<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 June 30, 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 July 31, 1997:


    Common Stock, $.01 per value                    8,586,519
    ----------------------------                    ---------
        (Title of Class)                (Number of Shares Outstanding)
<PAGE>
 
                                     INDEX
                                     -----



<TABLE>
<CAPTION>
 
 
 
                                                                                          PAGE NO.
                                                                                         ------------
 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
<S>                                                                                      <C>
 
     Consolidated Balance Sheet at June 30, 1997 and December 31, 1996                        1
                                                                              
     Consolidated Statement of Operations for the quarters and the six months                 2
      ended June 30, 1997 and 1996                                             
 
     Consolidated Statement of Cash Flows for the six months ended June 30, 1997              3
      and 1996
 
     Notes to Consolidated Financial Statements                                               4
 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of  Operations                                                                       6
 
 
Item 3.  Quantitative and Qualitative Disclosure about Market Risk                           12
 
 
PART II.  OTHER INFORMATION                                                                  13
                                                                                             
 
SIGNATURES                                                                                   15

</TABLE>

 
<PAGE>
 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

                            PETROCORP INCORPORATED
                            ----------------------
                          CONSOLIDATED BALANCE SHEET
                          --------------------------
             (dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
 
                                                                              JUNE 30,    December 31,
                                                                                1997          1996
                                                                            -----------   ------------
                             ASSETS                                         (UNAUDITED)
                             ------
<S>                                                                           <C>         <C>
 
Current assets:
 Cash and cash equivalents                                                  $   18,622    $     8,859
 Accounts receivable, net                                                        5,035          8,114
 Other current assets                                                              352            312
                                                                            ----------    ----------- 
   Total current assets                                                         24,009         17,285
                                                                            ----------    -----------
Property, plant and equipment:
 Proved oil and gas properties, at cost, full cost method, net
   of accumulated depreciation, depletion and amortization                      92,374         93,161
 Unproved oil and gas properties, not subject to depletion                       7,412          5,279
 Plant and related facilities, net                                               4,268          4,585
 Other, net                                                                      1,939          2,257
                                                                            ----------    -----------     
                                                                               105,993        105,282
                                                                            ----------    -----------
Other assets, net                                                                1,489            297
                                                                            ----------    -----------
   Total assets                                                             $  131,491    $   122,864
                                                                            ==========    ===========

     LIABILITIES AND SHAREHOLDERS' EQUITY
     ------------------------------------                                   
 
Current liabilities:
 Accounts payable                                                           $    3,977    $     6,007
 Accrued liabilities                                                             3,031          3,569
 Current portion of long-term debt                                               6,057          5,763
                                                                            ----------    -----------
    Total current liabilities                                                   13,065         15,339
                                                                            ----------    -----------
Long-term debt                                                                  43,491         33,462
                                                                            ----------    -----------
Deferred revenue                                                                 1,008          1,395
                                                                            ----------    -----------
Deferred income taxes                                                            7,204          7,003
                                                                            ----------    -----------
Commitments and contingencies (Note  6)
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 (8,586,519 shares and 8,584,519 shares
  outstanding at June 30, 1997 and December 31, 1996, respectively)                 86             86
 Additional paid-in capital                                                     71,168         71,170
 Retained earnings (accumulated deficit)                                          (580)        (1,799)
 Foreign currency translation adjustment                                        (3,654)        (3,475)
 Treasury stock, at cost  (29,697 shares at June 30, 1997 and
  31,697 shares at December 31, 1996)                                             (297)          (317)
                                                                            ----------    -----------
    Total shareholders' equity                                                  66,723         65,665
                                                                            ----------    -----------
    Total liabilities and shareholders' equity                              $  131,491    $   122,864
                                                                            ==========    ===========
</TABLE>
        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)

<TABLE>
<CAPTION>
 
 
                                             For the three months                 For the six months
                                                 ended June 30,                      ended June 30,
                                           ----------------------------        --------------------------
                                              1997             1996               1997         1996
                                           ---------        -----------        ----------    ------------
<S>                                        <C>              <C>                <C>           <C>
 
REVENUES:
    Oil and gas                            $      7,166     $     6,938        $   16,141    $     13,814
    Plant processing                                357             459               721             926
    Other                                            63              (8)              118             179
                                           ------------     -----------        ----------    ------------
                                                  7,586           7,389            16,980          14,919
                                           ------------     -----------        ----------    ------------
EXPENSES:                                                                     
                                                                              
