corporation;  to set apart out of any funds
         of the  Corporation  such reserve or reserves in such amount or amounts
         and for such proper  purpose or purposes as it shall  determine  and to
         abolish any such reserve or any part  thereof;  to  distribute  and pay
         distributions  or  dividends  in  stock,  cash or other  securities  or
         property,  out of  surplus  or  any  other  funds  or  amounts  legally
         available therefor,  at such times and to the stockholders of record on
         such dates as it may,  from time to time,  determine;  and to determine
         whether  and to what  extent and at what times and places and under and
         subject to what  conditions  and  regulations  the books,  accounts and
         documents  of the  Corporation,  or any of  them,  shall be open to the
         inspection of stockholders,  except as otherwise  provided by law or by
         the By-Laws,  and, except as so provided, no stockholder shall have any
         right to inspect  any book,  account  or  document  of the  Corporation
         unless authorized so to do by resolution of the Board of Director.

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<PAGE>



                  (4)  Notwithstanding  any  provision of Maryland Law requiring
         the authorization of any action by a greater proportion than a majority
         of the total number of shares of all classes of capital stock or of the
         total number of shares of any class of capital stock, such action shall
         be valid and  effective if authorized  by the  affirmative  vote of the
         holders  of a  majority  of the total  number of shares of all  classes
         outstanding  and  entitled to vote  thereon,  except as provided in the
         Charter.

                  (5) The  Corporation  shall  indemnify  (A) its  directors and
         officers,  whether  serving the Corporation or at its request any other
         entity,  to the full extent  required or permitted by the Maryland Law,
         including the advance of expenses  under the procedures and to the full
         extent  permitted  by law and (B) other  employees  and  agents to such
         extent  as  shall  be  authorized  by the  Board  of  Directors  or the
         Corporation's  By-Laws and be permitted by law. The foregoing rights of
         indemnification  shall not be  exclusive  of any other  rights to which
         those seeking  indemnification may be entitled.  The Board of Directors
         may take such action as is necessary to carry out these indemnification
         provisions and is expressly empowered to adopt,  approve and amend from
         time to time such by-laws,  resolutions or contracts  implementing such
         provisions  or  such  further  indemnification  arrangements  as may be
         permitted by Maryland Law.

                  (6) No  director  or  officer  of this  Corporation  shall  be
         personally  liable to the Corporation or its  stockholders for monetary
         damages  for  breach of  fiduciary  duty as a director  or an  officer,
         except to the extent that  exculpation  from liability is not permitted
         under Maryland Law as in effect when such breach occurred. No amendment
         of the  Charter  or  repeal  of any of its  provisions  shall  limit or
         eliminate  the  limitations  on  liability  provided to  directors  and
         officers hereunder with respect to acts or omissions occurring prior to
         such amendment or repeal.

                  (7) The power to adopt,  alter and repeal  the  By-Laws of the
         Corporation   shall  be  vested  in  the  Board  of  Directors  of  the
         Corporation,  subject to the rights of stockholders to adopt, alter and
         repeal the By-Laws of the Corporation.

                  (8) The  Corporation  reserves  the right from time to time to
         make any  amendments  to the  Charter  which  may now or  hereafter  be
         authorized by Maryland Law, including any amendments changing the terms
         or contract rights,  as expressly set forth in any of the Corporation's
         outstanding stock by classification, reclassification or otherwise.

         (b) The enumeration and definition of particular powers of the Board of
Directors  included in the foregoing shall in no way be limited or restricted by
reference  to or  inference  from the terms of any  other  clause of this or any
other  Article  of the  Charter,  or  construed  as or  deemed by  inference  or
otherwise in any manner to exclude or limit any powers  conferred upon the Board
of Directors under Maryland Law.

         EIGHTH:  The duration of the Corporation shall be perpetual.


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<PAGE>


         IN WITNESS  WHEREOF,  the  Corporation  has caused  these  Articles  of
Amendment  and  Restatement  to be signed  in its name and on its  behalf by its
President and witnessed by its Secretary on __________, 1995.







- -------------------------------           ------------------------------------
Diane Mack, Secretary                     Francis D. John, President


         THE UNDERSIGNED,  President of Key Energy Group,  Inc., who executed on
behalf  of  the  Corporation  Articles  of  Amendment  and  Restatement,  hereby
acknowledges  in the name and on behalf of said  Corporation  that the foregoing
Articles  of  Amendment  and  Restatement  are to be the  corporate  act of said
Corporation  and hereby  certifies  that the matters and facts set forth  herein
with  respect to  authorization  and  approval  thereof are true in all material
respects under the penalties of perjury.

                                          
                                          -------------------------------------
                                          Francis D. John, President











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<PAGE>



                                                           Exhibit C to Annex I




                                     BY-LAWS

                                       OF

                             KEY ENERGY GROUP, INC.
                             a Maryland corporation


                                   ARTICLE I.

