_______________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended DecemberMarch 31, 19971998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________

Commission file number 1-8038

KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)

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

Two Tower Center, 20th Floor, East Brunswick, NJ 08816
Address of Principal executive offices) (ZIP Code)

Registrant's telephone number including area code: (732) 247-4822

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant has filed documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court since there was a distribution of securities under a plan confirmed by a
court. Yes X No

Common Shares outstanding at FebruaryMay 13, 1998 - 18,307,39018,327,390

_______________________________________

KEY ENERGY GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets at
DecemberMarch 31, 19971998 (unaudited) and June 30, 1997 3

Unaudited Consolidated Statements of Operations for the
Three months and sixnine months ended DecemberMarch 31,
1998 and 1997 and 1996 4

Unaudited Consolidated Statements of Cash Flows for the
Three months and sixnine months ended DecemberMarch 31,
19971998 and 19961997 5

Notes to Unaudited Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1516

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 2425

Item 2. Changes in Securities and Use of Proceeds 2425

Item 3. Defaults Upon Senior Securities 2425

Item 4. Submission of Matters to a Vote of Security Holders 2426

Item 5. Other Information 26

Item 6. Exhibits and Reports on Form 8-K 2527

Signatures 28

KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)

DecemberMarch 31, June 30,
1998 1997
1997---------- ---------
(Unaudited)
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 53,770 $ 41,704$26,874 $41,704
Accounts receivable, net 76,87585,629 45,230
Inventories 10,18214,781 5,171
Prepaid expenses and other 1,9544,140 1,228
- --------------------------------------------------------------------------------------- -------
Total current assets 142,781131,424 93,333
- -------------------------------------------------------------------------------

Property and equipment, at cost:
Oilfield service equipment 327,410376,666 186,895
Oilfield drilling equipment 28,52247,591 6,319
Oil and gas properties, using the
successful efforts accounting method 28,71331,890 23,622
Other property and equipment 27,95632,908 10,419
- -------------------------------------------------------------------------------
412,601-------- --------
489,055 227,255
Less accumulated depreciation and depletion 31,06539,622 19,069
- --------------------------------------------------------------------------------------- --------
Property and equipment, net 381,536449,433 208,186
- --------------------------------------------------------------------------------------- --------
Goodwill, net 43,024 16,387
Other assets 63,266 18,576
- -------------------------------------------------------------------------------

$ 587,583 $ 320,095
===============================================================================14,452 2,189
-------- --------
TOTAL ASSETS $638,333 $320,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 16,842 $ 15,339$16,707 $15,339
Other accrued liabilities 21,00523,583 12,507
Accrued interest 3,3141,325 2,102
Accrued income taxes 448326 1,664
Deferred taxes 12698 126
Current portion of long-term debt 1,9452,591 1,404
- --------------------------------------------------------------------------------------- --------
Total current liabilities 43,68044,630 33,142
- -------------------------------------------------------------------------------

Long-term debt, net of current portion 330,292356,043 172,763
Noncurrent accrued expenses 4,0155,365 4,017
Deferred taxes 77,24385,333 35,738
Minority interest - 1,256
Commitments and contingencies

Stockholders' equity:Equity:
Common stock, $0.10 par value per share;
25,000,000100,000,000 shares authorized,
18,356,29618,724,056 and 12,297,752 shares issued at
DecemberMarch 31, 19971998 and June 30, 1997,
respectively 1,8361,872 1,230
Additional paid-in capital 110,998118,489 55,031
Treasury stock, at cost; 416,666 shares
and zero shares at DecemberMarch 31, 1998 and June
June 30, 1997, respectivily (9,682) -
Retained earnings 29,20136,283 16,918
- --------------------------------------------------------------------------------------- --------
Total stockholders' equity 132,353Stockholders' Equity 146,962 73,179
- -------------------------------------------------------------------------------

$ 587,583 $ 320,095
===============================================================================-------- --------
$638,333 $320,095
======== ========

The accompanying notes are an integral part of these unaudited
consolidated financial statements.

KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)

Three months ended SixNine months ended
DecemberMarch 31, DecemberMarch 31,
1998 1997 19961998 1997
1996
- -------------------------------------------------------------------------------
Revenues: --------------------- --------------------
Oilfield services $ 97,542 $ 31,708 $ 167,040 $ 59,019$104,014 $38,308 $271,505 $97,327
Oilfield drilling 8,689 2,359 11,512 4,68314,078 2,414 25,590 7,097
Oil and gas 1,949 2,088 4,067 3,6131,730 2,250 5,422 5,863
Other, net 1,493 42 2,574 344
- -------------------------------------------------------------------------------902 78 3,201 422
-------- -------- -------- --------
Total revenues 109,673 36,197 185,193 67,659
- -------------------------------------------------------------------------------120,724 43,050 305,718 110,709
-------- -------- -------- --------
Costs and expenses:
Oilfield services 68,354 23,066 116,592 42,76672,222 26,502 188,814 69,268
Oilfield drilling 6,590 1,963 8,853 3,84410,434 2,061 19,287 5,905
Oil and gas 893 773 1,831 1,286787 899 2,282 2,185
General and administrative 10,370 3,735 18,036 7,26211,774 4,914 29,947 12,176
Depreciation, depletion
and amortization 7,740 2,342 12,886 4,4379,215 3,250 22,101 7,687
Interest expense 3,879 1,296 7,317 2,646
- -------------------------------------------------------------------------------5,063 1,861 12,380 4,507
-------- -------- -------- --------
Total costs and expenses 97,826 33,175 165,515 62,241
- -------------------------------------------------------------------------------109,495 39,487 274,811 101,728
-------- -------- -------- --------
Income before income taxes and
minority interest 11,847 3,022 19,678 5,41811,229 3,563 30,907 8,981

Income tax provision 4,502 1,029 7,395 1,8134,147 1,207 11,542 3,020
Minority interest in income - (50)(9) - 8
- -------------------------------------------------------------------------------(1)
-------- -------- -------- --------
Net income $ 7,345 $ 2,043 $ 12,283 $ 3,597
===============================================================================$7,082 $2,365 $19,365 $5,962
======== ======== ======== ========

Net income per share:

Basic $ 0.40 $ 0.19 $ 0.76 $ 0.34$0.39 $0.20 $1.15 $0.54
Diluted $ 0.36 $ 0.16 $ 0.62 $ 0.29$0.35 $0.17 $0.97 $0.46

Weighted average shares outstanding:
Basic 18,151 10,850 16,137 10,63518,295 11,612 16,843 10,961
Diluted 25,571 17,027 22,720 16,81525,449 18,162 23,725 17,251

The accompanying notes are an integral part of these unaudited
consolidated financial statements.

KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

Net income $ 7,345 $ 2,043 $ 12,283 $ 3,597$7,082 $2,365 $19,365 $5,962
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation, depletion
and amortization 7,740 2,342 12,886 4,4379,215 3,250 22,101 7,687
Deferred income taxes 1,177 1,029 4,070 1,813(261) 1,207 3,809 3,020
Minority interest in
net income - (50)(9) - 8(1)

Changes in assets and
liabilities, net of effects
from acquisitions:
Accounts receivable 1,890 (1,761) (4,334) (3,673)(2,062) (3,462) (6,396) (7,135)
Other current assets (1,742) 352 (342) (97)(4,104) (1,253) (4,446) (1,350)
Accounts payable and
accrued liabilities (8,666) (3,922) (9,638) (3,069)(7,483) (1,541) (17,121) (4,610)
Accrued interest 3,041 (947) 1,213 (283)(1,989) 1,158 (776) 875
Other assets and
liabilities (3,424) (175) (4,717) (806)
- -------------------------------------------------------------------------------1,317 699 (3,400) (107)
------- -------- -------- --------
Net cash provided by
(used in) operating activities 7,361 (1,089) 11,421 1,927
- -------------------------------------------------------------------------------1,715 2,414 13,136 4,341
------- -------- -------- --------

Cash flows from investing activities:
Property and equipment
additions related to:
Oilfield service operations (12,268) (3,049) (18,962) (5,949)(9,965) (3,108) (28,927) (9,057)
Oilfield drilling operations (1,315) (268) (3,373) (591)(1,593) (485) (4,966) (1,076)
Oil and gas operations (1,926) (975) (2,265) (1,297)(1,815) (1,623) (4,080) (2,639)
Acquisitions of:
Oilfield service operations,
net of cash acquired (29,933) (13,228) (134,660) (13,228)(24,654) (8,494) (159,314) (21,722)
Oilfield drilling operations,
net of cash acquired (7,256)(15,216) - (21,866)(37,082) -
Oil and gas operations,
net of cash acquired (600)- - (600) -(281)
Minority interest - - (3,426) -
- -------------------------------------------------------------------------------------- ------- -------- --------
Net cash used in
investing activities (53,298) (17,520) (185,152) (21,065)
- -------------------------------------------------------------------------------(53,243) (13,710) (238,395) (34,775)
------- ------- -------- --------

Cash flows from financing activities:
Principal payments on debt (2,229) (154) (2,547) (1,053)(936) (200) (3,483) (1,253)
Repayment of long-term debt (19,337) - (1,675) (216,337) (35,413)(37,088)
Borrowings under line of credit 65,000 368 199,000 1,30725,000 1,980 224,000 3,287
Purchase of treasury stock (9,682)- - (9,682) -
Proceeds from convertible
subordinated debentures, net - - - 50,440
Proceeds from long-term
commercial paper debt, net 14,000- - 208,500 -
Procceds from other
long-term debt 1,638 10,500 1,699 10,500568 15,000 2,267 25,500
Proceeds from exercise of
warrants 99 - 375 4,222 -375
Proceeds from exercise
stock options 942- - 942 58
- --------------------------------------------------------------------------------------- -------- -------- --------
Net cash provided by
financing activities 50,431 10,714 185,797 25,839
- -------------------------------------------------------------------------------24,632 15,480 210,429 41,319
-------- -------- -------- ---------
Net increase (decrease)
in cash 4,494 (7,895) 12,066 6,701(26,896) 4,184 (14,830) 10,885

Cash, beginning of period 49,276 18,80753,770 10,912 41,704 4,211
- --------------------------------------------------------------------------------------- -------- -------- --------
Cash, end of period $ 53,770 $ 10,912 $ 53,770 $ 10,912
===============================================================================$26,874 $15,096 $26,874 $15,096
======== ======== ======== ========

The accompanying notes are an integral part of these unaudited
consolidated financial statements.

