<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                        
                                   FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________


Commission file number    0-17162
                        -----------


                         KEY PRODUCTION COMPANY, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


Delaware                                                         84-1089744
--------------------------------------------------------------------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)

707 Seventeenth Street, Suite 3300  Denver, Colorado              80202-3404
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                          (Zip Code)

Registrant's Telephone Number, Including Area Code    303/295-3995  .
                                                    ----------------
One Norwest Center, 20th Floor
1700 Lincoln Street, Denver, Colorado                             80203-4520
--------------------------------------------------------------------------------
(Previous Address of Principal Executive Offices)

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

The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of March 31, 1998, is 11,504,080.

<PAGE>
 
                         PART 1  FINANCIAL INFORMATION
                         -----------------------------

ITEM 1  FINANCIAL STATEMENTS
----------------------------

                         KEY PRODUCTION COMPANY, INC.
                       CONSOLIDATED STATEMENT OF INCOME
                                  (Unaudited)
 
                                              For the Three Months
                                                 Ended March 31,
                                             ----------------------
(In thousands, except per share data)           1998         1997
                                             ----------  ----------
Revenues:
 Oil and gas production revenues             $    9,786  $   11,039
 Other revenues                                      25          71
                                             ----------  ----------
 
                                                  9,811      11,110
                                             ----------  ----------
 
Operating Expenses:
 Depreciation, depletion and amortization         3,960       3,154
 Operating costs                                  2,827       2,753
 Administrative, selling and other                  452         409
 Financing costs:
   Interest costs                                   290         189
   Interest income                                  (33)        (24)
                                             ----------  ----------
 
                                                  7,496       6,481
                                             ----------  ----------
 
Income Before Income Taxes                        2,315       4,629
 
Provision for Income Taxes                          880       1,759
                                             ----------  ----------
 
Net Income                                   $    1,435  $    2,870
                                             ==========  ==========
 
Basic Earnings Per Share                     $      .12  $      .25
                                             ==========  ==========
 
DILUTED EARNINGS PER SHARE                   $      .12  $      .24
                                             ==========  ==========
 

        The accompanying notes to consolidated financial statements are
                      an integral part of this statement.

                                      -2-
<PAGE>
 
                         KEY PRODUCTION COMPANY, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (Unaudited)
 
 
                                                   For the Three Months
                                                      Ended March 31,
                                                   --------------------
(In thousands)                                       1998        1997
                                                   --------    -------- 
Cash Flows from Operating Activities:
 Net income                                        $  1,435     $ 2,870
 Adjustment to reconcile net income to net cash
   provided by operating activities:
   Depreciation, depletion and amortization           3,960       3,154
   Deferred income taxes                                787       1,574
 
 Changes in operating assets and liabilities:
   Decrease in receivables                            2,956       2,798
   Decrease in prepaid expenses and other                26         243
   Increase (decrease) in accounts payable
     and accrued expenses                            (4,447)      1,075
   Decrease in long-term property liabilities
     and other                                          (40)       (235)
                                                   --------    -------- 
 
     Net cash provided by operating activities        4,677      11,479
                                                   --------    -------- 
 
Cash Flows from Investing Activities:
 Oil and gas exploration and development
   expenditures                                      (9,169)     (5,739)
 Acquisition of oil and gas properties                  (49)       (404)
 Proceeds from sale of oil and gas properties             -          44
 Other capital expenditures                            (126)        (66)
                                                   --------    -------- 
 
     Net cash used by investing activities           (9,344)     (6,165)
                                                   --------    -------- 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Long-term borrowings                                 4,000       1,000
 Payments on long-term debt                               -      (4,500)
 Payments to acquire treasury stock                       -          (1)
                                                   --------    -------- 
 
     Net cash provided (used) by financing
     activities                                       4,000      (3,501)
                                                   --------    -------- 
 
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                  (667)      1,813
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR        3,349       1,581
                                                   --------    -------- 
 
Cash and Cash Equivalents at End of Period         $  2,682    $  3,394
                                                   ========   =========
 

        The accompanying notes to consolidated financial statement are
                      an integral part of this statement.

