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                                                                  EXECUTION COPY

                        SEPARATION AND RELEASE AGREEMENT

         This SEPARATION AND RELEASE AGREEMENT ("Agreement") is made and entered
into by and between KEY ENERGY SERVICES, INC., a Maryland corporation (the
"Company"), and THOMAS K. GRUNDMAN ("Executive") on this 6th day of May, 2002.

         WHEREAS, Executive and the Company are parties to an employment
agreement dated as of February 15, 2002, as in effect on the date hereof (the
"Employment Agreement");

         WHEREAS, in addition to other offices held from time to time, Executive
has most recently served as Executive Vice President - M&A and International of
the Company;

         WHEREAS, Executive and the Company desire to terminate the employment
relationship between Executive and the Company effective as of the date hereof;

         WHEREAS, Executive is indebted to the Company pursuant to a Demand Note
of Executive dated August 3, 1999 (the "Demand Note"), which is subject to the
letter agreement dated July 1, 2000 between the Company and Executive (the "Note
Letter Agreement"), in an aggregate amount of principal and accrued and unpaid
interest equal to $58,359.47 (the "Indebtedness Amount") on April 26, 2002 (with
interest accruing thereafter at a rate of $8.38 per day); and

         WHEREAS, it is the desire of the Company and Executive that they enter
into a written agreement in order to confirm and establish their respective
rights, duties, and obligations, to resolve any and all claims and differences
that may exist, and generally for to provide mutual releases to one another from
any and all claims or other matters as set forth herein;

         NOW, THEREFORE, for and in consideration of the premises and the
consideration more fully set forth hereinafter, and intending to be legally
bound hereby, the Company and Executive mutually agree as follows:

         1.   COMPANY REFERENCES. All references used herein to "Company" shall
refer to Key Energy Services, Inc. and its subsidiaries and affiliates, and the
successors of the Company and its subsidiaries and affiliates.

         2.   TERMINATION DATE. The employment relationship between Executive
and Company shall terminate and cease as of 5:00 p.m. (New York time) on the
date hereof (the "Termination Date"), and neither party shall have any further
rights or obligations with respect to or arising from such employment
relationship except as provided herein and in Section 6 of the Employment
Agreement (together with any other provisions of the Employment Agreement
necessary or desirable to enforce such Section 6). Effective as of the
Termination Date, Executive hereby tenders, and Company accepts, Executive's
resignation from any and all offices and positions that Executive may hold in
the Company.

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         On the Termination Date, Executive shall be paid (i) any unpaid portion
of his base salary (as specified in the Employment Agreement; "Base Salary")
through the Termination Date, and (ii) for any accrued but unused vacation days
in accordance with the policy of the Company (payable in an amount equal to the
Base Salary divided by 255 and multiplied by the number of accrued but unused
vacation days).

         3.   SEVERANCE BENEFITS.

              (a)      Provided that Executive does not revoke this Agreement as
         provided at the end of this Agreement, then:

              (i)      on the date which is the eighth day after the
                       Termination Date (the "Effective Date"), the Company
                       agrees (A) to pay to Executive Eight Hundred Forty
                       Thousand Dollars ($840,000), in thirty-six (36)
                       substantially equal monthly installments payable on
                       the last day of each calendar month, commencing on
                       the first such date on or after the Effective Date
                       and (B) to forgive the remaining $50,000 principal
                       of, and all accrued and unpaid interest on, the
                       Demand Note; and

              (ii)     in addition, the Company shall, in accordance with
                       the provisions of the Note Letter Agreement (A) pay
                       to Executive, within thirty (30) days of the actual
                       filing of Executive's 2002 federal and state income
                       tax returns, a "gross-up" bonus (the "2002 Note
                       Letter Bonus") equal to the amount of federal, state
                       and local income or payroll taxes paid by Executive
                       by virtue of the forgiveness of the Indebtedness
                       Amount, which such amount shall be certified by
                       Executive's accountant in a statement delivered to
                       the Company within fifteen (15) days of the actual
                       filing of Executive's 2002 federal and state income
                       tax returns, and (B) pay to Executive, on or prior to
                       the later of May 15, 2002 or thirty (30) days after
                       the actual filing of Executive's 2001 federal and
                       state income tax returns, a "gross-up" bonus (the
                       "2001 Note Letter Bonus") equal to $43,348.00, being
                       the amount of federal, state and local income or
                       payroll taxes paid by Executive by virtue of the
                       forgiveness of $55,575.00 principal amount of, and
                       accrued interest on, the Demand Note that was
                       forgiven in 2001; PROVIDED, HOWEVER, that (x) the
                       Company shall prepay to Executive such portion of the
                       2002 Note Letter Bonus as may be required to satisfy
                       withholding requirements in respect of the
                       forgiveness of the Demand Note specified above and
                       the 2002 Note Letter Bonus and (y) the 2001 Note
                       Letter Bonus shall be reduced by any prepayments
                       thereof that the Company has made to Executive.

         The Company may make any tax withholding from any payments made
         pursuant to this SECTION 3(a) that it deems to be necessary under
         applicable tax laws. If there is a Change in Control (as such term is
         defined in Exhibit A hereto) after the Termination Date and while
         Executive is entitled to any payments pursuant to SECTION 3(a)(i)(A)
         hereof, all such payments pursuant to such SECTION 3(a)(i)(A) hereof
         which remain unpaid as of the Change in Control shall be paid in one
         lump sum as of the date of the Change in Control.

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         Except as specifically provided in this Agreement, no other amounts
         will be payable by the Company to Executive.

              (b)      The Company has previously granted to Executive options
         to purchase shares of the Company's common stock as set forth in
         Exhibit B hereto. Provided that Executive does not revoke this
         Agreement as provided at the end of this Agreement, then, on the
         Effective Date:

              (i)      all such stock options which have not vested prior to
                       the Termination Date shall immediately vest; and

              (ii)     all such options which (x) are marked with an
                       asterisk on said Exhibit B shall remain exercisable
                       until the earlier to occur of (1) the third
                       anniversary of the Termination Date and (2) the final
                       stated expiration date of the option or restricted
                       stock and (y) which are not so marked with an
                       asterisk shall remain exercisable until the earlier
                       to occur of (1) the date which is 90 days after the
                       Termination Date and (2) the final stated expiration
                       date of the option or restricted stock.

         All shares of the Company's common stock underlying such options will,
         when and if exercised, be issued to Executive pursuant to a
         Registration Statement on either Form S-3 or Form S-8 and, as such,
         will not be deemed to be "restricted securities" as contemplated by
         Rule 144 promulgated under the Securities Act of 1933, as amended.