KEY ENERGY GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DecemberMarch 31, 19971998
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited consolidated financial statements of Key Energy Group, Inc. (the(collectively
with its subsidiaries, the "Company" or "Key") and its wholly-owned subsidiaries
for the interim period as of March 31, 1998 and 1997, and for the three and nine
months ended March 31, 1998 and 1997 are unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
conformityaccordance with generally accepted accounting principals, but do not purportprinciples have been condensed or
omitted in this Form 10-Q pursuant to be a complete presentationthe rules and regulations of the
Securities and Exchange Commission. However, in as
much asthe opinion of management, these
interim financial statements include all note disclosures requiredthe necessary adjustments to fairly
present the results of the interim periods. The results of operations for the
three and nine months ended March 31, 1998 are not included.necessarily indicative of the
results of operations for the full fiscal year ended June 30, 1998. These
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements offor the Company and notes theretofiscal year ended June
30, 1997 included in the Company's 1997 Annual Report on Form 10-K for the year ended June 30, 1997.

In the opinion of management, the Company's unaudited consolidated financial
statements as of December 31, 1997 and for the three months and six months ended
December 31, 1997 and 1996 contain all adjustments and accruals, consisting only
of normal recurring accrual adjustments, necessary for a fair presentation of
the results of the interim periods. These interim results are not necessarily
indicative of results for a full year.10-K.

Earnings per Share

The Company implemented the Statement of Financial Accounting Standards No. 128
("SFAS 128") - Earnings per Share, for the quarter ended December 31, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 has been applied retro-actively for
each period presented. In accordance with SFAS 128, the reconciliation of the
numerators and denominators of basic EPS andfor diluted EPS is presented below:

Three MonthsEnded Nine Months Ended
Six Months Ended
DecemberMarch 31, DecemberMarch 31,
1998 1997 19961998 1997
1996
--------------------- --------------------
Basic EPS Computation:
Numerator-
Net Income $ 7,345 $ 2,043 $12,283 $ 3,597
--------------------- --------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,635
--------------------- --------------------
Basic EPS $ 0.40 $ 0.19 $ 0.76 $ 0.34
===================== ====================----------------- -----------------
Diluted EPS Computation:
Numerator-
Net Income $ 7,3457,082 $ 2,043 $12,2832,365 $19,365 $ 3,5975,962
Effect of Dilutive Securities,
Tax Effected:
Convertible Debentures 1,738 609 1,882 1,219
-------------------- --------------------debt 1,752 634 3,599 1,901
------ ------ ------ ------
$ 9,0838,834 $ 2,652 $14,165 $4,816
-------------------- --------------------

- 6 -

Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
-------------------- --------------------2,999 $22,964 $7,863
------ ------ ------ ------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,63518,295 11,612 16,843 10,961
Warrants 82 319 235 32074 411 199 309
Stock Options 1,256 525 1,294 527997 806 1,357 648
7% Convertible Subordinated Debentures 472 5,333 2,0961,497 5,333
5% Convertible DebenturesSubordinated Notes 5,610 - 2,9583,829 -
-------------------- --------------------
25,571 17,027 22,720 16,815
-------------------- -------------------------- ------ ------ ------
25,449 18,162 23,725 17,251
------ ------ ------ ------
Diluted EPS $ 0.360.35 $ 0.160.17 $ 0.620.97 $ 0.29
==================== ====================0.46

2. BUSINESS AND PROPERTY ACQUISITIONS

The Company

The Company conducts its domestic operations primarily through eight
wholly-owned subsidiaries: Yale E. Key, Inc., WellTech Eastern, Inc., WellTech
Mid-Continent, Inc., Brooks Well Servicing, Inc., Key Four Corners, Inc., Key
Rocky Mountain, Inc., Odessa Exploration Incorporated, and Key Energy Drilling,
Inc. The Company's Argentina operations are conducted through its wholly-owned
subsidiaries Servicios WellTech S.A. and Kenting Drilling (Argentina) S. A.

As of February 13,May 15, 1998, the Company owned a fleet of approximately 820830 well service
rigs, 628700 oilfield fluid, haulinghaul and other trucks, and 5963 land drilling rigs,
including 16 well service rigs, 14 trucks and 6 drilling rigs in Argentina.

Acquisitions Completed During the SixNine Months Ended DecemberMarch 31, 19971998

The following acquisitions have beenwere completed during the sixnine months ended DecemberMarch 31,
1997.1998. Except as otherwise noted, the results of operations from these
acquisitions are included in the Company's results of operations for the
applicable three months and sixnine months ended DecemberMarch 31, 1997 (effective as of
the date of completion of the acquisition unless otherwise noted).1998. Each of the
acquisitions was accounted for using the purchase method of accounting. Unless
otherwise noted, the purchase prices specified below are based on cash paid and
the value of the Company's common stock, par value $0.10 (the "Common Stock"),
issued at the closing of the acquisitions (with the Common Stock being valued at
the closing price on the closing date), and do not include any post-closing
adjustments, if any, paid or to be paid based onupon a re-calculation of the
working capital of the acquired company as of the closing date.

Edwards Transport, Inc.

On March 27, 1998, the Company completed the acquisition of Edwards Transport,
Inc. ("Edwards") for approximately $3.0 million in cash. Edwards operates
fifteen vacuum and pump trucks in West Texas. The operating results of Edwards
will be included in the Company's results of operations effective April 1, 1998.

Lundy Vacuum Service, Inc.

On March 3, 1998, the Company completed the acquisition of Lundy Vacuum Service,
Inc. ("Lundy") for approximately $1.4 million in cash. Lundy operates eight
vacuum trucks, other oilfield fluid hauling trucks and an oilfield construction
site buisiness in East Texas. The operating results of Lundy will be included in
the Company's results of operations effective March 3, 1998.

Lauffer Well Service, Inc.

On March 2, 1998, the Company completed the acquisition of the assets of Lauffer
Well Service, Inc. ("Lauffer") for approximately $400,000 in cash. Lauffer
operates four well service rigs in Kentucky. The operating results of Lauffer
will be included in the Company's results of operations effective March 2, 1998.

Updike Brothers, Inc.

On February 6, 1998, the Company completed the acquisition of Updike Brothers,
Inc. ("Updike") for approximately for approximately $10.6 million in cash.
Updike operates 25 well service rigs in Wyoming. The operating results of Updike
are included in the Company's results of operations effective February 6, 1998.

Four Corners Drilling Company

On February 4, 1998, the Company completed the acquisition of Four Corners
Drilling Company ("Four Corners") for approximately $10.0 million in cash. Four
Corners owns 12 drilling rigs in the four corners region of the Southwestern
United States. The operating results of Four Corners are included in the
Company's results of operations effective February 4, 1998.

Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.

On January 30, 1998, the Company completed the acquisition of Legacy Drilling
Co. ("Legacy") for approximately $3.6 million in cash. Legacy operates four
drilling rigs in the Permian Basin region of West Texas. The operating results
of Legacy are included in the Company's results of operations effective February
1, 1998

Circle M Vacuum Services, Inc.

On January 30, 1998, the Company completed the acquisition of Circle M Vacuum
Services, Inc. ("Circle M") for approximately $800,000 in cash. Circle M
operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas. The operating results of Circle M are included in the Company's
results of operations effective February 1, 1998

Hot Oil Plus, Inc.

On January 29, 1998, the Company completed the acquisition of Hot Oil Plus, Inc.
("Hot Oil Plus") for approximately $1.8 million in cash. Hot Oil Plus operates
eight hot oil trucks, a pump truck and a steam heater in Southeast Texas. The
operating results of Hot Oil Plus are included in the Company's results of
operations effective February 1, 1998.

J.W. Gibson Well Service Company

On January 8, 1998, the Company completed the acquisition of J.W. Gibson Well
Service Company ("Gibson") for approximately $25.5 million, consisting of $23.9
million in cash, 100,000 shares of Common Stock and warrants to acquire 265,000
shares of Common Stock at an exercise price of $18.00 per share, subject to
certain adjustments.

