<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                   FORM 10-Q
(Mark One)
           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  XX       SECURITIES EXCHANGE OF 1934
 ----
           For the quarterly period ended July 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 : 333-19013

                            Alliance Resources PLC
            (Exact name of registrant as specified in its charter)

       England and Wales                             73-1405081
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
Incorporation or organization)


4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma              74135
(Address of principal executive offices)                      (Zip Code)

 
      Registrant's telephone number, including area code  (918) 491-1100


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 Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X   No 
    -----    -----

     As of August 31, 1998, there were 31,209,408 shares of the Registrant's
single class of common stock issued and outstanding.
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                  INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD
                              ENDED JULY 31, 1998

<TABLE> 
<S>                                                                                                                <C> 
PART I - FINANCIAL INFORMATION
       Item 1. Financial Statements.                                                                               Page
                  Consolidated Condensed Balance Sheets as of
                  July 31, 1998 and April 30, 1998                                                                   2
       
                  Consolidated Condensed Statements of Operations
                  for the three months ended July 31, 1998 and 1997                                                  4
       
                  Consolidated Condensed Statement of Stockholders'
                  Equity for the three months ended July 31, 1998 and the year ended April 30, 1998                  5
       
                  Consolidated Condensed Statements of Cash Flows
                  for the three months ended January 31, 1998 and 1997                                               6
       
                  Notes to Consolidated Condensed Financial Statements                                               8
       
       Item 2.    Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.                                                               9       
PART II - OTHER INFORMATION                                                                                           
       Item 1.    Legal Proceedings                                                                                 16

                  The information called  for by  Item 2.  Changes in Securities,  Item 3.  Default Upon
          Senior Securities,  Item 4.  Submission of Matters to a Vote of Security Holders,  Item 5.  Other
          Information has been omitted as either inapplicable or because the answer thereto is negative.

       Item 6.    Exhibit and Reports on Form 8-K                                                                   16  

SIGNATURES                                                                                                          17
</TABLE> 

                                       1
<PAGE>
 
ITEM 1.  FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 
                                              ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                                               CONSOLIDATED CONDENSED BALANCE SHEETS

                                                                              JULY 31, 1998                         APRIL 30, 1998
                                                                               (UNAUDITED)                             (AUDITED)
                                                                             ===============                       ================
<S>                                                                          <C>                                   <C> 
ASSETS

Current assets:
          Cash                                                                $      262,048                        $       408,439
          Accounts receivable - trade                                              1,784,593                              2,132,654
          Other current assets                                                        11,940                                 73,977
                                                                             ---------------                       ----------------
          Total current assets                                                     2,058,581                              2,615,070
                                                                             ---------------                       ----------------

Property, plant, and equipment, at cost:
          Oil and gas properties (using full cost method)                         42,858,264                             43,200,388
          Other depreciable assets                                                 1,039,636                              1,029,118
                                                                             ---------------                       ----------------
                                                                                  43,897,900                             44,229,506

          Less accumulated depreciation and depletion                            (14,930,756)                           (14,421,400)
                                                                             ---------------                       ----------------

          Net property, plant and equipment                                       28,967,144                             29,808,106
                                                                             ---------------                       ----------------

Other assets:
          Other assets                                                               144,989                                144,989
          Deferred acquisition costs                                               3,062,916                                970,305
          Deferred loan costs, less accumulated amortization                         966,326                              1,221,650
                                                                             ---------------                       ----------------
          Total other assets                                                       4,174,231                              2,336,944
                                                                             ---------------                       ----------------

TOTAL ASSETS                                                                  $   35,199,956                        $    34,760,120
                                                                             ===============                       ================ 

</TABLE> 
See accompanying notes to consolidated condensed financial statements.


