<PAGE>
 

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

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

                 For the Quarterly period ended March 31, 1997

                                       OR

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

        For the Transition period _________________ to _________________

                         Commission File Number 0-22650

                             PETROCORP INCORPORATED
             (Exact name of registrant as specified in its charter)


            Texas                                      76-0380430
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)


     16800 Greenspoint Park Drive                      77060-2391
       Suite 300, North Atrium                         (Zip Code)
           Houston, Texas
(Address of Principal Executive Offices)


       Registrant's Telephone Number, Including Area Code: (281) 875-2500

                                 Not Applicable
   (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 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  
                                 -----         -----     


Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of April 30, 1997:


Common Stock, $.01 per value                               8,584,519
     (Title of Class)                           (Number of Shares Outstanding)
<PAGE>
 
                             PETROCORP INCORPORATED



                                     INDEX

 
 
                                                               PAGE NO.
                                                               --------
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

     Consolidated Balance Sheet at March 31, 1997 and 
      December 31, 1996                                           1

     Consolidated Statement of Operations for the three 
      months ended March 31, 1997 and 1996                        2

     Consolidated Statement of Cash Flows for the three 
      months ended March 31, 1997 and 1996                        3

     Notes to Consolidated Financial Statements                   4
 
Item 2.  Management's Discussion and Analysis of Financial 
         Condition and Results of Operations                      6
 
PART II.  OTHER INFORMATION                                      11
 
SIGNATURES                                                       12
 
 
 
 
<PAGE>
 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

                            PETROCORP INCORPORATED
                          CONSOLIDATED BALANCE SHEET
             (dollar amounts in thousands, except per share data)





                                                        MARCH 31,   December 31,
                                                          1997          1996
                                                        --------      --------
                                                       (UNAUDITED)
                                    ASSETS

Current assets:
 Cash and cash equivalents                             $  15,915     $   8,859
 Accounts receivable, net                                  4,531         8,114
 Other current assets                                        402           312
                                                        --------      --------
  Total current assets                                    20,848        17,285
                                                        --------      --------
Property, plant and equipment:
 Proved oil and gas properties, at cost, full cost
  method, net of accumulated depreciation, depletion
  and amortization                                        93,161        93,161
 Unproved oil and gas properties, not subject to 
  depletion                                                6,050         5,279
 Plant and related facilities, net                         4,415         4,585
 Other, net                                                2,072         2,257
                                                        --------      --------
                                                         105,698       105,282
                                                        --------      --------
Other assets, net                                            261           297
                                                        --------      --------
    Total assets                                        $126,807      $122,864
                                                        ========      ========


                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Accounts payable                                       $  8,751      $  6,007
 Accrued liabilities                                       3,785         3,569
 Current portion of long-term debt                         5,755         5,763
                                                        --------      --------
    Total current liabilities                             18,291        15,339
                                                        --------      --------
Long-term debt                                            33,245        33,462
                                                        --------      --------
Deferred revenue                                           1,181         1,395
                                                        --------      --------
Deferred income taxes                                      7,689         7,003
                                                        --------      --------
Commitments and contingencies (Note 5)
Shareholders' equity:
 Preferred stock, $0.01 par value, 1,000,000 shares
  authorized, none issued                                      -             -
 Common stock, $0.01 par value, 25,000,000 shares 
  authorized, 8,616,216 shares issued and 8,584,519
  shares outstanding                                          86            86
 Additional paid-in capital                               71,170        71,170
 Retained earnings (accumulated deficit)                    (824)       (1,799)
 Foreign currency translation adjustment                  (3,714)       (3,475)
 Treasury stock, at cost (31,697 shares)                    (317)         (317)
                                                        --------      --------
    Total shareholders' equity                            66,401        65,665
                                                        --------      --------
    Total liabilities and shareholders' equity          $126,807      $122,864
                                                        ========      ========



        The accompanying notes are an integral part of this statement.