Gibson operates 74 well service rigs and related equipment in eight states. From
August 1, 1997 through the closing of the acquisition, the Company managed the
operations of Gibson pursuant to an interim operating agreement. Under the
operating agreement, the Company received a management fee equal to the
operating income from Gibson's operations less $25,000 per month and received a
one-time management fee of $300,000. The full operating results of Gibson are
included in the Company's consolidated results of operations effective January
8, 1998.

Sitton Drilling Co.

On January 1, 1998, the Company completed the acquisition of Sitton Drilling Co.
("Sitton") for approximately $14.8 million, including $12.9 million in cash and
100,000 shares of Common Stock. Sitton operates five drilling rigs in the
Permian Basin region of West Texas. The operating results of Sitton are included
in the Company's results of operations effective January 1, 1998.

Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.

EffectiveOn December 2, 1997, the Company completed the acquisition of the assets of
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. (collectively
the "Critchfield Assets") for approximately $8.5 million, consisting of $2.7
million in cash and 240,000 shares of Common Stock. The Critchfield Assets
consistedconsist of five land drilling rigs, five well service rigs and other related
equipment in Michigan. - 7 -

The operating results of Critchfield Assets are included
in the Company's results of operations effective December 2, 1997.

Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation

EffectiveOn November 24, 1997, the Company completed the acquisition of Win-Tex Drilling
Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for approximately $6.7
million in cash. Win-Tex operates six land drilling rigs, trucks, trailers and
related equipment in West Texas. The operating results of Win-Tex are included
in the Company's results of operations effective December 1, 1997.

Jeter Service Co.

EffectiveOn November 18, 1997, the Company completed the acquisition of Jeter Service Co.
("Jeter") for approximately $6.7 million in cash. Jeter operates 15 well service
rigs, an oilfield supply store and an oilfield location construction/maintenance
business with 15 trucks and other related equipment in Oklahoma. The operating
results of Jeter are included in the Company's results of operations effective
December 1, 1997.

GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well
Service, Inc.

On October 3, 1997, the Company acquired certain assets of GSI Trucking Company,
Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI,
Kahlden and McCurdy") for approximately $1.6 million in cash. GSI, Kahlden and
McCurdy operate 12 fluid and 5 equipment hauling trucks in Southeast Texas. The
operating results of GSI, Kahlden and McCurdy are included in the Company's
results of operations effective October 3, 1997.

Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.

EffectiveOn October 1, 1997, the Company completed the acquisition of substantially all
of the assets of Big A Well Service Co., Sunco Trucking Co. and Justis Supply
Co., Inc. (collectively "Big A/Sunco") for approximately $32.1 million,
consisting of $28 million in cash and 125,000 shares of Common Stock. Big
A/Sunco operates 25 well service rigs, four drilling rigs, 75 fluid hauling and
other trucks, related equipment and a machine shop/supply store in the Four
Corners region of the Southwestern United StatesStates. The operating results of Big
A/Sunco are included in the Company's results of operations effective October 1,
1997.

Frontier Well Service, Inc.

EffectiveOn September 30, 1997, the Company completed the acquisition of Frontier Well
Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier
operates 12 well service rigs and related equipment in Wyoming. The operating
results of Frontier are included in the Company's results of operations
effective October 1, 1997.

Dunbar Well Service, Inc.

EffectiveOn September 29, 1997, the Company completed the acquisition of Dunbar Well
Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar
operates 38 well service rigs and related equipment in Wyoming. The operating
results of Dunbar are included in the Company's results of operations effective
October 1, 1997.

BRW Drilling, Inc.

EffectiveOn September 25, 1997, the Company completed the acquisition of BRW Drilling,
Inc. "BRW"("BRW") for approximately $14.6 million in cash. BRW operates seven
drilling rigs and related equipment in the Permian Basin region of West Texas
and Eastern New Mexico. The operating results of BRW are included in the
Company's results of operations effective October 1, 1997.

- 8 -

Landmark Fishing & Rental, Inc.

EffectiveOn September 16, 1997, the Company completed the acquisition of Landmark Fishing
& Rental, Inc. ("Landmark") for approximately $3.3 million in cash. Landmark
operates a rental tool business in Western Oklahoma and the Texas Panhandle. The
operating results of Landmark are included in the Company's results of
operations effective September 16, 1997.

Waco Oil & Gas Co., Inc.

EffectiveOn September 1, 1997, the Company completed the acquisition of certain assets of
Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in cash. The
Waco assets included 12 well service rigs, three drilling rigs, 33 fluid hauling
trucks and other trucks operated in West Virginia. Following the consummation of
the acquisition, the three drilling rigs acquired from Waco were sold to an
independent third party for $2.3 million in cash. No gain or loss was recognized
in the sale of these rigs. The operating results of Waco are included in the
Company's results of operations effective September 23, 1997.

Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.

EffectiveOn September 1, 1997, the Company completed the acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million
in cash. Ram/Rowland operates 17 well service rigs, 93 fluid hauling and other
trucks, 290 frac tanks, three disposal and brine wells, and dirt construction
equipment in the Permian Basin region of West Texas and Southeastern New MexicoMexico.
The operating results of Ram/Rowland are included in the Company's results of
operations effective September 1, 1997.

Mosley Well Service, Inc.

EffectiveOn August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley"), which operates 36 well service rigs and related
equipment in East Texas, Northern Louisiana and Arkansas, for approximately
$16.2 million in cash. The operating results of Mosley are included in the
Company's results of operations effective September 1,August 22, 1997.

Kenting Holdings (Argentina) S.A.

EffectiveOn July 30, 1997, the Company completed the acquisition of Kenting Holdings
(Argentina) S.A. ("Kenting") for approximately $10.1 million in cash. Kenting is
the sole shareholder of Kenting Drilling (Argentina) S.A. which operates six
well service rigs, three drilling rigs and related equipment in Argentina. The
operating results of Kenting are included in the Company's results of operations
effective August 1, 1997.

Patrick Well Service, Inc.

EffectiveOn July 17, 1997, the Company completed the acquisition of Patrick Well Service,
Inc. ("Patrick") for approximately $7.0 million in cash. Patrick operates 29
well service rigs and related equipment in Southwest Kansas, Oklahoma and
Southeast Colorado. The operating results of Patrick are included in the
Company's results of operations effective August 1, 1997.

Servicios WellTech S.A.

EffectiveOn July 1, 1997, the Company purchased the remaining 37% minority interest in
Servicios WellTech S.A. ("Servicios") from two unrelated parties for
approximately $3.4 million in cash. As a result of the purchase, the Company now
owns 100% of Servicios. - 9 -

AcquisitionsThe operating results of Servicios are included in the
Company's results of operations effective July 17, 1997.

Acquisition Completed After DecemberMarch 31, 19971998

The following acquisitions wereacquisition was completed after DecemberMarch 31, 1997. Except as
otherwise noted, the1998. The results of
operations from these acquisitionsthis acquisition are not included in the Company's results of
operations for the three and sixnine months ended DecemberMarch 31, 1997.

Sitton Drilling Company

Effective January 1,1998.

JPF Well Service, Inc. and JPF Lease Service, Inc.

On April 20, 1998, the Company completed the acquisition of Sitton
Drilling Co. ("Sitton"JPF Well Service,
Inc. and JPF Lease Service, Inc. (collectively, "JPF") for approximately $14.8 million, including $12.9$6.2
million in cash and 100,000 shares of Common Stock. Sittoncash. JPF operates five drilling rigs
in the Permian Basin region of West Texas.

J.W. Gibson Well Service Company

Effective January 8, 1998, the Company completed the acquisition of J.W. Gibson
Well Service Company ("Gibson") for approximately $25.5 million, consisting of
$23.9 million in cash, 100,000 shares of Common Stock and warrants to acquire
265,000 shares of Common Stock at an exercise price of $18.00 per share, subject
to certain adjustments.

Gibson operates 74nine well service rigs and relatedoilfield construction
equipment in eight states.
Since July 31, 1997, the Company managed the operations of Gibson pursuant to an
interim operating agreement. Under the operating agreement, the Company received
a management fee equal to the net income from Gibson's operations less $25,000
per month and received a one-time management fee of $300,000.

Hot Oil Plus

Effective January 29, 1998, the Company completed the acquisition of Hot Oil
Plus, Inc. ("Hot Oil Plus") for approximately $1.9 million in cash. Hot Oil Plus
operates eight hot oil trucks, a pump truck and a steam heater in Southeast Texas.

Legacy Drilling Co.

Effective January 30, 1998, the Company completed the acquisition of Legacy
Drilling Co. ("Legacy") for approximately $2.9 million in cash. Legacy operates
four drilling rigs in the Permian Basin region of West Texas.

Circle M Vacuum Services

Effective January 30, 1998, the Company completed the acquisition of Circle M
Vacuum Services ("Circle M") for approximately $800,000 in cash. Circle M
operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas.

Four Corners Drilling Company

Effective February 4, 1998, the Company completed the acquisition of Four
Corners Drilling Company ("Four Corners") for $10.0 million in cash. Four
Corners owns 12 drilling rigs in the Four Corners region of the Southwestern
United States.

- 10 -

Updike Brothers, Inc.

