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: March 31, 1997

                                       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 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 April 30, 1997:

                17,565,496 shares of common stock, par value $.01




                                        1

<PAGE>



                             CAIRN ENERGY USA, INC.


                                      INDEX
<TABLE>
<CAPTION>

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

  Item 1. Financial Statements

     Statements of Operations for the three
<S>                                                                                                                     <C>
       months ended March 31, 1997 and 1996............................................................................  3

     Balance Sheets at March 31, 1997 and December 31, 1996 ...........................................................  4

     Statement of Changes in Stockholders' Equity for the
       three  months ended March 31, 1997..............................................................................  6

     Statements of Cash Flows for the three months
       ended March 31, 1997 and 1996...................................................................................  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
</TABLE>



                                        2

<PAGE>



                          PART I. FINANCIAL INFORMATION

                          Item 1. Financial Statements

                             CAIRN ENERGY USA, INC.


                            STATEMENTS OF OPERATIONS
                   Three months ended March 31, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                                     Three months ended
                                                                                                          March 31,
                                                                                                     -------------------
                                                                                                       1997       1996
                                                                                                     --------   --------
                                                                                                     (in thousands except
                                                                                                      per share amounts)

Revenues:
<S>                                                                                                 <C>         <C>     
     Oil and gas.............................................................................       $  8,290    $  7,253
     Other revenue...........................................................................             67          34
                                                                                                    --------    --------

         Total revenues......................................................................          8,357       7,287

Expenses:
     Lease operating expenses ...............................................................            765         628
     Depreciation, depletion and amortization................................................          3,472       3,244
     Administrative expenses.................................................................            707         382
     Interest................................................................................            866         443
                                                                                                    --------   ---------


         Total expenses......................................................................          5,810       4,697
                                                                                                    --------   ---------

Net income...................................................................................       $  2,547   $   2,590
                                                                                                    ========   =========


Net income per common and common equivalent share............................................       $   0.15   $    0.15
                                                                                                    ========   =========

Weighted average common and common
     equivalent shares outstanding...........................................................         17,565     17 ,555
                                                                                                    ========   =========
</TABLE>

                             See accompanying notes.


                                        3

<PAGE>



                             CAIRN ENERGY USA, INC.

                                 BALANCE SHEETS

                      March 31, 1997 and December 31, 1996

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                    March 31,                December 31,
                                                                                      1997                       1996
                                                                                    ---------                ------------
                                                                                               (in thousands)

Current assets:
<S>                                                                                  <C>                     <C>       
     Cash and cash equivalent...................................................     $  2,492                $    6,438
     Accounts receivable........................................................        3,449                     4,904
     Prepaid expenses...........................................................          682                       482
                                                                                  -----------              ------------

              Total current assets..............................................        6,623                    11,824

Property and equipment at cost:
     Oil and gas properties, based on full cost accounting......................      212,730                   205,544
     Other equipment............................................................          956                       958
                                                                                  -----------              ------------

                                                                                      213,686                   206,502

     Less accumulated depreciation, depletion & amortization                          (79,343)                  (75,877)
                                                                                  -----------              ------------
     Net property and equipment................................................       134,343                   130,625


Deferred charges, net of amortization...........................................          918                       909
                                                                                  -----------              ------------


     Total assets...............................................................     $141,884                  $143,358
                                                                                  ===========              ============
</TABLE>


                             See accompanying notes.


                                        4

<PAGE>



                             CAIRN ENERGY USA, INC.

                                 BALANCE SHEETS

                      March 31, 1997 and December 31, 1996

                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                    March 31,                 December 31,
                                                                                      1997                        1996
                                                                                    ---------                 ------------
                                                                                              (in thousands)
Current liabilities:
<S>                                                                                 <C>                       <C>      
     Accounts payable......................................................         $  2,500                  $   6,303
     Accrued lease operating expenses......................................              334                        492
     Accrued well costs....................................................            2,756                      3,803
     Other accrued liabilities  .........................................                199                        222
     Current maturities of long-term debt..................................            4,300                          -
                                                                                   ---------                 ----------

          Total current liabilities........................................           10,089                     10,820

Long-term debt ............................................................           38,700                     42,000


Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding;
March 31, 1997 - 17,565,067 and
December 31, 1996 - 17,564,128.............................................              176                        176
Additional paid-in capital.................................................           94,844                     94,834
Accumulated deficit........................................................           (1,925)                    (4,472)
                                                                                   ----------                ----------

          Total stockholders' equity.......................................           93,095                     90,538
                                                                                   ----------                ----------

          Total liabilities and stockholders' equity.......................        $ 141,884                 $  143,358
                                                                                   ==========                ==========
</TABLE>



                             See accompanying notes




                                        5

<PAGE>

                             CAIRN ENERGY USA, INC.


