<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, 1999

                                      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, 1999:


     Common Stock, $.01 per value                            8,656,019
     ----------------------------                            ---------
           (Title of Class)                       (Number of Shares Outstanding)
<PAGE>
 
                            PETROCORP INCORPORATED

                                     INDEX
                                     -----



                                                                        PAGE NO.
                                                                        --------


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

    Consolidated Balance Sheets at March 31, 1999 and December 31, 1998       1


    Consolidated Statement of Operations for the three months ended 
    March 31, 1999 and 1998                                                   2

    Consolidated Statement of Cash Flows for the three months ended 
    March 31, 1999 and 1998                                                   3

    Notes to Consolidated Financial Statements                                4

Item 2.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations                                            7

Item 3.  Quantitative and Qualitative Disclosures about Market Risk          12

PART II. OTHER INFORMATION                                                   13

SIGNATURES                                                                   14
<PAGE>
 
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                            PETROCORP INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except share amounts)
<TABLE> 
<CAPTION> 

                                                                        MARCH 31,   December 31,
                                                                          1999          1998
                                                                        ---------     ---------
                            ASSETS                                     (UNAUDITED)
<S>                                                                    <C>           <C> 
Current assets:
  Cash and cash equivalents                                             $   6,855     $   7,786
  Accounts receivable, net                                                  3,647         4,569
  Other current assets                                                        315           326
                                                                        ---------     ---------
    Total current assets                                                   10,817        12,681
                                                                        ---------     ---------
Property, plant and equipment:
  Proved oil and gas properties, at cost, full cost method, net
    of accumulated depreciation, depletion and amortization                62,541        64,179
  Unproved oil and gas properties, not subject to depletion                 9,284         9,151
  Plant and related facilities, net                                         3,619         3,768
  Other, net                                                                1,013         1,144
                                                                        ---------     ---------
                                                                           76,457        78,242
                                                                        ---------     ---------
Deferred income taxes                                                      13,548        12,761
Other assets, net                                                             373           308
                                                                        ---------     ---------
    Total assets                                                        $ 101,195     $ 103,992
                                                                        =========     =========
                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                      $   3,405     $   4,424
  Accrued liabilities                                                       2,516         3,467
  Current portion of long-term debt                                         2,723         2,710
                                                                        ---------     ---------
    Total current liabilities                                               8,644        10,601
                                                                        ---------     ---------
Long-term debt                                                             47,249        47,305
                                                                        ---------     ---------
Deferred revenue                                                              172           257
                                                                        ---------     ---------
Deferred income taxes                                                       5,114         5,085
                                                                        ---------     ---------
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,
   8,656,019 shares issued and outstanding as of March 31, 1999
   and December 31, 1998                                                       87            87
  Additional paid-in capital                                               71,245        71,245
  Accumulated deficit                                                     (25,445)      (24,324)
  Accumulated other comprehensive loss                                     (5,871)       (6,264)
                                                                        ---------     ---------
    Total shareholders' equity                                             40,016        40,744
                                                                        ---------     ---------
    Total liabilities and shareholders' equity                          $ 101,195     $ 103,992
                                                                        =========     =========
</TABLE> 
  The accompanying notes are an integral part of these financial statements.

                                       1
<PAGE>

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

                                                   For the three months
                                                      ended March 31, 
                                                   --------------------
                                                     1999        1998
                                                   --------    --------
REVENUES:
  Oil and gas                                      $  4,941    $  6,173
  Plant processing                                      454         343
  Other                                                  10         (10)
                                                   --------    --------
                                                      5,405       6,506
                                                   --------    --------
EXPENSES:
  Production costs                                    1,611       1,789
  Depreciation, depletion and amortization            2,693       3,951
  General and administrative                          1,054       1,178
  Restructuring costs                                 1,090
  Other operating expenses                               63          38
                                                   --------    --------
                                                      6,511       6,956
                                                   --------    --------
LOSS FROM OPERATIONS                                 (1,106)       (450)
                                                   --------    --------
OTHER INCOME (EXPENSES):
  Investment and other income                            88          92
  Interest expense                                     (935)       (864)
  Other expenses                                         (1)         (3)
                                                   --------    --------
                                                       (848)       (775)
                                                   --------    --------
LOSS BEFORE INCOME TAXES                             (1,954)     (1,225)
Income tax benefit                                     (833)       (589)
                                                   --------    --------
NET LOSS                                           $ (1,121)   $ (  636)
                                                   ========    ========
Net loss per common share - basic                  $  (0.13)   $  (0.07)
                                                   ========    ========
Net loss per common share - diluted                $  (0.13)   $  (0.07)
                                                   ========    ========