                                       2
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                                         CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED

                                                                              JULY 31, 1998                        APRIL 30, 1998
                                                                                (UNAUDITED)                            (AUDITED)
                                                                             ---------------                       ----------------
<S>                                                                          <C>                                   <C> 
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
          Accounts payable                                                    $    8,926,597                        $     8,972,704
          Accrued expenses payable                                                   933,516                                847,190
          Current portion long-term debt                                           3,250,000                              2,275,000
                                                                             ---------------                       ----------------
          Total current liabilities                                               13,110,113                             12,094,894

Long-term Liabilities:
          Long-term debt                                                          19,316,762                             18,791,762
          Other liabilities                                                            3,568                                139,626
          Convertible subordinated unsecured loan notes                            1,550,700                              1,550,700
                                                                             ---------------                       ----------------
          Total liabilities                                                       33,981,143                             32,576,982
                                                                             ---------------                       ----------------

Stockholders' equity:
          Common stock-par value 40 pence;
          46,000,000 shares authorized representing:
                     Common stock issued and outstanding;
                     31,209,408 at July 31, 1998                                  
                     and April 30, 1998, respectively                             20,114,634                             20,114,634
          Additional paid-in capital                                               5,911,050                              5,911,050
                                                                             ---------------                       ----------------
          Accumulated deficit                                                    (24,806,871)                           (23,842,546)
                                                                             ---------------                       ----------------

          Total stockholders' equity                                               1,218,813                              2,183,138
                                                                             ---------------                       ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $   35,199,956                        $    34,760,120
                                                                             ===============                       ================
</TABLE> 

See accompanying notes to consolidated condensed financial statements.


                                       3
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                                          CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

                                                              Three                                  Three
                                                           Months Ended                           Months Ended
                                                           July 31, 1998                          July 31, 1997
                                                            (Unaudited)                            (Unaudited)
                                                        ------------------                       ----------------
<S>                                                     <C>                                      <C> 
Revenue:
          Oil and gas revenue                             $   1,917,966                            $ 2,727,336

                     Total operating income                   1,917,966                              2,727,336
                                                        ------------------                       ----------------

Operating expenses:
          Lease operating expense                               969,355                              1,173,644
          Depreciation, depletion, and amortization             509,355                                652,489
          Loss on commodity derivatives                               -                                268,571
          General and administrative expense                    848,422                              1,265,849
                                                        ------------------                       ----------------

                     Total operating expenses                 2,327,132                              3,360,553

Net operating loss                                             (409,166)                              (633,217)

Other income (expense):
          (Loss)\gain on sale of assets                          (9,184)                                18,331
          Interest expense                                     (668,450)                              (682,073)
          Interest income                                         5,259                                 20,609
          Miscellaneous income (expense)                        132,394                                325,153
                                                        ------------------                       ----------------

Net loss from continuing operations before income taxes        (949,147)                              (951,197)

Income tax expense                                                    -                                      -
                                                        ------------------                       ----------------
Net income (loss)                                              (949,147)                              (951,197)

Preferred stock dividends                                             -                                      -
                                                        ------------------                       ----------------

Net loss for common shareholders                          $    (949,147)                           $  (951,197)
                                                        ==================                       ================

Loss per share for common shareholders                    $       (0.03)                           $     (0.03)
                                                        ==================                       ================

Weighted average number of shares outstanding                31,209,408                             31,052,603
                                                        ==================                       ================ 

</TABLE> 
See accompanying notes to consolidated condensed financial statements.

                                       4
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
           Consolidated Condensed Statements of Stockholders' Equity
                       Three Months Ended July 31, 1998







<TABLE> 
<CAPTION> 
                                     Common Stock
                             ---------------------------       Additional      Retained Earnings           Total
                               Number of        Par             Paid-In          (Accumulated          Stockholders'
                                Shares         Value            Capital             Deficit)              Equity 
                             ============  =============      ============    ===================     ===============
<S>                          <C>           <C>                <C>             <C>                     <C> 
Balance at April 30, 1998     31,209,408   $ 20,114,634       $ 5,911,050       $ (23,842,546)         $  2,183,138

Foreign exchange                       -              -                 -             (15,178)         $    (15,178)

Net loss current period                -              -                 -            (949,147)         $   (949,147)

                             -----------   ------------       -----------     ---------------         -------------  
Balance July 31, 1998         31,209,408   $ 20,114,634       $ 5,911,050       $ (24,806,871)         $  1,218,813
                             ===========   ============       ===========     ===============         =============  
</TABLE> 
See accompanying notes to consolidated condensed financial statements.


