UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2002
Commission file No. 001-11769

KEY PRODUCTION COMPANY, INC.707 Seventeenth Street, Suite 3300
Denver, Colorado 80202-3404
(303) 295-3995

Incorporated in the
State of Delaware

Employer Identification
No. 84-1089744


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

The
number of shares outstanding of the Company's common stock as of June 30, 2002 is shown below:

Title of Class

Number of Shares OutstandingCommon Stock, par value $0.25 per share

14,080,468


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KEY PRODUCTION COMPANY, INC.        Table of Contents

|        |                                                                                                                      |  | Page
|------- | -------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  |                                                                                                                      | 
|Item 1 | Financial Statements                                                                                                 |  |     
|        | Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2002 and June 30, 2001 |  | 3   
|        | Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2002 and June 30, 2001           |  | 4   
|        | Consolidated balance sheets (unaudited) as of June 30, 2002 and December 31, 2001                                    |  | 5   
|        | Consolidated statement of stockholders' equity (unaudited) for the six months ended June 30, 2002                    |  | 6   
|        | Notes to consolidated financial statements                                                                           |  | 7   
|Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations                                |  | 12  
|Item 3 | Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 19  
|PART II |                                                                                                                      | 
|Item 6 | Exhibits and Reports on Form 8-K                                                                                     |  | 20  

In this report, we use terms to discuss oil and gas producing activities as defined in Rule 4-10(a) of
Regulation S-X. We express quantities of natural gas in terms of thousand cubic feet (Mcf), million cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in
terms of barrels (Bbls), thousands of barrels (MBbls) and millions of barrels (MMBbls). Oil is compared to natural gas in terms of equivalent thousand cubic feet (Mcfe). One barrel of oil is
the energy equivalent of six Mcf of natural gas. Information relating to our working interest in wells or acreage, "net" oil and gas wells or acreage is determined by multiplying gross wells or
acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross.

2

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KEY PRODUCTION COMPANY, INC.        Consolidated Statements of Operations        (Unaudited)

|                                                                      |                                          | For the Three Months
Ended June 30,                                   |            | For the Six Months
Ended June 30, |     
|--------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------------------------- | ---------- | --------------------------------- | ----
|
|
|Revenues:                                                             |                                          |                                                                       |            |                                   |     
|                                                                      | Gas sales                                |                                                                       | $          | 12,107                            |     
|                                                                      | Oil sales                                |                                                                       |            | 9,129                             |     
|                                                                      | Plant product sales                      |                                                                       |            | 299                               |     
|                                                                      | Other                                    |                                                                       |            | 39                                |     
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      |                                          |                                                                       | 21,574     |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     
|Operating expenses:                                                   |                                          |                                                                       |            |                                   |     
|                                                                      | Depreciation, depletion and amortization |                                                                       |            | 8,583                             |     
|                                                                      | Lease operating                          |                                                                       |            | 4,034                             |     
|                                                                      | Production taxes                         |                                                                       |            | 1,329                             |     
|                                                                      | General and administrative               |                                                                       |            | 2,142                             |     
|                                                                      | Financing costs:                         |                                                                       |            |                                   |     
|                                                                      |                                          | Interest expense                                                      |            |                                   | 341 
|                                                                      |                                          | Capitalized interest                                                  |            |                                   | (98 
|                                                                      |                                          | Interest income                                                       |            |                                   | (8  
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      |                                          |                                                                       | 16,323     |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     
|Income before income tax expense                                      |                                          |                                                                       | 5,251      |                                   |     
|Income tax expense                                                    |                                          |                                                                       | 1,729      |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     
|Income before cumulative effect of change in accounting method        |                                          |                                                                       | 3,522      |                                   |     
|Cumulative effect of change in accounting method, net of income taxes |                                          |                                                                       |           |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      |                                          |                                                                       | Net income |                                   | $   
|                                                                      |                                          |                                                                       |            |                                   |     
|Earnings per share:                                                   |                                          |                                                                       |            |                                   |     
|                                                                      | Basic:                                   |                                                                       |            |                                   |     
|                                                                      |                                          | Income before cumulative effect of change in accounting method        |            | $                                 | 0.25
|                                                                      |                                          | Cumulative effect of change in accounting method, net of income taxes |            |                                   |    
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      |                                          |                                                                       | Net income |                                   | $   
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      | Diluted:                                 |                                                                       |            |                                   |     
|                                                                      |                                          | Income before cumulative effect of change in accounting method        |            | $                                 | 0.24
|                                                                      |                                          | Cumulative effect of change in accounting method, net of income taxes |            |                                   |    
|                                                                      |                                          |                                                                       |            |                                   |     
|                                                                      |                                          |                                                                       | Net income |                                   | $   
|                                                                      |                                          |                                                                       |            |                                   |     
|Weighted average basic shares                                         |                                          |                                                                       | 14,080     |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     
|Weighted average diluted shares                                       |                                          |                                                                       | 14,413     |                                   |     
|                                                                      |                                          |                                                                       |            |                                   |     

See
accompanying notes to consolidated financial statements.

