SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (MARK ONE)

          [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               For the quarterly period ended: September 30, 1996

                                       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: 0-10156


                             CAIRN ENERGY USA, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                             23-2169839
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)


                8115 Preston Road, Suite 500, Dallas, Texas 75225
               (Address of principal executive offices) (Zip Code)


                                 (214) 369-0316
              (Registrant's telephone number, including area code)

                    Former address: 8235 Douglas Ave., Suite
             1221, Dallas, TX 75225 (Former name, former address and
               former fiscal year, if changed since last report.)

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 outstanding of each of the issuer's classes of common stock
as of October 31 1996:

                17,560,831 shares of common stock, par value $.01






                                        1

<PAGE>



                             CAIRN ENERGY USA, INC.


                                      INDEX

                                                                       Page No.
                                                                    ------------
PART I. FINANCIAL INFORMATION

  Item 1. Financial Statements

     Statements of Operations for the three and nine
       months ended September 30, 1996 and 1995.............................  3

     Balance Sheets at September 30, 1996 and December 31, 1995.............  4

     Statement of Changes in Stockholders' Equity for the
       nine months ended September 30, 1996.................................  6

     Statements of Cash Flows for the nine months
       ended September 30, 1996 and 1995....................................  7

     Notes to Financial Statements .........................................  8

  Item 2. Management's Discussion and Analysis of Financial
     Condition and Results of Operations.................................... 10

PART II. OTHER INFORMATION

  Item 1. Legal Proceedings................................................. 14

  Item 2. Changes in Securities............................................. 14

  Item 3. Defaults Upon Senior Securities................................... 14

  Item 4. Submission of Matters to a Vote of Security Holders............... 14

  Item 5. Other Information................................................. 14

  Item 6. Exhibits and Reports on Form 8-K.................................. 14



                                        2

<PAGE>



                          PART I. FINANCIAL INFORMATION

                          Item 1. Financial Statements

                             CAIRN ENERGY USA, INC.


                            STATEMENTS OF OPERATIONS
             Three and nine months ended September 30, 1996 and 1995

<TABLE>
<CAPTION>

                                                          Three months ended         Nine months ended
                                                              September 30,              September 30,
                                                          -------------------------- -------------------------
                                                           1996             1995       1996           1995
                                                          ------           -----      ----          -------
                                                             (in thousands, except per share amounts)
Revenues:
<S>                                                       <C>              <C>      <C>             <C>    
    Oil and gas . . . . . . . . . . . . . . . . . . . .   $7,414           $7,131   $22,155         $19,940
     Other revenue . . . . . . . . . . . . . . . . . . . .   140               75       203             150
                                                          -------         -------    ---------     ---------

Total revenues  . . . . . . . . . . . . . . . . . . . . .  7,554            7,206    22,358          20,090

Expenses:
    Lease operating expenses & production taxes            1,075              833     2,707           2,397
    Depreciation, depletion & amortization . . . . . .     4,503            3,909    12,400          10,680
    Administrative expenses  . . . . . . . . . . . . . . .   358              428     1,136           1,249
    Interest  . . . . . . . . . . . . . . . . . . . . . .    725              739     1,761           2,096
                                                          -------         -------    ---------     ---------

Total expenses  . . . . . . . . . . . . . . . . . . . . .  6,661            5,909    18,004          16,422
                                                          -------         -------    ---------     ---------

Net income . . . . . . . . . . . . . . . . . . . . . .     $ 893           $1,297    $4,354          $3,668
                                                            =====           =====     =====           =====

Net income per common and
    common equivalent share  . . . . . . . . . . . .      $ 0.05           $ 0.08    $ 0.25          $ 0.23
                                                           =====            =====     =====           =====
Weighted average common and common
    equivalent shares outstanding  . . . . . . . . . . .  17,560           16,187    17,558          16,043
                                                           =====            =====     =====           =====
</TABLE>


See accompanying notes.




                                        3

<PAGE>



                             CAIRN ENERGY USA, INC.