              (c)      Provided that Executive does not revoke this Agreement as
         provided at the end of this Agreement, then, beginning on the Effective
         Date, Executive shall be entitled, at the Company's expense, to the
         benefits that Executive was receiving or to which Executive was
         entitled as of the Termination Date pursuant to Section 4 of the
         Employment Agreement (other than the benefits described in Section 4(b)
         of the Employment Agreement) for a period of time following the
         Termination Date ending on the first to occur of (i) the third
         anniversary of the Termination Date or (ii) the date on which Executive
         commences full-time employment with another employer, but only if and
         to the extent Executive is eligible to receive through such other
         employer benefits which are at least equivalent on an aggregate basis
         to those benefits Executive was receiving or to which Executive was
         entitled under Section 4 of the Employment Agreement as of the
         Termination Date. If because of limitations required by third parties
         or imposed by law, Executive cannot be provided such benefits through
         the Company's plans, then the Company will provide Executive with
         substantially equivalent benefits, on an aggregate basis, at the
         Company's expense. For purposes of the determination of any benefits
         which require a particular period of employment by the Company and/or
         the attainment of a particular age while employed by the Company in
         order to be payable, Executive shall be treated as having continued in
         the employment of the Company during such period of time as Executive
         is entitled to receive benefits under this SECTION 3(c). At such time
         as the Company is no longer required to provide Executive with life
         and/or disability insurance, as the case may be, Executive shall be
         entitled, at Executive's expense, to convert such life and disability
         insurance, as the case may be, into individually owned policies, except
         if and to the extent such conversion is not available

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         from the provider of such insurance. Executive acknowledges and agrees
         that his right to continue group health plan coverage for a period of
         time after the Termination Date in accordance with the terms and
         conditions of the Consolidated Omnibus Budget Reconciliation Act of
         1985 ("COBRA") shall be deemed to be satisfied by Executive's receipt
         of coverage as provided herein, to the extent that such benefit equals
         or exceeds the time period specified in COBRA. Executive agrees to
         execute any elections and forms and take such other action as may be
         required by the Company to waive his rights to COBRA coverage
         consistent with the foregoing. In the event that Executive's
         eligibility for health insurance benefits pursuant to this paragraph
         terminates before the expiration of the time period specified in
         COBRA, Executive shall maintain the right to continue group health
         plan coverage in accordance with the terms and conditions of COBRA for
         that period of time remaining under COBRA. Except as specifically
         modified herein, all other regular COBRA procedures and rules will
         apply. Executive acknowledges that Company may modify its premium
         structure, the terms of its plans and the coverage of the plans,
         including the termination of all or part of a plan. Executive agrees
         to notify Company when Executive is eligible to participate and/or
         begins participation in another group health plan.

              (d)      Provided that Executive does not revoke this Agreement as
         provided at the end of this Agreement, then, on the Effective Date,
         Executive shall retain possession of the Sony laptop computer and home
         facsimile machine currently utilized by him in fulfilling his
         employment duties, PROVIDED, HOWEVER, that any confidential information
         (as defined in SECTION 11(a) below) and any software on the
         aforementioned computer that is licensed only to the Company shall be
         returned to the Company.

              (e)      Provided that Executive does not revoke this Agreement as
         provided at the end of this Agreement, then, Executive shall be paid
         any amounts for expense reimbursement and similar items which have been
         properly incurred in accordance with the provisions of the Employment
         Agreement prior to the Termination Date and have not yet been paid,
         including without limitation any sums due under Sections 2(c), 4(c),
         4(d) and 4(f) thereof and the last sentence of Section 10 thereof,
         provided that Executive provides the appropriate documentation of such
         expenses within 30 business days of the Termination Date.

              (f)      Provided that Executive does not revoke this Agreement as
         provided at the end of this Agreement, then, within 90 days of the
         Effective Date, Executive shall pay to the Company, in repayment of the
         advance made by the Company to the Executive for payment of Medicare
         taxes payable in connection with certain option exercises, the amount
         of $25,243.22, plus interest thereon from April 26, 2002 to the date of
         repayment at a daily rate equal to $4.07.

         4.   WELFARE BENEFIT PLAN CONTRIBUTIONS AND ACCRUALS. After the
Termination Date, except as provided in SECTION 3(c) and SECTION 5 hereof, the
Company shall not be obligated to continue, pay for, or provide Executive's
health, dental, disability, life insurance and any other "welfare benefits" (as
such term is defined under Section 3(1) of the Employment Retirement Income
Security Act of 1974, as amended ("ERISA")) or fringe benefits or perquisites.

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         5.   PENSION PLAN CONTRIBUTIONS AND ACCRUALS. After the Termination
Date, no further contributions, either by Executive or by the Company, shall
be made to, or benefits accrued under, any employee pension benefit plan (as
defined in Section 3(2) of ERISA) or deferred compensation plan or agreement
(collectively, the "Company Plans") on behalf of Executive; PROVIDED, HOWEVER,
Executive shall be entitled to receive any vested benefits due to him under
such Company Plans as determined in accordance with the terms and conditions
of such Company Plans and applicable law.

         6.   RECIPROCAL RELEASES AND WAIVERS OF CLAIMS.

              (a)      Except with respect to a claim for any compensation or
         benefits under the employee benefit plans in which Executive
         participated by virtue of his employment, Executive, as his free and
         voluntary act, on behalf of himself and his spouse, dependents, heirs,
         executors, administrators, representatives, attorneys, and permitted
         assigns, hereby fully releases and discharges the Company, and its
         successors and assigns, and the past, present and future owners,
         directors, officers, employees, and agents of the Company, personally
         and in their official capacities (collectively, the "Releasees"), of
         and from any and all debts, obligations, claims, demands, judgments or
         causes of action of any kind whatsoever, known or unknown, in tort,
         contract, by statute or on any other basis, for equitable relief,
         compensatory, punitive or other damages, expenses (including attorneys'
         fees), reimbursements of costs of any kind, including but not limited
         to, any and all claims, demands, rights and/or causes of action,
         including, without limitation, any negligence claims and those which
         might arise out of allegations relating to a claimed breach of the
         Employment Agreement or any other aspect of Executive's employment
         relationship with the Company or stock option agreements, or relating
         to purported employment discrimination or civil rights violations, such
         as, but not limited to, those arising under Title VII of the Civil
         Rights Act of 1964, the Civil Rights Acts of 1866 and 1871, Executive
         Order 11246, as amended, the Age Discrimination in Employment Act, the
         Employee Retirement Income Security Act of 1974, the Equal Pay Act of
         1963, the Rehabilitation Act of 1973, the Civil Rights Act of 1991, the
         Americans with Disabilities Act, and the Family and Medical Leave Act,
         as each such Act may be amended from time to time, or any other
         applicable federal, state or local law, regulation or other
         requirement, which Executive might have or assert against any of the
         Releasees by reason of (i) any event which occurred on or before the
         date that Executive executes this Agreement, in connection with
         Executive's employment by the Company, and all circumstances related
         thereto, (ii) the termination of his employment (including any rights
         of Executive under the Employment Agreement or any other employment
         contract), or (iii) any matter, cause or thing whatsoever which may
         have occurred prior to the date that Executive executes this Agreement.