    Production costs                              1,753           1,671             3,571           3,283
    Depreciation, depletion and                                                                          
      amortization                                4,070           3,061             7,917           6,154
    General and  administrative                   1,351           1,210             2,649           2,457
    Other operating expenses                         11              38                85             104
                                           ------------     -----------        ----------    ------------
                                                  7,185           5,980            14,222          11,998
                                           ------------     -----------        ----------    ------------
INCOME FROM OPERATIONS                              401           1,409             2,758           2,921
                                           ------------     -----------        ----------    ------------
OTHER INCOME (EXPENSES):                                                                                 
                                                                                                         
    Investment and other income                     132             258               288           1,433
    Interest expense                               (796)           (892)           (1,590)         (1,800)
    Other expenses                                    5              (7)               (2)             (7)
                                           ------------     -----------        ----------    ------------
                                                   (659)           (641)           (1,304)           (374)
                                           ------------     -----------        ----------    ------------
INCOME (LOSS) BEFORE INCOME TAXES                  (258)            768             1,454           2,547
Income tax provision (benefit)                     (502)            248               235             778 
                                           ------------     -----------        ----------    ------------
NET INCOME                                 $        244     $       520        $    1,219    $      1,769
                                           ============     ===========        ==========    ============ 
NET INCOME PER COMMON SHARE                $       0.03     $      0.06        $     0.14    $       0.20
                                           ============     ===========        ==========    ============ 
WEIGHTED AVERAGE NUMBER                                                                                  
     OF COMMON SHARES                             8,699           8,698             8,699           8,698 
                                           ============     ===========        ==========    ============ 
</TABLE>

   The accompanying notes are an integral part of this statement. 

                                       2
<PAGE>
 
                            PETROCORP INCORPORATED
                            ----------------------
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                     ------------------------------------
                            (amounts in thousands)
                                   (Unaudited)
<TABLE> 
<CAPTION> 

                                                                   For the six months
                                                                      ended June 30,
                                                                ----------------------------   
                                                                     1997           1996
                                                                ------------      ----------
<S>                                                             <C>               <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                      $     1,219      $    1,769
 Adjustments to reconcile net income to net
  cash provided by operating activities:
   Depreciation, depletion and amortization                            7,917           6,154   
   Deferred income tax provision                                         235             778   
   Gain on sale of gas gathering system                                    -            (999)  
                                                                 -----------      ---------- 
                                                                       9,371           7,702                   
   Change in operating assets and liabilities:                                                 
    Accounts receivable                                                3,079           2,365   
    Other current assets                                                 (40)          1,076   
    Accounts payable                                                  (2,030)          1,767   
    Accrued liabilities                                                 (538)         (1,241)  
   Other                                                                (369)           (190)  
                                                                 -----------      ---------- 
    NET CASH PROVIDED BY OPERATING ACTIVITIES                          9,473          11,479   
                                                                 -----------      ---------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                          
 Additions to oil and gas properties                                  (8,598)         (6,018)  
 Additions to plant and related facilities                              (100)           (184)  
 Additions to other property, plant and equipment                       (107)           (159)  
 Additions to other assets                                            (1,275)              -   
 Proceeds from sale of oil and gas properties                              -           3,950   
 Proceeds from sale of interest in plant and related facilities            -           1,211   
 Proceeds from sale of other property, plant and equipment                 -           3,838   
                                                                 -----------      ---------- 
    NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES              (10,080)          2,638   
                                                                 -----------      ---------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                          
 Proceeds from long-term debt                                         13,112              55   
 Repayment of long-term debt                                          (2,728)         (3,053)
                                                                 -----------      -----------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES               10,384          (2,998)  
                                                                 -----------      ---------- 
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                  (14)             15   
                                                                 -----------      ---------- 
NET INCREASE IN CASH AND CASH EQUIVALENTS                              9,763          11,134   
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       8,859          11,764   
                                                                 -----------      ---------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $    18,622      $   22,898   
                                                                 ===========      ==========  
</TABLE>

        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 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.  In the future,
should product prices decline further 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.