                                 BALANCE SHEETS

                    September 30, 1996 and December 31, 1995

                                     ASSETS
                                   -----------
<TABLE>
<CAPTION>

                                                                   September 30,                December 31,
                                                                       1996                        1995
                                                                   ------------                -----------
                                                                                  (in thousands)

Current assets:
<S>                                                                 <C>                          <C>     
     Cash and cash equivalent                                       $  2,144                     $  3,553
     Accounts receivable                                               3,021                        4,340
     Prepaid expenses                                                    733                          447
                                                                    --------                     --------

Total current assets                                                   5,898                        8,340



Property and equipment at cost:
     Oil and gas properties, based on full cost accounting           194,400                      157,100
     Other equipment                                                     898                          712
                                                                    --------                     --------

                                                                     195,298                      157,812

Less accumulated depreciation, depletion and amortization            (72,305)                     (59,905)

     Net property and equipment                                      122,993                       97,907

Deferred charges, net of amortization                                    288                          564
                                                                   ---------                    ---------

Total assets                                                        $129,179                     $106,811
                                                                       ======                      ======
</TABLE>






See accompanying notes.



                                        4

<PAGE>



                             CAIRN ENERGY USA, INC.

                                 BALANCE SHEETS

                    September 30, 1996 and December 31, 1995

                      LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                   September 30,                December 31,
                                                                       1996                        1995
                                                                   ------------                -----------
                                                                                  (in thousands)

Current liabilities:
<S>                                                                 <C>                          <C>     
     Accounts payable                                               $  1,225                     $    499
     Accrued lease operating expenses                                    457                          578
     Accrued well costs                                                1,880                        6,194
     Other accrued liabilities                                           401                          254
     Current maturities of long-term debt                              9,317                          -
                                                                     -------                      -------
Total current liabilities                                             13,280                        7,525

Long-term debt                                                        27,683                       15,500


Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding;
June 30, 1996 - 17,559,173
December 31, 1995 - 17,550,480                                           176                          176
Additional paid-in capital                                            94,796                       94,720
Accumulated deficit                                                   (6,756)                     (11,110)
                                                                     -------                      -------
Total stockholder's equity                                            88,216                       83,786
                                                                   ---------                    ---------

Total liabilities and stockholders' equity                          $129,179                     $106,811
                                                                      ======                      ======
</TABLE>






See accompanying notes.



                                        5

<PAGE>



                             CAIRN ENERGY USA, INC.

                  Statement of Changes in Stockholders' Equity
                      Nine months ended September 30, 1996
                                 (in thousands)

<TABLE>
<CAPTION>

                                                             Additional                            Total
                                Common Stock                  Paid-In          Accumulated       Stockholders'
                         Shares              Amount           Capital         Deficit               Equity

Balance at
 December 31,
<S>                      <C>                   <C>              <C>             <C>                    <C>    
 1995                    17,550                $176             $94,720         $(11,110)              $83,786

Exercise of
 stock options                7                  -                   42                 -                   42

Other                         3                  -                   34                 -                   34

Net income                   -                   -                   -              4,354                4,354
                         ----------------------------------------------------------------------------------------------------------

Balance at
 September 30, 1996      17,560                $176             $94,796           $15,464              $88,216
                         =====================================================================================

</TABLE>


























See accompanying notes.



                                        6

<PAGE>



                             CAIRN ENERGY USA, INC.

                            STATEMENTS OF CASH FLOWS
                  Nine months ended September 30, 1996 and 1995

<TABLE>
<CAPTION>

                                                                             September 30,       September 30,
                                                                                 1996                1995
                                                                             -------------       -------------
                                                                                        (in thousands)
Increase  (decrease)  in cash and cash  equivalents  Cash flows  from  operating
 activities:
<S>                                                                             <C>                 <C>    
  Net income....................................................................$ 4,354             $ 3,668
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Depreciation, depletion and amortization................................... 12,400              10,680
     Amortization of loan costs.................................................    287                 266
     Change in operating assets and liabilities:
       Accounts receivable......................................................  1,319              (2,494)
       Prepaid expenses.........................................................   (286)               (582)
       Accounts payable.........................................................    726                (966)
       Accrued liabilities......................................................     66                 236
       Deferred revenue.........................................................     -                 (137)
       Advances (repayments) from (to) Cairn Energy PLC.........................     (6)                 50
                                                                                 ----------        ----------
Net cash provided by operating activities....................................... 18,860              10,721