                                       5

<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE> 
<CAPTION> 
                                                                            Three                    Three
                                                                        Months Ended             Months Ended
                                                                        July 31, 1998            July 31, 1997
                                                                         (Unaudited)              (Unaudited)
                                                                        -------------            -------------
<S>                                                                     <C>                      <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
           Net loss                                                      $ (949,147)              $ (951,197)
           Adjustments to reconcile net loss to net                                            
           cash provided by (used in) operating activities:                                    
               Depreciation, depletion and amortization                     509,355                  652,489
               Amortization of deferred loan costs                          255,324                  140,847
               (Loss)\gain on sale of assets                                  9,184                  (18,331)
                                                                                               
                                                                                               
           Changes in assets and liabilities, net of effects                                   
           from acquisition:                                                                   
               Accounts receivable                                          348,061                  544,454
               Accounts payable                                          (1,074,397)              (1,631,751)
               Accrued expenses payable                                      86,326                      888
               Other assets                                                  62,037                  168,205
               Other liabilities                                           (136,058)              (1,578,180)
                                                                        -----------              -----------
Net cash (used in) provided by operating activities                        (889,315)              (2,672,576)
                                                                        -----------              -----------
                                                                                               
CASH FLOWS FROM INVESTING ACTIVITIES:                                                          
               Purchases of property and equipment                         (266,233)                (638,835)
               Proceeds from sale of property and equipment                 379,809                2,803,501
               Effect of LaTex Acquisition                                        -                  192,819
               Deferred acquisition costs                                  (870,652)                       -
                                                                        -----------              -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                  (757,076)               2,357,485
                                                                        -----------              -----------
</TABLE> 

See accompanying notes to consolidated condensed financial statements.

                                       6
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE> 
<CAPTION> 
  
                                                                                Three                      Three
                                                                            Months Ended                Months Ended
                                                                           July 31, 1998               July 31, 1997
                                                                            (Unaudited)                 (Unaudited)
                                                                           -------------               -------------
<S>                                                                        <C>                         <C> 
CASH FLOWS FROM FINANCING ACTIVITIES:
           Deferred loan and reorganization costs                            $        -                 $  (21,218)
           Proceeds from notes payable                                        1,500,000                  1,969,660
                                                                           ------------                -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                     1,500,000                  1,948,442
                                                                           ------------                -----------
Net increase in cash and cash equivalents                                      (146,391)                 1,633,351
Cash and cash equivalents at beginning of period                                408,439                     72,948
                                                                           ------------                -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      262,048                  1,706,299
                                                                           ============                ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           Cash paid during the period for:
               Interest                                                         400,554                    221,239
               Income taxes                                                           -                          -

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services and bonus                                            -                    203,000
Issuance of convertible loan notes                                                    -                    150,000
Ordinary shares due in settlement of advisory fees,                                   -                    150,000
           as of July 31, 1997
Common stock issued on acquisition of LaTex                                           -                  4,039,339
Common stock issued for overriding royalty                                            -                  2,371,300
Convertible loan notes issued for overriding royalty                                  -                  1,400,700

</TABLE> 
See accompanying notes to consolidatd condensed financial statements.

                                       7
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Alliance Resources PLC (the "Company" or "Alliance") is organized as a public
limited  company under the laws of England and Wales.  Alliance is a London-
based holding company of a group whose principal activities are the exploration,
development, and production of oil and gas and the acquisition of producing oil
and gas properties.  Alliance was incorporated and registered under the laws of
England and Wales on August 20, 1990.  Alliance's corporate headquarters are at
Kingsbury House, 15-17 King Street, London SW1Y 6QU, England, but its operations
office is located at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.

Interim Reporting

The interim consolidated condensed financial statements reflect all adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented.  All such adjustments are of a
normal recurring nature.  Due to the seasonal nature of the business, the
results of operations for the three months ended July 31, 1998, are not
necessarily indicative of the results that may be expected for the year ended
April 30, 1999.