                                  STOCKHOLDERS

         SECTION 1.01.  Annual  Meeting.  The  Corporation  shall hold an annual
meeting of its  stockholders  to elect directors and transact any other business
within its powers,  either on the first Thursday of November in each year if not
a legal  holiday,  or on such other day as shall be  determined  by the Board of
Directors.  Except as the Articles of Incorporation of the Corporation,  as from
time to time amended (the "Charter"), or the Maryland General Corporation Law or
any  other  law,  statutory  or  decisional,  of the  State of  Maryland  now or
hereafter  in  force  (collectively,  "Maryland  Law")  provide  otherwise,  any
business  may be  considered  at an annual  meeting  without  the purpose of the
meeting having been  specified in the notice.  Failure to hold an annual meeting
shall not invalidate the  Corporation's  existence or affect any otherwise valid
corporate acts.

         SECTION  1.02.  Special  Meeting.  At any time in the interval  between
annual  meetings,  a special  meeting of the  stockholders  may be called by the
Chairman  of the  Board  or the  President  or by a  majority  of the  Board  of
Directors by vote at a meeting or in writing  (addressed to the Secretary of the
Corporation)  with or without a meeting.  Special  meetings of the  stockholders
shall be called by the Secretary on the written request of stockholders entitled
to cast at least twenty-five  percent (25%) percent of all the votes entitled to
be cast at the meeting.  A request for a special meeting shall state the purpose
of the  meeting and the  matters  proposed  to be acted on at it. The  Secretary
shall inform the stockholders  who make the request of the reasonably  estimated
costs of  preparing  and mailing  notice of the meeting and, on payment of these
costs to the  Corporation,  notify  each  stockholder  entitled to notice of the
meeting. Unless requested by stockholders entitled to cast a majority of all the
votes entitled to be cast at the meeting, the special meeting need not be called
to consider any matter which is  substantially  the same as a matter voted on at
any special meeting of stockholders held in the preceding twelve months.

         SECTION 1.03. Place of Meetings.  Meetings of the stockholders shall be
held at such place in the United States as is set from time to time by the Board
of Directors or, in the case of a meeting called by the stockholders,  as set by
such stockholders.

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<PAGE>


                                       


         SECTION 1.04. Notice of Meetings; Waiver of Notice. Except as otherwise
required by Maryland Law or the Charter,  not less than ten nor more than ninety
days before each stockholders'  meeting, the Secretary shall give written notice
of the  meeting to each  stockholder  entitled  to vote at the  meeting and each
other stockholder  entitled to notice of the meeting. The notice shall state the
time and place of the meeting and, if the meeting is a special meeting or notice
of the purpose is required by Maryland  Law, the purpose of the meeting.  Notice
is given to a  stockholder  when it is  personally  delivered to him, her or it,
left at his, her or its residence or usual place of business,  or mailed to him,
her or it at  his,  her or its  address  as it  appears  on the  records  of the
Corporation.  Notwithstanding  the  foregoing  provisions,  each  person  who is
entitled to notice  waives notice if he, she or it, before or after the meeting,
signs a waiver of the notice which is filed with the records of the stockholders
meetings or is present at the meeting in person or by proxy.

         SECTION 1.05. Quorum;  Voting.  Unless Maryland Law, the Charter or the
By-Laws provide  otherwise,  at a meeting of stockholders the presence in person
or by  proxy  of  stockholders  entitled  to cast a  majority  of all the  votes
entitled to be cast at the meeting  constitutes a quorum,  and a majority of all
votes cast at a meeting at which a quorum is  present is  sufficient  to approve
any matter which properly  comes before the meeting,  except that a plurality of
all the votes cast at a meeting at which a quorum is  present is  sufficient  to
elect a director.

         SECTION 1.06. Adjournments.  Whether or not a quorum is present, except
as otherwise  provided by Maryland Law or the Charter, a meeting of stockholders
convened on the date for which it was called may be adjourned  from time to time
without further notice by a majority vote of the stockholders  present in person
or by proxy to a date not more than one hundred  twenty days after the  original
record date.  Any business  which might have been  transacted  at the meeting as
originally notified may be deferred and transacted at any such adjourned meeting
at which a quorum shall be present.