3

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KEY PRODUCTION COMPANY, INC.        Consolidated Statements of Cash Flows        (Unaudited)

|                                               |                                                                                  | For the Six Months
Ended June 30,                            |                                          
|---------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------ | -----------------------------------------
|
|
|Cash flows from operating activities:          |                                                                                  |                                                              |                                          
|                                               | Net income                                                                       |                                                              | $                                        
|                                               | Adjustment to reconcile net income to net cash provided by operating activities: |                                                              |                                          
|                                               |                                                                                  | Depreciation, depletion and amortization                     |                                          
|                                               |                                                                                  | Cumulative effect of change in accounting method             |                                          
|                                               |                                                                                  | Deferred income taxes                                        |                                          
|                                               |                                                                                  | Common stock issued as compensation                          |                                          
|                                               |                                                                                  | Amortization of unearned compensation                        |                                          
|                                               |                                                                                  | Income tax benefit related to stock options exercised        |                                          
|                                               | Changes in operating assets and liabilities:                                     |                                                              |                                          
|                                               |                                                                                  | Increase in receivables                                      |                                          
|                                               |                                                                                  | Decrease in prepaid expenses and other                       |                                          
|                                               |                                                                                  | Increase (decrease) in accounts payable and accrued expenses |                                          
|                                               |                                                                                  | Increase (decrease) in other liabilities                     |                                          
|                                               |                                                                                  |                                                              |                                          
|                                               |                                                                                  |                                                              | Net cash provided by operating activities
|                                               |                                                                                  |                                                              |                                          
|Cash flows from investing activities:          |                                                                                  |                                                              |                                          
|                                               | Oil and gas exploration and development expenditures                             |                                                              |                                          
|                                               | Acquisition of oil and gas properties                                            |                                                              |                                          
|                                               | Proceeds from sale of oil and gas properties                                     |                                                              |                                          
|                                               | Other capital expenditures                                                       |                                                              |                                          
|                                               |                                                                                  |                                                              |                                          
|                                               |                                                                                  |                                                              | Net cash used by investing activities    
|                                               |                                                                                  |                                                              |                                          
|Cash flows from financing activities:          |                                                                                  |                                                              |                                          
|                                               | Long-term borrowings                                                             |                                                              |                                          
|                                               | Payments on long-term debt, net                                                  |                                                              |                                          
|                                               | Payments to reacquire common stock                                               |                                                              |                                          
|                                               | Net proceeds from issuance of common stock                                       |                                                              |                                          
|                                               |                                                                                  |                                                              |                                          
|                                               |                                                                                  |                                                              | Net cash used by financing activities    
|                                               |                                                                                  |                                                              |                                          
|Net decrease in cash and cash equivalents      |                                                                                  |                                                              | (3,963                                   
|Cash and cash equivalents at beginning of year |                                                                                  |                                                              | 5,003                                    
|                                               |                                                                                  |                                                              |                                          
|Cash and cash equivalents at end of period     |                                                                                  | $                                                            | 1,040                                    
|                                               |                                                                                  |                                                              |                                          

See
accompanying notes to consolidated financial statements.

4

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KEY PRODUCTION COMPANY, INC.        Consolidated Balance Sheets        (Unaudited)

|                                                              |                                                                                                                    | June 30,
2002 |         | December 31,
2001 |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------- | ------- | ----------------- | -
|
|Assets                                                        |                                                                                                                    |               |         |                   |  
|Current assets:                                               |                                                                                                                    |               |         |                   |  
|                                                              | Cash and cash equivalents                                                                                          |               | $       | 1,040             |  
|                                                              | Receivables                                                                                                        |               |         | 15,192            |  
|                                                              | Prepaid expenses and other                                                                                         |               |         | 1,961             |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    |               | 18,193  |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Oil and gas properties, on the basis of full cost accounting: |                                                                                                                    |               |         |                   |  
|                                                              | Proved properties                                                                                                  |               |         | 413,645           |  
|                                                              | Unproved properties and properties under development, not being amortized                                          |               |         | 14,032            |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    |               | 427,677 |                   |  
|                                                              | Lessaccumulated depreciation, depletion and amortization                                                          |               |         | (223,292          | )
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    |               | 204,385 |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Other assets, net                                             |                                                                                                                    |               | 1,519   |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    | $             | 224,097 |                   | $
|                                                              |                                                                                                                    |               |         |                   |  
|Liabilities and Stockholders' Equity                          |                                                                                                                    |               |         |                   |  
|Current liabilities:                                          |                                                                                                                    |               |         |                   |  
|                                                              | Accounts payable                                                                                                   |               | $       | 13,626            |  
|                                                              | Accrued exploration and development                                                                                |               |         | 6,128             |  
|                                                              | Accrued lease operating expense and other                                                                          |               |         | 982               |  
|                                                              | Current portion of long-term debt                                                                                  |               |         | 33,000            |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    |               | 53,736  |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Long-term debt                                                |                                                                                                                    |               |        |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Deferred income taxes                                         |                                                                                                                    |               | 33,753  |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Other liabilities                                             |                                                                                                                    |               | 333     |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|Stockholders' equity:                                         |                                                                                                                    |               |         |                   |  
|                                                              | Common stock, $0.25 par value, 50,000,000 shares authorized, 14,080,468 and 14,041,269 shares issued, respectively |               |         | 3,520             |  
|                                                              | Paid-in capital                                                                                                    |               |         | 70,537            |  
|                                                              | Unearned compensation                                                                                              |               |         | (266              | )
|                                                              | Retained earnings                                                                                                  |               |         | 62,484            |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    |               | 136,275 |                   |  
|                                                              |                                                                                                                    |               |         |                   |  
|                                                              |                                                                                                                    | $             | 224,097 |                   | $
|                                                              |                                                                                                                    |               |         |                   |  

See
accompanying notes to consolidated financial statements.