B.  SIGNIFICANT EVENTS

On July 13, 1998, Alliance mailed a Proxy Statement to its U.S. shareholders
notifying them of a proposed acquisition of Difco Limited ("Difco"), in exchange
for at least 7,020,825 and as many as 28,083,300 ordinary shares of the Company,
the acquisition by Difco of certain oil and gas interests in the East Irish Sea
(the "U.K. Interests") from Burlington Resources (Irish Sea) Limited for a cash
consideration of approximately $34.0 million (collectively, the "Acquisitions").
The Acquisitions were originally expected to be funded by the issuance of senior
notes and related matters.  Additional information relating to the Acquisitions
can be obtained by reviewing the proxy statement mentioned earlier

On July 30, 1998 the Company announced that the issue of $100 million of Senior
Subordinated Notes due in 2008 (the "Notes") as part of the financing
arrangements for the acquisition of the East Irish Sea Interests and related
acquisition of Difco Limited had not been raised on acceptable terms and the
Company was in discussions with Difco Limited in connection with the
Acquisitions and was considering alternative methods of financing.

                                       8
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


As of September 13, 1998 the Company continues in its attempts to complete the
Acquisitions and will notify the shareholders of any future developments at the
appropriate time.


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

Results of Operations

     The following is a discussion of the results of operations of the Company
for the three months ended July 31, 1998.

     The factors which most significantly affect the Company's results of
operations are (i) the sales prices of crude oil and natural gas, (ii) the level
of total sales volumes, (iii) the level of lease operating expenses, and (iv)
the level of and interest rates on borrowings.  Total sales volumes and the
level of borrowings are significantly impacted by the degree of success the
Company experiences in its efforts to acquire oil and gas properties and its
ability to maintain or increase production from its existing oil and gas
properties through its development activities.  The following table reflects
certain historical operating data for the periods presented.
<TABLE>
<CAPTION>
 
                                                   Three Months Ended July 31
                                                  -----------------------------
                                                        1997       1998
                                                        ----       ----
<S>                                                     <C>        <C>
Net Sales Volumes:
     Oil (Mbbls)                                           102         66
     Natural Gas (Mmcf)                                    454        430
     Oil Equivalent (MBOE)                                 180        139
                                                 
Average Sales Prices:                            
     Oil (per Bbl)                                      $16.32(1)  $18.22(2)
     Natural Gas (per Mcf)                              $ 2.21(1)  $ 1.67(2)
                                                 
Operating Expenses per                           
BOE of Net Sales:                                
     Lease operating                                    $ 5.66     $ 6.41
     Severance tax                                      $ 0.87     $ 0.54
     Depreciation, depletion, and amortization          $ 3.62     $ 3.65
     General and administrative                         $ 7.03     $ 6.08
</TABLE>
(1)  On May 15, 1997, the commodity price hedging agreements were terminated
     with the Bank through a buyout, the cost of which was financed by a
     drawdown under the terms of the Alliance Credit Agreement.  Hence, the
     table reflects actual realized prices for the three months ended July 31,
     1997.

                                       9
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


(2)  After giving effect to the impact of the Company's commodity price hedging
     arrangements.  Without any hedging arrangements, the average sales prices
     for the quarter ended July 31, 1998 would have been $12.35\bbl for oil and
     $1.67\mcf for gas.

     Average sales prices received by the Company for oil and gas have
historically fluctuated significantly from period to period.  Fluctuations in
oil prices during these periods reflect market uncertainties as well as concerns
related to the global supply and demand for crude oil.  Average gas prices
received by the Company fluctuate generally with changes in the spot market for
gas.  Relatively modest changes in either oil or gas significantly impact the
Company's results of operations and cash flow and could significantly impact the
Company's borrowing capacity.

Three Months Ended July 31, 1998 compared to the Three Months Ended July 31,
1997

     Total revenues from the Company's operations for the quarter ended July 31,
1998 were $1,917,966 compared to $2,727,336 for the quarter ended July 31, 1997.
Revenues decreased significantly over the comparable period a year earlier due
principally to lower oil sales volumes and realized gas prices, property
disposals and the depletion of producing reserves.  Sales volumes for the
quarter ended July 31, 1998 were adversely affected by the Company's decision to
curtail oil sales in the South Carlton field in Alabama due to low posted oil
prices and property disposals completed in the last quarter of 1997 contributed
to the reduction in gas volumes.