Effective February 6, 1998, the Company completed the acquisition of Updike
Brothers, Inc. ("Updike") for approximately for $10.6 million in cash. Updike
operates 25 well service rigs in Wyoming.

3. LONG-TERM DEBT

At DecemberMarch 31, 1997,1998, major components of the Company's long-term debt were as
follows:

PNC Credit Agreement

On June 6, 1997, the Company entered into an agreement (the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on the LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained

certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).

Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended Credit Agreement"), as administrative
agent and lender, pursuant to which PNC agreed to make revolving credit loans of
up to a maximum loan commitment of $200 million. The maximum commitment
decreases to $175 million on November 6, 2000 and to $125 million on November 6,
2001. The loan commitment terminates on November 6, 2002. Borrowings under the
credit facility may be either (i) Eurodollar Loans with interest currently
payable quarterly at LIBOR plus 1.25% subject to adjustment based on certain
financial ratios, (ii) Base Rate Loans with interest payable quarterly at the
greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2 %,2%, or
(iii) a combination thereof, at the Company's option. The Amended Credit
Agreement contains certain restrictive covenants and requires the Company to
maintain certain financial ratios. A change of control of the Company, as
defined in the Amended Credit Agreement, is an event of default. Borrowings
under the Amended Credit Agreement are secured by substantially all of the
assets of the Company and its domestic subsidiaries.

Effective December 3, 1997, PNC completed the syndication of the Amended Credit
Agreement and, inAgreement. In connection therewith, PNC, as administrative agent, a syndication
of lenders and the Company entered into a First Amendment to the Amended and
Restated Credit Agreement providing for, among other things, an increase in the
maximum commitment to $250 million from $200 million to $250 million.

At DecemberMarch 31, 1997,1998, the principal balance of the Amended Credit Agreement, as
amended, was $107$132 million and the unused credit facility aggregated
approximately $143$118 million, with approximately $3 million reserved for existing
letters of credit.

7% Convertible Subordinated Debentures

In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible - 11 -

Subordinated Debentures due 2003 (the "Debentures"), pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Amended Credit Agreement, as amended. Interest on the
Debentures is payable on January 1 and July 1 of each year.

The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.

The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest thereon.
As of DecemberMarch 31, 1997,1998, $47,400,000 in principal amount of the Debentures had been
converted into 5,062,369 shares of Common Stock at the option of the holders.
The number of shares issued included 200,831 shares in excess of the number of
shares issuable at the conversion price of $9.75 per share. These additional
shares were issued by the Company to induce conversion. Such additional
consideration was accounted for as an increase to the Company's equity. In
addition, the proportional amount of debt issuance costs associated with the
converted Debentures was accounted for as a decrease to the Company's equity.

At DecemberMarch 31, 1997,1998, $4,600,000 principal amount of the Debentures remained
outstanding.

5% Convertible Subordinated Notes

On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of the Notes. The placements were made as private offerings pursuant
to Rule 144A and Regulation S under the Securities Act. The Notes are
subordinate to the Company's senior indebtedness, which, as defined in the
indenture under which the Notes were issued, includes the borrowings under the
Amended Credit Agreement, as amended. Interest on the Notes is payable on March
15 and September 15 commencingof each year. Interest of approximately $5.1 million was
paid on March 15, 1998.

The Notes are convertible, at the holder's option, into shares of Common Stock
at a conversion price of $38.50 per share, subject to certain adjustments.

The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.

- 12 -

In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holde'sholder's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.

Proceeds from the placement of the Notes were used to repay balances under the
Company's credit facilities (see above). At DecemberMarch 31, 1997,1998, $216,000,000
principal amount of the Notes was outstanding.

4. RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 130 - Reporting Comprehensive
Income

Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS 130 for the fiscal
year ended June 30, 1999. Management believes the adoption of SFAS 130 will not
have a material effect on its financial position or results of operations of the
Company.

Statement of Financial Accounting Standards No. 131 - Disclosures about Segments
of an Enterprise and Related Information

Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
need not be applied to interim financial statements in the initial year of its
application. However, comparative information for interim periods in the initial
year of application is to be reported in the financial statements for interim
periods in the second year of application. The Company will adopt SFAS 131 for
the fiscal year ended June 30, 1999. Management believes the adoption of SFAS
131 will not have a material effect on its financial position or results of
operations of the Company.

5. COMMITMENTS AND CONTINGENCIES

Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.

6. CASH FLOW DISCLOSURES

Supplemental cash flow disclosures (in thousands) for the three months and sixnine
months ended DecemberMarch 31, 19971998 and 19961997 follows:

Three months ended SixNine months ended
DecemberMarch 31, DecemberMarch 31,
1998 1997 19961998 1997
1996
------------------ ---------------------- ----- ----- -----
Interest paid $ 2,667 $2,243 $6,105 $2,9295,402 $703 $11,507 $3,632
Taxes paid 3,5685,036 - 3,5688,604 -

- 13 -

Supplemental non-cash investing and financing disclosures (in thousands) for the
three and sixnine months ended DecemberMarch 31, 19971998 and 19961997 follows:

Fair Value
of Issued Assumption Assumption Acquisition of
Common of of Property
Stock Debt Working Capital* and Equipment
----------- ---------- --------------- --------------

Three months ended
DecemberMarch 31, 1996 $12,476 $2,354 $12,2201998 $4,025 $1,697 $ 37,450

Six10,625 $ 63,165
====== ====== ======== =========
Nine months ended
DecemberMarch 31, 1996 $12,476 $2,354 $12,2201998 $17,366 $7,595 $ 37,45011,500 $ 213,633
======= ====== ======== =========
Three months ended
DecemberMarch 31, 1997 $ 5,812 $3,3914,496 $ 6,798 $101,612

Six695 $ (3,023) $ 34,229
======= ====== ========= =========
Nine months ended
DecemberMarch 31, 1997 $ 5,812 $7,65516,905 $ (970) $151,9793,049 $(15,243) $ 71,679
======== ======= ========= =========
* - excluding current maturities of long-term debt.

7. TREASURY STOCK

During the threenine months ended DecemberMarch 31, 1997,1998, the Company purchased 416,666
shares of Common Stock. All shares were purchased at the then prevailing market
prices. The purchased shares are accounted for as treasury stock on the
Company's balance sheet under the treasury stock method of accounting.

8. CHANGES APPROVED BY SHAREHOLDERS

At the Company's annual meeting of shareholders held on January 13, 1998, the
Company's shareholders approved an increase in the Company's authorized capital
stock from 25,000,000 shares, par value $.10 per share, to 100,000,000 shares,
par value $.10 per share, and approved the adoption of the Company's 1997
Incentive Plan.

The Company's 1997 Incentive Plan is an amendment and restatement of the
Company's 1995 Stock Option Plan and 1995 Outside Directors Stock Option Plan
(collectively, the "Prior Plans"), which authorized the issuance of up to
1,400,000 shares of Common Stock to key employees, officers and directors of the
Company, subject to the terms and conditions of options granted to such
individuals. The 1997 Incentive Plan authorizes the granting of stock options
and other stock-based incentive awards covering an aggregate of the greater of
(i) 3,000,000 shares of Common Stock or (ii) 10% of the number of shares of
Common Stock issued and outstanding on the last day of each calendar quarter,
provided, however, that a decrease in the number of issued and outstanding
shares of Common Stock from the previous calendar quarter; shall not result in a
decrease in the Common Stock available for issuance under the Company's 1997
Incentive Plan. Presently, 3,000,000 shares of Common Stock are authorized under
the 1997 Incentive Plan. Options previously granted under the Prior Plans were
assumed and continued by the 1997 Incentive Plan.

As of January 13, 1998, options to purchase 2,306,224 shares of Common Stock are
outstanding under the 1997 Incentive Plan.

- 14 -

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

The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.

Current and Subsequent Events

During the sixnine months ended DecemberMarch 31, 1997,1998, the Company purchased the remaining
37% minority interest in Servicios and completed the acquisition of the
following well servicing, trucking, drilling and drillingancillary equipment companies:

Patrick Well Service, Inc.
Kenting Holdings (Argentina) S.A.
Mosley Well Service, Inc.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
Waco Oil & Gas Co., Inc.
Landmark Fishing & Rental, Inc.
BRW Drilling, Inc.
Dunbar Well Service, Inc.
Frontier Well Service, Inc.
Big A Well Service Co., Sunco Trucking Co. and JusticeJustis Supply Co., Inc.
GSI Trucking Company, Inc.,
Kahlden Production Services, Inc. and
McCurdy Well Service, Inc.
Jeter Service Co.
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
Sitton Drilling Co.
J.W. Gibson Well Service Company
Hot Oil Plus, Inc.
Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.
Circle M Vacuum Services, Inc.
Four Corners Drilling Company
Updike Brothers, Inc.
Lauffer Well Service, Inc.
Lundy Vacuum Service Inc.
Edwards Transport, Inc.

These acquisitions (which are more fully described in Note 2 to the unaudited
consolidated financial statements) involve 192included 295 well service rigs (including six
well service rigs in Argentina), 210257 fluid hauling and other trucks and 2849
drilling rigs (including three drilling rigs in Argentina). The total purchase
price of these acquisitions totaled approximately $152$220 million, compromisedcomprised of
approximately $142$210 million in cash and 365,000565,000 shares of Common Stock.