                                      -3-
<PAGE>
 
                         KEY PRODUCTION COMPANY, INC.
                          CONSOLIDATED BALANCE SHEET
                                 (unaudited) 

                                                March 31,   December 31,
(In thousands)                                     1998         1997
                                               -----------  ------------
 
             ASSETS
 
CURRENT ASSETS:
 Cash and cash equivalents                     $     2,682  $      3,349
 Receivables                                         7,298        10,254
 Prepaid expenses and other                            354           380
                                               -----------  ------------
 
                                                    10,334        13,983
                                               -----------  ------------
 
OIL AND GAS PROPERTIES, ON THE BASIS OF
 FULL COST ACCOUNTING:
   Proved properties                               146,081       138,447
   Unproved properties and properties
     under development, not being amortized         20,736        18,624
                                               -----------  ------------
                                                   166,817       157,071
   Less  accumulated depreciation,
     depletion and amortization                    (45,775)      (41,919)
                                               -----------  ------------
                                                   121,042       115,152
                                               -----------  ------------
 
OTHER ASSETS, NET                                    1,534         1,512
                                               -----------  ------------
 
                                               $   132,910  $    130,647
                                               ===========  ============
 
     LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
 Accounts payable                              $     6,424  $     11,290
 Accrued exploration and development                 1,813         1,285
 Accrued lease operating expense and other           1,085           729
                                               -----------  ------------
                                                     9,322        13,304
                                               -----------  ------------
 
Long-Term Debt                                      39,000        35,000
                                               -----------  ------------
 
NONCURRENT LIABILITIES
 Deferred income taxes                              16,490        15,703
 Long-term property liabilities and other            1,689         1,729
                                               -----------  ------------
                                                    18,179        17,432
                                               -----------  ------------
 
STOCKHOLDERS' EQUITY:
 Common stock, $.25 par value, 50,000,000
   shares authorized, 11,776,190 shares
   issued                                            2,944         2,944
 Paid-in capital                                    37,390        37,380
 Retained earnings                                  28,600        27,165
 Treasury stock at cost, 272,110, and
   277,835 shares, respectively                     (2,525)       (2,578)
                                               -----------  ------------
                                                    66,409        64,911
                                               -----------  ------------
                                               $   132,910  $    130,647
                                               ===========  ============
 
        The accompanying notes to consolidated financial statements are
                      an integral part of this statement.

                                      -4-
<PAGE>
 
                         KEY PRODUCTION COMPANY, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                  (Unaudited)
 
 
                                                                      TOTAL
                                                                      STOCK-
                              COMMON   PAID-IN  RETAINED  TREASURY   HOLDERS'
                              STOCK    CAPITAL  EARNINGS   STOCK      EQUITY
                              -------  -------  --------  --------   --------
                                  (In thousands, except per share data)
 
BALANCE, DECEMBER 31, 1997    $2,944   $37,380   $27,165   $(2,578)   $64,911
 Net income                        -         -     1,435         -      1,435
 Treasury stock issued             -        10         -        53         63
                              ------   -------   -------   -------    -------
BALANCE, MARCH 31, 1998       $2,944   $37,390   $28,600   $(2,525)   $66,409
                              ======   =======   =======   =======    =======
 



        The accompanying notes to consolidated financial statements are
                      an integral part of this statement.

                                      -5-
<PAGE>
 
                         KEY PRODUCTION COMPANY, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


     The financial statements included herein have been prepared by Key
Production Company, Inc. (Key or the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited statements.  All such adjustments are of a normal, recurring
nature except as disclosed herein.  Certain information, accounting policies,
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.

BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of 
Key and the accounts of its wholly-owned subsidiaries: Brock Exploration 
Corporation, Brock Oil and Gas Corporation and Brock Gas Systems and Equipment, 
Inc.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

INCOME TAXES

     Income tax expense consisted of the following:
 
                          Three Months Ended March 31,
                          ----------------------------
                           1998                  1997 
                          ------                ------
 
Current Taxes:
 Federal                  $    -                $    -
 State                        93                   185
 
Deferred Taxes:              787                 1,574
                          ------                ------
 
                          $  880                $ 1,759
                          ======                =======