     Net sales volumes decreased 23% from the same period in 1997.  According to
the independent reservoir engineering appraisal, net sales volumes should have
declined by approximately 10% due to natural depletion.  The remainder of the
volume decrease is attributable to mechanical downtime and voluntary curtailment
due to the pricing environment.  Production from the South Carlton field
increased 14% over the comparable period, although sales declined 62% due to the
low posted oil price environment.  Gas production declines are in line with the
reservoir engineering forecasts.  However, due to the successful efforts in the
Bacon and Balls Branch fields, gas sales actually increased while production
remained constant.

     Total operating expenses decreased to $2,327,132 for the quarter ended July
31, 1998 compared to $3,360,553 for the same period in 1997.  This decrease was
primarily due to remedial workover costs and expenses associated with sold non-
operated, non-strategic wells incurred in the 1997 period.  Lease operating
expenses were significantly lower at $969,355 for the three month period ending
July 31, 1998 compared to $1,173,644 for the same period in 1997.  The quarter
ended July 31, 1997 was impacted by the remedial work program mentioned above
and the sold non-operated, non-strategic wells.  Depreciation, depletion and
amortization decreased to $509,355 from $652,489 a year earlier primarily as a
result of lower volumes.  General and administrative expenses decreased from
$1,265,849 during the quarter ended July 31, 1997 to $848,422 for the

                                       10
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


quarter ended July 31, 1998. The decrease is a result of continuing efforts by
management to reduce corporate overhead expenses although the 1997 period was
adversely affected by some costs associated with the LaTex/Alliance merger.

     A net operating loss of $409,166 was realized for the quarter ended July
31, 1998 compared to a net operating loss of $633,217 for the same period in
1997

     In summary, due to the above factors, the net loss for the common
shareholders for the quarter ended July 31, 1998 decreased to $949,147 ($0.03
per share) compared to a net loss of $951,197 ($0.03 per share) for the same
period in 1997.

Capital Resources and Liquidity

     The Company's capital requirements relate primarily to the development of
its oil and gas properties and undeveloped leasehold acreage, exploration
activities, and the servicing of the Company's debt.  In general, because the
Company's oil and gas reserves are depleted by production, the success of its
business strategy is dependent upon a continuous exploration and development
program and the acquisition of additional reserves.

     Cash Flows and Liquidity.  At July 31, 1998, Alliance has current assets of
$2.059 million and current liabilities of $13.110 million, which resulted in a
net current deficit of $11.051 million.  Since April 30, 1998, the net current
deficit has increased from $9.480 million to its current position of $11.051
million.  The $1.571 million increase is primarily due to a transfer of a
portion of the credit facility from long term debt to current liabilities.  The
accounts payable at July 31, 1998 were virtually unchanged at $8.927 million
compared to $8.973 at April 30, 1998.

     For the quarter ended July 31, 1998, net cash used in the Company's
operating activities was $.889 million compared to cash used of $2.673 million
for the quarter ended July 31, 1997.  This improvement is substantially due to
the allocation of funds to improve the working capital deficit of the Company in
the quarter ended July 31, 1998.

     Investing activities of the Company used $.757 million in net cash
flow for the quarter ended July 31, 1998 compared to $2.357 million generated
for the quarter ended July 31, 1997. The deterioration was principally due to
property sales of $2.424 million less than the 1997 period and the increase in
deferred acquisition costs of .871 million. Financing activities provided $1.500
million for the quarter ended July 31, 1998 compared to cash provided of $1.948
million for the quarter ended July 31, 1997. 

     Overall, cash and cash equivalents decreased by $.146 million in the
quarter ended July 31, 1998 compared to an increase of $1.633 million in the
1997 period.