5

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KEY PRODUCTION COMPANY, INC.        Consolidated Statement of Stockholders' Equity        For the Six Months Ended June 30, 2002        (Unaudited)

|                                                         |  | Common Stock |   |   |       |   |   |        |   |   |     
|-------------------------------------------------------- |  | ------------ | - | - | ----- | - | - | ------ | - | - | ----
|
|
|
|Balance, December 31, 2001                               |  | 14,041       |   | $ | 3,510 |   | $ | 69,924 |   | $ | (278
|Net income                                               |  |             |   |   |      |   |   |       |   |   |    
|Common stock issued for options exercised                |  | 40           |   |   | 10    |   |   | 377    |   |   |    
|Stock option compensation                                |  |             |   |   |      |   |   | 233    |   |   |    
|Income tax benefit from stock options exercised          |  |             |   |   |      |   |   | 18     |   |   |    
|Common stock withheld from options exercised             |  | (6           | ) |   | (1    | ) |   | (95    | ) |   |    
|Unearned compensation related to restricted stock awards |  | 5            |   |   | 1     |   |   | 80     |   |   | (81 
|Amortization of unearned compensation                    |  |             |   |   |      |   |   |       |   |   | 93  
|                                                         |  |              |   |   |       |   |   |        |   |   |     
|Balance, June 30, 2002                                   |  | 14,080       |   | $ | 3,520 |   | $ | 70,537 |   | $ | (266
|                                                         |  |              |   |   |       |   |   |        |   |   |     

See
accompanying notes to consolidated financial statements.

6

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KEY PRODUCTION COMPANY, INC.        Notes to Consolidated Financial Statements        June 30, 2002        (Unaudited)

1. Basis of Presentation

The accompanying financial statements are unaudited and were prepared from the Company's records. We believe these financial statements include all adjustments
necessary for a fair presentation of our financial position and results of operations. Key Production Company, Inc. (Key) prepared these statements on a basis consistent with the annual audited
statements and Regulation S-X. Regulation S-X allows us to omit some of the footnote and policy disclosures required by accounting principles generally accepted
in the United States of America and normally included in annual reports on Form 10-K. These interim financial statements should be read in conjunction with the financial statements,
summary of significant accounting policies and notes in our most recent annual report on Form 10-K.

The
accounts of Key and its subsidiaries are presented in the accompanying consolidated financial statements. All intercompany accounts and transactions were eliminated in consolidation.

We
rely on management estimates and assumptions to prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Those
estimates and assumptions affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period and in disclosures of commitments and
contingencies. Actual results could differ from those estimates.

The
more significant areas requiring the use of management's estimates and judgments relate to estimates of oil and gas reserves used in calculating depletion, depreciation and
amortization; estimates of future net revenues used in computing the ceiling test limitations and estimates of abandonment obligations used in such calculations. Estimates and judgments are also
required in determining the impairments of undeveloped properties and the valuation of deferred tax assets.

The
financial statements for the three and six months ended June 30, 2001 have been restated to reflect the change in accounting method from the future gross revenue method
to the units-of-production method for depletion of our oil and gas properties. The change in accounting method occurred in the fourth quarter of 2001 and was effective
January 1, 2001.

The
cumulative effect of the change, calculated as of January 1, 2001, was to decrease net income by $1.8 million, net of income taxes of $1.1 million, or $0.13 per
diluted share for the six months ended June 30, 2001. The effect of the change was to decrease net income for the three months ended June 30, 2001 by $1.4 million,
$0.8 million net of income taxes, or $0.06 per diluted share. The effect of the change was to increase net income for the six months ended June 30, 2001 by $1.3 million,
$0.8 million net of income taxes, or $0.06 per diluted share.

Certain
amounts in the accompanying consolidated financial statements for prior periods have been reclassified to conform to the current year presentation.

2. Merger with Helmerich & Payne, Inc.'s Oil and Gas Division

On February 23, 2002, Key, Helmerich & Payne, Inc., a Delaware corporation (H&P), Helmerich & Payne Exploration and Production Co., a
Delaware corporation and a wholly owned subsidiary of H&P, which, after the Merger will be named Cimarex Energy Co. (Cimarex) and a wholly owned subsidiary of Cimarex (Merger Sub), entered into
an Agreement and Plan of Merger (Merger

7

---

Agreement). Under the Merger Agreement and other related transaction documents: (i) H&P will transfer to Cimarex certain assets primarily related to the oil and gas exploration, production,
marketing and sales operations of H&P, (ii) Cimarex will assume certain liabilities of H&P and (iii) H&P will distribute to its stockholders 26,591,321 shares of Cimarex common stock
upon distribution in the pro rata spin-off of Cimarex (Spin-off). Immediately thereafter, Merger Sub will be merged with and into Key, with Key as the surviving subsidiary of
Cimarex (Merger) and each share of our common stock will be exchanged for one share of Cimarex common stock.

Upon
completion of the transaction, holders of H&P common stock will own approximately 65 percent and Key stockholders will own approximately 35 percent of the common stock
of Cimarex, in each case on a diluted basis.

The
Merger Agreement has been unanimously approved by the respective Boards of Directors of Key and H&P. In July 2002, H&P received a ruling from the Internal Revenue Service
qualifying the Spin-off as a tax-free transaction. The Merger is subject to, among other things, the completion of the Spin-off and the approval of our
stockholders. The Merger is anticipated to close prior to the end of September 2002.