         SECTION  1.07.  General  Right to Vote;  Proxies.  Unless  the  Charter
provides  for a greater or lesser  number of votes per share or limits or denies
voting rights to one or more classes or series, or except as otherwise  provided
by Maryland Law, each outstanding share of stock, regardless of class or series,
is  entitled  to one vote on each  matter  submitted  to a vote at a meeting  of
stockholders.  In all elections for  directors,  each share of stock entitled to
vote with  respect  thereto  may be voted for as many  individuals  as there are
directors to be elected.  A stockholder may vote the stock the stockholder  owns
of  record  either  in person  or by  proxy.  A  stockholder  may sign a writing
authorizing  another person to act as proxy.  Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the  stockholder's  signature  to be  affixed to the  writing by any  reasonable


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<PAGE>

                                       

means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram,  datagram,  or other means of electronic  transmission  to the person
authorized  to act as  proxy  or to a proxy  solicitation  firm,  proxy  support
service  organization,  or other person authorized by the person who will act as
proxy to receive the transmission.  Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a  stockholder
at any time without  condition or qualification  unless the proxy states that it
is  irrevocable  and the proxy is coupled with an interest.  A proxy may be made
irrevocable  for so long as it is coupled  with an interest.  The interest  with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or  another  general  interest  in the  Corporation  or its  assets or
liabilities.

         SECTION 1.08. List of Stockholders.  At each meeting of stockholders, a
full,  true  and  complete  list of all  stockholders  entitled  to vote at such
meeting,  showing  the  number  and class or  series of shares  held by each and
certified by the  transfer  agent for such class or by the  Secretary,  shall be
furnished by the Secretary.

         SECTION  1.09.  Conduct of  Business  and  Voting.  At all  meetings of
stockholders,  unless the voting is  conducted  by  inspectors,  the proxies and
ballots  shall be received,  and all  questions  touching the  qualification  of
voters and the  validity of proxies,  the  acceptance  or rejection of votes and
procedures for the conduct of business not otherwise specified by these By-Laws,
the Charter or Maryland  Law,  shall be decided or determined by the chairman of
the  meeting.  If  demanded  by  stockholders,  present  in  person or by proxy,
entitled to cast ten percent (10%) in number of votes entitled to be cast, or if
ordered by the chairman,  the vote upon any election or question  shall be taken
by ballot and,  upon like demand or order,  the voting shall be conducted by two
inspectors,  in which event the proxies and ballots  shall be received,  and all
questions  touching the  qualification of voters and the validity of proxies and
the  acceptance  or  rejection  of votes shall be decided,  by such  inspectors.
Unless so demanded or ordered,  no vote need be by ballot and voting need not be
conducted by inspectors. The stockholders at any meeting may choose an inspector
or  inspectors  to act at such  meeting,  and in  default of such  election  the
chairman of the meeting may appoint an inspector or inspectors. No candidate for
election as a director at a meeting shall serve as an inspector thereat.

         SECTION 1.10.  Informal Action by Stockholders.  Any action required or
permitted  to be taken at a  meeting  of  stockholders  may be taken  without  a
meeting if there is filed with the  records of  stockholders  meetings a written
consent  which sets  forth the  action  and is signed and dated by  stockholders
holding the minimum  number of shares  required to execute a written  consent in
accordance  with the  provisions  of  Maryland  Law and  entitled to vote on the

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matter and, to the extent  required  by  Maryland  Law, a written  waiver of any
right to dissent  signed by each  stockholder  entitled to notice of the meeting
but not entitled to vote at it.



                                   ARTICLE II.

                               BOARD OF DIRECTORS

         SECTION 2.01.  Function of  Directors.  The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors.  All
powers of the Corporation may be exercised by or under authority of the Board of
Directors,  except as conferred on or reserved to the  stockholders  by Maryland
Law or by the Charter or By-Laws.

         SECTION 2.02. Number of Directors.  The Corporation shall have at least
three directors;  provided, however, that, if there is no stock outstanding, the
number of Directors  may be less than three but not less than one, and, if there
is stock outstanding and so long as there are less than three stockholders,  the
number  of  directors  may be less than  three  but not less than the  number of
stockholders. The Corporation shall have the number of directors provided in the
Charter  until  changed as herein  provided.  The number of directors may be set
from time to time by action of the  stockholders  or of a majority of the entire
Board of  Directors,  but may not exceed 25 nor be less than the minimum  number
permitted  herein,  but the  action  may not  affect the tenure of office of any
director.

         SECTION 2.03. Election and Tenure of Directors. At each annual meeting,
the  stockholders  shall elect  directors  to hold office  until the next annual
meeting and until their successors are elected and qualify.

         SECTION 2.04.  Removal of Director.  Unless Maryland Law or the Charter
provides  otherwise,  (a) the  stockholders  may  remove any  director,  with or
without cause, by the  affirmative  vote of a majority of all the votes entitled
to be cast for the election of  directors,  and (b) the Board of  Directors  may
remove any  director  with cause by the  affirmative  vote of a majority  of the
remaining directors then in office.