                                       11
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


     Capital Expenditures.  The timing of most of the Company's capital
expenditures is discretionary.  Currently, there are no material long-term
commitments associated with the Company's capital expenditure plans.
Consequently, the Company has a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant.  The Company primarily uses
internally generated cash flow and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital deficit.  If the Company's internally generated
cash flows should be insufficient to meet its banking or other obligations, the
Company may reduce the level of discretionary capital expenditures or increase
the sale of non-strategic oil and gas properties in order to meet such
obligations.  The level of the Company's capital expenditures will vary in
future periods depending on energy market conditions and other related economic
factors.  As a result, the Company will continue its current policy of funding
capital expenditures with internally generated cash flow and the proceeds from
oil and gas property divestitures.

     Financing Arrangements.  Under the Alliance Credit Agreement, principal
payments are suspended until October 31, 1998.  However, cash flows generated by
Alliance and its subsidiaries in excess of amounts provided for in the business
plan that formed the basis of negotiation with the Bank will be used to reduce
outstanding principal indebtedness.  The maturity date of the existing line of
credit remains at March 31, 2000.

     Substantially all of the existing security for the outstanding indebtedness
under the LaTex Credit Agreement, being the mortgages of all of LaTex's
producing oil and gas properties and pledges of stock of the existing Borrowers
and ENPRO, remains in place.  As additional security, the Bank has received
mortgages on substantially all of Alliance's producing oil and gas properties
and pledges of the stock of Alliance's subsidiaries.

     Under the Alliance Credit Agreement, the borrowing base will be equal to
the outstanding indebtedness under the LaTex Credit Agreement as of the date of
the Merger.  The borrowing base is to be redetermined annually as of December 31
and June 30 of each year.

     Borrowings under the Alliance Credit Agreement maintained from time to time
as a "Base Rate Loan" bear interest, payable monthly, at a fluctuating rate
equal to the higher of (i) the rate of interest announced from time to time by
the Bank as its "reference rate" plus 1% or (ii) the "Federal Funds Rate" (as
defined in the Alliance Credit Agreement) plus 1  1/4%.  Borrowings under the
Alliance Credit Agreement maintained from time to time as a "LIBO Rate Loan"
bear interest, payable on the last day of each applicable interest period (as
defined in the Alliance Credit Agreement), at a fluctuating rate equal to the
LIBO Rate (Reserve Adjusted) (as defined in the Alliance Credit Agreement) plus
2%.  As of July 31, 1998, all advances to Alliance under the Alliance

                                       12
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


Credit Agreement were maintained as LIBO Rate Loans that bore interest at the
annual rate of 7.5%.
 
     At July 31, 1998, the outstanding balance under the Alliance Credit
Agreement was $22.567 million.  The outstanding loan balance has increased
$1.500 million since April 30, 1998 as a result of advances by the Bank to pay
Difco Acquisition-related costs.

     Financial Condition.  Management had planned to consummate the acquisition
of a 20 per cent interest in certain undeveloped oil and gas properties in the
East Irish Sea and Liverpool Bay areas ("the East Irish Sea Interests") which
would have involved a satisfactory refinancing of the Group's borrowings.  On
July 30, 1998 the Board announced that financing for that transaction had not
been raised and that resolutions to approve the acquisition were not put to
shareholders.

     Management's plans in the event that the acquisition and refinancing did
not proceed, were to seek other transactions of a similar nature, restructure
the existing credit facility or seek alternative forms of financing and to take
such steps as were necessary to allow the Group to meet its obligations as they
fell due.  It was envisioned that such steps might have included the continued
reduction of the Group's overheads, deferral of elements of the recompletion
program and realization of oil and gas properties.

     Since July 30, 1998, management has reduced the Group's overheads through
selective redundancies and has held discussions with Bank of America regarding
the existing credit facility but has primarily been evolving alternative
financing plans to allow the acquisition of part of the East Irish Sea
Interests.  Such a plan has been formulated and it is anticipated that proposals
will be put to shareholders on or before October 31, 1998.  Management believe
that this plan, which involves inter alia a restructuring of the existing credit
facility, will provide the Group with financing which will allow it to meet its
obligations as they fall due.

     Management is mindful of the Group's financial condition should this
transaction not be consummated.  The existing credit facility with Bank of
America requires monthly repayments to commence on October 31, 1998 and
repayments of $2,275,000 are scheduled to be made on or before April 30, 1999.
The Group's operating cash flow will not be sufficient to meet its obligations
under the existing credit facility and given the passage of time and the
concentration of management's efforts on achieving the acquisition outlined
above, it may not be possible to arrange property sales or to take other steps
to allow the Group to meet its obligations in a timely manner.