Weighted average number of common shares - basic      8,656       8,592

Weighted average number of common shares - diluted    8,667       8,682


  The accompanying notes are an integral part of these financial statements.

                                       2
<PAGE>

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

                                                           For the three months
                                                              ended March 31, 
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                 $ (1,121)   $   (636)
  Adjustments to reconcile net loss to net
   cash provided by operating activities:
     Depreciation, depletion and amortization                 2,693       3,951
     Deferred income tax benefit                               (833)       (589)
                                                           --------    --------
                                                                739       2,726
     Change in operating assets and liabilities:
       Accounts receivable                                      922       1,873
       Other current assets                                      11          38
       Accounts payable                                      (1,019)     (1,471)
       Accrued liabilities                                     (951)        347
     Other                                                      (85)       (126)
                                                           --------    --------
       NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     (383)      3,387
                                                           --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of oil and gas properties                              977
  Additions to oil and gas properties                          (345)     (5,482)
  Additions to plant and related facilities                     (37)        (36)
  Additions to other property, plant and equipment               (5)        (48)
  Additions to other assets                                     (81)
                                                           --------    --------
       NET CASH USED IN INVESTING ACTIVITIES                   (468)     (4,589)
                                                           --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                  132          82
  Repayment of long-term debt                                  (231)     (2,193)
                                                           --------    --------
       NET CASH USED IN FINANCING ACTIVITIES                    (99)     (2,111)
                                                           --------    --------
Effect of exchange rate changes on cash                          19           8
                                                           --------    --------
Net decrease in cash and cash equivalents                      (931)     (3,305)
Cash and cash equivalents at beginning of period              7,786       9,391
                                                           --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                 $  6,855    $  6,086
                                                           ========    ========


  The accompanying notes are an integral part of these financial statements.

                                       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, 1998, included in the Company's 1998
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 - RESTRUCTURING:

  On November 16, 1998, the Company announced that its Board of Directors had
retained CIBC Oppenheimer Corp. to advise it with respect to strategic
alternatives available to the Company for maximizing shareholder value,
including sales of some or all of the Company's assets or a merger,
reorganization or other restructuring of the Company.

  As part of its goal of maximizing shareholder value, the Company also
announced that its Board of Directors has adopted a Shareholder Rights Plan. The
newly adopted Shareholder Rights Plan is designed to protect the shareholder
against any effort to acquire the Company for less than its full value. However,
the Plan does not prevent a takeover. The intention of the Plan is to enable
shareholders to realize the long-term value of their investments and to enable
the Board of Directors to serve the interests of all shareholders.  Under the
Plan, each shareholder of record at the close of business on November 23, 1998,
received one Series A Preferred Stock Purchase Right (Right) for each share of
Common Stock held. The Rights expire on November 12, 2008.

  The Company opened a data room in February, 1999 and to date has received
expressions of interest from third parties to purchase certain assets of, or
merge with, the Company. The Board of Directors and management are currently
assessing and evaluating the specific terms of these offers. At this time, it is
not possible to determine the likelihood that a possible transaction with one or
more of these third parties would be pursued, or that another course of action
would ultimately be followed.

  The Company recorded a $1.1 million restructuring charge, included in the
accompanying consolidated statement of operations, in the first quarter of 1999
related to the Company's pursuit of strategic alternatives to maximize
shareholder value.  Included in this charge are retention costs along with
severance pay related to a 20% reduction in personnel.