         SECTION 2.05.  Vacancy on Board. The stockholders may elect a successor
to fill a vacancy on the Board of Directors  which results from the removal of a
director. A director elected by the stockholders to fill a vacancy which results
from the  removal of a director  shall  serve for the balance of the term of the
removed  director.  A  majority  of  the  remaining  directors,  whether  or not
sufficient to constitute a quorum,  may fill a vacancy on the Board of Directors
which results from any cause (including a removal if the  stockholders  have not
filled  the  vacancy)  except an  increase  in the  number of  directors,  and a
majority of the entire Board of Directors  may fill a vacancy which results from


                                     AI-92

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an  increase  in the number of  directors.  A  director  elected by the Board of
Directors  to fill a vacancy  shall  serve  until  the next  annual  meeting  of
stockholders and until his or her successor is elected and qualifies.

         SECTION 2.06.  Regular Meetings.  After each meeting of stockholders at
which  directors  shall have been elected,  the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business.  In the event that no other time and place are specified by resolution
of the  Board,  the  Chairman  of the  Board or the  President,  with  notice in
accordance  with Section  2.08,  the Board of Directors  shall meet  immediately
following  the close of, and at the place of, such  stockholders'  meeting.  Any
other regular  meeting of the Board of Directors  shall be held on such date and
at any place as may be designated from time to time by the Board of Directors.

         SECTION  2.07.  Special  Meetings.  Special  meetings  of the  Board of
Directors  may be  called  at any  time  by the  Chairman  of the  Board  or the
President or by a majority of the Board of Directors by vote at a meeting, or in
writing with or without a meeting.  A special  meeting of the Board of Directors
shall be held on such  date and at any place as may be  designated  from time to
time by the Board of Directors. In the absence of designation such meeting shall
be held at such place as may be designated in the call.

         SECTION  2.08.  Notice of  Meeting.  No notice  shall be  required  for
regular  meetings  for  which  the time and place  have  been  fixed.  Except as
provided in Section 2.07,  the  Secretary  shall give notice to each director of
each special meeting of the Board of Directors.  The notice shall state the time
and place of the  meeting.  Notice is given to a director  when it is  delivered
personally  to him or her,  left  at his or her  residence  or  usual  place  of
business, or sent by telegram,  cablegram,  datagram,  facsimile transmission or
other means of electronic  transmission  or telephone,  at least 24 hours before
the time of the meeting or, in the alternative, by mail to his or her address as
it shall appear on the records of the Corporation,  at least 72 hours before the
time of the  meeting.  Unless  Maryland  Law, the  Charter,  these  By-Laws or a
resolution  of the Board of Directors  provides  otherwise,  the notice need not
state the business to be transacted at or the purposes of any regular or special
meeting  of the Board of  Directors.  No notice of any  meeting  of the Board of
Directors  need be given to any  director  who attends  except  where a director
attends a meeting for the express purpose of objecting to the transaction of any
business  because  the meeting is not  lawfully  called or  convened,  or to any
director  who,  in writing  executed  and filed with the  records of the meeting
either before or after the holding thereof,  waives such notice.  Any meeting of
the Board of  Directors,  regular or special,  may adjourn  from time to time to
reconvene  at the same or some other  place,  and no notice need be given of any
such adjourned meeting other than by announcement.


                                     AI-93

<PAGE>
                                       

          SECTION 2.09 Action by Directors.  Unless Maryland Law, the Charter or
these  By-Laws  require a greater  proportion,  the action of a majority  of the
directors  present at a meeting at which a quorum is present is an action of the
Board of Directors. A majority of the entire Board of Directors shall constitute
a quorum for the  transaction  of business  except  when a vacancy or  vacancies
prevent  such  majority,  whereupon a majority of the  directors  then in office
shall constitute a quorum, provided that such majority shall constitute at least
one-third  of the entire  Board of  Directors  and,  in no event,  less than two
directors,  unless only one director is required to be in office at the time. In
the absence of a quorum,  the  directors  present by  majority  vote and without
notice  other than by  announcement  may adjourn  the meeting  from time to time
until a quorum shall  attend.  At any such  adjourned  meeting at which a quorum
shall  be  present,  any  business  may be  transacted  which  might  have  been
transacted  at the  meeting  as  originally  notified.  Any action  required  or
permitted  to be taken at a  meeting  of the  Board  of  Directors  may be taken
without a meeting,  if an unanimous  written consent which sets forth the action
is signed and dated by each  member of the Board and filed  with the  minutes of
proceedings of the Board.

         SECTION 2.10. Meeting by Conference Telephone.  Members of the Board of
Directors  may  participate  in a meeting by means of a conference  telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same  time.  Participation  in a meeting  by these  means
constitutes presence in person at a meeting.

         SECTION 2.11.  Compensation.  By resolution of the Board of Directors a
fixed sum and  expenses,  if any,  for  attendance  at each  regular  or special
meeting  of  the  Board  of  Directors  or  of  committees  thereof,  and  other
compensation  for  the  services  as  such  or on  committees  of the  Board  of
Directors,  may be paid to directors.  Directors who are full-time  employees of
the  Corporation  need not be paid for  attendance  at  meetings of the Board or
committees  thereof for which fees are paid to other  directors.  A director who
serves the Corporation in any other capacity also may receive  compensation  for
such other services, pursuant to a resolution of the directors.