NOTE 3 - LONG-TERM DEBT:

  The Company has entered into a $50.0 million revolving credit agreement dated
June 26, 1997 with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia.  Initial borrowing availability under this new 

                                       4
<PAGE>
 
facility was $25.0 million. On June 30, 1997, the Company was advanced $13.0
million to primarily fund a July 1, 1997 acquisition of producing oil and gas
properties with an adjusted purchase price of $9.1 million and to replace
amortizing principal payments under the Series A and B Notes of the Company.
Such debt has been classified as "long-term" on the accompanying consolidated
balance sheet as of June 30, 1997. The facility is for a five-year term through
July 1, 2002 with quarterly borrowing base amortization beginning September 30,
2000. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 5/8% to 1 1/4% on Eurodollar loans and 1/8% to 1/4% on Prime
loans. The Company initially funded the $13.0 million advance with a Prime loan
but rolled-over the debt into a six-month Eurodollar loan on July 7, 1997 with
an interest rate of 6.8%.


NOTE 4 - 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 June 30, 1997, $1.1
million has been recognized, leaving a balance of $1.0 million in "deferred
revenue" on the consolidated balance sheet as of June 30, 1997.


NOTE 5 - PENDING ACCOUNTING CHANGES:

  In February 1997, the Financial Accounting Standards Board (the FASB) 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 and six-
month periods ended June 30, 1997 and 1996, basic and diluted net income per
common share would be unchanged compared to the previously reported amounts.

  In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (SFAS 130).  This statement requires
disclosure of changes in equity from non-owner sources in a primary financial
statement and the accumulated balance of such items as a separate caption within
the shareholders' equity section of the balance sheet.  SFAS 130 is effective
for periods beginning after December 15, 1997.  This pronouncement will impact
the disclosure of the Company's foreign currency translation adjustment reported
on the accompanying consolidated balance sheet.


NOTE 6 - 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 2.  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:



<TABLE>
<CAPTION>
 
 
 
                                                              For the quarter       For the six months
                                                               ended June 30,         ended June 30, 
                                                              ----------------      ---------------- 
                                                                1997       1996       1997     1996  
                                                              --------   --------   --------  ------- 
<S>                                                           <C>        <C>        <C>       <C>   
PRODUCTION:
     United States:
            Oil (Mbbls).....................................       142        169        291      336
            Gas (MMcf)......................................     1,056      1,398      2,172    2,724
            Oil equivalents (MBOE)..........................       318        402        653      790
     Canada:
            Oil (Mbbls).....................................        38        ---         70      ---
            Gas (MMcf)......................................     1,343        758      2,337    1,615
            Oil equivalents (MBOE)..........................       262        126        460      269
     Total: 
            Oil (Mbbls).....................................       180        169        361      336
            Gas (MMcf)......................................     2,399      2,156      4,509    4,339 
            Oil equivalents (MBOE)..........................       580        528      1,113    1,059 
AVERAGE SALES PRICES (including the effects of hedging):                                              
     United States:                                                                            
            Oil (per Bbl)...................................    $18.86     $17.47     $20.47   $17.82 
            Gas (per Mcf)...................................      2.08       2.19       2.51     2.15 
     Canada:                                                                                   
            Oil (per Bbl)...................................     18.47        ---      19.62      --- 
            Gas (per Mcf)...................................      1.18       1.21       1.43     1.22 
     Weighted average:                                                                         
            Oil (per Bbl)...................................     18.78      17.47      20.31    17.82 
            Gas (per Mcf)...................................      1.58       1.85       1.95     1.80 
SELECTED DATA PER BOE:                                                                                
         Average sales price................................    $12.36     $13.14     $14.50   $13.04 
         Production costs...................................      3.02       3.16       3.21     3.10 
         General and administrative expenses................      2.33       2.29       2.38     2.32 
         Oil and gas depreciation, depletion and                  
          amortization......................................      6.25       5.00       6.32     4.99 
 
</TABLE>

                                       6
<PAGE>
 
RESULTS OF OPERATIONS


Comparison of Second Quarter 1997 and Second Quarter 1996

  Overview.  Cash flow before changes in operating assets and liabilities
remained level at $3.8 million between quarters.  Net income decreased 53% to
$244,000, or $0.03 per share, in the second quarter of 1997 compared to
$520,000, or $.06 per share, recorded in the second quarter of 1996.  Second
quarter 1997 net income was significantly impacted by increased DD&A as a result
of the year-end 1996 reduction in proved reserves at the Company's Texas
waterflood project.  Assuming the reduction in reserves occurred at the
beginning of 1996 rather than at the end, second quarter 1997 net income would
have increased 30% from $188,000, or $0.02 per share, that would have been
reported in the second quarter of 1996.