                                       4
<PAGE>
 
NOTE 3 - COMPREHENSIVE INCOME OR LOSS:

  The Company implemented Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," effective January 1, 1998.  This statement
establishes new requirements for reporting comprehensive income or loss  and the
components which include the Company's foreign currency translation.  Adoption
of this statement has no impact on the Company's net loss as presented on the
accompanying consolidated statement of operations.  The Company's comprehensive
loss for the three months ended March 31, 1999 and 1998 are as follows (amounts
in thousands):

                                                   For the three
                                                    months ended
                                                      March 31,
                                                 -------------------
                                                   1999       1998
                                                 --------   --------
                                 
Net loss                                         $(1,121)     $(636)
Foreign currency translation gain                    393        186
                                                 -------      -----
Comprehensive loss                               $  (728)     $(450)
                                                 =======      =====

NOTE 4 - 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 though increasing since year-end.
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 significantly and depending
on drilling results, the Company could be required to record a valuation
adjustment to its oil and gas property balances, resulting in a non-cash charge
against earnings.

NOTE 5 - DEFERRED REVENUE:

  In March 1996, the Company sold its SW 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 

                                       5
<PAGE>
 
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 SW Oklahoma City Field. Through March
31, 1999, $1.9 million has been recognized, leaving a balance of $172,000 in
"deferred revenue" on the consolidated balance sheet as of March 31, 1999.

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.

                                       6
<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 three
                                                                      months ended
                                                                        March  31,
                                                                    ------------------
                                                                     1999        1998
                                                                    ------      ------
<S>                                                                <C>         <C> 
     PRODUCTION:
         United States:
             Oil (MBbls).......................................         88         121
             Gas (MMcf)........................................      1,236       1,164
             Gas equivalents (MMcfe)...........................      1,764       1,890
         Canada:                                                     
             Oil (MBbls).......................................         33          32
             Gas (MMcf)........................................      1,079       1,102
             Gas equivalents (MMcfe)...........................      1,277       1,294
         Total:                                                      
             Oil (MBbls).......................................        121         153
             Gas (MMcf)........................................      2,315       2,266
             Gas equivalents (MMcfe)...........................      3,041       3,184

     AVERAGE SALES PRICES:
         United States:
             Oil (per Bbl).....................................     $11.01      $14.42
             Gas (per Mcf).....................................       1.76        2.20
         Canada:                                                     
             Oil (per Bbl).....................................      10.99       12.88
             Gas (per Mcf).....................................       1.32        1.32
         Weighted average:                                           
             Oil (per Bbl).....................................      11.00       14.10                
             Gas (per Mcf).....................................       1.56        1.77

     SELECTED DATA PER MCFE:
         Average sales price...................................     $ 1.62      $ 1.94
         Production costs......................................       0.53        0.56
         General and administrative expenses...................       0.35        0.37
         Oil and gas depreciation, depletion and amortization..       0.76        1.11
</TABLE> 

                                       7
<PAGE>
 
RESTRUCTURING

  On November 16, 1998, the Company announced that its Board of Directors had
retained CIBC Oppenheimer Corp. to advise it with respect to strategic
alternatives available to the Company for maximizing shareholder value,
including sales of some or all of the Company's assets or a merger,
reorganization or other restructuring of the Company.

  As part of its goal of maximizing shareholder value, the Company also
announced that its Board of Directors has adopted a Shareholder Rights Plan. The
newly adopted Shareholder Rights Plan is designed to protect the shareholder
against any effort to acquire the Company for less than its full value. However,
the Plan does not prevent a takeover. The intention of the Plan is to enable
shareholders to realize the long-term value of their investments and to enable
the Board of Directors to serve the interests of all shareholders.  Under the
Plan, each shareholder of record at the close of business on November 23, 1998,
received one Series A Preferred Stock Purchase Right (Right) for each share of
Common Stock held. The Rights expire on November 12, 2008.

  The Company opened a data room in February, 1999 and to date has received
expressions of interest from third parties to purchase certain assets of, or
merge with, the Company. The Board of Directors and management are currently
assessing and evaluating the specific terms of these offers. At this time, it is
not possible to determine the likelihood that a possible transaction with one or
more of these third parties would be pursued, or that another course of action
would ultimately be followed.

ACQUISITIONS

  In June 1998, the Company acquired a position in a South Texas exploration and
development drilling alliance (the South Texas Acquisition).  The acquisition
includes a working interest in the new discovery well in the Rich Hurt Field in
western Duval County. The alliance also controls approximately 25,000 acres in
Duval and Webb counties as well as the rights to more than 100 square miles of
new 3-D seismic data over the area.