                                       1
<PAGE>
 

                            PETROCORP INCORPORATED
                     CONSOLIDATED STATEMENT OF OPERATIONS
                 (amounts in thousands, except per share data)
                                  (Unaudited)


                                                   For the three months
                                                      ended March 31,
                                                   --------------------
                                                     1997        1996
                                                   -------      -------

REVENUES:
 Oil and gas                                       $ 8,975      $ 6,876
 Plant processing                                      364          467
 Other                                                  55          187
                                                   -------      -------
                                                     9,394        7,530
                                                   -------      -------

EXPENSES:
 Production costs                                    1,818        1,612
 Depreciation, depletion and amortization            3,847        3,093
 General and administrative                          1,298        1,247
 Other operating expenses                               74           66
                                                   -------      -------
                                                     7,037        6,018
                                                   -------      -------
INCOME FROM OPERATIONS                               2,357        1,512
                                                   -------      -------

OTHER INCOME (EXPENSES):
 Investment and other income                           156        1,175
 Interest expense                                     (794)        (908)
 Other expenses                                         (7)           -
                                                   -------      -------
                                                      (645)         267
                                                   -------      -------

INCOME BEFORE INCOME TAXES                           1,712        1,779
Income tax provision                                   737          530
                                                   -------      -------

NET INCOME                                         $   975      $ 1,249
                                                   =======      =======

NET INCOME PER COMMON SHARE                        $  0.11      $  0.14
                                                   =======      =======

WEIGHTED AVERAGE NUMBER OF COMMON SHARES             8,698        8,698
                                                   =======      =======



        The accompanying notes are an integral part of this statement.

                                       2
<PAGE>
 


                            PETROCORP INCORPORATED
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                            (amounts in thousands)
                                  (Unaudited)
 


                                                          For the three months
                                                             ended March 31,
                                                          ---------------------
                                                            1997         1996
                                                          --------     --------

CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                               $    975     $  1,249
 Adjustments to reconcile net income to net
  cash provided by operating activities:
   Depreciation, depletion and amortization                  3,847        3,093
   Deferred income tax provision                               737          530
   Gain on sale of gas gathering system                          -         (999)
                                                          --------     --------
                                                             5,559        3,873

   Change in operating assets and liabilities:
    Accounts receivable                                      3,583          281
    Other current assets                                       (90)         581
    Accounts payable                                         2,744          524
    Accrued liabilities                                        216         (642)
   Other                                                      (214)           -
                                                          --------     --------
      NET CASH PROVIDED BY OPERATING ACTIVITIES             11,798        4,617
                                                          --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to oil and gas properties                        (4,481)      (2,426)
 Additions to plant and related facilities                     (67)          (8)
 Additions to other property, plant and equipment              (26)        (123)
 Additions to other assets                                      (6)           -
                                                          --------     --------
      NET CASH USED IN INVESTING ACTIVITIES                 (4,580)      (2,557)
                                                          --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from long-term debt                                   46           47
 Repayment of long-term debt                                  (188)        (225)
                                                          --------     --------
      NET CASH USED IN FINANCING ACTIVITIES                   (142)        (178)
                                                          --------     --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                        (20)          14
                                                          --------     --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                    7,056        1,896
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD             8,859       11,764
                                                          --------     --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                $ 15,915     $ 13,660
                                                          ========     ========



        The accompanying notes are an integral part of this statement.

                                       3

<PAGE>
 
                             PETROCORP INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



NOTE 1 - BASIS OF PRESENTATION:

  The unaudited consolidated financial statements of PetroCorp Incorporated (the
"Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1996, included in the Company's 1996 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.  Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.


NOTE 2 - PROPERTY, PLANT AND EQUIPMENT:

  The Company accounts for its oil and gas properties using the full cost
accounting rules promulgated by the Securities and Exchange Commission (the SEC)
whereby all productive and nonproductive exploration and development costs
incurred for the purpose of finding oil and gas reserves are capitalized. Such
capitalized costs include lease acquisition, geological and geophysical work,
delay rentals, drilling, completing and equipping oil and gas wells, together
with internal costs directly attributable to property acquisition, exploration
and development activities.  No gains or losses are recognized upon the sale or
other disposition of oil and gas properties, except in unusually significant
transactions.

  The costs of the Company's oil and gas properties, including estimated future
development and dismantlement costs, are depreciated on a country-by-country
basis using a composite unit-of-production rate.  An additional valuation
adjustment is made on a country-by-country basis if net capitalized costs of the
Company's oil and gas properties exceed the capitalization ceiling, which is
calculated on a quarterly basis as the sum of (1) the present value (10%) of
future net revenues from estimated production of proved oil and gas reserves
plus (2) the lower of cost or estimated fair value of the unproved properties,
less (3) the related income tax effects.