Cash flows from investing activities:
 Exploration and development expenditures.......................................(42,117)            (19,275)
 Proceeds from sale of natural gas and crude oil properties.....................    503               1,841
 Increase in other equipment....................................................   (186)               (169)
                                                                                ---------         -----------
Net cash used in investing activities...........................................(41,800)            (17,603)

Cash flows from financing activities:
 Proceeds from long-term debt................................................... 21,500              10,000
 Repayment of long-term debt....................................................     -              (19,000)
 Issuance of Common Stock, Net  . . . . . . . . . . . . . . . . . . . . . . . .      -               16,598
 Exercise of stock options......................................................     42                 102
 Other   .......................................................................    (11)                (55)
                                                                                ---------          -----------
Net cash provided by financing activities....................................... 21,531               7,645
                                                                                ---------          -----------
Net change in cash and cash equivalents......................................... (1,409)               (763)
Cash and cash equivalents at beginning of period................................  3,553               2,182
                                                                                --------          ------------
Cash and cash equivalents at end of period......................................$ 2,144             $ 2,945
                                                                                =======             =======
Supplemental cash flow information -
 Interest paid in cash..........................................................$ 1,480             $ 1,832
                                                                                =======              ======
</TABLE>


See accompanying notes.


                                        7

<PAGE>


                             CAIRN ENERGY USA, INC.

                          Notes to Financial Statements

1. Basis of Presentation

In the opinion of management,  the accompanying  unaudited financial  statements
reflect all adjustments  (consisting only of normal recurring adjustments) which
are necessary for a fair  presentation of the financial  position of the Company
at September  30,  1996,  the results of its  operations  for the three and nine
months ended  September  30, 1996 and 1995 and the results of its cash flows for
the nine months ended September 30, 1996 and 1995.  These  financial  statements
should be read in conjunction  with the notes to the Company's  annual financial
statements,  which were included in the Company's Annual Report on Form 10-K for
the year ended  December  31,  1995,  filed  with the  Securities  and  Exchange
Commission (the "Commission") on March 5, 1996.

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiary.  All intercompany  accounts and transactions  have
been eliminated in consolidation.

2.  Long-term debt.

Long-term  debt at September  30, 1996 and  December 31, 1995,  consisted of the
following:
<TABLE>
<CAPTION>
                                                                September 30,                     December 31,
                                                                    1996                             1995
                                                                 -----------                      ------------
<S>                                                             <C>                               <C>        
         Revolving credit agreement ............................$37,000,000                       $15,500,000
         Less: Current maturities of long-term debt.............  9,317,000                           -
                                                                 -----------                      ------------
         Long-term debt less current maturities.................$27,683,000                       $15,500,000
                                                                 ===========                      ============
</TABLE>

     The Company has a credit  agreement as amended (the INCC Credit  Agreement)
with ING (U.S.) Capital  Corporation,  f/k/a  Internationale  Nederlanden (U.S.)
Capital  Corporation  (INCC),  Mees Pierson,  N.V.  (Mees  Pierson),  and Credit
Lyonnais (Credit  Lyonnais).  At September 30, 1996, the Company had outstanding
borrowings  of $37.0 million  under the INCC Credit  Agreement.  The INCC Credit
Agreement is secured by substantially  all of the Company's  assets. It contains
financial  covenants  which  require  the Company to maintain a ratio of current
assets to current liabilities (excluding the current portion of related debt) of
no less than 1.0 to 1.0 and a tangible  net worth of not less than $40  million.
The Company is currently in compliance with such financial  covenants.  Prior to
June  28,  1996,  outstanding  borrowings  accrued  interest  at  either  INCC's
fluctuating base rate or INCC's reserve  adjusted  Eurodollar rate plus 1.5%, at
the Company's  option.  On June 28, 1996, the INCC Credit Agreement was amended,
(the Third  Amendment)  to decrease the  addition to the INCC  reserve  adjusted
Eurodollar  rate from 1.5% to 1.25% as long as  outstanding  borrowings are less
than 75% of the borrowing  base.  The borrowing base was also increased from $45
million to $50 million.