                  Statement of Changes in Stockholders' Equity
                        Three months ended March 31, 1997
                                 (in thousands)


<TABLE>
<CAPTION>

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

Balance at
<S>                                                 <C>          <C>                  <C>              <C>               <C>    
   December 31, 1996...........................     17,564       $      176           $ 94,834         $(4,472)          $90,538


   Other.......................................          1                -                 10               -                10


   Net Income..................................          -                -                  -           2,547             2,547
                                                    ------        ---------            -------         --------          -------

Balance at
   March 31, 1997..............................     17,565        $     176            $94,844         $(1,925)          $93,095
                                                    ======        =========            =======         ========          =======
</TABLE>



                             See accompanying notes.




                                        6

<PAGE>



                             CAIRN ENERGY USA, INC.

                            STATEMENTS OF CASH FLOWS
                   Three months ended March 31, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                           March 31,
                                                                                     --------------------
                                                                                     1997            1996
                                                                                     ----            ----
                                                                                        (in thousands)
Operating Activities:
<S>                                                                             <C>                  <C>    
 Net income..................................................................   $ 2,547              $  2,590
     Adjustments to reconcile net income to net
         cash provided by operating activities:
         Depreciation, depletion and amortization............................     3,472                 3,244
         Amortization of loan costs..........................................        92                    95
         Amortization of prepaid gathering...................................        22                     -
         Change in operating assets and liabilities:
              Accounts receivable............................................     1,455                (1,197)
              Prepaid expenses...............................................      (200)                 (112)
              Accounts payable...............................................    (3,929)                  403
              Accrued liabilities............................................      (171)                 (316)
              Advances (repayments) from (to) Cairn Energy PLC...............         -                    (6)
                                                                             -----------            ----------

Net cash provided by operating activities....................................     3,288                 4,701

Investing Activities:
 Exploration and development expenditures....................................    (8,107)              (14,366)
 Additions to other equipment ...............................................        (4)                 (132)
                                                                               ---------            ----------


Net cash used in investing activities........................................    (8,111)              (14,498)

Financing Activities
Proceeds from long-term debt.................................................     1,000                 8,000
Financing costs and other....................................................      (123)                   31
                                                                               ---------            ----------

Net cash provided by financing activities....................................       877                 8,031
                                                                               ---------            ----------

Net change in cash and cash equivalents......................................    (3,946)               (1,766)
Cash and cash equivalents at beginning of period.............................     6,438                 3,553
                                                                               ---------            ----------

Cash and cash equivalents at end of period...................................   $ 2,492              $  1,787
                                                                               =========            ==========

Supplemental cash flow information
interest paid in cash........................................................   $   738              $    346
                                                                               =========            ==========
</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 March 31,  1997,  the results of its  operations  for the three  months ended
March 31, 1997 and 1996 and the  results of its cash flows for the three  months
ended March 31, 1997. 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,
1996,  filed with the Securities and Exchange  Commission (the  "Commission") on
March 5, 1997.

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 March  31,  1997 and  December  31,  1996,  consisted  of the
following:
<TABLE>
<CAPTION>

                                                                     March 31,                 December 31,
                                                                       1997                         1996
                                                                    ----------                -------------

<S>                                                             <C>                           <C>        
         Revolving credit agreement ..........................  $  43,000,000                   $42,000,000
         Less: Current maturities of long-term debt...........      4,300,000                             -
                                                                 ------------                  ------------

         Long-term debt less current maturities...............  $  38,700,000                   $42,000,000
                                                                 ============                  ============
</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) (together, the Bank Group). At March 31, 1997, the Company had
outstanding  borrowings of $43.0 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.


                                        8

<PAGE>




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.  The Bank Group has  substantial  discretion in
determining the reserve value of the borrowing base.