                                  ARTICLE III.

                                   COMMITTEES

         SECTION 3.01. Committees. The Board of Directors may appoint from among
its members an Executive  Committee and other committees composed of two or more
directors  and  delegate to these  committees  any of the powers of the Board of
Directors,  except, unless otherwise specifically permitted by Maryland Law, the
power to declare  dividends or other  distributions  on stock,  elect directors,
issue  stock  other than as  provided  in the next  sentence,  recommend  to the
stockholders  any  action  which  requires  stockholder  approval,  amend  these
By-Laws,  or  approve  any  merger  or share  exchange  which  does not  require

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stockholder  approval. If the Board of Directors has given general authorization
for the  issuance  of stock,  a committee  of the Board,  in  accordance  with a
general formula or method specified by the Board by resolution or by adoption of
a  stock  option  or  other  plan,  may  fix  the  terms  of  stock  subject  to
classification  or  reclassification  and the  terms on which  any  stock may be
issued,  including  all  terms  and  conditions  required  or  permitted  to  be
established or authorized by the Board of Directors.

         SECTION  3.02.  Committee  Procedure.  Each  committee may fix rules of
procedure  for its  business.  A majority of the  members of a  committee  shall
constitute a quorum for the transaction of business and the act of a majority of
those  present at a meeting at which a quorum is present shall be the act of the
committee.  The members of a committee  present at any  meeting,  whether or not
they  constitute  a quorum,  may  appoint a  director  to act in the place of an
absent  member.  Any action  required or permitted to be taken at a meeting of a
committee may be taken without a meeting,  if an unanimous written consent which
sets forth the action is signed and dated by each  member of the  committee  and
filed with the minutes of the committee.  The members of a committee may conduct
any meeting thereof by conference telephone in accordance with the provisions of
Section 2.10.

         SECTION  3.03.  Emergency.  In the  event  of a state  of  disaster  of
sufficient  severity to prevent the  conduct and  management  of the affairs and
business of the Corporation by its directors and officers as contemplated by the
Charter  and  these  By-Laws,  any two or more  available  members  of the  then
incumbent  Executive  Committee shall  constitute a quorum of that Committee for
the full conduct and  management of the affairs and business of the  Corporation
in  accordance  with  the  provisions  of  Section  3.01.  In the  event  of the
unavailability,  at such time, of a minimum of two members of the then incumbent
Executive Committee,  the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors,  whether or not they be
officers of the  Corporation,  which two members shall  constitute the Executive
Committee for the full conduct and management of the affairs of the  Corporation
in accordance with the foregoing provisions of this Section.  This Section shall
be subject to implementation by resolution of the Board of Directors passed from
time to time for that purpose,  and any  provisions of these By-Laws (other than
this Section) and any  resolutions  which are contrary to the provisions of this
Section  or to the  provisions  of any such  implementary  resolutions  shall be
suspended until it shall be determined by any interim Executive Committee acting
under this  Section  that it shall be to the  advantage  of the  corporation  to
resume the conduct and  management  of its  affairs and  business  under all the
other provisions of these By-Laws.


                                     AI-95



<PAGE>

                                      

                                   ARTICLE IV.

                                    OFFICERS

         SECTION 4.01. Executive and Other Officers.  The Corporation shall have
a President,  a Secretary,  and a Treasurer.  It may also have a Chairman of the
Board. The Board of Directors shall designate who shall serve as chief executive
officer,  who shall have general  supervision of the business and affairs of the
Corporation,  and may  designate  a chief  operating  officer,  who  shall  have
supervision  of the  operations  of the  Corporation,  subject to the rights and
authority of the chief executive  officer.  In the absence of any designation by
the Board of Directors,  the Chairman of the Board, if there be one, shall serve
as chief  executive  officer and the  President  shall serve as chief  operating
officer.  In the absence of the Chairman of the Board,  or if there be none, the
President  shall be the chief executive  officer.  The same person may hold both
offices.  The Corporation may also have one or more  Vice-Presidents,  assistant
officers,  and subordinate  officers as may be established  from time to time by
the  Board  of  Directors.  A person  may  hold  more  than  one  office  in the
Corporation  except that no person may serve  concurrently as both President and
Vice- President of the Corporation.  The Chairman of the Board, if there be one,
and the President, if designated as the chief executive officer, shall each be a
director; the other officers may be directors.