  The acquired Rich Hurt discovery well, along with three subsequently drilled
development wells, were producing at a combined rate of approximately 13 MMcf/D
at March 31, 1999.  PetroCorp's net share of this production is approximately
1.7 MMcf/D.  Additionally, the Company is currently completing a new well on its
Ruidoso prospect in the area.  The alliance has identified more than 80
prospects/leads in this South Texas area and currently has a leasehold position
over 35 of these ideas.

RESULTS OF OPERATIONS

 Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998

  Overview.  The Company recorded a first quarter 1999 net loss of $439,000, or
$0.05 per share, before  restructuring charges.  This compares to a net loss of
$636,000, or $0.07 per share, recorded in the first quarter of 1998.  This
improvement results from lower operating expenses, though oil and gas prices
declined 16% per Mcfe.  The Company recorded a $1.1 million ($682,000 after-tax)
restructuring charge in the first quarter of 1999.  Excluding the restructuring
charge, the Company's cash flow before changes in operating assets and
liabilities decreased 33% to $1.8 million as a result of the lower prices.

  Revenues.  Total revenues decreased 17% to $5.4 million in the first quarter
of 1999 compared to $6.5 million in the first quarter of 1998.  The Company's
natural gas production increased 2% to 2,315 MMcf 

                                       8
<PAGE>
 
from 2,266 MMcf but was more than offset by a 21% decline in oil production to
121 MBbls from 153 Mbbls, resulting in the Company's overall production
declining 4% to 3,041 MMcfe from 3,184 MMcfe. The increase in natural gas
production reflects the impact of the South Texas Acquisition completed in June
1998 coupled with increases resulting from new wells in Canada. The decline in
oil production reflects normal production declines and the deferment of drilling
and workover operations during a period of low oil prices.

  The Company's composite average oil price decreased 22% to $11.00 per barrel
in the first quarter of 1999 from $14.10 per barrel in the first quarter of
1998.  The Company's average U.S. natural gas price decreased 20% to $1.76 per
Mcf in the first quarter of 1999 from $2.20 per Mcf in the prior year quarter,
while the average Canadian natural gas price remained level at $1.32 per Mcf.
The significant decline in prices coupled with the modest decline in production
volumes resulted in a 20% decrease in oil and gas revenues to $4.9 million in
the first quarter of 1999 from $6.2 million in the prior year quarter.

  Production Costs.  Production costs decreased 10% to $1.6 million in the first
quarter of 1999 as a result of lower U.S. production taxes and the Company's
cost reduction efforts.  Production costs per Mcfe decreased 5% to $0.53 per
Mcfe.

  Depreciation, Depletion & Amortization (DD&A).  Total DD&A decreased 32% to
$2.7 million in the first quarter of 1999 from $4.0 million in the first quarter
of 1998.  The decrease reflects the impact of a lower U.S. DD&A rate resulting
from a U.S. oil and gas property valuation adjustment recorded in the fourth
quarter of 1998.  The composite oil and gas DD&A rate also decreased 32% to
$0.76 per Mcfe from $1.11 per Mcfe.

  General and Administrative Expenses.  General and administrative expenses
decreased 11% to $1.1 million in the first quarter of 1999 from $1.2 million in
the first quarter of 1998 as a result of the Company's focus on reducing costs.

  Restructuring Costs.  The Company recorded a $1.1 million restructuring charge
in the first quarter of 1999 related to the Company's pursuit of strategic
alternatives to maximize shareholder value.  Included in this charge are
retention costs along with severance pay related to a 20% reduction in
personnel.

  Investment and Other Income.  Investment and other income decreased 4% to
$88,000 in the first quarter of 1999 from $92,000 in the first quarter of 1998.

  Interest Expense.  Interest expense increased 8% to $935,000 in the first
quarter of 1999 from $864,000 in the prior year quarter, reflecting the impact
of increased debt associated with the South Texas Acquisition completed in June
1998.