  Product prices continue to be volatile.  Since December 31, 1996, U.S. and
Canadian oil and gas prices have declined significantly.  Companies that follow
the full cost accounting method are required to make the quarterly "ceiling
test" calculations using product prices in effect at that time.  However, the
full cost rules allow companies to include the impact of subsequent price
increases, if any, in the ceiling test calculations.  At March 31, 1997, using
product prices in effect at that time, the Company had ceiling shortfalls of
$1.7 million and $400,000, respectively, related to its U.S. and Canadian oil
and gas properties.  Because of subsequent increases in both oil and gas prices
in the U.S. and Canada, the Company was not required to take a valuation
adjustment against its oil and gas property balances.  In the future, however,
should product prices decline and depending on drilling results, the Company
could potentially be required to record a valuation adjustment to its oil and
gas property balances, resulting in a charge against earnings.


                                       4
<PAGE>
 
NOTE 3 - DEFERRED REVENUE:

  In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million.  The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was  deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field.  Through March 31, 1997,
$908,000 has been recognized, leaving a balance of $1.2 million in "deferred
revenue" on the consolidated balance sheet as of March 31, 1997.


NOTE 4 - EARNINGS PER SHARE:

  In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128), which
established new guidelines for computing and presenting earnings per share and
is effective for financial statements issued for periods ending after December
31, 1997.  If SFAS 128 had been in effect for the three-month periods ended
March 31, 1997 and 1996, basic and diluted net income per common share would be
unchanged compared to the previously reported amounts.


NOTE 5 - COMMITMENTS AND CONTINGENCIES:

  There are claims and actions pending against the Company.  In the opinion of
management, the amounts, if any, which may be awarded in connection with any of
these claims and actions would not be material to the Company's consolidated
financial position or results of operations.


                                       5

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

GENERAL

  The Company's principal line of business is the production and sale of its oil
and natural gas reserves located in North America.  Results of operations are
dependent upon the quantity of production and the price obtained for such
production.  Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period.  Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.

  The following table reflects certain operating data for the periods presented:


                                                                 For the three
                                                                 months ended
                                                                   March 31,
                                                                 --------------
                                                                  1997    1996
                                                                 ------  ------
     PRODUCTION:
         United States:
             Oil (Mbbls)                                            149     167
             Gas (MMcf)                                           1,116   1,326
             Oil equivalents (MBOE)                                 335     388
         Canada:
             Oil (Mbbls)                                             32       -
             Gas (MMcf)                                             994     857
             Oil equivalents (MBOE)                                 198     142
         Total:
             Oil (Mbbls)                                            181     167
             Gas (MMcf)                                           2,110   2,183
             Oil equivalents (MBOE)                                 533     531
     AVERAGE SALES PRICES (includes the effects of hedging):
         United States:
             Oil (per Bbl)                                       $22.00  $18.17
             Gas (per Mcf)                                         2.92    2.10
         Canada:
             Oil (per Bbl)                                        20.98       -
             Gas (per Mcf)                                         1.77    1.23
         Weighted average:
             Oil (per Bbl)                                        21.82   18.17
             Gas (per Mcf)                                         2.38    1.76
     SELECTED DATA PER BOE:
         Average sales price                                     $16.84  $12.95
         Production costs                                          3.41    3.04
         General and administrative expenses                       2.44    2.35
         Oil and gas depreciation, depletion and amortization      6.39    4.98
 

                                       6
<PAGE>
 
RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996

  Overview.  Income from operations increased 56% to $2.4 million in the first
quarter of 1997 compared to $1.5 million in the first quarter of 1996.  During
the same periods, net income increased 57% to $975,000, or $0.11 per share, from
$620,000, or $.07 per share (excluding a $629,000, or $.07 per share, after-tax
gain on the sale of a gas gathering system).  These increases primarily reflect
the impact of improved product prices.