     However, the pursuit by management of an alternative structure to acquire
the East Irish Sea Interests has been undertaken with the full support of Bank
of America, including the deferral of any property disposals pending final
resolution of the acquisition of part of the East Irish Sea Interests. Bank of
America has indicated to management that,

                                       13
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


in the event that the proposed transaction is not consummated, it will work with
the Group to achieve a mutually satisfactory refinancing and has committed that
pending this it will take such actions as are necessary to keep the Group in
good standing under the credit agreement until June 30, 1999. There is, however,
no guarantee that a successful refinancing will be achieved in a timely manner
if at all.

     The Directors believe that there is reasonable assurance that the Group
will remain a going concern even if the proposed transaction is not consummated.

     Seasonality.  The results of operations of the Company are somewhat
seasonal due to fluctuations in the price for crude oil and natural gas.
Recently, crude oil prices have been generally higher in the third calendar
quarter, and natural gas prices have been generally higher in the first calendar
quarter. Due to these seasonal fluctuations, results of operations for
individual quarterly periods may not be indicative of results which may be
realized on an annual basis.

     Inflation and Prices.  In recent years, inflation has not had a significant
impact on the operations or financial condition of the Company.  The generally
downward pressure on oil and gas prices during most of such periods has been
accompanied by a corresponding downward pressure on costs incurred to acquire,
develop, and operate oil and gas properties as well as the costs of drilling and
completing wells on properties.

     Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly from 1995 through 1998.
The following table sets forth the average price received by the Company for
each of the last three years and the effects of the various hedging arrangement
noted above.

                                       14
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


<TABLE>
<CAPTION>
 
Three Months             Oil                  Oil                  Gas                  Gas
Ended July 31      (excluding the       (including the       (excluding the       (including the
                 effects of hedging   effects of hedging   effects of hedging   effects of hedging
                    transactions)        transactions)        transactions)        transactions)
--------------------------------------------------------------------------------------------------
<S>              <C>                  <C>                  <C>                  <C>
 1998                  $12.35               $18.22                $1.67                $1.67
                     
 1997                  $16.32               $16.32                $2.21                $2.21
                     
 1996                  $22.04               $20.90                $2.60                $2.17
 
</TABLE>
     On October 23, 1997, the Company entered into new commodity price hedge
agreements to protect against price declines which may be associated with the
volatile environment of oil and natural gas spot pricing.  Unlike the previous
hedging agreements entered into by LaTex, the new commodity price hedge
agreements, while protecting against oil and natural gas price declines, also
provide the Company with exposure to price increases beyond certain agreed price
levels.  The commodity price hedges were executed through the purchase of put
options by the Company, and the associated cost was funded by additional
drawdowns under the Alliance Credit Agreement.

                                       15
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements
   

PART II  OTHER INFORMATION

Item 1.    Legal Proceedings

Contingencies

In addition to the litigation set forth in the Company's Annual Report on Form
10-K for the year ended April 30, 1998, the Company is a named defendant in
lawsuits, is a party in governmental proceedings, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome to lawsuits or other proceedings and claims against the
Company cannot be predicted with certainty, management does not expect these
additional matters to have a material adverse effect on the financial position
of the Company.

Item 6.    Exhibits and Reports on Form 8-K

           (a)  Exhibits

           SEC
           Exhibit
           No.             Description of Exhibits
           -------         -----------------------

 

           (27)  Financial Data Schedule
 
                 *27.1  Financial Data Schedule of Alliance Resources PLC

     *Filed Herewith.

           (b)   Reports on Form 8-K

                 None

                                       16
<PAGE>
 
                            Alliance Resources PLC
             Notes to Consolidated Condensed Financial Statements


                                  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.

     Alliance Resources PLC



     /s/H.B.K. Williams
     ---------------------------------------------
     H.B.K Williams, Finance Director

Date:  September 21, 1998

                                       17