  Income Taxes.  The Company recorded a $833,000 income tax benefit with an
effective tax rate of 43% on a pre-tax loss of $2.0 million in the first quarter
of 1999.  This compares to an income tax benefit of $589,000 with an effective
tax rate of 48% on a pre-tax loss of $1.2 million in the first quarter of 1998.

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, 1999, the Company
had working capital of $2.2 million as compared to $2.1 million at December 31,
1998. Excluding the $1.1 million restructuring charge in the first quarter of
1999, cash provided by operating activities before changes in operating assets
and liabilities were $1.8 million and $2.7 million for the quarters ended March
31, 1999 and 1998, respectively.

                                       9
<PAGE>
 
  The Company's total capital expenditures, including capitalized internal
costs, were $468,000 and $5.6 million for the quarters ended March 31, 1999 and
1998, respectively.

  No oil and gas property sales occurred in the first quarter of 1999 while
sales of non-strategic properties totaled $977,000 in the first quarter of 1998.

  In March 1996, the Company sold its SW 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 SW Oklahoma City Field. Through March 31, 1999,
$1.9 million has been recognized, leaving a balance of $172,000 in ''deferred
revenue'' on the consolidated balance sheet as of March 31, 1999.

  In June 1997, the Company entered into a $50.0 million five-year revolving
credit agreement with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia. On June 30, 1997, the Company was advanced $13.0 million to fund an
acquisition of producing properties completed in early July 1997 and to fund
certain debt repayments. During 1998, the Company borrowed $12.0 million to fund
additional acquisitions and other debt repayments. At March 31, 1999, the
Company had a total of $25.0 million outstanding under the revolver. The
facility was amended in June 1998 to extend the initial five-year term an
additional year to July 1, 2003 with quarterly borrowing base amortization
beginning September 30, 2001. The borrowings can be funded by either Eurodollar
loans or Prime loans. The interest rate on the borrowings is equal to an
interest rate spread plus either the Eurodollar rate or the Prime rate. 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 7/8% to 1 1/2% on Eurodollar loans and nil to 1/2% on Prime loans.
The Company's average interest rate under this facility was approximately 6.4%
during the first quarter of 1999.

  On December 30, 1996, the Company, through a wholly-owned Canadian subsidiary,
entered into a long-term borrowing agreement with the Royal Bank of Canada (RBC)
whereby the Company borrowed $3.5 million to partially fund the December 1996
acquisition of Millarville Oil and Gas Ltd., a privately held Alberta
corporation that owns and operates oil and gas properties in Alberta, Canada. On
June 29, 1998, this loan was repaid and the agreement was terminated. The
Company's average interest rate while the loan remained outstanding in 1998 was
6.6%.

  In July 1993, PetroCorp issued $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 (a 20% shareholder of the Company), 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 (formerly an 18% shareholder of
the Company) 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 March 31, 1999, the remaining principal
balances for the Series A and B Notes were $875,000 and $20.3 million,
respectively. Of the total $21.2 million, $3.8 million matures in the next
twelve months. 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 Note Purchase Agreement contains provisions that limit the Company's debt
levels based on undiscounted and discounted oil and gas reserves using the SEC's
rules, including the use of year-end prices 

                                       10
<PAGE>
 
held constant over the life of the remaining reserves. Due to low oil and gas
prices, the Company was not in compliance with certain debt covenants of the
Series A and Series B Note Purchase Agreement at year-end. However, the Series A
and Series B note holders have waived such provisions until January 1, 2000.

  As the Company has both the ability and intent to refinance $2.0 million of
its current maturities of long-term debt utilizing its revolving credit
facility, $2.0 million has been reclassified from ''current'' to ''long-term''
on the Company's accompanying consolidated balance sheet as of March 31, 1999.

  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,
1999, the nonrecourse long-term notes payable balance was $3.8 million, of which
$923,000 was classified as "current."

  Product prices continue to be volatile. Under rules promulgated by the
Securities and Exchange Commission, companies that follow the full cost
accounting method are required to make quarterly "ceiling test" calculations, by
country, using product prices in effect at that time (see Note 4 to the
Consolidated Financial Statements--Property, Plant and Equipment).  In the
future, should prices decline significantly and depending on drilling results,
the Company could be required to record a valuation adjustment to its oil and
gas property balances, resulting in a future non-cash charge against earnings.