3. Long-Term Debt

We have a long-term credit agreement with a group of banks led by Bank of America, N.A. that was amended as of May 31, 2002 to extend the
revolving facility to be payable in full on December 31, 2002. The agreement provides for a maximum loan amount of $150 million limited to a borrowing base. Our borrowing base was
$90 million at June 30, 2002. We may voluntarily select a borrowing base, less than the maximum value our properties would allow, to reduce fees for unused borrowing base capacity. At
June 30, 2002, we had $33 million outstanding and $57 million unused and available on the credit facility. The amended credit agreement has a maturity date of December 31,
2002 and as such, we have classified the loan as current at June 30, 2002.

We
secured this debt with oil and gas assets owned by Key and our subsidiaries. We are also subject to customary covenants and restrictions including limitations on additional borrowings
and minimum working capital and net worth maintenance requirements. We were in compliance with the covenants of the agreement as of June 30, 2002.

8

---

4. Income Taxes

Income tax expense (benefit) consisted of the following:

Three Months Ended June 30,

Six Months Ended June 30,2002

2001

2002

2001*(In thousands)Current taxes:Federal

$
(53
)
$
2,304

$
73

$
5,995State


(14
)

165


2


599(67
)

2,469


75


6,594Deferred taxes


1,796


2,590


1,054


7,244$
1,729

$
5,059

$
1,129

$
13,838


---

5. Supplemental Disclosure of Cash Flow Information

For the Six Months Ended June 30,2002

2001(In thousands)Cash paid during the period for:Interest (net of amounts capitalized)

$
461

$
562Income taxes (net of refunds received)

$
365

$
4,328


9

---

6. Earnings Per Share

The calculations of basic and diluted net income per common share for the periods ended June 30, 2002 and 2001 are presented in the table below:

|                            |                                                           | Three Months Ended June 30, |   | Six Months Ended June 30,
|--------------------------- | --------------------------------------------------------- | --------------------------- | - | -------------------------
|
|
|Basic earnings per share:   |                                                           |                             |   |                          
|                            | Income available to common stockholders                   |                             | $ | 3,522                    
|                            | Weighted average basic shares outstanding                 |                             |   | 14,080                   
|                            | Basic earnings per share                                  |                             | $ | 0.25                     
|Diluted earnings per share: |                                                           |                             |   |                          
|                            | Income available to common stockholders                   |                             | $ | 3,522                    
|                            | Incremental shares assuming the exercise of stock options |                             |   | 333                      
|                            | Weighted average diluted shares outstanding               |                             |   | 14,413                   
|                            | Diluted earnings per share                                |                             | $ | 0.24                     

All
stock options outstanding as of June 30, 2002 and 2001 were considered dilutive and included in the calculation for the incremental shares assuming exercise of the stock
options.

7. Stock Plans



On February 23, 2002, the Board of Directors adopted a stockholder rights plan. The plan is designed to improve the ability of the board to protect the
interests of our stockholders in the event of an unsolicited takeover attempt.

In
adopting the plan, the board declared a dividend of one common share purchase right for each outstanding share of common stock of Key, payable to our stockholders of record at the
close of business on March 7, 2002. The rights will become exercisable only in the event a person or group acquires beneficial ownership of 15% or more of our common stock, or a person or group
commences a tender offer or exchange offer that, if successfully consummated, would result in such person or group beneficially owning 15% or more of our common stock.

Upon
a person or group acquiring beneficial ownership of 15% or more of our common stock, holders of the rights (other than rights owned by the acquiring person or group) would be
entitled to purchase Key common stock (or in certain circumstances, shares of the acquiring entity) at approximately half the then current market price of such stock. Further, at any time after a
person or group acquires 15% or more (but less than 50%) of our outstanding common stock, the board may, at its option, exchange all or part of the rights for our common stock at an exchange ratio of
one share of common stock per right.

Key
generally will be entitled to redeem the rights at $0.01 per right at any time prior to the close of business on the tenth business day after there has been a public announcement of
the acquisition of

10

---

the beneficial ownership by any person or group of 15% or more of our common stock. The rights may not be exercised until the board's right to redeem the stock has expired.

The
plan is not intended to prevent a takeover of Key on terms that are in the best interests of our stockholders. Because the rights may be redeemed by the board, the plan will not
interfere with any transaction which the board has approved, and the merger with H&P's oil and gas division will not trigger a distribution under the plan.



We periodically grant stock options under stockholder approved stock option plans. In the six months ended June 30, 2002 and 2001, 40,000 and 41,108
stock options were exercised. No stock options were granted during these periods. We accelerated the vesting of 40,000 stock options, which resulted in compensation expense of $233,000 for the
six months ended June 30, 2002. As of June 30, 2002 and December 31, 2001, there were 788,834 and 828,834 stock options outstanding. The proposed merger with Cimarex will
constitute a change in control of Key. As a result, all unvested stock options will immediately vest upon the closing of the merger.



Key has an employee retention program where we award restricted stock grants to certain employees. There were 31,000 and 26,000 shares of restricted stock
outstanding as of June 30, 2002 and December 31, 2001, respectively. The restrictions related to these stock grants are associated with the continued employment of the grantee for
three years from the date of the grant; at which time these shares will vest. A grant of 10,000 restricted shares was made in September 1999, grants totaling 16,000 restricted shares
were made in January 2001 and a grant of 5,000 restricted shares was made in January 2002 to executive and non-executive personnel. The restricted stock agreements provide
that, during the vesting period, if we pay a dividend on our common stock, the grantees will be entitled to receive such dividend. We do not currently pay dividends on our common stock.