  Revenues.  Total revenues increased 25% to $9.4 million in the first quarter
of 1997 compared to $7.5 million in the first quarter of 1996.  Oil production
increased 8% to 181 Mbbls from 167 Mbbls.  Natural gas production decreased
slightly by 3% to 2,110 MMcf in the first quarter of 1997 from 2,183 MMcf in the
first quarter of 1996, resulting in overall production remaining level at 533
MBOE. The increase in oil volume is primarily the result of oil production
related to the properties acquired in December 1996  when the Company purchased
Millarville Oil and Gas Ltd., a privately held Alberta corporation that owns and
operates oil and gas properties in Alberta (the Millarville Acquisition).  The
decrease in natural gas production is primarily the result of U.S. and Canadian
property sales in the second and third quarters of 1996 and normal production
declines in the Company's U.S. properties.  However, partially offsetting the
decrease in total gas volumes, the Company's share of gas production increased
in the Hanlan-Robb area in western Alberta as a result of an increase in
ownership following a February 1997 payout to its joint venture partner in
addition to increased gas production from the Millarville Acquisition.
 
  The Company's average U.S. natural gas price increased 39% to $2.92 per Mcf in
the first quarter of 1997 from $2.10 per Mcf in the first quarter of 1996, while
the average Canadian natural gas price increased 44% to $1.77 from $1.23.  The
Company's average oil price increased 20% to $21.82 per barrel in the first
quarter of 1997 from $18.17 per barrel in the first quarter of 1996.  As a
result of hedging transactions, the Company's first quarter 1996 average oil and
gas prices were reduced by $0.41 per barrel and $.08 per Mcf, respectively, from
the average prices that would have otherwise been received.  No hedging
transactions were in place during the first quarter of 1997.  As a result of the
increases in product prices, oil and gas revenues increased 31% to $9.0 million
in the first quarter of 1997 from $6.9 million in the first quarter of 1996.
Plant processing revenues decreased 22% to $364,000 from $467,000 primarily as a
result of the Company's sale of a portion of its interest in the Canadian
Hanlan-Robb gas processing plant in May 1996.  Other revenues declined 71% to
$55,000 in the first quarter of 1997 from $187,000 in the first quarter of 1996
due to reduced gas gathering fees resulting from the March 1996 sale of the
Company's Oklahoma gas gathering system.

  Production Costs.  Production costs increased 13% to $1.8 million in the first
quarter of 1997 compared to $1.6 million in the first quarter of 1996, while
production costs per BOE increased 12% to $3.41 per BOE from $3.04 per BOE.  In
line with the Company's forecasts, these increases in absolute dollars and costs
per BOE are primarily the result of production costs related to the Millarville
Acquisition.
 
  Depreciation, Depletion & Amortization (DD&A).  Total DD&A increased 24% to
$3.8 million in the first quarter of 1997 from $3.1 million in the first quarter
of 1996, primarily as a result of the increase in the oil and gas DD&A rate to
$6.39 per BOE from $4.98 per BOE. The increase in the DD&A rate primarily
reflects the impact of the year-end 1996 reduction in proved reserves due to the
lack of commercial oil response at the Company's Richardson-Mueller Caddo Unit
waterflood project in northern Texas.

                                       7
<PAGE>
 
  General and Administrative Expenses.  General and administrative expenses
increased 4% to $1.3 million in the first quarter of 1997 from $1.2 million in
the first quarter of 1996, primarily due to a decrease in the Company's drilling
and operating overhead recoveries which reduce general and administrative
expenses.

  Investment and Other Income.  Investment and other income decreased 87% to
$156,000 in the first quarter of 1997 from $1.2 million in the first quarter of
1996 because a $1.0 million gain on the sale of the Company's Oklahoma gas
gathering system was included in investment and other income in the first
quarter of 1996.

  Interest Expense.  Interest expense decreased 13% to $794,000 in the first
quarter of 1997 from $908,000 in the first quarter of 1996, due to reductions in
outstanding debt.

  Income Taxes.  The Company recorded a $737,000 income tax provision on pre-tax
income of $1.7 million with an effective tax rate of 43% in the first quarter of
1997 compared to an income tax provision of $530,000 on pre-tax income of $1.8
million with an effective tax rate of 30% in the first quarter of 1996.  The
increase in the effective tax rate reflects the impact of higher non-deductible
Canadian crown royalties resulting from higher gas prices in the first quarter
of 1997.