  The Company plans to finance its substantially reduced 1999 capital
expenditures solely from available cash flow from operations and working
capital. If the Company increases its capital expenditure level 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.

YEAR 2000 ISSUES

  The Year 2000 presents significant issues for many computer systems. Much of
the software in use today may not be able to accurately process data beyond the
year 1999. The vast majority of computer systems process transactions using two
digits for the year of the transaction, rather than the full four digits, making
such systems unable to distinguish January 1, 2000 from January 1, 1900. Such
systems may encounter significant processing inaccuracies or become inoperable
when Year 2000 transactions are processed. Such matters could not only impact
the Company in its day-to-day operations but also impact the Company's financial
institutions, customers and vendors as well as state, provincial and federal
governments with jurisdictions where the Company maintains operations.

  PetroCorp has formed a Year 2000 compliance team and has been addressing Year
2000 issues since the fourth quarter of 1997. The Company's initial focus was on
internal business systems and processes. Beginning in August 1998, PetroCorp
expanded its focus to include its oil and gas operations systems and processes
as well as assessing the readiness of its key business partners (financial
institutions, customers, vendors, oil and gas operators, etc.).

  It has been a PetroCorp strategy to use, wherever possible, industry prevalent
products and processes with minimal customization. As a result, PetroCorp does
not expect any extensive in-house hardware, software or process conversions in
an effort to be Year 2000 compliant nor does PetroCorp expect its Year 2000
compliance related costs to be material to the Company's operations. PetroCorp
has contacted its major information technology suppliers concerning their Year
2000 compliance status and is continuing to test (using available software
tools) these systems for compliance.

                                       11
<PAGE>
 
  The Company's goal is to be Year 2000 compliant by June 30, 1999 and have
contingency plans in place, wherever possible, when compliance is not probable
in a timely manner.

  While it is PetroCorp's goal to be Year 2000 compliant, there can be no
assurance that there will not be a material adverse effect on the Company as a
result of a Year 2000 related issue. The Company believes its business partners
present the area of greatest risk to the Company, in part because of the
Company's limited ability to influence actions of third parties, and in part
because of the Company's inability to estimate the level and impact of
noncompliance of third parties. Additionally, there are many variables and
uncertainties associated with judgments regarding any contingency plans
developed by the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.

 Commodity Price Risk

  The Company produces and sells natural gas, crude oil, condensate, natural gas
liquids and sulfur. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response to
changing market forces. Prior to 1997, the Company utilized hedging transactions
to manage its exposure to price fluctuations on its sales of oil and natural
gas.  No hedge transactions were in place in 1998 and 1997.

 Interest Rate Risk

  Total debt at March 31, 1999, included $24.1 million of fixed-rate debt
attributed to Series B Senior Notes and Nonrecourse Notes Payable, and $25.9
million of floating-rate debt attributed to Series A Senior Notes and the TD
Bank Credit Agreement.  As a result, the Company's annual interest cost in 1999
will fluctuate based on short-term interest rates. The impact on annual cash
flow of a 100 basis point change in the floating rate would be approximately
$184,000.

  At March 31, 1999, the Company's fixed rate Series B Senior Notes had a book
value of $20.8 million and a fair market value of $26.5 million. Due to the
nature of the Nonrecourse Notes Payable, the Company believes that it is not
practicable to estimate the fair value.

 Foreign Currency Exchange Rate Risk

  The Company conducts a significant portion of its business in the Canadian
dollar and is therefore subject to foreign currency exchange rate risk on cash
flows related to sales, expenses, financing and investing transactions. Exposure
from market rate fluctuations related to activities in Canada, where the
Company's functional currency is the Canadian dollar, is not material at this
time.

                                       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

     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.

          10.1  PetroCorp Incorporated Executive Severance Plan.

          27    Financial Data Schedule
          ______________________________
          * Incorporated by reference.


     (b)  Reports on Form 8-K

          Not Applicable

                                       13
<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:  May 14, 1999          /s/ CRAIG K. TOWNSEND
                             -------------------------------------------------
                             Craig K. Townsend
                             Vice President - Finance, Secretary and Treasurer
                             (On behalf of the Registrant and as the
                             Principal Financial Officer)

                                       14