              (b)      Executive acknowledges that Company's agreement to
         provide Executive with the payments and other benefits recited in
         SECTION 3 hereof is in consideration for Executive's release and waiver
         of claims, demands and causes of action as set forth in the immediately
         preceding paragraph in addition to Executive's other agreements
         contained herein. Executive understands and acknowledges that Executive
         would not receive the payments and benefits recited in SECTION 3 hereof
         but for his execution of this Agreement.

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              (c)      The Company hereby releases and discharges Executive, and
         his heirs, executors, administrators, representatives, attorneys, and
         permitted assigns, of and from any and all debts, obligations, claims,
         demands, judgments or causes of action of any kind whatsoever, known or
         unknown, in tort, contract, by statute or on any other basis, for
         equitable relief, compensatory, punitive or other damages, expenses
         (including attorneys' fees), reimbursements of costs of any kind,
         including but not limited to, any and all claims, demands, rights
         and/or causes of action, including breach of fiduciary duty, breach of
         the duty of confidentiality, tortious interference with contract,
         defamation, libel, civil conspiracy, false light, invasion of privacy,
         actions which might arise out of allegations relating to a claimed
         breach of the Employment Agreement or any other aspect of Executive's
         employment relationship with the Company relating to purported
         employment discrimination or civil rights violations, which the Company
         might have or assert against Executive, but only with respect to or by
         reason of any event which occurred prior to the date that the Company
         executes this Agreement.

         7.   COOPERATION AND INDEMNIFICATION IN THE EVENT OF THIRD-PARTY
LITIGATION.

              (a)      In the event that any third-party (including, without
         limitation, any private party or governmental entity) asserts a claim
         or legal cause of action, initiates a governmental review, or initiates
         a legal proceeding (civil or criminal), with respect to any events or
         matters with which Executive was formerly involved as an employee of
         Company, the Company shall indemnify Executive to the same extent, and
         subject to the same terms, conditions and limitations, as would be
         applicable under the by-laws of the Company to an individual who is an
         officer of the Company. To the extent permitted by the Company's
         applicable director and officer insurance policy, Executive shall be
         entitled to coverage under such policy for actions taken in the scope
         of his service as an officer of the Company.

              (b)      In consideration for such indemnification, Executive
         agrees to make himself freely available to cooperate in the defense and
         in the preparation of the legal response if any third party (including,
         without limitation, any private party or governmental entity) asserts a
         claim or legal cause of action, initiates a governmental review, or
         initiates a legal proceeding (civil or criminal), with respect to any
         events or matters with which Executive was formerly involved as an
         employee of Company and, in such a case, the Company shall reimburse
         Executive for reasonable travel costs in connection with rendering any
         such assistance. Executive agrees to cooperate to the fullest extent of
         his abilities with Company and, if requested by Company to do so, with
         any attorney, expert or other person Company may designate, in the
         investigation, defense and resolution of any threatened or asserted
         litigation, claim, potential claim, or investigation initiated by or
         involving the Company, including, without limitation, truthfully
         testifying on behalf of Company in connection with any such
         investigation or proceeding. The Company agrees to use reasonable
         efforts to schedule any work or appearances of Executive required
         pursuant to this SECTION 7(b) so as to not unreasonably conflict with
         Executive's employment with another employer.

              (c)      In consideration for any such cooperation rendered by
         Executive pursuant to this SECTION 7, but only to the extent permitted
         by applicable legal or court

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         requirements the Company shall pay Executive $140 per hour for the
         reasonable period of time, including travel time, devoted exclusively
         to rendering such assistance. Such hourly fee shall be payable for all
         hours actually devoted to such assistance (including hours in transit)
         to the extent permitted by applicable legal or court requirements, and
         will not be limited to 8 hours per day if the hours of active
         assistance (and travel) exceed 8 hours in any given day.

              (d)      Subject to the scope of the indemnification in paragraph
         (a) above, in the event of a civil action commenced by a private party
         which implicates Executive in connection with his conduct during his
         period of service as an employee of the Company, the Company reserves
         the right and discretion to retain counsel to jointly represent the
         Company and Executive, unless and until such counsel determines that
         the interests of the Company and Executive pose a conflict of interest
         for such counsel under the applicable code of professional conduct. In
         the event that separate counsel is necessary for Executive, he may
         select counsel of his choice subject to the approval of the Company
         which shall not be unreasonably withheld. The Company will reimburse
         the reasonable attorney's fees and costs of counsel for Executive, and
         such reimbursement will be paid as services are rendered, subject to a
         right of the Company to recover the amount of such payments from
         Executive in the event, and to the extent, that a court or agency finds
         that the relevant actions of Executive were either (i) unlawful (unless
         the Company was found to have directed the unlawful action) or (ii)
         outside the scope of his duties as an employee.

              (e)      As used in this SECTION 7, the term "reasonable
         attorneys' fees" shall not include any attorney time or expense for the
         purpose of initiating or maintaining any counterclaim by Executive
         against the Company or any private party or governmental entity, unless
         the Companythen consents, in its sole discretion and in writing, to
         cover Executive's attorneys' fees for any such counterclaim.

              (f)      The provisions of this SECTION 7 shall expire six (6)
         years from the Termination Date; provided that if a claim is made but
         final resolution thereof has not been obtained within such six-year
         period, the provisions of this SECTION 7 shall continue as to that
         claim until final resolution is obtained.

         8.   RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS.

              (a)      Executive agrees that he shall, not later than the date
         Executive receives his first severance payment pursuant to SECTION
         3(a)(i)(A) hereof, or any earlier date when requested to do so by the
         Company, return to the Company all property of the Company, including,
         for example, files and records (whether on paper or in tapes, disks, or
         other machine-readable form), credit cards, engineering reports,
         employee IDs, vehicles and office equipment, and all documents and
         other materials in Executive's possession, custody or control (whether
         prepared by Executive or others) obtained by Executive from the Company
         or a customer, supplier or contractor of the Company and relating to
         the past, present or anticipated business, finances or affairs of the
         Company, including, without limitation, any confidential information
         (as defined in SECTION 11(a) below); PROVIDED, HOWEVER, that Executive
         may either return to the Company or destroy

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         any immaterial personal notes or files that Executive has created. At
         the request of Executive, the Company may agree in writing to allow
         Executive to retain possession of any property of the Company.
         Executive shall at all times cooperate with the Company in executing
         and delivering documents requested by the Company that are necessary
         to assist the Company in patenting or registering any programs, ideas,
         inventions, discoveries, copyright material or trademarks, and to vest
         title thereto in the Company.

              (b)      Executive affirms that he has no claims against the
         Company arising out of his employment or any other matter, and that he
         has not filed any lawsuits, charges, complaints, petitions, or
         accusatory pleading against the Company with any governmental agency or
         in any court, based upon or related in any way to any events occurring
         on or prior to the date that Executive executes this Agreement.