On November 7, 1996 the Company further amended (the Fourth  Amendment) the INCC
Credit Agreement. Under the Fourth Amendment, Credit Lyonnais joined as a lender
under the INCC Credit Agreement.  Also under the Fourth Amendment,  the original
facility  under the INCC Credit  Agreement was  designated as Facility A and the
maximum  amount of the facility was  increased in amount from $50 million to $75
million;  provided,  however,  that the maximum amount  available to the Company
cannot exceed the borrowing  base of its  properties as determined  from time to
time by the lenders.  The borrowing base under Facility A was  reconfirmed as of
November  7, 1996 as $50  million.  The  revolving  period of  borrowings  under
Facility A was extended  from March 31, 1997 to September 30, 1997. On September
30, 1997 the borrowings outstanding under Facility A will be converted to a term
loan that  requires  quarterly  repayments  of principal  on a revised  schedule
through  March 31, 2001.  The  Company's  ability to borrow under  Facility A is
dependent upon the reserve value of its oil and gas  properties.  If the reserve
value of the Company's  borrowing  base  declines,  the amount  available to the
Company  under  Facility A will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding  under Facility A the Company will
be  obligated  to repay such  excess  amount on 30-days  notice  from INCC or to
provide additional collateral.
                                        8
<PAGE>



INCC,  Mees Pierson,  N.V., and Credit Lyonnais have  substantial  discretion in
determining the reserve value of the borrowing base.

In addition under the Fourth  Amendment a second  facility was created under the
INCC Credit Agreement. This new standby credit facility,  Facility B, is for the
amount of $14 million.  Facility B provides for three levels of borrowings of $5
million each by the Company.  There are no restrictions on the Company's ability
to borrow the first $5 million under  Facility B and the amount  borrowed may be
used for general corporate  purposes.  The Company's ability to borrow under the
further two levels of  borrowings  of $5 million  and $4 million,  respectively,
under  Facility  B is  dependent  upon the  Company  establishing  total  proved
reserves  at  certain  levels  and  appropriate  ratios  between  the  Company's
outstanding  debt and the value of its proved  reserves.  The Company  must also
submit detailed  proposals,  acceptable to its lenders,  outlining the manner in
which the second two levels of borrowings  under  Facility B will be used in the
development of the Company's oil and gas properties.  Facility B is repayable on
December 31, 1997.  The interest  margin over INCC reserve  adjusted  Eurodollar
rate for Facility B varies from 3.25% to 3.75%,  depending upon the ratio of the
amount of the outstanding  loans to the value of the Company's  proved reserves.
Under the INCC Credit Agreement,  interest is payable quarterly on any base rate
borrowings and payable on maturity of any Eurodollar borrowings or at the end of
three months if the maturity of the  Eurodollar  borrowing is in excess of three
months.

The INCC Credit Agreement does not permit the Company to pay or declare any cash
or property dividends or otherwise make any distribution of capital. On Facility
A the Company is obligated to pay a quarterly fee equal to 0.5% per annum of the
unused  portion of the borrowing  base under the facility and a Letter of Credit
fee for each Letter of Credit in the amount of 1.5% per annum of the face amount
of such  Letter of Credit.  On  Facility B the  Company  is  obligated  to pay a
drawdown  fee for  each $5  million  borrowed  equal  to 0.3%  for the  first $5
million, 1.15% for the second $5 million and 1.6% for the last $4 million. Also,
the Company must pay 0.5% per annum on the undrawn portion of Facility B.


The carrying value of the Company's long-term debt approximates fair value.