LIQUIDITY AND CAPITAL RESOURCES

  The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. As of  March 31, 1997, the Company
had working capital of $2.6 million as compared to $1.9 million at December 31,
1996.  The increase in working capital was primarily the result of net cash
provided by operating activities before changes in operating assets and
liabilities exceeding capital expenditures for the period.  Net cash provided by
operating activities was $11.8 million and $4.6 million for the first quarters
of 1997 and 1996, respectively, while net cash provided by operating activities
before changes in operating assets and liabilities for the same periods was $5.6
million and $3.9 million, respectively.

  The Company's total capital expenditures, including capitalized internal
costs, were $4.6 million and $2.6 million in the first quarters of 1997 and
1996, respectively, and were primarily related to exploration and development.
 
  In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million.  The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was  deferred.  The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field.  Through March 31, 1997,
$908,000 has been recognized, leaving a balance of $1.2 million in "deferred
revenue" on the consolidated balance sheet as of March  31, 1997.

  In July 1993, PetroCorp refinanced its long-term debt through the issuance of
$40.0 million in senior notes.  The Note Purchase Agreement established $10.0
million of Senior Adjustable Rate Notes Series A, due June 30, 1999 (the Series
A Notes), payable to a subsidiary of USF&G Corporation, and $30.0 million of
7.55% Senior Notes Series B, due June 30, 2008 (the Series B Notes), payable to
two wholly-owned subsidiaries of CIGNA Corporation and to four unaffiliated

                                       8
<PAGE>
 
institutional investors in amounts totaling $20.0 million and $10.0 million,
respectively.  Mandatory redemptions commenced on December 31, 1994 for the
Series A Notes and commenced on December 31, 1995 for the Series B Notes.  As of
March 31, 1997, the remaining principal balances for the Series A and B Notes
were $4.6 million and $26.3 million, respectively, for a total of $30.9 million
of which $5.0 million was classified as current.

  Interest on the Series A Notes is adjustable, based on a spread of 115 basis
points over the London Interbank Offered Rate (LIBOR).  The Company may select a
rate which may be applicable for a one-, three- or six-month period.  Interest
is payable in arrears at the end of the selected period. Interest on the Series
B Notes is fixed at a rate of 7.55% and is payable semiannually in arrears.

  On December 30, 1996, the Company, through a wholly-owned Canadian subsidiary,
entered into a long-term borrowing arrangement with the Royal Bank of Canada
(RBC) whereby the Company borrowed $3.6 million to partially fund the
Millarville Acquisition.  The arrangement allows the Company to forego principal
payments during the first year.  Additionally, the Company may elect to pay
interest only (Interest Only Period) in subsequent years if the Company's
Canadian subsidiary meets certain borrowing base tests.  Otherwise, the loan
becomes payable over a three-year period as follows:  $1,575,000 in the first
year, $1,200,000 in the second year and $873,000 in the third year (the Term
Period).  The borrowings may be funded by RBC Prime loans or Bankers'
Acceptances (BA) loans.  During the Interest Only Period, the Company pays
interest at the RBC prime rate plus 1/2% on Prime loans and pays the BA rate
plus 1/2% and an acceptance fee on BA loans. During the Term Period, the Company
pays interest at the RBC prime rate plus 3/4% on Prime loans and pays the BA
rate plus 3/4% and an acceptance fee on BA loans.  The Company initially funded
the debt with a Prime loan but rolled-over the debt into a twelve-month BA loan
on January 9, 1997 with an effective interest rate of 5.8%.

  The Company's Canadian subsidiary redeemed its redeemable preferred stock on
August 9, 1994 for $7.0 million and simultaneously issued $7.0 million in
nonrecourse long-term notes payable with similar financial terms.  At March 31,
1997, the nonrecourse long-term notes payable balance was $4.5 million, of which
$755,000 was classified as current.

  Product prices continue to be volatile.  Since December 31, 1996, U.S. and
Canadian oil and gas prices have declined significantly. Under rules promulgated
by the Securities and Exchange Commission (the SEC), companies that follow the
full cost accounting method are required to make quarterly "ceiling test"
calculations using product prices in effect at that time (see Note 2 to the
Consolidated Financial Statements -- Property, Plant and Equipment).  However,
the SEC rules allow companies to include the impact of subsequent price
increases, if any, in the ceiling test calculations. At March 31, 1997, using
product prices in effect at that time, the Company had ceiling shortfalls of
$1.7 million and $400,000, respectively, related to its U.S. and Canadian oil
and gas properties. Because of subsequent increases in both oil and gas prices
in the U.S. and Canada, the Company was not required to take a valuation
adjustment against its oil and gas property balances.  In the future, however,
should product prices decline and depending on drilling results, the Company
could potentially be required to record a valuation adjustment to its oil and
gas property balances, resulting in a charge against earnings.