         9.   NON-ADMISSION OF LIABILITY. This Agreement shall not constitute or
be construed as an admission by the Company or any other person or entity of any
liability to, or the validity of, any claim by Executive. Executive acknowledges
and agrees that he has been treated in a fair and lawful manner, and it is
agreed between the parties that nothing herein is intended or shall be construed
as an admission of fault or liability by the Company or its directors, officers,
employees, agents, successors and assigns.

         10.  CONFIDENTIALITY; NON-DISPARAGEMENT.

              (a)      Except as may be required under compulsion of law,
         Executive agrees not to disclose or discuss, other than with his legal
         counsel, personal tax or financial adviser, or his spouse, either the
         existence of or any details of this Agreement. With respect to any
         financial advisor (other than his tax advisor), Executive may disclose
         the compensation and benefits which may result as a consequence of this
         Agreement, but Executive shall not disclose to any such financial
         adviser any other sections or provisions of this Agreement or any
         related matter. In the event Executive discusses this Agreement with
         any such legal counsel or advisor, or with his spouse, he will instruct
         such person not to disclose or discuss the existence or any details of
         this Agreement, or any related matter, with any other person, except as
         may be required under compulsion of law.

              (b)      In the event that the disclosure of the terms of this
         Agreement is ordered in the context of a court proceeding, Executive
         shall promptly notify the Company prior to disclosure so that the
         Company may seek a protective order or other appropriate remedy and
         Executive shall cooperate with the Company in connection therewith.

              (c)      Executive agrees that he will not disparage, harm or take
         any action that would reasonably be expected to embarrass the Company
         or its directors, officers, employees, agents or successors; PROVIDED,
         HOWEVER, Executive shall retain the right to discuss information
         concerning the duties and responsibilities of his former employment
         with prospective employers, excluding any confidential information (as
         defined in SECTION 11(a) below); and PROVIDED FURTHER, that Executive
         fully retains the right to inform his legal counsel of all matters
         concerning his former employment and the termination thereof if said
         information is communicated as a matter of confidential attorney-client
         privilege. Executive shall not make any statements, whether regarded as

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         true or not, which would have the effect of causing any existing or
         prospective lenders, purchasers, creditors, customers, suppliers,
         employees or other persons or entities to question the financial
         condition, integrity, reputation, character or quality of the Company,
         or its management, employees, and affiliates. Executive shall not at
         any time make a statement of any kind, which is calculated to, or which
         foreseeably will, damage the business or reputation of the Company or
         its affiliates, or the past or present directors, officers or employees
         of any of them. The Company agrees that it will not, and that it will
         instruct its directors and officers not to, disparage, harm or take any
         action that would reasonably be expected to embarrass Executive. The
         Company shall issue a press release which includes an announcement
         regarding the termination of the employment relationship between the
         Company and Executive, and, prior to making such press release, the
         Company shall provide Executive with the portion thereof discussing
         such termination for comment by Executive. Executive will direct all
         requests for recommendations to prospective employers solely to Francis
         D. John, and upon receiving such request, the Company will provide a
         favorable recommendation.

              (d)      Except as may be required by law, legal process or the
         rules or regulations of any self-regulatory body to which the Company
         is subject, the Company shall not disclose the terms of this Agreement,
         except to the extent that it is reasonably necessary or desirable in
         furtherance of its business purposes to do so in connection with the
         conduct of its business or the preparation of its financial or other
         reports or filings. Executive acknowledges that the terms and
         conditions of this Agreement may have to be described in, and that this
         Agreement may have to be filed as an exhibit to, one or more of the
         Company's proxy statements or filings under the Securities Act of 1933,
         as amended, or the Securities Exchange Act of 1934, as amended, or
         other applicable legal or regulatory requirements and agrees that no
         such description or filing shall in any way affect Executive's
         obligations hereunder, except that Executive shall be released from his
         obligations under SECTIONS 10(a) AND 10(b) above, and the Company shall
         be released from its obligations under the first sentence of this
         SECTION 10(d), solely with respect to the information so disclosed or
         filed.

         11. CONFIDENTIAL INFORMATION

             (a)       Executive agrees that he shall not, without the express
         written consent of the Chief Executive Officer or General Counsel of
         the Company, directly or indirectly communicate or divulge to, or make
         available to, or use for his own benefit or for the benefit of, any
         competitor or any other person or entity, any of the Company's trade
         secrets, engineering and reserve data, proprietary data or other
         confidential or proprietary information (hereafter collectively
         referred to as "confidential information"), which confidential
         information was communicated to or otherwise learned or acquired by
         Executive through his employment or other associations with the
         Company, except that Executive may disclose confidential information
         only to the extent that disclosure is required (i) at the Company's
         direction or (ii) by a court or other governmental agency of competent
         jurisdiction (in which event Executive shall promptly notify the
         Company prior to disclosure so that the Company may seek a protective
         order or other appropriate remedy and Executive shall cooperate with
         the Company in connection therewith). Executive shall not use such
         confidential information in any way or in any capacity other

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         than as expressly consented to by the Chief Executive Officer or
         General Counsel of the Company.

              (b)      Such confidential information shall be deemed to include
         any and all information regarding the Company other than information
         disclosed in its public filings under the Securities Act of 1933, as
         amended, or the Securities Exchange Act of 1934, as amended, or
         information that becomes public other than by violation of SECTIONS 10
         OR 11 hereof. Such confidential information shall also include, but is
         not limited to, personnel information (including information relating
         to any and all aspects of compensation of any and all employees of the
         Company), ideas, discoveries, designs, inventions, improvements, trade
         secrets, know-how, manufacturing processes, design specifications,
         writings and other works of authorship, computer programs, financial
         information, accounting information, organizational structure, Company
         expenditures, marketing plans, customer lists and data, business plans
         or methods and the like, that relate in any manner to the actual or
         anticipated business of the Company.

              (c)      Executive agrees that all records, drawings, data,
         samples, models, correspondence, manuals, notes, reports, notebooks,
         proposals, and any other documents concerning the Company's customers
         or products or other technical, payroll, financial or business
         information used by the Company and any other tangible materials or
         copies or extracts of tangible materials regarding the Company's
         operations or business, received by Executive during his employment
         with the Company are, and shall be, the property of the Company
         exclusively, with the exception of those items to which the Company has
         agreed in writing to permit Executive to retain possession of pursuant
         to SECTION 8(a) hereof. Executive agrees to immediately return to the
         Company all of the material mentioned above, including writing notes,
         memoranda or notes taken by Executive and all tangible materials,
         including, without limitation, correspondence, drawings, blueprints,
         letters, notebooks, reports, flow-charts, computer programs and data
         proposals, except that Executive may retain possession of those items
         to which the Company has consented to his continued retention in
         writing pursuant to SECTION 8(a) hereof. No copies will be made by
         Executive, or retained by Executive, of any such confidential
         information, whether or not developed by Executive.