  Revenues.  Total revenues increased 3% to $7.6 million in the second quarter
of 1997 compared to $7.4 million in the second quarter of 1996.  Oil production
increased 7% to 180 Mbbls from 169 Mbbls.  Natural gas production increased 11%
to 2,399 MMcf in the second quarter of 1997 from 2,156 MMcf in the second
quarter of 1996, resulting in overall production increasing 10% to 580 MBOE from
528 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
increase in natural gas production is primarily the result of an increase in the
Company's share of gas production 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 decreased 5% to $2.08 per Mcf in
the second quarter of 1997 from $2.19 per Mcf in the second quarter of 1996,
while the average Canadian natural gas price decreased 2% to $1.18 from $1.21.
The Company's composite average oil price increased 8% to $18.78 per barrel in
the second quarter of 1997 from $17.47 per barrel in the second quarter of 1996.
As a result of hedging transactions, the Company's second quarter 1996 average
oil price was reduced by $3.18 per barrel from the average price that would have
otherwise been received.  No hedging transactions were in place during the
second quarter of 1997.  Primarily as a result of the increase in production,
oil and gas revenues increased 3% to $7.2 million in the second quarter of 1997
from $6.9 million in the second quarter of 1996.  Plant processing revenues
decreased 22% to $357,000 from $459,000 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.

  Production Costs.  Production costs increased 5% to $1.8 million in the second
quarter of 1997 compared to $1.7 million in the second quarter of 1996, while
production costs per BOE decreased 4% to $3.02 per BOE from $3.16 per BOE.

  Depreciation, Depletion & Amortization (DD&A).  Total DD&A increased 33% to
$4.1 million in the second quarter of 1997 from $3.1 million in the second
quarter of 1996, primarily as a result of the increase in the oil and gas DD&A
rate to $6.25 per BOE from $5.00 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 12% to $1.35 million in the second quarter of 1997 from $1.2 million
in the second quarter of 1996.  This increase  is  largely due to an increase in
contract and temporary personnel associated with the Millarville Acquisition and
other ongoing projects coupled with 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 49% to
$132,000 in the second quarter of 1997 from $258,000 in the second quarter of
1996 as more cash was available for investing during the second quarter of 1996.

  Interest Expense.  Interest expense decreased 11% to $796,000 in the second
quarter of 1997 from $892,000 in the second quarter of 1996, due to a reduction
in average outstanding debt between periods.

  Income Taxes.  The Company recorded a $502,000 income tax benefit on a pre-tax
loss of $258,000 in the second quarter of 1997 compared to an income tax
provision of $248,000 on pre-tax income of $768,000 in the second quarter of
1996 with an effective tax rate of 32%.  During the second quarter of 1997 the
Company recorded an income tax benefit on its U.S. operations with an effective
tax rate of 37% which was partially offset by an income tax provision on its
Canadian operations with a disproportionately lower effective tax rate of 23%.
Additionally, a downward adjustment to the Canadian tax provision was recorded
in the second quarter of 1997.  As a result, the second quarter 1997 income tax
benefit was 194% of the pre-tax loss.


Comparison of Six Months Ended June 30, 1997 and Six Months Ended June 30, 1996

  Overview.  As a result of increases in product prices and production, cash
flow before changes in operating assets and liabilities increased 22% to $9.4
million in the first six months of 1997 compared to $7.7 million in the first
six months of 1996.  Net income increased 7% to $1.2 million, or $0.14 per
share, compared to $1.1 million, or $0.13 per share (excluding a $629,000, or
$.07 per share, after-tax gain on the sale of a gas gathering system) for the
corresponding periods.  First half 1997 net income was significantly impacted by
increased DD&A as a result of the year-end 1996 reduction in proved reserves at
the Company's Texas waterflood project.  Assuming the reduction in reserves
occurred at the beginning of 1996 rather than at the end and excluding the gain
on the 1996 sale of the gas gathering system, first half 1997 net income would
have increased 174% from $445,000, or $0.05 per share, that would have been
reported in the first half of 1996.