3.  Property and Equipment.

The Company  capitalized  approximately  $1.1  million and  $941,000 of internal
costs during the nine months ended  September  30, 1996 and 1995,  respectively.
Such  capitalized  costs include  salaries and related  benefits of  individuals
directly  involved in the Company's  acquisition,  exploration,  and development
activities, based on a percentage of their time devoted to such activities.

                                        9

<PAGE>



                             CAIRN ENERGY USA, INC.

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


Item 2 of this document  includes  "forwarding  looking"  statements  within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the  Securities  Exchange Act of 1934,  as amended.  Although the Company
believes that the expectations  reflected in such forward looking statements are
based upon reasonable assumptions, it can give no assurance that is expectations
will be achieved.  Important factors ("Cautionary Disclosures") that could cause
the actual results to differ materially from the Company's  expectations are set
forth  under the  caption  "Risk  Factors" in the  Company's  Prospectus,  dated
September 14, 1995 and under the caption "Oil and Gas Revenues" in the Company's
Annual  Report  on Form  10-K for the year  ended  December  31,  1995,  and are
disclosed in conjunction  with the forward looking  statements  included herein.
Subsequent  written and oral  forward  looking  statements  attributable  to the
Company  or  persons  acting on its  behalf  are  expressly  qualified  in their
entirety  by  the  Cautionary  Disclosures,  including  without  limitation  the
President's Letter contained in the Third Quarter Report to Stockholders.

Results of Operations

The following  table sets forth  certain  information  regarding the  production
volumes  of,  average  sales  prices  received  for,  average  production  costs
associated with, and average  depletion rate associated with the Company's sales
of oil and gas for the periods indicated.
<TABLE>
<CAPTION>

                                                             Three months                      Nine Months
                                                        ended September 30,               ended September 30,
                                                      ------------------------       -------------------------------
                                                       1996              1995              1996             1995
                                                     ----------        ----------       ----------        ----------

    Net Production:
<S>                                                  <C>               <C>              <C>               <C>    
      Gas (MMcf) ....................................$ 2,652           $ 2,930          $ 7,840           $ 8,187
      Oil (MBbl).....................................     74               130              216               350
    Average Sales Price:
      Gas (per Mcf) (1) .............................$  2.18           $  1.61          $  2.24           $  1.64
      Oil (per Bbl)..................................$ 21.24           $ 18.03          $ 20.48           $ 18.19
    Average Production Costs:
      (per Mcfe) (2).................................$  0.35           $  0.22          $  0.30           $  0.23
    Depletion rate: (per Mcfe) ......................$  1.44           $  1.05          $  1.34           $  1.03
</TABLE>

    ------------------

(1) Includes natural gas liquids.
(2)   Includes direct lifting costs (labor,  repairs and maintenance,  materials
      and  supplies)  and  the  administrative   costs  of  production  offices,
      insurance and property and severance taxes.

Three months ended September 30, 1996 and 1995

Revenues.  Total revenues  increased $348,000 (5%) to $7.6 million for the three
months  ended  September  30,1996  from $7.2  million for the three months ended
September 30, 1995. Revenues increased as a result of higher oil and gas prices,
partially offset by lower production volumes.

Expenses.  Total expenses increased $752,000 (13%) to $6.7 million for the three
months  ended  September  30, 1996 from $5.9  million for the three months ended
September 30, 1995.  An increase in  depreciation,  depletion  and  amortization
("DD&A") is the reason for the increase in  expenses.  DD&A  increased  $595,000
(15%) to $4.5 million for the three months  ended  September  30, 1996 from $3.9
million for the same period in 1995 due to an increase in the depletion  rate. A
significant  part  of  the  depletion  rate  increase  is due  to  drilling  and
acquisition  costs associated with  exploration  wells which were drilled during
the first three quarters which were determined to be dry being added