                                      -6-
<PAGE>
 
NET INCOME PER SHARE

     The Company adopted Financial Accounting Standards No. 128, "Earnings per
Share," on December 15, 1997. The new standard replaces "primary earnings per
share" with "basic earnings per share" and redefines "diluted earnings per
share."  Basic earnings per share is computed based on the monthly weighted-
average number of shares outstanding during the period.  The weighted-average
number of common shares used in computing basic earnings per share was
11,498,413 and 11,454,527 for 1998 and 1997, respectively.  Diluted earnings per
share is computed based on the weighted-average number of common shares
outstanding during the periods and the assumed exercise of dilutive common stock
equivalents (stock options) using the treasury stock method.  Dilutive
equivalents assumed to have been exercised totaled 681,237 and 724,701 for 1998
and 1997, respectively.  The effect on this previously reported earnings per
share data was as follows:
 
 
                                           For the Three Months
     Per Share Amounts                     Ended March 31,1997
     -----------------                     --------------------
 
     Primary EPS as reported                     $    .24
     Effect of SFAS No. 128                           .01
                                                 --------
     Basic EPS as restated                       $    .25
                                                 ========
 
     Fully diluted EPS as reported               $    .24
     Effect of SFAS No. 128                             -
                                                 --------
     Diluted EPS as restated                     $    .24
                                                 ========

STATEMENT OF CASH FLOWS

     The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.  These
investments earned 5.5 and 5.9 percent rates of interest at March 31, 1998 and
December 31, 1997, respectively, with cost approximating market.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
                                           For the Three Months
                                              Ended March 31,
                                            1998          1997
                                           ------        ------ 
 
Cash paid during the period for:
 Interest (net of amounts capitalized)     $  252        $  368
 Income taxes (net of refunds received)    $    3        $    6

                                      -7-
<PAGE>
 
ITEM 2  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FINANCIAL RESULTS

     Key is reporting first quarter net income of $1.4 million, or $.12 per
diluted share.  This is down 50 percent from the $2.9 million and $.24 per
diluted share reported for the first quarter of 1997.  These results were based
on revenues of $9.8 million and $11.1 million for 1998 and 1997, respectively.

     During the first quarter of 1998, Key generated record equivalent gas
production.  Additions to production from new drilling helped to counter the
impact of extremely low oil and gas prices for this period.
 
RESULTS OF OPERATIONS
 
                               For the Three Months
                                  Ended March 31,
                                 1998        1997
                               --------    --------
Selected Oil and Gas
Operating Statistics
--------------------
 
Gas Volume  Mcf per day          33,057      28,367
Gas Price  Per Mcf             $   2.08    $   2.66
Oil Volume  Barrels per day       2,808       2,229
Oil Price  Per barrel          $  13.45   $   20.41
Full Cost Amortization Rate        39.4%       28.2%


     Oil and gas revenues decreased by 11 percent between the first quarters of
1998 and 1997 despite hefty increases to production.  Key's oil and gas revenues
were $9.8 million for the first quarter of 1998, compared to $11.0 million for
the first quarter of 1997.

     Gas sales slipped 9 percent to $6.2 million for 1998.  The $.6 million
decrease is composed of a negative $1.7 million price variance and a positive
$1.1 million boost from production.  Average daily gas volumes climbed from
28,367 Mcf per day in 1997 to 33,057 Mcf per day in 1998.  Unfortunately, Key's
average gas price dropped from $2.66 per Mcf in 1997 to $2.08 per Mcf in 1998.
Gas volumes continue to rise due to the success of the Company's drilling
program.

     Oil sales for the current quarter of $3.4 million are down 17 percent from
the $4.1 million reported for the same quarter a year ago.  Average daily
production rose from 2,229 barrels per day in 1997 to 2,808 barrels per day in
1998, adding $1.1 million in value to sales.  Approximately 73 percent of the
oil volume increase is from the acquisition of producing oil properties in the
third quarter of 1997.  On the downside, Key's average oil price plummeted from
$20.41 per barrel in 1997 to $13.45 in 1998.  Price had a negative impact of
$1.8 million on sales.