In addition a second  facility was created under the Fourth  Amendment . The new
standby credit facility, Facility B, was for the amount of $14 million. Facility
B provided for three levels of borrowings by the Company, two of $5 million each
and one of $4 million.  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 was  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 would 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 is either 3.25% or 3.75%,  depending  upon the ratio of the
amount of the outstanding loans to the value of the Company's proved reserves.

On March 17, 1997,  a Fifth  Amendment  was added to the INCC Credit  Agreement.
Under the Fifth Agreement,  the borrowing base for Facility A was increased from
$50 million to $65 million and the amount available under Facility B was reduced
from $14 million to $10  million  available  in two  levels.  The first level of
borrowing   under   Facility  B  remained   unchanged  at  $5  million  with  no
restrictions.  The  second  level of  borrowing  under  Facility B was set at $5
million with similar  restrictions  as in the Fourth  Amendment.  Under the INCC
Credit Agreement,  interest is payable quarterly on any base rate borrowings and
payable  quarterly and on maturity of any Eurodollar  borrowings if the maturity
of the Eurodollar borrowing is in excess of three months.



                                        9

<PAGE>




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 0.5%  for the  first $5
million,  and 1.25% for the second $5  million.  Also,  the  Company  must pay a
quarterly fee equal to 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  $429,000 and $439,000 of internal costs
during  the three  months  ended  March 31,  1997 and 1996,  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.

4.  Earnings per Share

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share,  which is required to be adopted on December 31, 1997.
At that time,  the Company will be required to change the method  currently used
to compute  earnings per share and to restate all prior  periods.  Under the new
requirements for calculating  primary earnings per share, the dilutive effect of
stock  options  will be excluded.  The impact on both primary and fully  diluted
earnings per share for the first quarter ended March 31, 1997 and March 31, 1996
is not expected to be material.

                                       10

<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  it's
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
Reserves"  in the  Company's  Annual  Report  on Form  10-K for the  year  ended
December 31, 1996,  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 First 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
                                                                                             ended March 31,
                                                                                        -------------------------
                                                                                         1997               1996
                                                                                        ------             ------
    Net Production:
<S>                                                                                     <C>               <C>  
      Gas (MMcf) ...................................................................      2,227             2,368
      Oil (MBbl)....................................................................         70                70
    Average Sales Price:
      Gas (per Mcf) (1) ............................................................    $  2.99           $  2.46
      Oil (per Bbl).................................................................    $ 22.29           $ 19.85
    Average Production Costs:
      (per Mcfe) (2)................................................................    $  0.29           $  0.23

    Depletion rate: (per Mcfe) .....................................................    $  1.30           $  1.15
<FN>

(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.
</FN>
</TABLE>






                                       11

<PAGE>



Three months ended March 31, 1997 and 1996

Revenues

Total revenues increased $1.1 million (15%) to $8.4 million for the three months
ended March 31,  1997 from $7.3  million  for the three  months  ended March 31,
1996.  The primary  reason for the  increase  was the neutral  effect of the gas
hedges  reflected in the first quarter of 1997 compared with an unfavorable  gas
hedge  realized in the first quarter of 1996.  Additionally,  higher oil and gas
prices  during  the  first  quarter  of 1997  added  to the  revenues,  but were
partially offset by an overall decrease in production.

Expenses

Total expenses increased $1.1 million (24%) to $5.8 million for the three months
ended March 31,  1997 from $4.7  million  for the three  months  ended March 31,
1996.  Interest  expense  increased  $423,000  (95%) to  $866,000  for the first
quarter of 1997 from $443,000 for the same period in 1996.  This increase is due
to increased  borrowing under the Company's  credit facility coupled with higher
interest  rates than during the first quarter of 1996.  Administrative  expenses
increased  $325,000 (85%) to $707,000 for the three month period ended March 31,
1997,  from  $382,000 for the same period in 1996 due primarily to the severance
payment to the Company's former Chief Financial Officer. Depreciation, depletion
and  amortization  increased  $228,000 (7%) to $3.5 million for the three months
ended  March 31,  1997 from $3.2  million  for the same period in 1996 due to an
increase in the depletion rate.  Production  costs  increased  $137,000 (22%) to
$765,000 for the three  months  ended March 31, 1997 from  $628,000 for the same
period in 1996 due primarily to transportation  costs associated with Vermillion
Block 203, Mustang Island Block 858 and Main Pass Block 262.