              (d)      The parties agree that all work product conceived,
         created or developed by Executive either solely or jointly with others
         in the course or as a result of his employment with the Company is
         proprietary to Company and constitutes confidential information subject
         to this Agreement. The parties further agree that Company is the sole
         owner of all such work product.

         12.  WAIVER OF AGE DISCRIMINATION CLAIMS. Executive specifically,
knowingly and voluntarily waives any and all rights and claims arising under the
Age Discrimination in Employment Act (ADEA), which claims have arisen as of the
date that Executive executes this Agreement. Executive acknowledges that the
consideration set forth in SECTION 3 hereof includes consideration for
Executive's agreement herein to waive any and all rights and claims arising
under the ADEA.

                                     -10-
<Page>

         13.  CONTINUANCE OF SECTION 6 OF EMPLOYMENT AGREEMENT. Executive hereby
reaffirms his obligations under Section 6 of the Employment Agreement with the
same force and effect as such Section were set forth fully herein (together with
any other provisions of the Employment Agreement necessary or desirable to
enforce such Section 6), and acknowledges and agrees that he shall continue to
be bound by such Section 6 on and after the Termination Date.

         14.  NO WAIVER AND HEADINGS. The parties acknowledge and agree that the
failure of either party to enforce any provision of this Agreement shall not
constitute a waiver of that provision, or of any other provision in this
Agreement. The headings of sections as used herein are intended for reference
purposes only and shall not affect the interpretation of this Agreement.

         15.  TERMINATION OF CERTAIN PROVISIONS OF EMPLOYMENT AGREEMENT. The
Employment Agreement shall terminate on the Effective Date effective as of the
Termination Date and be of no further force or effect (except that the
obligations of Executive pursuant to Section 6 thereof, together with any other
provisions of the Employment Agreement necessary or desirable to enforce such
Section 6, shall remain in full force and effect as provided herein); PROVIDED,
HOWEVER, that if the conditions for receiving the severance payments contained
in SECTION 3(a) hereof are not met and the first such severance payment is not
made, the Employment Agreement shall remain in effect unless and until
terminated in accordance with the terms thereof and this Agreement shall
automatically terminate and be of no force or effect.

         16.  ENTIRE AGREEMENT. The parties acknowledge and agree that this
Agreement, together with Section 6 of the Employment Agreement and any other
provisions of the Employment Agreement necessary or desirable to enforce such
Section 6, constitutes the complete and entire agreement between the parties;
that the parties have executed this Agreement based upon the express terms and
provisions set forth herein; that the parties have not relied on any
representations, oral or written, which are not set forth in this Agreement;
that no previous employment, severance or other agreement, whether oral or
written, shall have any effect on the terms and provisions of this Agreement
except as expressly provided herein; and that all such previous agreements,
except as expressly provided in this Agreement, are expressly superseded and
revoked by this Agreement. Executive hereby declares and represents that no
promise, inducement, or agreement not contained in this Agreement has been made
or offered to him, and that the terms hereof are contractual and not a mere
recital.

         17.  AMENDMENT. This Agreement shall not be modified by any subsequent
agreement unless the modifying agreement (a) is in writing, (b) contains an
express provision referencing this Agreement, (c) is executed by a designated
officer of the Company, and (d) is executed by Executive.

         18.  CONSULTATION WITH LEGAL COUNSEL. This Agreement creates legal
obligations and the Company hereby advises Executive to consult with an attorney
prior to executing this Agreement. Executive acknowledges and agrees that he has
been provided a reasonable time to review this Agreement with legal counsel and
to consider the terms and provisions of this Agreement. Both parties acknowledge
and agree that they are voluntarily entering into this Agreement, after
consultation with their legal counsel if so desired, and after full disclosure
of all the facts and circumstances surrounding the execution of this Agreement
and its legal effect.

                                     -11-
<Page>

         19.  BINDING EFFECT. This Agreement shall inure to the benefit of the
Company (as defined in SECTION 1 hereof), and to its successors and assigns, and
to the persons released hereunder pursuant to SECTIONS 6 AND 12 hereof. This
Agreement shall inure to the benefit of Executive and his heirs, executors,
administrators, representatives, attorneys and permitted assigns; PROVIDED,
HOWEVER, that this Agreement is personal to Executive, and Executive may not
assign, delegate or otherwise transfer any of his rights, duties or obligations
hereunder without the written consent of the Chief Executive Officer or General
Counsel of the Company, and any attempt to do so without such written consent
shall be deemed void and of no force and effect.

         20.  NOTICES. Except as expressly provided herein, notices provided for
in this Agreement shall be in writing and shall be deemed to have been duly
received (a) when delivered in person or sent by facsimile transmission, (b) on
the first business day after it is sent by air express overnight courier
service, or (c) on the fourth business day following deposit in the United
States mail, registered or certified mail, return receipt requested, postage
prepaid and addressed, to the following address, as applicable:

                  (1)      If to Company, addressed to:

                           Key Energy Services, Inc.
                           400 South River Road
                           New Hope, PA 18938
                           Attention: General Counsel

                           With a copy to:

                           Ropes & Gray
                           One International Place
                           Boston, MA  02110
                           Attention:  Winthrop G. Minot, Esq.

                  (2)      If to Executive, addressed to the address set forth
                           below his name on the execution page hereof, with a
                           copy to:

                           Dow, Lohnes & Albertson , PLLC
                           1200 New Hampshire Avenue, N.W.
                           Suite 800
                           Washington, D.C. 20036-6802
                           Attention: Paul R. Lang, Esq.

or to such other address as either party may have furnished to the other party
in writing in accordance with this SECTION 20.

         21.  EXECUTIVE ACKNOWLEDGMENT/NO STRICT CONSTRUCTION. Executive
represents to Company that he is knowledgeable and sophisticated as to business
matters, including the subject matter of this Agreement, that he has read the
Agreement and that he understands its terms and conditions. The parties hereto
agree that the language used in this Agreement shall be deemed to be the
language chosen by them to express their mutual intent, and no rule of strict
construction

                                     -12-
<Page>

shall be applied against either party hereto. Executive also represents that he
is free to enter into this Agreement. Executive acknowledges that he has had
the opportunity to consult with counsel of his choice, independent of the
Company's counsel, regarding the terms and conditions of this Agreement.

         22.  GOVERNING LAW. The laws of the Commonwealth of Pennsylvania,
without regard to conflicts of law provisions, shall govern the enforceability,
interpretation and legal effect of this Agreement.