                                       10

<PAGE>


to the full cost pool without the  addition of new  reserves.  Production  costs
increased  $242,000  (29%) to $1.1 million for the three months ended  September
30, 1996,  from  $833,000 for the same period in 1995 due  primarily to pipeline
transportation  fees related to the  production  from Mustang  Island Block 858,
Vermilion  Block 203 and Main Pass Block  262.  Administrative  costs  decreased
$70,000  (16%) to $358,000  for the  quarter  ended  September  30,  1996,  from
$429,000 for the same  quarter in 1995.  During the third  quarter of 1995,  the
Company incurred noncapitalized expenses relating to a secondary stock offering.
Administrative  costs in the  third  quarter  of 1996 are  less  because  of the
absence of those expenses.  Interest expense decreased a marginal amount for the
three months ended September 30, 1996 compared with the same period in 1995.

Net  Income.  Net income  decreased  $404,000  (31%),  or  $(0.03)  per share to
$893,000,  or $0.05 per share for the quarter ended September 30, 1996 from $1.3
million,  or $0.08 per share for the same period in 1995. The primary reason for
the decrease was higher DD&A expenses and production  costs partially  offset by
increased  oil and gas  prices.  Earnings  per  share  were  also less due to an
increase in the average number of shares outstanding.

Nine months ended September 30, 1996 and 1995

Revenues.  Total revenues  increased $2.3 million (11%) to $22.4 million for the
nine months ended  September  30, 1996,  from $20.1  million for the nine months
ended September 30, 1995. The primary reason for the increase was higher oil and
gas prices partially offset by lower production volumes.

Expenses.  Total expenses  increased $1.6 million (10%) to $18.0 million for the
nine months ended  September 30, 1996,  compared with $16.4 million for the same
period in 1995.  An increase in DD&A is the reason for the increase in expenses.
DD&A  increased  $1.7 million  (16%) to $12.4  million for the nine months ended
September  30,  1996,  from $10.7  million for the same period in 1995 due to an
increase  in the  depletion  rate.  A  significant  part of the  depletion  rate
increase is due to drilling and acquisition  costs  associated with  exploration
wells which were drilled  during the first three quarters of the year which were
determined  to be dry being added to the full cost pool  without the addition of
new reserves.  Production costs increased $310,000 (13%) to $2.7 million for the
first nine months of 1996 compared with $2.4 million for the same period in 1995
due primarily to pipeline transportation fees related to production from Mustang
Island Block 858,  Vermilion  Block 203 and Main Pass Block 262.  Administrative
expense  decreased  $113,000  (9%) to $1.1  million  for the nine  months  ended
September  30,  1996,  compared  with $1.2  million for the same period in 1995.
During the first  nine  months of 1995,  the  Company  incurred  non-capitalized
expenses relating to a secondary stock offering. Administrative costs during the
first nine  months of 1996 are less  because of the  absence of those  expenses.
Interest  expense  decreased  $336,000  (16%) to $1.8 million for the first nine
months of 1996  compared  with $2.1  million for the same period in 1995.  Lower
interest rates are the reason for the decrease.

Net Income.  Net income  increased  $686,000  (19%),  or $0.02 per share to $4.4
million or $0.25 per share for the nine months ended  September  30, 1996,  from
$3.7 million, or $0.23 per share for the same period in 1995. The primary reason
for the  increase  was higher oil and gas prices  partially  offset by decreased
production and increased depletion costs.

Capital Resources and Liquidity

At September  30, 1996,  the Company had existing cash and cash  investments  of
$2.1 million.  Net cash provided by operating  activities  was $18.9 million for
the nine months ended  September  30, 1996  compared  with $10.7 million for the
same period in 1995.  The primary  reason for this  increase in cash provided by
operating  activities  was higher  results of  operations  (or  earnings  before
depreciation, depletion and amortization) coupled with decreased working capital
requirements.  Net cash used in investing  activities  for the nine months ended
September  30, 1996 was $41.8  million  compared with $17.6 million for the same
period  in  1995.  This  increase  was  principally  due  to  expenditures   for
exploration and development  projects,  including leasehold costs related to the
26 blocks acquired in the Gulf of Mexico Central Area Lease Sale in April 1996.