  From time to time, the Company has utilized hedging transactions to manage its
exposure to price fluctuations on its sales of oil and natural gas.  Realized
gains and losses from the Company's hedging activities are included in oil and
gas revenues in the period of the hedged production. Normally, any realized and
unrealized gains and losses prior to the period when the hedged production
occurs are deferred.  To date, the Company has used oil and natural gas futures
contracts 

                                       9
<PAGE>
 
or natural gas option contracts traded on the NYMEX to hedge its oil and gas
sales. The Company had no open hedging positions as of March 31, 1997.

  The Company's Board of Directors has approved a capital budget of $26.0
million for 1997.  The approved 1997 capital budget includes $16.0 million for
exploration and development projects and $10.0 million for producing property
acquisitions.  However, actual levels of expenditures for planned exploration
and development projects and producing property acquisitions may vary
significantly due to many factors, including drilling results, oil and gas
prices, industry conditions and acquisition opportunities, among others.

  The Company plans to finance its 1997 exploration and development expenditures
with its cash flow from operations while it plans to finance its 1997 producing
property acquisitions with new borrowings.  If the Company increases its
exploration, development and acquisition activities in the future, capital
expenditures may require additional funding obtained through borrowings from
commercial banks and other institutional sources, public offerings of equity or
debt securities and existing and future relationships with institutional
investment partners.


FORWARD-LOOKING STATEMENTS AND RISK FACTORS

  The information discussed herein includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").  All statements other than statements of
historical facts included herein regarding planned capital expenditures,
increases in oil and gas production, the number of anticipated wells to be
drilled after the date hereof, the Company's financial position, business
strategy and other plans and objectives for future operations, are forward-
looking statements.  Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, they do involve
certain assumptions, risks and uncertainties, and the Company can give no
assurance that such expectations will prove to have been correct.  The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors.  Among the factors that could
cause actual results to differ materially are the timing and success of the
company's drilling activities, the volatility of the prices and supply and
demand for oil and gas, the numerous uncertainties inherent in estimating
quantities of oil and gas reserves and actual future production rates and
associated costs, the usual hazards associated with the oil and gas industry
(including blowouts, cratering, pipe failure, spills, explosions and other
unforeseen hazards), and increases in regulatory requirements, as well as other
risks described more fully in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 filed with the SEC.

                                       10
<PAGE>
 
PART II.  OTHER INFORMATION

Item 1 - Legal Proceedings

     Not Applicable

Item 2 - Changes in Securities

     Not Applicable

Item 3 - Defaults upon Senior Securities

     Not Applicable

Item 4 -  Submission of Matters to Vote of Security Holders

     Not Applicable

Item 5 - Other Information

     Not Applicable

Item 6 -

     (a)  Exhibits

          3.1* Amended and Restated Articles of Incorporation of PetroCorp
               Incorporated. Incorporated by reference to Exhibit 3.2 to the
               Registration Statement on Form S-1 (Registration No. 33-36972)
               initially filed with the Securities and Exchange Commission on
               August 26, 1993 (the "Registration Statement").

          3.2* Amended and Restated Bylaws of PetroCorp Incorporated.
               Incorporated by reference to Exhibit 3.2 to the Form 10-Q for the
               quarterly period ended June 30, 1996.

          27   Financial Data Schedule
          ______________________________
          *  Incorporated by reference.

     (b)  Reports on Form 8-K

          Report on Form 8-K dated December 23, 1996 relating to the Millarville
          acquisition.

          Report on Form 8-K/A dated December 23, 1996 relating to the filing of
          financial statements relating to the Millarville Acquisition.

                                       11
<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.



                                                    PETROCORP INCORPORATED
                                                    (Registrant)



Date:  March 13, 1997                              /s/   CRAIG K.TOWNSEND
                                                   --------------------------
                                                   Craig K. Townsend
                                                   Vice President - Finance, 
                                                   Secretary and Treasurer
                                                   (On behalf of the 
                                                   Registrant and as the
                                                   Principal Financial Officer)



                                      12