         SECTION 4.02.  Chairman of the Board. The Chairman of the Board, if one
be elected,  shall  preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present.  Unless otherwise specified by
the Board of Directors,  he or she shall be the chief  executive  officer of the
Corporation  and  shall  perform  the  duties  customarily  performed  by  chief
executive  officers  and  may  execute,  in the  name  of the  Corporation,  all
authorized deeds,  mortgages,  bonds, contracts or other instruments,  except in
cases in which the  signing  and  execution  thereof  shall have been  expressly
delegated to some other officer or agent of the Corporation.  In general,  he or
she may perform any duties of a chairman of the board and, if so  designated,  a
chief executive  officer and shall perform such other duties and have such other
powers  as are  from  time  to  time  assigned  to him  or her by the  Board  of
Directors.

         SECTION 4.03.  President.  Unless otherwise  specified by resolution of
the Board of  Directors,  the  President,  in the absence of the Chairman of the
Board,  shall  preside  at all  meetings  of the Board of  Directors  and of the
stockholders at which he or she shall be present.  Unless otherwise specified by
the Board of Directors,  the President shall be the chief  operating  officer of
the Corporation and perform the duties customarily  performed by chief operating
officers, and may execute, in the name of the Corporation, all authorized deeds,
mortgages,  bonds, contracts or other instruments,  except in cases in which the
signing and execution thereof shall have been expressly  delegated to some other
officer or agent of the  Corporation.  In general,  he or she shall perform such

                                     AI-96

<PAGE>
                                       

other duties  customarily  performed by a president of a  corporation  and shall
perform  such other  duties and have such other  powers as are from time to time
assigned to him or her by the Board of Directors or the chief executive  officer
of the Corporation.

         SECTION 4.04. Vice Presidents.  The Vice-President or Vice- Presidents,
at the  request  of the chief  executive  officer  or the  President,  or in the
President's  absence or during his or her  inability to act,  shall  perform the
duties and exercise the  functions  of the  President,  and when so acting shall
have the powers of the President. If there be more than one Vice-President,  the
Board of Directors may determine which one or more of the Vice- Presidents shall
perform  any of  such  duties  or  exercise  any of such  functions,  or if such
determination  is not  made by the  Board  of  Directors,  the  chief  executive
officer,  or if he or she  shall  fail to do so,  the  President  may make  such
determination;  otherwise  any of the  Vice-Presidents  may  perform any of such
duties or exercise any of such functions. Each Vice-President shall perform such
other duties and have such other powers,  and have such  additional  descriptive
designations in their titles (if any), as are from time to time assigned to them
by the Board of Directors, the chief executive officer, or the President.

         SECTION 4.05.  Secretary.  The Secretary  shall keep the minutes of the
meetings of the  stockholders,  of the Board of Directors and of any committees,
in books provided for the purpose; he or she shall see that all notices are duly
given in  accordance  with the  provisions  of the  By-Laws  or as  required  by
Maryland Law; he or she shall be custodian of the records of the Corporation; he
or she may witness any document on behalf of the  Corporation,  the execution of
which is duly  authorized,  see that the  corporate  seal is affixed  where such
document is required or desired to be under its seal, and, when so affixed,  may
attest  the  same.  In  general,  he or she  shall  perform  such  other  duties
customarily  performed by a secretary of a  corporation,  and shall perform such
other duties and have such other powers as are from time to time assigned to him
or her by the Board of Directors, the chief executive officer, or the President.

         SECTION  4.06.  Treasurer.  The  Treasurer  shall have charge of and be
responsible  for  all  funds,  securities,  receipts  and  disbursements  of the
Corporation,  and shall  deposit,  or cause to be deposited,  in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other  depositories as shall,  from time to time, be selected by the Board of
Directors;  he or she shall render to the chief executive officer, the President
and the Board of  Directors,  whenever  requested,  an account of the  financial
condition of the  Corporation.  In general,  he or she shall  perform such other
duties customarily performed by a treasurer of a corporation,  and shall perform
such other duties and have such other  powers as are from time to time  assigned
to him or her by the Board of Directors,  the chief  executive  officer,  or the
President.  Unless otherwise specified by the Board of Directors,  the Treasurer
shall be the chief  financial  officer  and, in the absence of the election of a
Controller, the chief accounting officer of the Corporation.

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                                      -10-

         SECTION 4.07.  Assistant and  Subordinate  Officers.  The assistant and
subordinate  officers of the  Corporation  are all officers  below the office of
Vice-President,  Secretary, or Treasurer.  The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors,  the chief  executive  officer,  or the  President  or in the case of
Assistant  Treasurer and Assistant Secretary by the Treasurer and the Secretary,
respectively.

         SECTION 4.08.  Election,  Tenure and Removal of Officers.  The Board of
Directors  shall elect the officers of the  Corporation.  The Board of Directors
may from time to time  authorize any  committee or officer to appoint  assistant
and  subordinate  officers.  Election or appointment of an officer,  employee or
agent  shall  not of  itself  create  contract  rights.  All  officers  shall be
appointed to hold their offices, respectively, during the pleasure of the Board.
The Board of Directors  (or, as to any  assistant or  subordinate  officer,  any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his or her contract  rights.
The Board of Directors  (or, as to any  assistant or  subordinate  officer,  any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office for the unexpired portion of the term.