Net Income

Net Income  decreased  $43,000 (2%) to $2.55  million or $0.15 per share for the
quarter ended March 31, 1997 from $2.59 million, or $0.15 per share for the same
period in 1996.

Capital Resources and Liquidity

At March 31, 1997,  the Company had existing cash and cash  investments  of $2.5
million.  Net cash  provided by  operating  activities  was $3.3 million for the
three months ended March 31, 1997 compared with $4.7 million for the same period
in 1996.  The primary  reason for this  decrease in cash  provided by  operating
activities was increased working capital requirements partially offset by higher
results  of  operations  (or  earnings   before   depreciation,   depletion  and
amortization).  Net cash used in investing activities for the three months ended
March 31, 1997 was $8.1 million  compared with $14.5 million for the same period
in 1996. This decrease was principally due to less  expenditures for exploration
and  development  projects in the first  quarter of 1997 when  compared with the
same period in 1996.

Net cash provided by financing activities for the first three months of 1997 was
$877,000  compared  with $8.0  million  for the same  period  in 1996.  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.




                                       12

<PAGE>





In the first quarter the Company  participated in the drilling of one successful
development well on East Cameron Blocks 331/332 (20% WI). This well is scheduled
for  completion  in the  second  quarter  of  1997.  The  Company  is  currently
participating  in a sidetrack  operation of the A-6 well located on East Cameron
Blocks  331/332.  Upon  completion  of this  operation,  the A-11  well  will be
sidetracked  followed by  completions  on the A-11 well,  the A-6ST and the A-14
well. The Company owns a 20% working interest in these three wells.

During  the first  quarter,  completion  operations  were  begun on the  Company
operated Ship Shoal Block 261.  Platform and pipeline  installations  are almost
complete and first production is expected in mid to late May. The Company owns a
50% working interest in Ship Shoal Bock 261.

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 8
blocks in the Gulf of Mexico  Central Area Lease Sale held on March 5, 1997. The
Company's  interest in these blocks ranges from 20 to 100 percent.  To date, one
block has been awarded to the Company. If all eight blocks are awarded,  related
rental and lease bonus liability will total $6.5 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 a number of exploration
wells in the second quarter of 1997,  including  Grand Isle Block 77 (33.3% WI),
East  Cameron  Block  305 (50%  WI),  Eugene  Island  Block 60 (25% WI) and East
Cameron  Block  332 #8 (20%  WI).  The  Company  will  also  participate  in the
development of East Cameron Block 349 (37.5% WI) and West Cameron Block 263 (50%
WI). The Company expects capital expenditures during 1997 to total approximately
$46 million.  The Company's  capital  resources  consist  primarily of borrowing
capacity under the INCC Credit  Agreement ($22.0 million under Facility A and up
to $10 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  either the  existing  INCC Credit  Agreement or a new
facility will be sufficient to finance the  currently  planned  exploration  and
development  expenditures  through  December  1997.  On  September  30, 1997 the
borrowings  outstanding  under  Facility A will be converted to a term loan that
requires  quarterly  repayments  of  principal  beginning  January 1, 1998 on an
amortization  schedule  through March 31, 2001. All borrowings  under Facility B
are due on December 31, 1997. Management of the Company believes that it will be
able to negotiate an extension of the INCC credit facility or to negotiate a new
credit facility  before  September 30, 1997 that will extend the credit facility
at least to the end of this year.

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 or a new facility.
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




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<PAGE>



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 and
may require the Company to curtail its exploration and development  program.  In
addition, the Company does not act as operator with respect to a majority 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.

In March 1997, the Company  retained the  investment  banking firm of Donaldson,
Lufkin & Jennette  to assist the  Company in the  exploration  of its  strategic
alternatives, a process that is continuing.

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 1996 or the first three months of 1997.

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.

The Company entered into a number of gas price swap transactions under which the
Company  received a fixed price per MMBtu and paid a floating price based on the
settlement  prices for the NYMEX  Natural Gas futures  contract for the delivery
month.  During  the first  quarter  of 1997 and 1996 oil and gas  revenues  were
increased $1,000 and decreased  $847,000,  respectively,  as a result of hedging
transactions. The Company currently has no swap hedging transactions in place.