         23.  COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Facsimile signatures shall be enforceable.

         STATEMENT BY EXECUTIVE: THE COMPANY HAS ADVISED ME IN WRITING TO
         CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT. I HAVE
         CAREFULLY READ AND FULLY UNDERSTOOD THE PROVISIONS OF THIS AGREEMENT
         AND HAVE HAD SUFFICIENT TIME AND OPPORTUNITY (NOT LESS THAN A PERIOD OF
         21 DAYS) TO CONSULT WITH MY PERSONAL TAX, FINANCIAL AND LEGAL ADVISORS
         PRIOR TO EXECUTING THIS AGREEMENT, AND I INTEND TO BE LEGALLY BOUND BY
         ITS TERMS. I UNDERSTAND THAT I MAY REVOKE MY CONSENT TO THIS AGREEMENT
         WITHIN SEVEN (7) DAYS FOLLOWING THE DATE I SIGN THIS AGREEMENT BY
         NOTICE TO THE COMPANY OF MY REVOCATION ACTUALLY RECEIVED WITHIN SEVEN
         (7) DAYS AFTER I HAVE SIGNED THIS AGREEMENT; THEREAFTER, I CANNOT
         REVOKE THIS AGREEMENT. I UNDERSTAND THAT MY RIGHTS UNDER THIS
         AGREEMENT, INCLUDING MY RIGHT TO RECEIVE THE PAYMENTS AND OTHER
         BENEFITS PROVIDED HEREIN, ARE CONTINGENT ON MY SIGNATURE BELOW AND NOT
         REVOKING THIS AGREEMENT WITHIN THE 7-DAY PERMITTED REVOCATION PERIOD.

                            [SIGNATURE PAGE FOLLOWS]

                                     -13-

<Page>

         IN WITNESS WHEREOF, the parties have executed this Agreement with the
intent that it be enforceable in all respects.

EXECUTIVE:

/s/ Thomas K. Grundman                         /s/ Diane V. Garrity
------------------------------------           ---------------------------------
Thomas K. Grundman                                  Witness' Signature
Address: 4 Bowman's Drive
        ----------------------------
         New Hope, PA 18938                    Name: Diane V. Garrity
        ----------------------------                ----------------------------
Date:    5/6/02                                Date: 5/6/02
     -------------------------------                ----------------------------

THE COMMONWEALTH OF PENNSYLVANIA

COUNTY OF BUCKS

         BEFORE ME, the undersigned authority, on this day personally appeared
Thomas K. Grundman, known to me to be the person whose name is subscribed to the
foregoing Separation and Release Agreement, who acknowledged to me that he
executed the same for the purposes and consideration therein expressed.

         GIVEN UNDER MY HAND AND SEAL on this 6th day of May, 2002.

         (Seal)

ATTEST:                                        COMPANY:

By: /s/ Jack D. Loftis, Jr.                    By: /s/ Francis D. John
   ---------------------------------              ------------------------------

Name: Jack D. Loftis, Jr.                      Name: Francis D. John
     -------------------------------                ----------------------------
Title: Sr. VP & General Counsel                Title: Chairman & CEO
      ------------------------------                 ---------------------------

Date: 5/6/02                                   Date: 5/6/02
     -------------------------------                ----------------------------

                                     -14-
<Page>

                                                                       EXHIBIT A

                        DEFINITION OF "CHANGE IN CONTROL"

         The occurrence of any of the following shall constitute a "Change in
Control" of the Company:

              (a)      If any person (as defined in Section 3(a)(9) of the
         Securities Exchange Act of 1934, as from time to time in effect (the
         "Exchange Act"), or any successor provision), other than the Company,
         becomes the beneficial owner directly or indirectly of more than
         twenty-five percent (25%) of the outstanding Common Stock of the
         Company, determined in accordance with Rule 13d-3 under the Exchange
         Act (or any successor provision), or otherwise becomes entitled to vote
         more than twenty-five percent (25%) of the voting power entitled to be
         cast at elections for directors ("Voting Power") of the Company;

              (b)      If the Company is subject to the reporting requirements
         of Section 13 or 15(d) (or any successor provision) of the Exchange
         Act, and any person (as defined in Section 3(a)(9) of the Exchange Act,
         or any successor provision), other than the Company, purchases shares
         pursuant to a tender offer or exchange offer to acquire Common Stock of
         the Company (or securities convertible into or exchangeable for or
         exercisable for Common Stock) for cash, securities or any other
         consideration, if after consummation of the offer, the person in
         question is the beneficial owner, directly or indirectly, of more than
         twenty-five percent (25%) of the outstanding Common Stock of the
         Company, determined in accordance with Rule 13d-3 under the Exchange
         Act (or any successor provision);

              (c)      If the stockholders or the Board of Directors of the
         Company (the "Board") approve any consolidation or merger of the
         Company (i) in which the Company is not the continuing or surviving
         corporation unless such merger is with a subsidiary of the Company (a
         "Subsidiary") at least eighty percent (80%) of the Voting Power of
         which is held by the Company or (ii) pursuant to which the holders of
         the Company's shares of Common Stock immediately prior to such merger
         or consolidation would not be the holders immediately after such merger
         or consolidation of at least a majority of the Voting Power of the
         Company;

              (d)      The stockholders or the Board shall have approved any
         sale, lease, exchange or other transfer (in one transaction or a series
         of transactions) of all or substantially all of the assets of the
         Company; or

              (e)      Upon the election of one or more new directors of the
         Company, a majority of the directors holding office, including the
         newly elected directors, were not nominated as candidates by a majority
         of the directors in office immediately before such election.

         As used in this definition of "Change in Control", "Common Stock" means
the Common Stock, or if changed, the capital stock of the Company as it shall be
constituted from time to time

                                     -15-
<Page>

entitling the holders thereof to share generally in the distribution of all
assets available for distribution to the Company's stockholders after the
distribution to any holders of capital stock with preferential rights.

         Notwithstanding the occurrence of any of the events described in the
immediately preceding clauses (a) and (b) which would otherwise result in a
Change in Control pursuant to said clause (a) or (b), the Board may determine in
its discretion, if it deems it to be in the best interest of the Company, that
an event or events otherwise constituting a Change in Control pursuant to said
clause (a) or (b) but which would not constitute such a Change in Control if the
phrase "fifty percent (50%)" were to be substituted for the phrase "twenty-five
percent (25%)" each place it appears therein shall not be considered such a
Change in Control; provided, however, that such determination shall not affect
any accelerated vesting of any stock options or restricted stock purchase rights
or any extensions of the term of exercisability of such options or rights which
would otherwise have occurred by virtue of such events; and provided, further,
that such determination shall not be effective hereunder unless the Company
shall have at least one other executive officer who has a provision similar to
this paragraph in such executive officer's employment agreement with the Company
and the Board shall make such determination with respect to all executive
officers of the Company who have a provision similar to this paragraph in such
executive officers' employment agreements with the Company. Such determination
shall be effective only if it is made by the Board prior to the occurrence of an
event that otherwise would be or probably would lead to such a Change in
Control; or within thirty (30) days after such event if made by the Board a
majority of which is composed of directors who were members of the Board
immediately prior to the event that otherwise would be or probably would lead to
such a Change in Control.