     Product sales from gas processing plants contributed approximately $210,000
and $162,000 to oil and gas production revenues in 1998 and 1997, respectively.
In the first quarter of 1998, Key's oil and gas revenues are derived from the
following product mix: 35 percent oil, 63 percent gas and 2 percent from plant
product sales.  Similarly, the product mix for 1997 was: 37 percent oil, 61
percent gas and 2 percent from plant product sales.

                                      -8-
<PAGE>
 
     Other revenues were approximately $25,000 and $71,000 for the first quarter
of 1998 and 1997, respectively.  Key's primary source of other revenue for 1997
was income from a pipeline acquired in the 1996 Brock acquisition.  This
pipeline was sold in March 1997, resulting in a decrease to other revenues
between 1997 and 1998.

     Depreciation, depletion and amortization (DD&A) expense increased 26
percent between the first quarters of 1998 and 1997 despite an 11 percent
decrease to oil and gas revenues. The depletion rate as a percentage of oil and
gas sales increased from 28.2 percent in the first quarter of 1997 to 39.4
percent in the same period of 1998 largely due to unfavorable commodity prices.

     Operating expenses increased 3 percent between the first quarters of 1997
and 1998 while equivalent production increased by 20 percent. On a unit of
production basis, operating expenses declined from $.73 per EMcf in 1997 to $.63
per EMcf in 1998. (Oil is compared to natural gas in terms of equivalent
thousand cubic feet, "EMcf." One barrel of oil is the energy equivalent of six
Mcf of natural gas.)

     General, administrative and other costs (G&A) increased by 11 percent
between 1998 and 1997. Based on the increase in sales volumes, this translates
to a $.01 per EMcf decrease to G&A between 1997 and 1998. Due to certain
economies of scale and full cost accounting rules, which provide for the
capitalization of direct overhead related to acquisition, exploration and
development activities, the Company was able to maintain levels of (G&A) expense
while managing a growing asset base.

     Interest expense before capitalization was $625,000 and $360,000 for first
quarter 1998 and 1997, respectively.  Key capitalized interest of $335,000 and
$171,000 in 1998 and 1997, respectively.  These amounts are for borrowings
associated with undeveloped leasehold.  The long-term debt balance was $39.0
million at March 31, 1998, compared to $19.0 million at March 31, 1997.

     Key is using an effective tax rate of 38 percent for 1998 and 1997.

CASH FLOW AND LIQUIDITY

     Key's primary needs for cash are to fund oil and gas exploration,
development and acquisition activities and for payment of existing obligations
and trade commitments related to oil and gas operations. The Company's primary
sources of liquidity are cash flows from operating activities and proceeds from
financing activities.

     Cash from operating activities for the first quarter of 1998 was $4.7
million, down 59 percent from the $11.5 million reported a year ago.  Most of
the variance stems from a reduction of accounts payable balances and a decrease
in net income.

     Expenditures for exploration and development for the first quarter of 1998
totaled $9.2 million, or double the cash provided by operating activities.  This
is a 60 percent increase over the $5.7 million spent in the first quarter of
1997.  So far in 1998, exploration and development projects have been funded
with a combination of cash from operations and long-term-debt.  In the first
quarter of 1997, exploration and development projects were funded with cash from
operations.

                                      -9-
<PAGE>
 
     In the first quarter of 1998, the Company borrowed $4.0 million to finance
exploration and drilling activities in excess of cash generated by operating
activities.  In the first quarter of 1997, the Company retired a net $3.5
million of long-term debt using cash from operating activities.

     The Company's ratio of current assets to current liabilities was 1.1 to 1
at March 31, 1998 and December 31, 1997.

FUTURE TRENDS

     Key expects to continue to expand its drilling program for the remainder of
1998.  First quarter expenditures for exploration and development are
significantly ahead of last year, $9.2 million compared to $5.7 million for the
first quarter of 1997.  Exploration for the year is expected to outpace 1997.
The Company expects its budget for drilling expenditures to increase to
approximately $34 million compared to $24.7 million spent for drilling in 1997.
Total expenditures for exploration and development, including land and seismic
costs, are expected to increase to $46.1 million.  This compares to $40.5
million spent in 1997.