         SECTION 4.09  Compensation.  The Board of Directors shall have power to
fix the salaries and other  compensation and remuneration,  of whatever kind, of
all officers of the  Corporation.  No officer shall be prevented  from receiving
such  salary  by reason  of the fact  that he or she is also a  director  of the
Corporation. The Board of Directors may authorize any committee or officer, upon
whom the power of appointing  assistant and  subordinate  officers may have been
conferred, to fix the salaries,  compensation and remuneration of such assistant
and subordinate officers.


                                   ARTICLE V.

                                DIVISIONAL TITLES

         SECTION 5.01.  Conferring Divisional Titles. The Board of Directors may
from time to time confer upon any employee of a division of the  Corporation the
title of  President,  Vice  President or Treasurer of such division or any other
title or titles deemed  appropriate,  or may authorize the Chairman of the Board
or the President to do so. Any such titles so conferred may be discontinued  and
withdrawn at any time by the Board of Directors, or by the Chairman of the Board
or the President if so  authorized by the Board of Directors.  Any employee of a
division  designated by such  divisional  title shall have the powers and duties
with respect to such  division as shall be prescribed by the Board of Directors,
or, to the extent  authorized  by the Board of  Directors,  the  Chairman of the
Board or the President.

                                     AI-98


<PAGE>

                                     

         SECTION 5.02. Effect of Divisional Titles. The conferring of divisional
titles  shall not create an office of the  Corporation  under  Article IV unless
specifically designated as such by the Board of Directors, but any person who is
an officer of the Corporation may also have a divisional title.


                                   ARTICLE VI.

                                      STOCK

         SECTION 6.01.  Certificates for Stock.  Each stockholder is entitled to
certificates which represent and certify the shares of stock he, she or it holds
in the Corporation. Each stock certificate shall include on its face the name of
the  Corporation,  the name of the  stockholder  or other  person  to whom it is
issued,  and the class of stock and number of shares it represents.  It shall be
in such form,  not  inconsistent  with Maryland Law or the Charter,  as shall be
approved by the Board of  Directors  or any officer or officers  designated  for
such purpose by the Board of Directors.  Each stock  certificate shall be signed
by  the  Chairman  of  the  Board,  the  President  or  a  Vice-President,   and
countersigned  by the  Secretary,  an Assistant  Secretary,  the Treasurer or an
Assistant  Treasurer.  Each  certificate may be sealed with the actual corporate
seal or  facsimile of it or in any other form and the  signatures  may be either
manual or facsimile signatures. A certificate is valid and may be issued whether
or not an officer who signed it or whose  facsimile is affixed  thereto is still
an officer when it is issued.  No certificate  shall be issued for any shares of
stock  until such  shares are fully  paid,  except as  otherwise  authorized  by
provisions of Section 2-210 of the Maryland General Corporation Law.

         SECTION 6.02.  Transfers.  The Board of Directors  shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue,  transfer and  registration  of certificates of stock and may appoint
transfer  agents  and  registrars  thereof.  The  duties of  transfer  agent and
registrar may be combined.  Upon  compliance  with  provisions  restricting  the
transferability  of shares of stock, if any, transfers of shares of stock of the
Corporation shall be made only on the stock transfer books of the Corporation by
the record holder thereof,  or by his attorney thereunto  authorized by power of
attorney duly executed and filed with the Secretary of the Corporation or with a
transfer  agent or a registrar,  if any, and on surrender of the  certificate or
certificates  for such shares of stock properly  endorsed and the payment of all
taxes due thereon, if any.

         SECTION 6.03.  Record Dates or Closing of Transfer Books.  The Board of
Directors  may set a record  date or  direct  that the stock  transfer  books be
closed for a stated  period for the  purpose of making any proper  determination
with  respect to  stockholders,  including  which  stockholders  are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the

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<PAGE>

                                      

day the record date is fixed nor, subject to Section 1.06 of these By-Laws, more
than ninety days before the date on which the action requiring the determination
will be taken;  the  transfer  books may not be closed for a period  longer than
twenty days; and, in the case of a meeting of  stockholders,  the record date or
the closing of the transfer  books shall be at least ten days before the date of
the meeting.  If a record date is not set, and, if the stock  transfer books are
not closed, the record date for determining  stockholders  entitled to notice of
or to vote at a meeting of  stockholders  shall be the later of (i) the close of
business  on the day on  which  notice  of the  meeting  is  mailed  or (ii) the
thirtieth day before the meeting.  Except as otherwise  required by Maryland Law
or the Charter, the record date for determining stockholders entitled to receive
payment  of a  dividend  or an  allotment  of any  rights  shall be the close of
business on the day on which the resolution of the Board of Directors  declaring
the  dividend  or  allotment  of  rights is  adopted,  but any such  payment  or
allotment  shall not be made more than  sixty  days  after the date on which the
resolution is adopted.