Compensation
expense is based upon the difference between the market price of the restricted stock and the price the employees paid for the restricted stock (zero in each of these cases)
multiplied by the number of shares of restricted stock granted. Compensation cost is being recognized over the period that ends when all risks of forfeiture have passed. Compensation expense is
amortized on a straight-line basis over the three year vesting period.

11

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

This report contains "forward-looking statements" within the meaning of the federal securities law. These forward-looking statements
include, among others, statements concerning the consummation of the proposed merger, its effect on future earnings, cash flow, or other operating results, the expected closing date of the merger, the
tax treatment of the proposed merger, the Company's outlook with regard to production levels, price realizations, expenditures for exploration and development, plans for funding operations and capital
expenditures, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The
forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the
statements.

These risks and uncertainties include, but are not limited to, fluctuations in the price the Company receives for its oil and gas production, reductions in the
quantity of oil and gas sold due to decreased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and
capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration
and development opportunities being greater or fewer than currently anticipated, and increased financing costs due to a significant increase in interest rates. These and other risks and uncertainties
affecting the Company are discussed in greater detail in this report and in other filings by the Company with the Securities and Exchange Commission.

Financial Results

For the Three Months Ended June 30,

For the Six Months Ended June 30,2002

2001

2002

2001(In thousands, except per share amounts)Revenues

$
21,574

$
29,886

$
37,939

$
69,657Net income


3,522


8,081


1,413


21,186Per sharebasic


0.25


0.58


0.10


1.52Per sharediluted


0.24


0.56


0.10


1.47


Net Income

We generated net income of $3.5 million, or $0.24 per diluted share, for the second quarter of 2002 compared with net income of $8.1 million, or
$0.56 per diluted share, for the second quarter of 2001. For the first six months of 2002, net income was $1.4 million, or $0.10 per diluted share, compared to net income of
$21.2 million, or $1.47 per diluted share, for the same period in 2001. The year-to-date 2002 net income includes $5.2 million of charges including charges for
our planned merger with Helmerich & Payne, Inc.'s (H&P) oil and gas division of $1.7 million, separation pay of $3.3 million and other unusual items of $0.2 million.
The decrease in income is also the result of a 46 percent decline in revenues due to lower oil and gas prices. The decline in income for the second quarter is attributable to a decrease in
revenues to $21.6 million for the second quarter of 2002 compared to $29.9 million for the same period of 2001.

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Results of Operations

Information about oil and gas sales, production volumes and prices are presented in the following table:

|                           |                         | For the Three Months Ended June 30, |        | For the Six Months Ended June 30,
|-------------------------- | ----------------------- | ----------------------------------- | ------ | ---------------------------------
|
|
|Gas sales                  |                         | $                                   | 12,107 |                                  
|Oil sales                  |                         |                                     | 9,129  |                                  
|Plant product sales        |                         |                                     | 299    |                                  
|                           |                         |                                     |        |                                  
|                           | Total oil and gas sales |                                     | $      | 21,535                           
|                           |                         |                                     |        |                                  
|Gas volumeMcf per day     |                         |                                     | 43,411 |                                  
|Gas priceper Mcf          |                         | $                                   | 3.06   |                                  
|Oil volumebarrels per day |                         |                                     | 4,222  |                                  
|Oil priceper barrel       |                         | $                                   | 23.76  |                                  

Oil
and gas sales declined 28 percent, or $8.3 million between the second quarter of 2002 and 2001 to $21.5 million. Compared to a year earlier, gas sales decreased
$7.6 million, oil sales decreased $0.7 million and plant product sales were essentially unchanged. The decline was due primarily to lower oil and gas prices during the second quarter of
2002. We produced combined oil and gas volumes of 68.7 MMcfe per day in the second quarter of 2002, a slight decrease from the 69.3 MMcfe per day produced in the second quarter of 2001.

For
the six months ended June 30, 2002, oil and gas sales dropped by $31.8 million, or 46 percent, to $37.8 million compared to the first six months of
2001. Gas sales declined $27.6 million, oil sales decreased $4.1 million and plant products decreased $0.1 million. Consistent with the quarter results, reduced oil and gas prices
resulted in the decreased revenues. Combined oil and gas production volumes were 68.7 MMcfe per day in the first six months of 2002 compared to 69.1 MMcfe per day in the first two quarters of
2001.

Driven
by lower prices in the second quarter of 2002, gas sales decreased $7.6 million, or 39 percent, as compared to $12.1 million in the same quarter of 2001.
Lower gas prices caused $7.2 million of the decrease and slightly lower production volume resulted in the remaining $0.4 million decrease. The average realized gas price for the second
quarter of 2002 was $3.06 per Mcf, compared to $4.87 per Mcf during the same three months of 2001. Daily gas production declined two percent to 43.4 MMcf versus 44.4 MMcf in the second quarter
of 2001. The slight fall in daily gas production is due to natural declines in wells in the Mid-continent region, partially offset by production from wells that were completed since
June 30, 2001.

Gas
sales for the first six months of 2002 of $20.8 million were also impacted by significantly lower gas prices. Gas prices decreased to $2.65 per Mcf in 2002 from $6.17
per Mcf in 2001 causing a $27.7 million decline in sales. Gas production was relatively constant at 43.5 Mcf per day in 2002 compared to 43.4 Mcf per day in 2001.