  Revenues.  Total revenues increased 14% to $17.0 million in the first six
months of 1997 compared to $14.9 million in the first six months of 1996.  Oil
production increased 7% to 361 Mbbls from 336 Mbbls.  Natural gas production
increased 4% to 4,509 MMcf in the first six months of 1997 from 4,339 MMcf in
the first six months of 1996, resulting in overall production increasing 5% to
1,113 MBOE from 1,059 MBOE. The increase in oil volume is primarily the result
of oil production related to the properties acquired in the December 1996
Millarville Acquisition.  The increase in natural gas production is primarily
the result of an increase in the Company's share of gas production 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 17% to $2.51 per Mcf in
the first six months 1997 from $2.15 per Mcf in the first six months of 1996,
while the average Canadian natural gas price increased 17% to $1.43 from $1.22.
The Company's composite average oil price increased 14% to $20.31 per barrel in
the first six months of 1997 from $17.82 per barrel in the first six months of
1996.  As a result of hedging transactions, the Company's first six months of
1996 average oil and gas prices 

                                       8
<PAGE>
 
were reduced by $1.80 per barrel and $.04 per Mcf, respectively, from the
average prices that would have otherwise been received. No hedging transactions
were in place during the first six months of 1997. As a result of the increases
in product prices and production volumes, oil and gas revenues increased 17% to
$16.1 million in the first six months of 1997 from $13.8 million in the first
six months of 1996. Plant processing revenues decreased 22% to $721,000 from
$926,000 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.

  Production Costs.  Production costs increased 9% to $3.6 million in the first
six months of 1997 compared to $3.3 million in the first six months of 1996,
while production costs per BOE increased 4% to $3.21 per BOE from $3.10 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 and initiation of waterflood operations in the Southwest
Oklahoma City field.

  Depreciation, Depletion & Amortization (DD&A).  Total DD&A increased 29% to
$7.9 million in the first six months of 1997 from $6.2 million in the first six
months of 1996, primarily as a result of the increase in the oil and gas DD&A
rate to $6.32 per BOE from $4.99 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.

  General and Administrative Expenses.  General and administrative expenses
increased 8% to $2.6 million in the first six months of 1997 from $2.5 million
in the first six months 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 80% to
$288,000 in the first six months of 1997 from $1.4 million in the first six
months of 1996 as a result of a $1.0 million pre-tax gain on the sale of the
Company's Oklahoma gas gathering system included in investment and other income
in the first quarter of 1996.

  Interest Expense.  Interest expense decreased 12% to $1.6 million in the first
six months of 1997 from $1.8 million in the first six months of 1996, due to a
reduction in average outstanding debt.

  Income Taxes.  The Company recorded a $235,000 income tax provision on pre-tax
income of $1.5 million with an effective tax rate of 16% in the first six months
of 1997 compared to an income tax provision of $778,000 on pre-tax income of
$2.5 million with an effective tax rate of 31% in the first six months of 1996.
During the first six months of 1997 the Company recorded an income tax benefit
on its U.S. operations with an effective tax rate of 35% which was more than
offset by an income tax provision on its Canadian operations, but with a
disproportionately lower effective tax rate of 23%.  Accordingly, the result was
an unusually low consolidated effective tax rate of 16%.


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  June 30, 1997, the Company
had working capital of $10.9 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 plus proceeds from new bank borrowings in excess of capital
expenditures for the period.  Net cash provided by operating activities was $9.5
million and $11.5 million for the first six months of 1997 and 1996,
respectively, while net cash 

                                       9
<PAGE>
 
provided by operating activities before changes in operating assets and
liabilities for the same periods was $9.4 million and $7.7 million,
respectively.

  The Company's total capital expenditures, including capitalized internal
costs, were $10.1 million and $6.4 million in the first six months of 1997 and
1996, respectively, and were primarily related to exploration and development.
However, $1.1 million in 1997 was a deposit recorded in "other assets" on the
accompanying consolidated balance sheet at June 30, 1997 related to producing
oil and gas properties acquired on July 1, 1997 while $2.3 million in 1996 was
related to producing property acquisitions.

  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 June 30, 1997,  $1.1
million has been recognized, leaving a balance of $1.0 million in "deferred
revenue" on the consolidated balance sheet as of June 30, 1997.

  On July 1, 1997, the Company acquired producing oil and gas properties in
Louisiana and Alabama for an adjusted purchase price of $9.1 million (the Gulf
Coast Acquisition).