         SECTION 6.04.  Stock Ledger.  The  Corporation  shall  maintain a stock
ledger which contains the name and address of each stockholder and the number of
shares of stock of each class which the stockholder  holds. The stock ledger may
be in  written  form or in any  other  form  which  can be  converted  within  a
reasonable  time into  written  form for visual  inspection.  The  original or a
duplicate of the stock  ledger shall be kept at the offices of a transfer  agent
for the  particular  class or  series of stock,  or, if none,  at the  principal
office  in the State of  Maryland  or the  principal  executive  offices  of the
Corporation.

         SECTION  6.05.   Certification  of  Beneficial  Owners.  The  Board  of
Directors  may adopt by  resolution  a procedure by which a  stockholder  of the
Corporation may certify in writing to the  Corporation  that any shares of stock
registered  in the  name  of the  stockholder  are  held  for the  account  of a
specified person other than the stockholder.  The resolution shall set forth the
class of stockholders who may certify,  the purpose for which the  certification
may be made, the form of  certification  and the  information to be contained in
it, if the  certification  is with  respect  to a record  date or closing of the
stock  transfer  books,  the time after the record dates or closing of the stock
transfer  books  within  which  the  certification   must  be  received  by  the
Corporation,  and any other  provisions  with respect to the procedure which the
Board  considers  necessary or desirable.  On receipt of a  certification  which
complies with the procedure adopted by the Board of Directors in accordance with
this Section,  the person specified in the certification is, for the purpose set
forth in the certification, the holder of record of the specified stock in place
of the stockholder who makes the certification.

          SECTION  6.06.  Lost Stock  Certificates.  The Board of Directors  may
determine the  conditions  for issuing a new stock  certificate  in place of one
which is  alleged  to have  been  lost,  stolen  or  destroyed,  or the Board of

                                     AI-100

<PAGE>

                                     

Directors may delegate such power to any officer or officers of the Corporation.
In their  discretion,  the Board of  Directors  or such  officer or officers may
require the owner of the certificate to give bond, with  sufficient  surety,  to
indemnify the  Corporation  against any loss or claim arising as a result of the
issuance of a new certificate or refuse to issue such new certificate  save upon
the order of some court having jurisdiction.

         SECTION 6.07.  Fractional  Shares  Interests.  The Corporation may, but
shall  not be  obliged  to,  issue  fractional  shares  of  stock,  eliminate  a
fractional  interest by rounding  off to a full share of stock,  arrange for the
disposition of a fractional  interest by the person entitled to it, pay cash for
the fair value of a fractional share of stock determined as of the time when the
person entitled to receive it is determined, or issue scrip or other evidence of
ownership  which  shall  entitle  its  holder to  exchange  such  scrip or other
evidence  of  ownership  aggregating  a  full  share  for  a  certificate  which
represents the shares,  but such scrip or other evidence of ownership shall not,
unless otherwise  provided,  entitle the holder to exercise any voting right, or
to  receive  dividends  thereon  or to  participate  in any of the assets of the
corporation in the event of  liquidation.  The Board of Directors may impose any
reasonable condition on the issuance of scrip or other evidence of ownership may
cause such scrip or evidence of ownership to be issued  subject to the condition
that it shall become void if not exchanged for a certificate representing a full
share of stock  before a  specified  date or subject to the  condition  that the
shares for which such scrip or evidence of ownership is exchangeable may be sold
by the Corporation and the proceeds  thereof  distributed to the holders of such
scrip or evidence of ownership, or subject to a provision for forfeiture of such
proceeds  to the  Corporation  if not  claimed  within a period of not less than
three  years  from the  date  the  scrip or  other  evidence  of  ownership  was
originally issued.


                                  ARTICLE VII.

                                     FINANCE

         SECTION 7.01. Checks,  Drafts,  Etc. All checks,  drafts and orders for
the payment of money,  notes and other evidences of indebtedness,  issued in the
name of the Corporation,  shall,  unless otherwise provided by resolution of the
Board of Directors,  be signed by the chief executive officer, the President,  a
Vice-  President  or  an  Assistant  Vice-President  and  countersigned  by  the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary.

         SECTION 7.02. Annual Statement of Affairs.  The chief executive officer
or chief financial  officer shall prepare,  or cause to be prepared,  annually a
full and correct  statement  of the  financial  affairs of the  Corporation,  to
include  a balance  sheet and  statements  of  operations  and cash flow for the
preceding fiscal year. The statement of affairs shall be submitted at the annual

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meeting of the stockholders and, within twenty days after the meeting, placed on
file at the Corporation's principal office.

         SECTION 7.03.  Fiscal Year. The fiscal year of the Corporation shall be
the twelve calendar months period ending Jun