Subsequent to DecemberMarch 31, 19971998 and through FebruaryMay 13, 1998, the Company has
completed the
acquisition of four well servicingJPF Well Service, Inc. and JPF Lease Service, Inc., related
companies and three contract
drilling companies involving 99that operate nine well service rigs 21 drilling rigs and 24 fluid
hauling and other trucks.engages in oilfield
construction. The total purchase price of thesethis subsequent acquisitions aggregateacquisition was
approximately $63.4 million, compromised of approximately
$60 million in cash and 200,000 shares of Common Stock.

These acquisitions were$6.2 million. This acquisition was financed primarily through long-term debt
borrowings (see Note 3 to the unaudited consolidated financial statements) and, to a lesser extent,
through internally generated funds.

Including these recent acquisitions, as.

As of FebruaryMay 13, 1998, the Company owns 820approximately 830 oilfield servicing rigs,
628700 oilfield fluid hauling and other trucks and 5963 land drilling rigs.
Management currently believes that as of February 13, 1998, the Company's active well servicing and fluid
hauling fleet is the largest active onshore fleet in the continental United
States and is the second largest active fleet in Argentina. The Company operates
in most major onshore oil and gas producing regions of the continental United
States, with the exception of California, and provides a full range of drilling,
completion, maintenance, workover and plugging and abandonment services for the
oil and gas industry.

- 15 -

Impact of DecliningLower Crude Oil Prices

During the quartersix months ended DecemberMarch 31, 1997,1998, the posted price of West Texas
intermediate crude oil (the"West(the "West Texas Crude Oil Price") fell from prices in
excess of $20 per barrel to prices of less than $17$15 per barrel. From DecemberMarch 31,
19971998 through FebruaryMay 13, 1998, the West Texas Crude Oil Price has remained in the
range of $15.50$14.50 to $17.50$15.50 per barrel. This decline in prices is thought to be
caused primarily by an oversupply of crude oil inventory created, in part, by an
unusually warm winter in the United States and Europe, an announced increase
inover production of crude
oil production quotas forfrom OPEC and non-OPEC countries and a possible decline in demand in certainfrom Asian markets.

If suchAs the result of lower crude oil prices, the Company has experienced a declinereduction
in the West Texas Crude Oil Price worsens or persists for a
protracted period, the Company's oilfield servicewell completion, workover and drilling operations would
likely be affected by postponements of drilling commitments and delays in
scheduled maintenance service for marginally producing wells which, in turn,
couldactivities. This reduction adversely
effectimpacted the Company's service and drilling rig utilization rates,
pricing structures, revenues, net income and cash flows from operations.operations for
the quarter ended March 31, 1998 and is expected to similarly impact the
Company's results of operations until crude oil prices increase to a level
substantially above the current prices and remain at such a price for an
extended period of time.
Growth Strategy

Historically, the domestic well servicing industry has been highly fragmented,
characterized by a large number of smaller companies which have competed
effectively on a local basis in terms of pricing and the quality of services
offered. In recent years, however, many major and independent oil and gas
companies have placed increasing emphasis not only on pricing, but also on the
safety records and quality management systems of, and the breadth of services
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.

Over the past eighteentwenty-one months, the Company has been the leading consolidator
of this industry, completing 3545 acquisitions of well servicing and drilling
operations through DecemberMarch 31, 19971998 and 4246 such acquisitions through FebruaryMay 13, 1998.
This consolidation has led to reduced fragmentation in the market and a more
predictable demand for well services for the Company and its competitors. The
Company's management structure is decentralized, which allows for rapid
integration of acquisitions and the retention of strong local identities of many
of the acquired businesses.

As a result of these and other factors, the Company has developed a growth
strategy to:

1. Identify, negotiate and consummate additional acquisitions of complementary
well servicing operations, including rigs, trucking and other ancillary
services;

2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize operating margins;

3. Expand business lines and services offered by the Company in existing areas
of operations; and,

4. Extend the geographic scope and operating environments for the Company's
operations.

- 16 -

If the current decline in the West Texas Crude Oil Price worsens or persists for
a protracted period, the Company may curtail or halt its growth strategy until
such time as oil prices reach more favorable ranges.

RESULTS OF OPERATIONS

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

- 17 -

QUARTER ENDED DECEMBERMARCH 31, 19971998 VERSUS THE QUARTER ENDED DECEMBERMARCH 31, 19961997

Net Income

For the quarter ended DecemberMarch 31, 1997,1998, the Company reported net income of
$7,345,000$7,082,000 ($.40.39 per share - basic) as compared to $2,043,000$2,365,000 ($.19.20 per share -
basic) for the quarter ended DecemberMarch 31, 1996,1997, representing an increase of
$5,302,000,$4,717,000, or 260%199% (95% increase in basic earnings per share). The increase in
net income is primarily attributable to the Company's acquisitions completed
between OctoberApril 1, 19961997 and DecemberMarch 31, 1997,1998, increased service and drilling rig
utilization rates and price increases.

Revenues

The Company's total revenues for the quarter ended DecemberMarch 31, 19971998 increased by
$73,476,000,$77,674,000, or 203%180%, to $109,673,000$120,724,000 compared to $36,197,000$43,050,000 reported for the
quarter ended DecemberMarch 31, 1996.1997. The increase is primarily attributable to the
Company's acquisitions of oilfield service and drilling rig companies (see Note
2 to the consolidated financial statements), increased demand for oilfield
service equipment and recent price increases for oilfield services. From October 1,
1996 through DecemberMarch 31, 1997,1998, the Company has added 387490 well servicing rigs, 413460
fluid hauling trucks and 3152 drilling rigs to its fleet.

Oilfield service revenues for the current quarter increased by $65,834,000,$65,706,000, or
208%172%, to $97,542,000$104,014,000 compared to $31,708,000$38,308,000 reported for the quarter ended
DecemberMarch 31, 1996.1997. The increase is primarily attributable to recent acquisitions,
increased demand for oilfield service equipment and recent price increases for oilfield
services.

Drilling revenues for the quarter ended DecemberMarch 31, 19971998 increased by $6,330,000,$11,664,000,
or 268%483%, to $8,689,000$14,078,000 compared to $2,359,000$2,414,000 reported for the quarter ended
DecemberMarch 31, 1996.1997. The increase is primarily attributable to recent contract
drilling rig acquisitions, higher rig utilization and price increases.

Oil and gas revenues for the quarter ended DecemberMarch 31, 19971998 decreased by $139,000,$520,000,
or 7%23%, to $1,949,000$1,730,000 compared to $2,088,000$2,250,000 reported for the quarter ended
DecemberMarch 31, 1996.1997. The decrease is primarily attributable to lower crude oil and natural gas
prices.

Costs and Expenses and Operating Margins

The Company's total costs and expenses for the quarter ended DecemberMarch 31, 19971998
increased by $64,651,000,$70,008,000, or 195%177%, to $97,826,000$109,495,000 compared to $33,175,000$39,487,000
reported for the quarter ended DecemberMarch 31, 1996.1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.

Oilfield service expenses for the quarter ended DecemberMarch 31, 19971998 increased by
$45,288,000,$45,720,000, or 196%173%, to $68,354,000$72,222,000 compared to $23,066,000$26,502,000 reported for the
quarter ended DecemberMarch 31, 1996.1997. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended DecemberMarch 31, 19971998 by
$20,546,000,$19,986,000, or 238%169%, to $29,188$31,792,000 compared to $8,642,000$11,806,000 for the quarter
ended DecemberMarch 31, 1996.1997. Oilfield service margins as a percentage of oilfield
service revenue for the quarters ended DecemberMarch 31, 1998 and 1997 was 31% and 1996 was 30% and 27%31%,
respectively. Such increases are due primarily to acquisitions, increased demand
for oilfield services and increased operating efficiencies. In addition, the Company has continued to expand its services,
offering higher margin ancillary services and equipment such as well fishing
tools, blow-out preventerspreventors and frac tanks.

- 18 -

The Company's contract drilling costs and expenses for the quarter ended DecemberMarch
31, 19971998 increased by $4,627,000,$8,373,000, or 236%406%, to $6,590,000$10,434,000 compared to $1,963,000$2,061,000
for the quarter ended DecemberMarch 31, 1996.1997. Oilfield drilling margins for the
Company's drilling operations during the quarter ended DecemberMarch 31, 19971998 increased
by $1,703,000,$3,291,000, or 430%932%, to $2,099,000$3,644,000 compared to $396,000$353,000 for the quarter ended
DecemberMarch 31, 1996.1997. Oilfield drilling margin as a percentage of oilfield drilling
revenue for the quarters ended DecemberMarch 31, 1998 and 1997 was 26% and 1996 was
24% and 17%15%,
respectively. Such increases are attributable to the Company's recent
acquisitionacquisitions of contract drilling rig companies, increased activity and increased operating
efficiencies.

There was no significant change in oil and gas production costs and expenses for
the quarter ended DecemberMarch 31, 1997.1998.