Net cash provided by financing  activities for the first nine months of 1996 was
$21.5 million  compared with $7.6 million for the same period in 1995.  The cash
provided by financing  activities for the period  consisted mainly of borrowings
under the Company's  revolving credit facility which were used to fund a portion
of the Company's capital spending program.

                                       11

<PAGE>



In the third  quarter,  the  Company  participated  in a total of 3  exploration
wells, two of which were successful.  Two exploration  wells, East Cameron Block
331 #A12  (Cairn WI 40%) and West  Cameron  Block 290 #3 (Cairn WI 2.25%),  were
drilled from  existing  platforms  and are expected to begin  production  in the
fourth  quarter of 1996.  Another  exploration  well,  West Cameron Block 263 #2
(Cairn WI 50%) was plugged and abandoned in August.

In  general,  because  the  Company's  oil  and gas  reserves  are  depleted  by
production,  the success of its  business  strategy is dependent on a continuous
exploration  and  development   program.   Therefore,   the  Company's   capital
requirements  relate  primarily  to the  acquisition  of  undeveloped  leasehold
acreage and exploration and  development  activities.  In addition to pursuing a
number of existing exploration prospects,  the Company was the high bidder on 26
blocks in the Gulf of Mexico Central Area Lease Sale held on April 24, 1996. The
Company's interest in these blocks ranges from 25 to 60 percent.  All twenty-six
of the blocks have been awarded and related lease bonuses paid through September
30, 1996 totaled $7.4 million.

The Company's  operating needs and capital spending programs have been funded by
borrowings under its bank credit  facilities,  proceeds from public offerings of
its Common Stock and cash flows from operations. The Company expects to continue
with an active exploration program and to participate in additional  exploration
wells in the remainder of 1996 including West Cameron Block 588 #2, West Cameron
Block 610 #1,  South  Timbalier  Block 290 #1 and Main  Pass  Block 262 #3.  The
Company  expects capital  expenditures  during 1996 to total  approximately  $50
million.  Plans for 1997 currently call for the drilling of thirteen exploration
and two development wells. On this basis, and including estimated lease and data
acquisition costs and development  expenditures on currentlyidentified  projects
only, total capital  expenditures in 1997 are forecast to be  approximately  $32
million.  As of the date  hereof,  the  Company's  capital  resources  consisted
primarily of borrowing  capacity under the INCC Credit  Agreement ($13.0 million
under  Facility A and up to $14 million under  Facility B which are available to
the Company  assuming  that it  satisfies  the  conditions  to borrow under such
facilities) and cash flow from  operations.  Management  believes that cash flow
from operations along with the amounts available under the INCC Credit Agreement
will be sufficient to finance the currently planned  exploration and development
expenditures.

If the Company is successful in a substantial number of its currently  scheduled
exploration prospects,  additional funds may be required in order to conduct the
necessary development activities.  Additionally,  if the Company is unsuccessful
in its currently scheduled exploration program, additional funds may be required
in order to continue the exploration and development  program.  If necessary the
Company may seek to raise additional capital in public or private equity or debt
markets.  No assurance  can be given that the Company will be able to raise such
capital if needed or on terms that are  favorable to the Company.  Any resulting
lack of  sufficient  capital may  require the Company to reduce its  interest in
such  properties  or  to  forego  developing  such  reserves  or to  reduce  the
exploration  program.  In addition,  the Company  does not act as operator  with
respect to most of its  properties.  The  Company may not be able to control the
development  activities  or the  associated  costs with  respect  to  properties
operated by other parties.

The Company's revenues and the value of its oil and gas properties have been and
will  continue to be affected  by changes in oil and gas prices.  The  Company's
ability to maintain current borrowing  capacity and to obtain additional capital
on attractive terms is also substantially  dependent on oil and gas prices (Note
2).  Oil  and  gas  prices  are  subject  to  significant   seasonal  and  other
fluctuations  that are beyond  the  Company's  ability  to  control or  predict.
Although  certain of the Company's  costs and expenses are affected by the level
of  inflation,  inflation  has not had a  significant  effect  on the  Company's
results of operations during 1995 or the first nine months of 1996.