Oil
sales decreased $0.7 million, or seven percent, to $9.1 million in the second quarter of 2002 compared to the same period in 2001. Approximately $0.8 million of
the decrease is related to lower oil prices partially offset by $0.1 million increase in oil production. We produced an average of 4,222 barrels per day in 2002 compared to 4,150 barrels per
day in 2001. We realized an average price of
$23.76 per barrel in second quarter of 2002, compared to $25.92 per barrel in the second quarter of 2001.

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Oil
sales decreased $4.1 to $16.4 million in the first six months of 2002 compared to $20.5 million in the same period of 2001. Average oil prices declined to $21.66
per barrel in 2002 from $26.40 per barrel in 2001 resulting in $3.6 million of the decrease. Daily oil production was 4,195 barrels per day, a two percent decline from the 4,288 barrels per day
produced in 2001.

The
decline in gas and oil prices is a result of many factors, including, geopolitical events, economic growth, Organization of Petroleum Exporting Countries policies, weather,
electricity demand and others. We have not entered into any derivative contracts or hedges with respect to our production. As a result, the prices we receive reflect the impact of market forces.

As
the prices for oil and gas change, the components of our oil and gas sales fluctuate. In the first six months of 2002, our revenues came from the following product mix:
55 percent gas, 44 percent oil, and one percent plant products. This compares to the following mix for the first six months of 2001: 70 percent gas, 29 percent oil,
and one percent plant products. On a volumetric basis, we produced 63 percent gas and 37 percent oil in 2002 and 2001.

Costs and Expenses

Depreciation, depletion and amortization expense (DD&A) decreased ten percent between the second quarter of 2002 and 2001. On a unit of production basis, DD&A was
$1.37 per Mcfe in the second quarter of 2002 compared to $1.52 per Mcfe for the same period in 2001. DD&A for the six months ended June 30, 2002 decreased nine percent to $1.33 per Mcfe
compared to $1.45 per Mcfe for the same period in 2001. The declines are a result of a lower basis in our net oil and gas properties as a result of a full cost ceiling write-down recorded
at the end of 2001. Effective January 1, 2001, we changed our method of computing depletion on our oil and gas properties from the future gross revenue method to the
units-of-production method. DD&A for 2001 has been restated to reflect this change. We also include a small amount of fixed asset depreciation in this income statement line.

The
risk that we will be required to write-down the carrying value of our oil and gas properties increases when oil and gas prices are depressed or if we have substantial
downward revisions in our estimated proved reserves. Based on oil and gas prices in effect on June 30, 2002 and 2001, we were not required to record a full cost ceiling write-down
in the first six months of 2002 or 2001. Because of the volatility of oil and gas prices, no assurance can be given that we will not experience a ceiling test write-down in future
quarterly periods.

Our
lease operating expense (LOE) decreased seven percent between the second quarter of 2002 and the same period of 2001. On a unit of production basis, second quarter LOE decreased to
$0.65 per Mcfe in 2002 from $0.69 per Mcfe in 2001. Second quarter 2002 LOE included $0.4 million of workover expense, or $0.06 per Mcfe, compared to second quarter 2001 workover expense of
$0.7 million, or $0.11 per Mcfe. Excluding workover expenses, our routine operating expenses on a unit of production basis would be $0.59 and $0.58 per Mcfe for the second quarter of 2002 and
2001, respectively.

For
the six months, LOE increased by two percent between 2002 and 2001. Compared on a unit of production basis, year to date expenses increased to $0.67 per Mcfe in 2002 from
$0.66 per Mcfe in 2001. General LOE increased $0.4 million, partially offset by a $0.3 million decrease in workover expenses and ad valorem taxes.

Production
taxes for the second quarter of 2002 decreased 28 percent to $1.3 million from $1.8 million last year. The tax for 2002 equates to 6.3 percent of
oil and gas sales, or $0.21 per Mcfe. This compares to 6.3 percent of oil and gas sales, or $0.29 per Mcfe in 2001. The decline in production taxes, on a unit of production basis, for the
quarter was a result of the 28 percent decrease in oil and gas sales due to lower oil and gas prices. Production taxes for the first six months of 2002 and 2001

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were 6.3 percent of oil and gas sales, or $0.19 per Mcfe and $0.35 per Mcfe, respectively. The decrease on a per unit basis is the result of lower oil and gas prices.

General
and administrative expense (G&A) increased 153 percent between the second quarter of 2002 and 2001. On a unit basis, second quarter G&A increased to $0.34 per Mcfe
compared to $0.13 per Mcfe for the comparable period in 2001 primarily due to separation pay of $0.3 million and charges related to our proposed merger with H&P's oil and gas division of
$0.5 million. Excluding these charges, G&A on a unit of production basis would be $0.22 per Mcfe for the second quarter of 2002. G&A for the two quarters of 2002 increased 358% to $0.63 per
Mcfe compared to $0.14 per Mcfe in 2001. The increase includes $5.2 million of charges, or $0.42 per Mcfe, including charges for our planned merger with H&P's oil and gas division of
$1.7 million, separation pay of $3.3 million and other unusual items of $0.2 million. The additional increase in G&A is a consequence of increased rent at our Denver headquarters
of $0.02 per Mcfe and higher employee compensation and benefit expense. We have added ten employees since June 2001 owing to increased activity and the proposed merger with Cimarex. The cost of
our health insurance benefits also increased approximately 50 percent.