     Exploration efforts will continue in the company's five primary focus
areas: the Mid-Continent, Rocky Mountains, California, North Texas and the Gulf
Coast. Drilling has commenced on the Company's salt basin play in Mississippi
and several locations are expected to be drilled during the remainder of the
year. The first well on the Company's West Gueydan prospect in south Louisiana
is currently being drilled and several other drilling locations have been
identified.

     Activity is increasing in North Texas, Key's newest region.  The company
became active in the Hardeman Basin of north-central Texas through a joint-
venture agreement entered into in the fall of 1997.  To date four oil wells have
been completed as producers.  Key will operate all wells drilled under the
exploration joint venture agreement.

     California continues to be one of the Company's most active exploration
regions.  However, hampered by inclement weather on the West Coast, drilling
activity was somewhat behind schedule for the first quarter.  Gas sales were
also affected by pipeline capacity constraints.  The two productive wells
drilled in the area during 1998 will begin producing once expansion of the
Company's gas gathering facility is completed late in the second quarter.
The total number of wells drilled in 1998 is expected to be significantly higher
than the number drilled in 1997.

     Oil and gas prices declined since yearend 1997 and continue to be
depressed.  These price declines had a significant negative impact on first
quarter 1998 revenue.  Although increased production from new wells will help
mitigate the effect, low product prices will have a negative impact on revenue
and net income. It is impossible to predict, with any substantial degree of
accuracy, the trend in, or level of, future oil and gas prices and their impact
on the Company's reported results in future periods.

     Lower product prices also impact the calculation of the limitation on
capitalized costs under the full cost accounting rules of the Securities and
Exchange Commission.  Application of this rule generally requires pricing future
revenues at the unescalated prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling' is exceeded, even if prices decline
for only a short period of time.  If a write-down were required, the charge to
earnings would not impact cash flow from operating activities. Key has not taken
any such writedowns in the past.

                                      -10-
<PAGE>
 
     On April 15, 1998, the Company amended certain terms of its existing
revolving credit facility with NationsBank of Texas, N.A (Second Amendment to
the Credit Agreement).  The Second Amendment to the Credit Agreement increased
the maximum loan amount authorized under the facility from $50 million to $75
million and increased the borrowing base from $42 million to $55 million.  No
other significant terms were modified.  The Second Amendment to the Credit
Agreement is being filed as an exhibit to this Form 10-Q.

     The Company will continue to review merger and acquisition opportunities.
Potential acquisitions or mergers with the economic and strategic attributes
necessary to facilitate the profitable growth of the Company will be actively
pursued.

     Management believes that cash on hand, net cash generated from operations
and amounts available under the Company's revolving line of credit will be
adequate to meet future liquidity needs, including satisfying the Company's
financial obligations and funding operations, exploration and development
activities.

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

     This report contains "forward-looking statements" within the meaning of the
federal securities laws.  These forward-looking statements include, among
others, statements concerning the Company's outlook for the remainder of 1998
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 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.

                                      -11-
<PAGE>
 
PART II  OTHER INFORMATION
--------------------------


ITEM 1.  LEGAL PROCEEDINGS
-------  -----------------

     None.

ITEM 2.  CHANGES IN SECURITIES
-------  ---------------------

     None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
-------  -------------------------------

     None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
-------  -------------------------------------------------------

     None.

ITEM 5.  OTHER INFORMATION
-------  -----------------

     None.

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

     (a) Exhibits:

         10.20  Second Amendment to Credit Agreement between Key Production
                Company, Inc. and NationsBank of Texas, N.A., dated April 15,
                1998.

         27.1   Financial Data Schedule for Commercial and Industrial Companies
                per Article 5 of Regulation S-X for the quarter ended March 31,
                1998.

     (b) Reports on Form 8-K:

         None.

                                      -12-
<PAGE>
 
                                  SIGNATURES



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


Dated May __, 1998


                                      KEY PRODUCTION COMPANY, INC.



                                      
                                      ------------------------------------------
                                      Monroe W. Robertson
                                      Senior Vice President and Secretary
                                      (Principal Financial Officer)



                                      
                                      ------------------------------------------
                                      Cathy L. Anderson
                                      Controller
                                      (Principal Accounting Officer)

                                      -13-