In an effort to reduce the effects of the volatility of the price of oil and gas
on the Company's operations,  management has adopted a policy of hedging oil and
gas  prices,  usually  when  such  prices  are at or in  excess  of  the  prices
anticipated  in the  Company's  operating  budget,  through the use of commodity
futures,  options,  forward contracts and swap agreements.  Hedging transactions
are limited by the Board of Directors  such that no  transaction  may fix an oil
and gas price for a term of more than 12 months,  and the  aggregate oil and gas
production  covered by all  transactions  may not  exceed  50% of the  Company's
budgeted production for any 12- month period from the date of the transaction or
75% of the Company's  budgeted  production for any single month from the date of
the  transaction.  By hedging  its oil and gas prices,  the  Company  intends to
mitigate  the risk of  future  declines  in oil and gas  prices.  Under  certain
contracts should oil or gas prices increase above the contract rate, the Company
will not participate in the higher prices for the production.




                                       12

<PAGE>







The Company has entered into a number of gas price swap transactions under which
the Company  receives a fixed price per MMBtu and pays a floating price based on
the  settlement  prices  for the NYMEX  Natural  Gas  futures  contract  for the
delivery  month.  In total under these contracts the Company has fixed the price
of 4,065,000  MMBtu of gas for the period January to December 1996 at an average
price of $2.018  per MMBtu of which  1,730,550  MMBtu  (at an  average  price of
$2.404 per MMBtu)  related to the fourth  quarter of the year.  The  Company has
also fixed the price of 90,000  MMBtu for  January  1997 at an average  price of
$2.750  per MMBtu.  During  the first  nine  months of 1996 and 1995 oil and gas
revenues were decreased $2.1 million and increased $272,000,  respectively, as a
result of hedging transactions.

The Company may enter into certain interest rate hedging  contracts.  By hedging
its  interest  rate under its  credit  facility,  the  Company  would  intend to
mitigate the risk of future  increases in interest rates.  Should interest rates
decrease below the contract rate, the Company will not  participate in the lower
interest rate for the portion of the credit facility under the hedging contract.
The Company currently has no interest rate hedging contracts in place.



                                       13

<PAGE>



                             CAIRN ENERGY USA, INC.


                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

No new material developments.


ITEM 2 - CHANGES IN SECURITIES

None


ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None


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

None


ITEM 5 - OTHER INFORMATION

None


Item 6 - Exhibits and Reports and Form 8-K
         (a)      Each of the following exhibits is filed herewith:


          10.1    Third   Amendment  to  First   Amended  and  Restated   Credit
Agreement,  dated as of June 28,  1996,  by and among Cairn  Energy  USA,  Inc.,
Internationale   Nederlanden   (U.S.)  Capital   Corporation,   as  agent,   and
Internationale  Nederlanden (U.S.) Capital  Corporation and Meespierson N.V., as
lenders. (with exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K).


          10.2    Fourth   Amendment  to  First  Amended  and  Restated   Credit
Agreement,  dated as of November 7, 1996,  by and among Cairn Energy USA,  Inc.,
ING (U.S.) Capital Corporation,  f/k/a Internationale Nederlanden (U.S.) Capital
Corporation, as agent, and ING (U.S.) Capital Corporation, Meespierson N.V., and
Credit  Lyonnais New York Branch,  as lenders  (with  certain  exhibits  omitted
pursuant to Item 601(b)(2) of Regulation S-K).


          27.1    Financial Data Schedule

            (b)      Reports on Form 8-K
                     None

<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.


                                                   CAIRN ENERGY USA, INC.
                                                     (Registrant)




Date: November 8, 1996                       /s/ Michael R. Gilbert
                                            ------------------------
                                             Michael R. Gilbert
                                             President




                                             /s/ J. Munro M. Sutherland
                                             ----------------------------
                                             J. Munro M. Sutherland
                                             Senior Vice President and Treasurer
                                             (Principal Financial Officer)

                                       15

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