General and administrative expenses for the quarter ended DecemberMarch 31, 19971998
increased by $6,635,000,$6,860,000, or 180%140%, to $10,370,000$11,774,000 compared to $3,735,000$4,914,000 for the
quarter ended DecemberMarch 31, 1996.1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenue decreased from 10.3%11% during the quarter
ended DecemberMarch 31, 19961997 to 9.5%10% for the quarter ended DecemberMarch 31, 1997.1998.

Depreciation, depletion and amortization expense for the quarter ended DecemberMarch 31,
19971998 increased by $5,398,000,$5,965,000, or 230%184%, to $7,740,000$9,215,000 compared to $2,342,000$3,250,000 for
the quarter ended DecemberMarch 31, 1996.1997. The increase is directly related to the
increase in property and equipment, increased goodwill, and long-term debt
issuance cost incurred by the Company over the past eighteen months in
conjunction with its acquisitions.

Interest expense for the quarter ended DecemberMarch 31, 19971998 increased by $2,583,000,$3,202,000,
or 199%172%, to $3,879,000$5,063,000 compared to $1,296,000$1,861,000 for the quarter ended DecemberMarch 31,
1996.1997. The increase was primarily the result of increased indebtedness as a
result of the Company's acquisition program.
Income tax expense for the quarter ended DecemberMarch 31, 19971998 increased by $3,473,000,$2,940,000,
or 338%244%, to $4,502,000$4,147,000 compared to $1,029,000$1,207,000 for the quarter ended DecemberMarch 31,
1996.1997. The Company does not expect to have to pay the full amount of the income
tax provision because of the availability of accelerated tax depreciation,
drilling tax credits, and tax loss carry-forwards.

Cash Flows

Net cash provided by operating activities for the quarter ended DecemberMarch 31, 1997 increased1998
decreased by $8,450,000,$699,000 or 29%, to $7,361,000$1,715,000 compared to the $1,089,000$2,414,000 used by
operating activities for the quarter ended DecemberMarch 31, 1996.1997. The increasedecrease is
primarily attributable to interest paid in the acquisitions, increased servicecurrent quarter, an increase in
accounts receivable and drilling
operating margins, increased service and drilling utilization rates, increased
operating efficiencies and, to a lesser extent, increased prices for oilfield
service and drilling.decrease in accounts payable, net of current quarter
acquisitions.

Net cash used in investing activities for the quarter ended DecemberMarch 31, 19971998
increased by $35,778,000,$39,533,000, or 204%288%, to $53,298,000$53,243,000 compared to $17,520,000$13,710,000 used
for the quarter ended DecemberMarch 31, 1996.1997. This increase is primarily related to the
Company's recent acquisitions.

Net cash provided by financing activities for the quarter ended DecemberMarch 31, 19971998
increased by $39,717,000,$9,152,000 or 371%59%, to $50,431,000$24,632,000 compared to $10,714,000$15,480,000 provided
during the quarter ended DecemberMarch 31, 1996.1997. The increase is primarily the result of
the proceeds from long-term debt (see Note 3 to consolidated financial
statements) and partially offset by the repayment of such debt.

- 19 -

SIXstatements.

NINE MONTHS ENDED DECEMBERMARCH 31, 19971998 VERSUS THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 19961997

Net Income

For the sixnine months ended DecemberMarch 31, 1997,1998, the Company reported net income of
$12,283,000$19,365,000 ($.761.15 per share - basic) as compared to $3,597,000$5,962,000 ($.34.54 per share
- - basic) for the sixnine months ended DecemberMarch 31, 1996,1997, an increase of $8,686,000,$13,403,000,
or 241%225%. The increase in net income is primarily attributable to the Company's
acquisitions completed between OctoberApril 1, 19961997 and DecemberMarch 31, 1997,1998, increased
service and drilling rig utilization rates, increased operational efficiencies
and price increases.

Revenues

The Company's total revenues for the sixnine months ended DecemberMarch 31, 19971998 increased
by $117,534,$195,009,000 or 174%176%, to $185,193,000$305,718,000 compared to $67,659,000$110,709,000 for the sixnine
months ended DecemberMarch 31, 1996.1997. The increase is attributable to the Company's
recent acquisitions of oilfield service and drilling rig companies, increased
utilization and higher prices for oilfield services.

Oilfield service revenues for the sixnine months ended DecemberMarch 31, 19971998 increased by
$108,021,000,$174,178,000, or 183%179%, to $167,040,000$271,505,000 compared to $59,019,000$97,327,000 reported for the
sixnine months ended DecemberMarch 31, 1996.1997. The increase is primarily attributable to
recent acquisitions, higher demand for oilfield service equipment and, to a
lesser extent, from recent price increases for oilfield services.

Drilling revenues for the sixnine months ended DecemberMarch 31, 19971998 increased by
$6,829,000,$18,493,000, or 146%261%, to $11,512,000$25,590,000 compared to $4,683,000$7,097,000 reported for the
sixnine months ended DecemberMarch 31, 1996.1997. The revenue increase is primarily attributable
to recent contract drilling rig acquisitions, higher rig utilization and price
increases.
Oil and gas revenues for the sixnine months ended DecemberMarch 31, 1997 increased1998 decreased by
$454,000,$441,000, or 13%8%, to $4,067,000$5,422,000 compared to $3,613,000$5,863,000 for the sixnine months ended
DecemberMarch 31, 1996.1997. The increasedecrease is directlyprimarily attributable to increased oil and
gas production as a result of the Company's oil and gas acquisitions for the
fiscal year ended June 30, 1997 and was partially offset by lower crude oil
and
natural gas prices during the last three months of calendar 1997.prices.

Costs and Expenses and Operating Margins

The Company's total costs and expenses for the sixnine months ended DecemberMarch 31, 19971998
increased by $103,274,000,$173,083,000, or 166%170%, to $165,515,000$274,811,000 compared to $62,241,000$101,728,000
reported for the sixnine months ended DecemberMarch 31, 1996.1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.

Oilfield service expenses for the sixnine months ended DecemberMarch 31, 19971998 increased by
$73,826,000,$119,546,000, or 173%, to $116,592,000$188,814,000 compared to $42,766,000$69,268,000 reported for the
sixnine months ended DecemberMarch 31, 1996.1997. Oilfield service margins (revenues less direct
costs and expenses) for the sixnine months ended DecemberMarch 31, 19971998 increased
$34,195,000,$54,632,000, or 210%195%, to $50,448,$82,691,000 compared to $16,253,000$28,059,000 for the sixnine months
ended DecemberMarch 31, 1996.1997. Oilfield service margins as a percentage of oilfield
service revenues for the sixnine months ended DecemberMarch 31, 19971998 and 19961997 was 30% and
28%29%, respectively. The increases in oilfield services expenses and margins are
due primarily to acquisitions, increased demand for oilfield services, the
Company's expansion of its ancillary oilfield services and equipment, such as
well fishing tools, blowout preventers and well frac tanks, and increased operating
efficiencies.

- 20 -

Drilling costs and expenses for the sixnine months ended DecemberMarch 31, 19971998 increased
by $5,009,000,$13,382,000, or 130%227%, to $8,853,000$19,287,000 compared to $3,844,000$5,905,000 for the sixnine
months ended DecemberMarch 31, 1996.1997. Drilling margins during the sixnine months ended DecemberMarch
31, 19971998 increased by $1,820,000,$5,111,000, or 217%429%, to $2,659,000$6,303,000 compared to $839,000$1,192,000
for the sixnine months ended DecemberMarch 31, 1996.1997. Oilfield drilling margin as a
percentage of oilfield drilling revenue for the sixnine months ended DecemberMarch 31, 1998
and 1997 was 25% and 1996 was 23% and 18%17%, respectively. These increases are attributable to the
Company's recent acquisitionacquisitions of contract drilling rig companies and increased
rig
utilizationactivity and operating efficiencies.

OilThere was no significant change in oil and gas production costcosts and expenses for
the sixnine months ended DecemberMarch 31, 1997 increased
by $545,000, or 42%, to $1,831,0001998 as compared to $1,286,000 for the sixnine months ended DecemberMarch 31,
1996. The increased costs were attributable to an increase in
the number of producing oil and gas wells.1997.

General and administrative expenses for the sixnine months ended DecemberMarch 31, 19971998
increased by $10,774,000,$17,771,000, or 148%146%, to $18,036,000$29,947,000 compared to $7,262,000$12,176,000 for
the
sixnine months ended DecemberMarch 31, 1996.1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenues for the sixnine months ended DecemberMarch 31,
1998 and 1997 were 10% and 1996 were 9.7% and 10.7%11%, respectively.

Depreciation, depletion and amortization expense for the sixnine months ended DecemberMarch
31, 19971998 increased by $8,449,000,$14,414,000, or 190%188%, to $12,886,000$22,101,000 compared to
$4,437,000$7,687,000 for the sixnine months ended DecemberMarch 31, 1996.1997. The increase is directly
related to the increase in property and equipment, increased goodwill and
long-term debt issuance costs incurred by the Company over the past eighteen monthstwo years in
conjunction with its acquisitions.

Interest expense for the sixnine months ended DecemberMarch 31, 19971998 increased by
$4,671,000,$7,873,000, or 177%175%, to $7,317,000$12,380,000 compared to $2,646,000$4,507,000 for the sixnine months
ended DecemberMarch 31, 1996.1997. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.