Interest
expense before capitalization was $0.3 million and $0.5 million for the second quarter of 2002 and 2001, respectively. We capitalized interest of
$0.1 million and $0.3 million in 2002 and 2001, respectively. Interest expense before capitalization was $0.6 million and $1.2 million for the first six months of
2002 and 2001, respectively. We capitalized interest of $0.2 and $0.7 million in each of those periods. The capitalized amounts were for borrowings associated with undeveloped leases. We paid
less interest in the first six months of 2002 because of average lower interest rates. Our average interest rate at June 30, 2002 was 3.1 percent compared to 5.1 percent at
June 30, 2001.

Income
tax expense totaled $1.1 million for the first six months of 2002 versus $13.8 million a year earlier. Tax expense was calculated using a combined federal and
state effective income tax rate of 38.5 percent in 2002 and 2001, adjusted for items that are non-deductible for income tax purposes.

Cash Flow and Liquidity

We primarily need cash to fund oil and gas exploration, development, and acquisition activities and to pay existing obligations and trade commitments related to
our oil and gas operations. Our primary sources of liquidity are cash flows from operating activities and proceeds from financing activities. The prices we receive for future oil and natural gas
production and the level of production will significantly impact future cash flows from operating activities. No prediction can be made as to the prices we will receive for our future oil and gas
production.

We
generated cash from operating activities of $18.3 million in the first six months of 2002, a decrease of 62 percent compared to the same period of 2001. Most of the
decrease was the result of lower oil and gas prices in 2002 compared to 2001.

Cash
expenditures for exploration and development (E&D) in the first quarter of 2002 totaled $20.7 million. In the six months ended June 30, 2002, we participated in
drilling 21 gross wells, with an overall success rate of 76 percent, or 71 percent on a net well basis. In the first six months of 2001, we made cash expenditures for E&D of
$43.5 million.

During
the first six months of 2002, we paid down $1.0 million to reduce our debt balance from the December 31, 2001 level. At June 30, 2002, we had
outstanding debt of $33 million and $57 million of unused borrowing capacity under our existing bank credit facility. The credit facility has a maturity date of December 31, 2002.
As such, we have classified the loan as current on our balance sheet.

Following
the merger with H&P's oil and gas division, the primary sources of liquidity are expected to be cash provided by operating activities, bank financing and access to other public
and private markets for either debt or equity capital.

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We
are currently in negotiations with a lead arranger to procure a $400 million secured revolving credit facility for the combined companies. Management expects that this facility
would close shortly following
the completion of the merger. We expect to ask the lead arranger on the revolving credit facility to initially seek commitments of only $200 million.

At
June 30, 2002, we had commitments on oil and gas wells approved for drilling or in the process of being drilled at June 30, 2002 of approximately $3.6 million. We
also had lease commitments for office space totaling $0.4 million for the remainder of 2002. All of the commitments were routine and were made in the normal course of our business. We believe
that cash on hand, net cash generated from operations and amounts available under our existing line of credit will be adequate to meet future liquidity needs, including satisfying our financial
obligations and funding our operations and exploration and development activities.

Critical Accounting Policies

We rely on management estimates and assumptions to prepare our financial statements in conformity with accounting principles generally accepted in the United
States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Significant
estimates with regard to our consolidated financial statements include the estimate of proved oil and gas reserve volumes and the related present value of estimated future
net cash flows. Each quarter end, proved oil and gas reserve quantities are based on estimates prepared by Key's engineers, in accordance with guidelines established by the SEC. Ryder Scott Company,
L.P., independent petroleum engineers, audits our oil and gas reserve estimates each year end. There are numerous uncertainties inherent in estimating quantities of proved reserves, projecting future
rates of production and the timing of development expenditures. Future oil and gas prices may vary significantly from the prices in effect as of June 30, 2002. The estimate of proved oil and
gas reserve volumes and the related present value of estimated future net cash flows can effect the charge for DD&A and the net carrying value of our oil and gas properties, as discussed below.

We
use the full cost method of accounting for our investment in oil and gas properties. As prescribed by full cost accounting rules, we capitalize all costs associated with property
acquisition, exploration, and development activities. Our exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and
development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of oil and
gas properties as well as other internal costs that can be specifically identified with acquisition, exploration and development activities are also capitalized.

Our
rate of recording DD&A is dependent upon our estimate of proved reserves. If the estimates of proved reserves decline, the rate at which we record DD&A increases. Such a decline in
reserves may result from lower market prices, which may make it non-economic to drill for and produce higher cost wells.

Proved
oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic producibility is supported by either actual
production or conclusive formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any, and (2) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available
geological and engineering data.

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Effective
January 1, 2001, we changed our method of amortizing capitalized costs from the future gross revenue method to the units-of-production method.
Key believes that the current accounting method is preferable in the circumstances because the units-of-production method results in a better matching of the costs of oil and
gas production against the related revenue received in periods of volatile prices for production, as have been experienced in recent periods. Additionally, the
units-of-production method is the predominant method used by full cost companies in the oil and gas industry, accordingly, the change improves the comparability of the
Company's financial statements with its peer group.

The
cumulative effect of the change, calculated as of January 1, 2001, was to decrease net income by $1.8 million, net of income taxes of $1.1 million, or $0.13 per
diluted share for the six months ended June 30, 2001. The financial results for the three and six months ended June 30, 2001 have been restated to reflect this change and
as a result, all periods are presented on a comparable basis.