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.



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<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

Effective March 17, 1997, J. Munro M.  Sutherland's  employment as the Company's
Senior Vice  President/Treasurer,  was terminated by the Company pursuant to the
Company's employment  agreement with Mr. Sutherland (the "Sutherland  Employment
Agreement")  without  due  cause  (as due  cause is  defined  in the  Sutherland
Employment  Agreement).  A description of the severance  payment Mr.  Sutherland
received  pursuant to the  Sutherland  Employment  agreement is set forth in the
Company's  Form 10-K/A,  dated April 30, 1997, and filed with the Securities and
Exchange Commission on May 1, 1997. A. Allen Paul, Vice  President/Marketing and
Administration  has been  appointed  as Senior  Vice  President/Treasurer  on an
interim basis.  The Company plans to retain a search firm to find a successor to
Mr. Sutherland.  Mr. Sutherland continues to serve as a Director of the Company.
In addition,  on March 17, 1997 the Company  announced  that it had retained the
investment banking firm of Donaldson, Lufkin & Jenrette to assist the Company in
the exploration of strategic alternatives. On March 31, 1997, James M. Alexander
and Thomas R. Hix resigned from the Board of Directors.

On March 27, 1997, the Board of Directors of the Company  declared a dividend of
one preferred  share  purchase right (a "Right") for each  outstanding  share of
common stock, par value $.01 per share, of the Company (the "Common Stock"). The
dividend was payable on April 11, 1997 (the "Record  Date") to the  stockholders
of record on that date.  Each Right entitles the  registered  holder to purchase
from the Company one one-thousandth of a share of Series A Junior  Participating
Preferred  Stock,  par value  $.01 per share,  of the  Company  (the  "Preferred
Stock") at a price of $40 per one  one-thousandth  of a share of Preferred Stock
(the "Purchase Price"), subject to adjustment.  The description and terms of the
Rights are set forth in a Rights  Agreement  dated as of April 1,  1997,  as the
same may be amended  from time to time (the  "Rights  Agreement"),  between  the
Company  and STOCK  TRANSFER  COMPANY OF  AMERICA,  INC.,  as Rights  Agent (the
"Rights  Agent").  A copy of the  Rights  Agreement  has  been  filed  with  the
Securities  and Exchange  Commission  as an exhibit to the  Company's  Form 8-K,
dated as of April 1,  1997 and  filed on April 3,  1997.  (A copy of the  Rights
Agreement is available free of charge from the Company.)

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<PAGE>








ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Each of the following exhibits is filed herewith:

         10.1     Fifth   Amendment  to  First   Amended  and  Restated   Credit
                  Agreement,  dated as of March 17,  1997,  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).

         10.2     Rights  Agreement  dated as of April 1,  1997,  between  Cairn
                  Energy USA, Inc. and StockTransfer  Company of America,  Inc.,
                  which includes the form of Certificate of Designation  for the
                  Series A Junior Participating Preferred Stock, $.01 par value,
                  as Exhibit A, the form of Right  Certificate as Exhibit B, and
                  the Summary of Rights as Exhibit C. (Incorporated by reference
                  to Exhibit 4.1 of the Company's  Form 8-K dated as of April 1,
                  1997 and filed on April 3, 1997.)

         27.1     Financial Data Schedule

         (b)      Reports on Form 8-K

                  A Form 8-K was filed on April 3, 1997 to report  that on March
                  27, 1997,  the Board of  Directors  of Cairn Energy USA,  Inc.
                  (The  "Company")  declared a dividend of one  preferred  share
                  purchase  right  (a  "Right")  for each  outstanding  share of
                  common stock,  par value $.01 per share,  of the Company.  The
                  dividend  was payable to  stockholders  of record on April 11,
                  1997. The description and terms of the Rights are set forth in
                  a Rights Agreement dated as of April 1, 1997.





















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<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: May  9, 1997                           /s/ Michael R. Gilbert
                                             -----------------------------------
                                             Michael R. Gilbert
                                             President




                                             /s/ A. Allen Paul
                                             -----------------------------------
                                             A. Allen Paul
                                             Senior Vice President and Treasurer
                                             (Principal Financial Officer)




                                       17