                                     -16-
<Page>

                                                                       EXHIBIT B
<Table>
<Caption>
                                             OUTSTANDING OPTIONS

   DATE GRANTED       NUMBER OF SHARES      EXERCISE PRICE     VESTING STATUS    STATED EXPIRATION DATE   *
   ------------       ----------------      --------------     --------------    ----------------------   -
   <S>                <C>                   <C>                <C>               <C>
      5/5/1999              50,000               $3.00               Vested              5/5/2009
      5/5/1999              50,000               $3.00           Not Vested              5/5/2009
     4/18/2000             250,000               $8.50               Vested             4/18/2010         *
     4/18/2000             250,000               $8.50           Not Vested             4/18/2010         *
    12/11/2000              45,000               $8.25               Vested            12/11/2010         *
    12/11/2000              90,000               $8.25           Not Vested            12/11/2010         *
    10/16/2001             150,000               $8.00           Not Vested            10/16/2011         *

</Table>

                                                 -17-QuickLinks
 -- Click here to rapidly navigate through this document
  

EXHIBIT 10.1  

 
 

VALENTIS, INC.
  
    AMENDED AND RESTATED 1997 EQUITY INCENTIVE PLAN    
  

INTRODUCTION.  

        In October 1993, the Board of Directors adopted the Valentis, Inc. (formerly Megabios Corp.) 1993 Stock Option Plan, which was subsequently amended
in August 1994, January 1996, February 1997 and December 2000. In July 1997, the Board of Directors renamed the 1993 Stock Option Plan as the "1997 Equity Incentive
Plan." In March 2002 the Board of Directors amended and restated the Plan to read as set forth herein. 

1.    Purposes.  

        (a)    The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company
and its Affiliates may be given an opportunity to benefit from increases in value of the common stock of the Company ("Common Stock") through the granting of (i) Incentive Stock Options,
(ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to purchase restricted stock. 

        (b)    The Company, by means of the Plan, seeks to retain the services of persons who are now Employees, Directors or
Consultants, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its
Affiliates. 

        (c)    The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to
which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock
Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof. All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for
shares purchased on exercise of each type of Option. 

2.    Definitions.  

        (a)    "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. 

        (b)    "Board" means the Board of Directors of the Company. 

        (c)    "Code" means the Internal Revenue Code of 1986, as amended. 

        (d)    "Committee" means a Committee appointed by the Board in accordance with
subsection 3(c) of the Plan. 

        (e)    "Company" means Valentis, Inc., a Delaware corporation. 

        (f)    "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by
the Company or who are not compensated by the Company for their services as Directors. 

1

 

        (g)    "Continuous Status as an Employee, Director or Consultant" means the
employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or
Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or
(ii) transfers between locations of the Company or between the Company, Affiliates or their successors. 

        (h)    "Director" means a member of the Board. 

        (i)    "Employee" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. 

        (j)    "Exchange Act" means the Securities Exchange Act of 1934, as amended.

        (k)    "Fair Market Value" means, as of any date, the
value of the Common Stock of the Company determined as follows: 

        (1)  If the Common Stock is listed on any established stock exchange, or traded on the Nasdaq National Market or the Nasdaq
SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market
(or the exchange or market with the greatest volume of trading in Common Stock) on the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; 

        (2)  In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the
Board. 

        (l)    "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 

        (m)    "Non-Employee Director" means a Director who either
(i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for
services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act of 1933
("Regulation S-K"), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not
engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee
director" for purposes of Rule 16b-3. 

        (n)    "Nonstatutory Stock Option" means an Option not intended to qualify as an
Incentive Stock Option. 

        (o)    "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. 

        (p)    "Option" means a stock option granted pursuant to the Plan. 

        (q)    "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. 

        (r)    "Optionee" means a person to whom an Option is granted pursuant to the
Plan. 

2

 

        (s)    "Outside Director" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company
or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at
any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is
otherwise considered an "outside director" for purposes of Section 162(m) of the Code. 

        (t)    "Plan" means this Valentis, Inc. Amended and Restated 1997 Equity
Incentive Plan. 

        (u)    "Rule 16b-3" means Rule 16b-3 of
the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 

        (v)    "Stock Award" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock. 

        (w)    "Stock Award Agreement" means a written agreement between the Company and
a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. 

3.    ADMINISTRATION.  

        (a)    The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as
provided in subsection 3(c). 

        (b)    The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: 

        (1)  To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how
each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, or a combination of the
foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award and the
number of shares with respect to which a Stock Award shall be granted to each such person. 

        (2)  To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective. 

        (3)  To amend the Plan or a Stock Award as provided in Section 13. 

        (4)  Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best
interests of the Company which are not in conflict with the provisions of the Plan. 

        (c)    The Board may delegate administration of the Plan to a committee or committees ("Committee") of one or more members of
the board. In the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Code Section 162(m), or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be 

3

 

to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan. 

4.    SHARES SUBJECT TO THE PLAN.  

        (a)    Subject to the provisions of Section 12 relating to adjustments upon changes in stock, the stock that may be
issued pursuant to Stock Awards shall not exceed in the aggregate five million one hundred thousand (5,100,000) shares of the Company's Common Stock. If any Stock Award shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan. 

        (b)    The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 

5.    ELIGIBILITY.  

        (a)    Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted
only to Employees, Directors or Consultants. 

        (b)    No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its
Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of
the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. 

        (c)    Subject to the provisions of Section 12 relating to adjustments upon changes in stock, no person shall be eligible
to be granted Options covering more than five hundred thousand (500,000) shares of the Common Stock in any calendar year. This subsection 5(c) shall not apply until (i) the earliest of:
(A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4); (B) the
issuance of all of the shares of Common Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders at which directors are to be
elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act;
or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 

6.    OPTION PROVISIONS.  

        Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be
identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 

        (a)    Term. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted. 

        (b)    Price. The exercise price of each Incentive Stock Option and each
Nonstatutory Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence, including where such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the 

4

 

provisions of Section 424(a) of the Code, if such Option is approved by the holders of a majority of the shares of common stock of the Company present and entitled to vote at a duly convened
meeting of shareholders. 

        (c)    Consideration. The purchase price of stock acquired pursuant to an Option
shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the
Committee, at the time of the grant of the Option, (A) by delivery to the Company of other Common Stock of the Company, (B) according to a deferred payment or other arrangement (which
may include, without limiting the generality of the foregoing, the use of other Common Stock of the Company) with the person to whom the Option is
granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. 

        In
the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at no less than a market rate of interest that is sufficient to avoid
the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. 