Income tax expense for the sixnine months ended DecemberMarch 31, 19971998 increased by
$5,582,000,$8,522,000, or 308%282%, to $7,395,000$11,542,000 compared to $1,813,000$3,020,000 for the sixnine months
ended DecemberMarch 31, 1996.1997. The Company does not expect to have to pay the full amount
of the income tax provision because of the availability of accelerated tax
depreciation, drilling tax credits, and tax loss carryforwards.

Cash Flows

Net cash provided by operating activities for the sixnine months ended DecemberMarch 31,
19971998 increased by $9,494,000,$8,795,000 or 493%203%, to $11,421,000$13,136,000 compared to $1,927,000$4,341,000 for
the sixnine months ended DecemberMarch 31, 1996.1997. The increase is primarily attributable to
an increased service and drilling operating margin, increased service and
drilling utilization rates, increased operating efficiencies created by the
acquisitions and price increases for oilfield service and drilling.

Net cash used in investing activities for the sixnine months ended DecemberMarch 31, 19971998
increased by $164,087,000,$203,620,000, or 779%586%, to $185,152,000$238,395,000 compared to $21,065,000$34,775,000 used
for the sixnine months ended DecemberMarch 31, 1996.1997. This increase is primarily related to
the Company's recent acquisitions.

Net cash provided by financing activities for the sixnine months ended DecemberMarch 31,
19971998 increased by $159,958,000,$169,110,000, or 619%409%, to $185,797,000$210,429,000 compared to $25,839,000$41,319,000
provided during the sixnine months ended DecemberMarch 31, 1996.1997. The increase is primarily
the result of the proceeds from long-term debt (see Note 3 to consolidated
financial statements).

- 21 -

, partially offset by the repayment of debt.

LIQUIDITY, CAPITAL COMMITMENTS AND CAPITAL RESOURCES

At DecemberMarch 31, 1997,1998, the Company had cash of $53.8$26.9 million compared to $41.7
million at June 30, 1997 and $9.3$11.5 million at DecemberMarch 31, 1996.1997. At DecemberMarch 31, 1997,1998,
the Company had working capital of $99.1$86.8 million compared to $60.2 million at
June 30, 1997 and $17.1$22.0 million at DecemberMarch 31, 1996.1997.

In addition to its on-goingon going acquisition program, for fiscal 1998, the Company
has projected $40 million of capital expenditures for improvements of existing
service and drilling rig machinery and equipment, an increase of $23.4 million
over the $16.6 million expended during fiscal 1997. Capital expenditures for
service and drilling rig improvements for the six months ended December 31, 1997
and 1996 were $22.3 million and $6.5 million, respectively. The Company expects to
finance these capital expenditures through internally generated operating cash
flows. Capital expenditures for service and drilling rig improvements for the
nine months ended March 31, 1998 and 1997 were $11.6 million and $3.6 million,
respectively.

The Company has projected $10.2 million of capital expenditures for oil and gas
explorationdevelopment for fiscal 1998 as compared to $8.2 million expended for fiscal
1997. For the six months ended December 31, 1997 and 1996, the Company expended
$2.3 million and $1.3, respectively. Financing of these costs is expected to come from operations and available
credit facilities. For the nine months ended March 31, 1998 and 1997, the
Company expended $4.1 million and $2.6 million, respectively.

The Company's primary capital resources are net cash provided by operations and
proceeds from certain long-term debt facilities.

Long-Term Debt Facilities

On June 6, 1997, the Company entered into the Initialan agreement (the "Initial Credit
AgreementAgreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on the LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained
certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).

Effective November 6, 1997, the Company entered into thean Amended and Restated
Credit Agreement with PNC (the "Amended Credit Agreement"), as administrative
agent and lender, pursuant to which PNC agreed to make revolving credit loans of
up to a maximum loan commitment of $200 million. The maximum commitment
decreases to $175 million on November 6, 2000 and to $125 million on November 6,
2001. The loan commitment terminates on November 6, 2002

- 22 -

In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures"), pursuant to
Rule 144A under the Securities Act.Act of 1933, as amended (the "Securities Act").
The Debentures are subordinate to the Company's senior indebtedness, which, as
defined under the indenture pursuant to which the Debentures were issued,
includes the borrowings under the Amended Credit Agreement, as amended. Interest
on the Debentures is payable on January 1 and July 1 of each year.

As of DecemberMarch 31, 1997,1998, $47,400,000 in principal amount of the Debentures had been
converted into 5,062,369 shares of Common Stock at the option of the holders.
The number of shares issued included 200,831 shares in excess of the number of
shares issuable at the conversion price of $9.75 per share. These additional
shares were issued by the Company to induce conversion. Such additional
consideration was accounted for as an increase to the Company's equity. In
addition, the proportional amount of debt issuance costs associated with the
converted Debentures was accounted for as a decrease to the Company's equity. At
DecemberMarch 31, 1997,1998, $4,600,000 principal amount of the Debentures remained
outstanding.

On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million Notes.of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of Notes. The placements were made as private offerings pursuant to
Rule 144A and Regulation S under the Securities Act. The Notes are subordinate
to the Company's senior indebtedness, which, as defined in the indenture under
which the Notes were issued, includes the borrowings under the Amended Credit
Agreement, as amended. Interest on the Notes is payable on March 15 and
September 15, commencing March 15, 1998. The Notes are convertible, at the
holder's option, into shares of Common Stock at a conversion price of $38.50 per
share, subject to certain adjustments.

Year 2000 Issue

As a result of the acquisitions completed by the Company over the past
twenty-one months, the Company currently utilizes several management information
systems in connection with its business operations and financial reporting
process. The Company has made an assessment of its Year 2000 issues. The Companyissues, and has
determined that certain operatingmany of these management information systems which the Company currently utilizes
for its financial reporting willwould be adversely
impacted by the arrival of the Year 2000.

For operational efficiency, the Company had previously determined to implement a
new integrated management information system to replace the systems currently
utilized by it. Since the new system will be designed to be year 2000 compliant,
management expects that a collateral benefit of it will be to prevent adverse
impacts that may result from the arrival of the year 2000. The Company is currently in the processimplementation of selecting a new operating system which
will not be adversely impacted by the year 2000. Conversion to
the new operatingmanagement information system began in May 1998 and is expected to begin on July 1, 1998 and be
completed by June 30,July 1999.

The cost ofCompany does not expect the amounts required to be expensed for the new
operatingintegrated management information system and conversion is not expectedover the next year to behave a material
to the Company's operationseffect on its financial position or financial condition.

- 23 -results of operations.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Changes in Securities and Use of Proceeds.

(a) See the disclosure set forth in Item 4 below with respect to the amendment
to the Company's Amended and Restated Articles of Incorporation below,
which is incorporated herein by reference.

During the three months ended DecemberMarch 31, 1997,1998, the Company effected the following
sales of unregistered securities:

Effective October 1, 1997, the Company issued 125,000 shares of
Common Stock as part of the consideration paid in the acquisition by
Key Four Corners, Inc., a wholly-owned subsidiary of the Company, of
substantially all of the assets of Big A Well Service Co., Sunco
Trucking Co. and Justis Supply Co., Inc., each a closely held New
Mexico corporation (collectively, the "Sellers"). The issuance of the
Common Stock to the sole shareholder of the Sellers was exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2), as a sale of securities
not involving any public offering.

Effective October 7, 1997, the Company issued $16 million in
principal amount of its 5% Convertible Subordinated Notes due 2004
(the "Notes") pursuant to an over-allotment option exercised by
McMahan Securities Co. L.P. and Lehman Brothers Inc., the initial
purchasers in the Company's September 25, 1997 private placement of
the Notes. The Notes are generally convertible at the holders' option
at any time into shares of Common Stock at a conversion price of
$38.50 per share. The issuance of the Notes was exempt from
registration under the Securities Act because the sale of the Notes
was only to qualified institutional buyers in compliance with rule
144A and outside the United States to persons other than U.S. persons
in reliance on Regulation S of the Securities Act.

Effective December 2, 1997, the Company agreed to issue 240,000 shares of Common
Stock in connection with the purchase by WellTech Eastern, Inc., a wholly-owned
subsidiary of the Company, of substantially all of the assets of White Rhino
Drilling, Inc. ("White Rhino"), S&R Cable, Inc. ("S&R Cable") and Wellcorps,
L.L.C.
("Wellcorps"). Of the 240,000 shares to be issued, 212,496 were issued to White Rhino
and its designees, 72,240 of which were issued on December 2, 1997 and 140,256
of which were issued on January 2, 1998. The remaining 27,504 shares were issued
to S&R Cable on January 2, 1998. The issuance of the Common Stock was exempt
from registration under Section 4(2) of the Securities Act as a sale of
securities not involving any public offering.

Effective January 5, 1998, the Company issued 100,000 shares of Common Stock as
partial consideration in connection with the purchase by Key Energy Drilling, a
wholly-owned subsidiary of the Company, of substantially all the capital stock
of Sitton Drilling Co. The issuance of the Common Stock was exempt from
registration under Section 4(2) of the Securities Act as a sale of securities
not involving any public offering.