  The Company has entered into a $50.0 million revolving credit agreement dated
June 26, 1997 with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia.  Initial borrowing availability under this new facility was $25.0
million.  On June 30, 1997, the Company was advanced $13.0 million to primarily
fund the Gulf Coast Acquisition and to replace amortizing principal payments
under the Series A and B Notes of the Company.  Such debt has been classified as
"long-term" on the accompanying consolidated balance sheet as of June 30, 1997.
The facility is for a five-year term through July 1, 2002 with quarterly
borrowing base amortization beginning September 30, 2000.  The interest spread
is determined from a sliding scale based on the Company's borrowing base
percentage utilization in effect from time to time.  The spread ranges from 5/8%
to 1 1/4% on Eurodollar loans and 1/8% to 1/4% on  Prime loans.  The Company
initially funded the $13.0 million advance with a Prime loan but rolled-over the
debt into a six-month Eurodollar loan on July 7, 1997 with an interest rate of
6.8%.

  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%.

  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 

                                       10
<PAGE>
 
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
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
June 30, 1997, the remaining principal balances for the Series A and B Notes
were $3.4 million and $25.1 million, respectively, for a total of $28.5 million
of which $5.3 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.

  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 June 30,
1997, the nonrecourse long-term notes payable balance was $4.4 million, of which
$757,000 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).  In the
future, should product prices decline further 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 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 June 30, 1997,
and has not hedged any of its production since October 1996.

  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.

                                       11
<PAGE>
 
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.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  Not Applicable

                                       12
<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
-----------------------------------------------------------


     (a) May 16, 1997 annual meeting of shareholders.

     (b)    (1)  Election of Directors

<TABLE>
<CAPTION>
 
 
 
                                                            Number of Votes
                               --------------------------------------------------------------------------
                                                                                      Abstentions and
         Nominee                      For                Withheld Authority          Broker Non-Votes
-------------------------  -------------------------  -------------------------  ------------------------
<S>                        <C>                        <C>                        <C>
Lealon L. Sargent                  7,986,784                     --                          --
                                   
G. Jay Erbe, Jr.                   7,986,584                    200                          --
                                   

          (2)  Adoption of the 1997 Non-Employee Director Stock Option Plan

                                                            Number of Votes
                               --------------------------------------------------------------------------
                                                                          Abstentions and
              For                            Against                     Broker Non-Votes
-------------------------------  -------------------------------  ----------------------------------------

           7,976,380                        10,404                              ---


          (3)  Ratification of the Reappointment of Price Waterhouse LLP as the Company's independent 
               accountants for the fiscal year ending December 31, 1997.

                                                            Number of Votes
                               ----------------------------------------------------------------------------
                                                                          Abstentions and
              For                            Against                     Broker Non-Votes
-------------------------------  -------------------------------  -----------------------------------------            

            7,986,784                          --                                 ---
                                 
</TABLE> 

Item 5 - Other Information
--------------------------

     Not Applicable

                                       13
<PAGE>
 
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.

          10.1*  Agreement for Purchase and Sale dated June 5, 1997 between
                 PetroCorp Incorporated and Great River Oil and Gas Corporation.
                 Incorporated by reference to Exhibit 2.1 to the Company's
                 current report on Form 8-K dated July 1, 1997.

          10.2*  First Amendment to Agreement for Purchase and Sale dated June
                 30, 1997 between PetroCorp Incorporated and Great River Oil and
                 Gas Corporation. Incorporated by reference to Exhibit 2.2 to
                 the Company's current report on Form 8-K dated July 1, 1997.

          10.3*  Credit Agreement dated as of June 26, 1997 among PetroCorp
                 Incorporated, PCC Energy Limited, PCC Energy Corp, and Toronto-
                 Dominion (Texas), Inc. and Toronto-Dominion Bank. Incorporated
                 by reference to Exhibit 10 to the Company's current report on
                 Form 8-K dated July 1, 1997.

          10.4*  1997 Non-Employee Director Stock Option Plan. Incorporated by
                 reference to Appendix A to the Company's Proxy Statement for
                 the Annual Meeting of Shareholders held on May 16, 1997.

          27     Financial Data Schedule
          ______________________________
          *  Incorporated by reference.



     (b)  Reports on Form 8-K
          -------------------

          Report on Form 8-K dated July 1, 1997 relating to the acquisition of
          oil and gas properties in Louisiana and Alabama.

                                       14
<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:         August 12, 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)

                                       15