        (d)    Transferability. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory
Stock Option may be transferred to the extent provided in the Option Agreement; provided that if the Option Agreement does not expressly permit the transfer of a Nonstatutory Stock Option, the
Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted
only by such person or any transferee pursuant to a domestic relations order. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company,
in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. 

        (e)    Vesting. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may
become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior
period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based
on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an
Option may be exercised. 

        (f)    Termination of Employment or Relationship as a Director or Consultant. In
the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. 

5

 

        An
Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant
(other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as
an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration
requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or
(ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the
Option would not be in violation of such registration requirements. 

        (g)    Disability of Optionee. In the event an Optionee's Continuous Status as
an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the
date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or
her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. 

        (h)    Death of Optionee. In the event of the death of an Optionee during, or
within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was
entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death
(or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the
Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan.
If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance
under the Plan. 

        (i)    Early Exercise. The Option may, but need not, include a provision whereby
the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option.
Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. 

        (j)    Re-Load Options. Without in any way limiting the authority of
the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a
provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option Agreement, in whole or in part, by
surrendering other shares of Common Stock in 

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accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares
surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to
such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the
Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is an Incentive Stock Option and which is granted to a 10%
stockholder (as described in subsection 5(b)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load
Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. 

        Any
such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original
Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred
thousand dollars ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 11(d) of the Plan and in Section 422(d) of the Code. There shall be no
Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to
such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 

7.    TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.  

        Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem
appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical,
but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following
provisions as appropriate: 

        (a)    Purchase Price. The purchase price under each restricted stock purchase
agreement shall be such amount as the Board or Committee shall determine and designate in such agreement; provided, however, that unless approved by the
holders of a majority of the shares of common stock of the Company present and entitled to vote at a duly convened meeting of shareholders, the purchase price shall not be less than one hundred
percent (100%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible
participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company for its benefit. 

        (b)    Transferability. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent and distribution or, if the agreement so provides, pursuant to a domestic relations order satisfying the requirements of
Rule 16b-3, so long as stock awarded under such agreement remains subject to the terms of the agreement. 

        (c)    Consideration. The purchase price of stock acquired pursuant to a stock
purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement
with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the
foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to
the Company or for its benefit. 

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        (d)    Vesting. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. 

        (e)    Termination of Continuous Status as an Employee, Director or Consultant.
In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that
person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 

8.    REPRICING PROHIBITED.  

        Notwithstanding any provision in this Plan to the contrary, unless approved by the holders of a majority of the shares of common stock of the Company present and
entitled to vote at a duly convened meeting of shareholders, no Stock Award may be amended to reduce the exercise price (or the purchase price, as applicable) per share of the shares subject to the
Stock Award below the exercise or purchase price as of the date the Stock Award is granted. In addition, unless approved by the holders of a majority of the shares of common stock of the Company
present and entitled to vote at a duly convened meeting of shareholders, no Stock Award may be granted in exchange for, or in connection with, the cancellation or surrender of a Stock Award having a
higher exercise or purchase price or less favorable vesting schedule. 

9.    COVENANTS OF THE COMPANY.  

        (a)    During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock
required to satisfy such Stock Awards. 

        (b)    The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares under Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as
amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 

10.  USE OF PROCEEDS FROM STOCK.  

        Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 

11.  MISCELLANEOUS.  

        (a)    The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during
which a Stock Award or any part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time
during which it will vest. 

        (b)    Neither an Employee, Director nor a Consultant nor any person to whom a Stock Award is transferred in accordance with the
Plan shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements
for exercise of the Stock Award pursuant to its terms. 

8

 

        (c)    Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee,
Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate, or to continue serving as a Consultant and Director, or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, or the right to terminate the relationship of any Consultant pursuant to the
terms of such Consultant's agreement with the Company or Affiliate or service as a Director pursuant to the Company's By-Laws. 

        (d)    To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which
Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000),
the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. 

        (e)    The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred
in accordance with the Plan, as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and
experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters,
and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise
distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or
acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to,
legends restricting the transfer of the stock. 

        (f)    To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy
any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means:
(1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or
acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company. 

12.  ADJUSTMENTS UPON CHANGES IN STOCK.  

        (a)    If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection
5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. 

9

 

Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not
be treated as a "transaction not involving the receipt of consideration by the Company".) 

        (b)    In the event of Change of Control: 

        (1)  with respect to each Optionee who is an executive officer, the vesting under all outstanding Options shall automatically
accelerate by the greater of (i) 12 months (e.g., that number of shares shall be immediately vested as would have been vested on the date 12 months after the date of the Change of
Control) or (ii) that number of months equal to the number of full months during which such executive officer has been employed by the Company; provided, however, that the Board does not find
that it is in the collective interest of the Company's stockholders and the Optionees to provide otherwise. If such a finding is made, the Options shall either remain outstanding or be assumed by the
acquiror (with the Optionee being entitled to receive the same consideration as was received by the Common Stock stockholders in the Change of Control transaction) or the Board and/or the acquiror
shall adopt a replacement benefit which shall (at a minimum) provide value to the executive officer on the vesting dates of the non-accelerated Options substantially equal to the value the
executive officer would have received if the shares had participated in all steps of the transaction; and 

        (2)  with respect to each Stock Award other than an Option held by an executive officer, any Stock Award shall remain
outstanding under the Plan, be assumed by the acquiror or be substituted with similar Stock Awards. In the event the acquiror refuses to assume, substitute or continue such Stock Awards, then such
Stock Awards shall be terminate if not exercised or vested, as applicable, prior to the Change of Control. 

        For
purposes of this Plan, "Change of Control" shall mean: any consolidation or merger of the Company with or into any other entity or person, or any other corporate reorganization in
which the Company shall not be the continuing or surviving entity, or any transaction or series of related transactions by the Company in which in excess of 50% of the Company's voting power is
transferred, or any sale, lease, license or other disposition of all or substantially all of the assets of the Company. The continuing or surviving organization entity shall be deemed the acquiror for
purposes of this subsection of the Plan. 

13.  AMENDMENT OF THE PLAN AND STOCK AWARDS.  

        (a)    The Board at any time, and from time to time, may amend the Plan. However, (i) except as provided in
Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company where stockholder is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements, and (ii) no amendment to the minimum price
provisions of Sections 6(b) or 7(a) and no amendment to Section 8 shall be effective unless approved by the holders of a majority of the shares of common stock of the Company present and
entitled to vote at a duly convened meeting of shareholders. 

        (b)    The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain executive officers. 

        (c)    It is expressly contemplated that, subject to this Section 13, the Board may amend the Plan in any respect the
Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code 

10

 

and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. 

        (d)    Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment
of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 

        (e)    The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing. 

14.  TERMINATION OR SUSPENSION OF THE PLAN.  

        (a)    The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten
(10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated. 

        (b)    Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 

11

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VALENTIS, INC. AMENDED AND RESTATED 1997 EQUITY INCENTIVE PLAN

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