In
accordance with full cost accounting rules, we are subject to a limitation on the capitalized costs of our oil and gas properties. Under these rules, capitalized costs of proved oil
and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and gas reserves, discounted at
10 percent, plus the lower of cost or fair value of unproved properties, as adjusted for related tax effects and deferred tax revenues (the "full cost ceiling limitation"). These rules
generally require pricing future oil and gas production at the unescalated oil and gas prices in effect at the end of each fiscal quarter and require a write-down if the "ceiling" is
exceeded. A full cost ceiling write-down is a non-cash charge to earnings. Moreover, the expense may not be reversed in future periods, even if higher oil and gas prices
subsequently increase the full cost ceiling limitation. Based on oil and gas prices in effect on June 30, 2002, we were not required to record a full cost ceiling limitation.

Our
results of operations are also highly dependent upon the prices we receive for natural gas and crude oil production, and those prices have been volatile and unpredictable in response
to changing market forces. Nearly all of our revenue is from the sale of gas and oil, so these fluctuations, positive and negative, can have a significant impact. If we wanted to attempt to smooth out
the effect of commodity price fluctuations, we could enter into various derivative or off-balance sheet arrangements, such as non-speculative hedge arrangements, commodity swap
agreements, forward sale contracts,
commodity futures, options, and other similar agreements relating to natural gas and crude oil. To date, we have not used any of these financial instruments or arrangements to mitigate commodity price
changes. If we decide to use derivative arrangements in the future, they could have a significant impact, positive or negative, on our results of operations and cash flows.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. We are currently
assessing the impact of this statement on our financial statements.

In
July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. We have not yet assessed whether this will have an impact
on Key.

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Future Trends and Significant Events

On February 23, 2002, Key, H&P, Helmerich & Payne Exploration and Production Co., a Delaware corporation and a wholly owned subsidiary of H&P,
which, after the Merger will be named Cimarex Energy Co. (Cimarex) and a wholly owned subsidiary of Cimarex (Merger Sub), entered into an Agreement and Plan of Merger (Merger Agreement). Under
the Merger Agreement and other related transaction documents: (i) H&P will transfer to Cimarex certain assets primarily related to the oil and gas exploration, production, marketing and sales
operations of H&P, (ii) Cimarex will assume certain liabilities of H&P and (iii) H&P will distribute to its stockholders 26,591,321 shares of Cimarex common stock upon distribution in
the pro rata spin-off of Cimarex (Spin-off). Immediately thereafter, Merger Sub will be merged with and into Key, with Key as the surviving subsidiary of Cimarex (Merger) and
each share of our common stock will be exchanged for one share of Cimarex common stock.

Upon
completion of the transaction, holders of H&P common stock will own approximately 65 percent and Key stockholders will own approximately 35 percent of the common stock
of Cimarex, in each case on a diluted basis.

The
Merger Agreement has been unanimously approved by the respective Boards of Directors of Key and H&P. In July 2002, H&P received a ruling from the Internal Revenue Service
qualifying the Spin-off as a tax-free transaction. The Merger is subject to, among other things, the completion of the Spin-off and the approval of our
stockholders. The Merger is anticipated to close prior to the end of September 2002. Cimarex also plans to change to a fiscal year that ends on December 31 versus the
September 30 year-end presently used by Cimarex.

As
we move forward with the planned merger with Cimarex, we anticipate exploration and development expenditures of approximately $20 to $25 million for the last half of 2002. The
amount and allocation of our future capital expenditures depends on a number of factors, including the impact of oil and gas prices on available cash flow and investment opportunities, availability of
rigs, the availability of debt and equity capital, the availability of attractive drilling opportunities and the rate in which we evaluate these opportunities and our drilling success. We plan to fund
these expenditures with cash provided by operating activities, supplemented by borrowings under our bank line of credit to the extent necessary.

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ITEM 3Quantitative and Qualitative Disclosures About Market Risk

Price Fluctuations

Our results of operations are highly dependent upon the prices we receive for natural gas and crude oil production, and those prices are constantly changing in
response to market forces. Nearly all of our revenue is from the sale of gas and oil, so these fluctuations, positive and negative, can have a significant impact.

If
we wanted to attempt to smooth out the effect of commodity price fluctuations, we could enter into non-speculative hedge arrangements, commodity swap agreements, forward
sale contracts, commodity futures, options and other similar agreements relating to natural gas and crude oil. To date, we have not used any of these financial instruments to mitigate commodity price
changes.

Interest Rate Risk

Our reported earnings are impacted by changes in interest rates. Any fluctuation in the rate will directly affect the amount of interest expense we report. At
June 30, 2002, we had $33 million of debt outstanding at an average interest rate of 3.09 percent. At our election, our interest charges are based on either the prime rate or the
LIBOR rate plus a margin predetermined by our debt agreement. Assuming there is no change in the balance outstanding for the remainder of 2002, a ten percent change in the average interest rate would
impact annual interest expense by approximately $51,000. As the interest rate is variable and is reflective of current market conditions, the carrying value of our debt approximates its fair value.

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PART IIOTHER INFORMATION

ITEM 6EXHIBITS AND REPORTS ON FORM 8-K



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SIGNATURE

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

August 13,
2002

| |  | KEY PRODUCTION COMPANY, INC.
| |  | ----------------------------
| |  | By:                         
| |  | By:                         

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