Effective January 8, 1998, the Company issued 100,000 shares of Common Stock as
partial consideration in connection with the purchase by Key Rocky Mountain, a
wholly-owned subsidiary of the Company, of substantially all the capital stock
of J.W. Gibson Well Service Company. The issuance of the Common Stock was exempt
from registration under Section 4(2) of the Securities Act as a sale of
securities not involving any public offering.

Item 3. Defaults Upon Senior Securities.

None.

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

None

- 24 -On January 13, 1998, a meeting of the holders of Common Stock was held to elect
the Company's Board of Directors and to vote on certain other matters. Only the
holders of record as of the close of business on November 14, 1997 (the "Record
Date") were entitled to notice of and to vote at the meeting and at any
adjournment thereof. On the Record Date, the outstanding number of shares
entitled to vote consisted of 18,087,455 shares of Common Stock. The
shareholders took the following actions at the meeting:

1. Elected the following six Directors, with the votes indicated opposite each
director's name:

For Against Abstain

Francis D. John 17,265,527 397,505 0

Kevin P. Collins 17,253,927 409,105 0

William Manly 17,265,587 397,445 0

W. Phillip Marcum 17,253,927 409,105 0

David J. Breazzano 17,262,484 400,548 0

Morton Wolkowitz 17,265,593 397,439 0

2. Approved the amendment to the Company's Amended and Restated Articles of
Incorporation to increase the authorized shares of capital stock, par value
$0.10 per share, from 25,000,000 shares to 100,000,000 shares authorized to be
issued. The vote was 16,582,418 for and 719,218 against, with 177,321
abstentions and 184,075 broker non-votes.

3. Approved the adoption of the Key Energy Group, Inc. 1997 Incentive Plan. The
vote was 7,571,692 for and 6,086,129 against, with 175,142 abstentions and
3,830,069 broker non-votes.

Item 5. Other Information.

Pursuant to a Registration Statement on Form 8-A that became effective on March
31, 1998, shares of Common Stock were listed for trading on the New York Stock
Exchange ("NYSE"). Trading in the Common Stock on the NYSE commenced at the
opening of business on April 6, 1998. Concurrently therewith trading in the
Common Stock was suspended on the American Stock Exchange ("ASE"). The Company
has filed an application for withdrawal from listing of its Common Stock with
the ASE, which is currently pending.

This Quarterly Report on Form 10-Q may contain statements which constitute or
contain "forward-looking" statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 (the "Act") or by the Securities and
Exchange Commission in its rules, regulations or releases. All statements other

than statements of historical facts included in this report including, without
limitation, statements regarding the Company's business strategy, plans,
objectives, capital expenditures and beliefs of management for future operations
are forward-looking statements. Although the Company believes the expectations
and beliefs reflected in such forward looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company cautions investors that any such forward-looking statements made by the
Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements. Important
factors that could cause actual results to differ materially from the Company's
expectations are discussed in the Company's Registration Statement on Form S-3
under the Securities Act of 1933, File No. 333-44677 (filed with the Commission
on January 22, 1998), under the caption "Risk Factors."

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

(a) The following exhibits are filed as a part of the Form 10-Q:

Number Description

10(a)
Stock Purchase Agreement by3(a) Amendment to the Amended and among Nabors Acquisition Corp IV,
as Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group,
Inc., dated July 31, 1997, (the "Gibson Stock Purchase Agreement")
(incorporated by reference to Exhibit 10(c)Restated Articles of Incorporation of the
Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)

10(b)
Amendment OneCompany (filed as Exhibit 3.1 to the Gibson Stock Purchase Agreement, dated as of
October 10, 1997 (incorporated by reference to Exhibit 10(d) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 1-8038

10(c)
Asset Purchase Agreement among Key Four Corners, Inc., Key Energy
Group, Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco
Trucking Co., Justis Supply Co., Inc. and George E. Coleman dated as
of September 2, 1997 (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
October 1, 1997,February 2, 1998, File No. 1-8038)000-22665, and incorporated here in by reference).

10(d)
Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy
Well Service, Inc. effective as of October 3, 1997.

10(e)
Asset Purchase Agreement among WellTech Eastern, Inc. and GSI
Trucking Company, Inc. effective as of October 3, 1997.

10(f)
Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden
Production Services, Inc. effective as of October 3, 1997.

10(g)
Stock Purchase Agreement between WellTech Eastern, Inc. and
Donald Jeter, effective as of November 11, 1997.

10(h)
Stock Purchase Agreement between Key Energy Drilling, Inc. and
Robert C. Jones and Dana Lunette Jones, effective as of November 24,
1997.
10(i)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc. and White Rhino Drilling, Inc. and Jeff Critchfield,
effective as of December 2, 1997.

10(j)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas,
Ronnie Shaw and Donald Tinker, effective as of December 2, 1997.

10(k)
Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps,
L.L.C. and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries,
effective as of December 2, 1997.

10(l)
Stock Purchase Agreement between Key Energy Group, Inc., Key
Energy Drilling, Inc. and Ronald M. Sitton and Frank R. Sitton,
effective as of December 12, 1997.

- 25 -

10(m)
Asset Purchase Agreement between Brooks Well Servicing, Inc. and
Sam F. McKee, Individually and d/b/a Circle M Vacuum Services,
effective as of January 30, 1998.

10(n)
Stock Purchase Agreement between Key Energy Drilling, Inc. and
Jack B. Loveless, Jim Mayfield and J.W. Miller, effective as of
January 30, 1998.

10(o)
Asset Purchase Agreement between Key Four Corners, Inc. and Four
Corners Drilling, R.L. Andes and W.E. Lang, effective as of January
30, 1998.

10(p)
Asset Purchase Agreement among Key Rocky Mountain, Inc., Updike
Brothers, Inc. Employee Stock Ownership Retirement Plan and Trust,
David W. Updike Trust, Dorothy A. Updike Trust, Dorothy R. Updike
Trust, Mary E. Updike, Ralph O. Updike and Daniel Updike effective
February 6, 1998.

10(q)10(a) Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot
Oil Plus,Lundy
Vacuum Service, Inc. and Peyton E. Lundy effective March 3, 1998.

10(b) Asset Purchase Agreement among Yale E. Key, Inc., Thomas N. Novosad, Jr.Edwards Transport,
Inc. and Patricia NovosadTom Nations effective January 29,March 26, 1998.

10(r)
Registration Rights10(c) Asset Purchase Agreement among Key Energy Group,Brooks Well Servicing, Inc. and JPF
Well Service Inc., Lehman Brotherseffective April 20, 1998.

10(d) Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF
Lease Service Inc., and McMahan Securities Co. L.P. dated as of
September 25, 1997.

10(s)
Amended and Restated Crediteffective April 20, 1998.

10(e) Employment Agreement among Key Energy Group, Inc
and several other financial institutions dated November 6, 1997.

10(t)
First Amendment to the Amended and Restated Credit Agreement
June 6, 1997, as amended and restated through November 6, 1997 dated December 3, 1997.5, 1997 by and between Stephen E.
McGregor and the Company.

27(a) Statement - Financial Data Schedule

99 Form 8-A of the Company for Registration of Certain Classes of
Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of
1934, File No. 001-08038 incorporated by reference.

(b) The following reportsreport on Form 8-K werewas filed during the quarter ended DecemberMarch
31, 1997:1998:

The Company's Current Report on Form 8-K dated OctoberFebruary 2, 1997,1998, File No.
1-8038.001-08038. The Report on Form 8-K concerned the Company's
private placement pursuantincrease of authorized capital
stock from 25,000,000 to Rule 144A100,000,000 shares of $200 million 5% convertible
subordinated notes.

The Company's Current Report on Form 8-K/A-1 dated October 9,
1997, File No. 1-8038. The Report on Form 8-K/A-1 concerned the
Company's private placement of an additional $16 million of 5%
convertible subordinated notes pursuant to an over-allotment option
exercised by the initial purchasers in the Company's private placement
of $200 million 5% convertible subordinated notes pursuant to Rule
144A.

The Company's Current Report on Form 8-K dated October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the appointment of
David J. Brezzano to the Company's Board of Directors replacing Van D.
Greenfield.

- 26 -

The Company's Current Report on Form 8-K dated October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the Company's
acquisition of substantially all of the assets of Big A Well Service
Co., Sunco Trucking Co. and Justice Supply Co.

The Company's Current Report on Form 8-K/A-1 dated November 17,
1997, File No. 1-8038. The Report on Form 8-K/A-1 was filed to include
the financial statements of Ram Oil Well Service, Inc. and Rowland
Trucking Co., Inc., the stock purchases of which were reported on Form
8-K on September 1, 1997.

The Company's Current Report on Form 8-K/A-1 dated December 15,
1997, File No. 1-8038. The Report on Form 8-K/A-1 was filed to include
the financial statements of Big A Well Service Co., Sunco Trucking Co.
and Justice Supply Co., the acquisition of whose assets was reported
on Form 8-K on October 14, 1997.

- 27 -Common Stock, par value $.10 per
share.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

KEY ENERGY GROUP, INC.
(Registrant)

By /s/ Francis D. John
Dated: February 14,May 15, 1998 President and Chief Executive Officer

By /s/ Stephen E. McGregor
Dated: February 14,May 15, 1998 Chief Financial Officer

- 28 -By /s/ Danny R.Evatt
Dated: May 15, 1998 Chief Accounting Officer