<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 September 30, 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 October  31, 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 Sheet at September 30, 1999 and
    December 31, 1998                                                        1

  Consolidated Statement of Operations for the three months and
    nine months ended September 30, 1999 and 1998                            2

  Consolidated Statement of Cash Flows for the nine months ended
    September 30, 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 Disclosure about Market Risk          13

PART II. OTHER INFORMATION                                                  15

SIGNATURES                                                                  17
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

                                              September 30,    December 31,
                                                  1999            1998
                                                ---------       ---------
                    ASSETS                     (unaudited)
                    ------
Current assets:
  Cash and cash equivalents                     $  12,243       $   7,786
  Accounts receivable, net                          4,440           4,569
  Other current assets                                210             326
                                                ---------       ---------
    Total current assets                           16,893          12,681
                                                ---------       ---------
Property, plant and equipment:
  Proved oil and gas properties, at cost,
   full cost method, net of accumulated
   depreciation, depletion and amortization        62,365          64,179
  Unproved oil and gas properties, not
   subject to depletion                             8,111           9,151
  Plant and related facilities, net                 3,282           3,768
  Other, net                                          742           1,144
                                                ---------       ---------
                                                   74,500          78,242
                                                ---------       ---------
Deferred income taxes                              14,434          12,761
Other assets, net                                     117             308
                                                ---------       ---------
  Total assets                                  $ 105,944       $ 103,992
                                                =========       =========

     LIABILITIES AND SHAREHOLDERS' EQUITY
     ------------------------------------
Current liabilities:
  Accounts payable                              $   5,149       $   4,424
  Accrued liabilities                               4,743           3,467
  Current portion of long-term debt                 4,448           2,710
                                                ---------       ---------
    Total current liabilities                      14,340          10,601
                                                ---------       ---------
Long-term debt                                     45,148          47,305
                                                ---------       ---------
Deferred revenue                                        -             257
                                                ---------       ---------
Deferred income taxes                               5,541           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
    September 30, 1999 and December 31, 1998           87              87
  Additional paid-in capital                       71,245          71,245
  Accumulated deficit                             (25,332)        (24,324)
  Accumulated other comprehensive loss             (5,085)         (6,264)
                                                ---------       ---------
    Total shareholders' equity                     40,915          40,744
                                                ---------       ---------
    Total liabilities and shareholders' equity  $ 105,944       $ 103,992
                                                =========       =========

  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)
<TABLE>
<CAPTION>
                                                    For the three months         For the nine months
                                                     ended September 30,         ended September 30,
                                                   ----------------------       -----------------------
                                                     1999          1998           1999          1998
                                                   --------      --------       --------       --------
<S>                                               <C>           <C>            <C>            <C>
REVENUES:
  Oil and gas                                      $  7,194      $  5,827       $ 18,099       $ 17,717
  Plant processing                                      426           340          1,332          1,017
  Other                                                 108             6            162             30
                                                   --------      --------       --------       --------
                                                      7,728         6,173         19,593         18,764
                                                   --------      --------       --------       --------
EXPENSES:
  Production costs                                    1,693         1,779          4,806          5,431
  Depreciation, depletion and amortization            2,755         4,277          8,222         12,245
  General and administrative                            826         1,126          2,701          3,459
  Restructuring costs                                 2,400                        3,490
  Other operating expenses                               57            97            210            183
                                                   --------      --------       --------       --------
                                                      7,731         7,279         19,429         21,318
                                                   --------      --------       --------       --------
INCOME (LOSS) FROM OPERATIONS                            (3)       (1,106)           164         (2,554)
                                                   --------      --------       --------       --------
OTHER INCOME (EXPENSES):
  Investment and other income                           185           669            352            845
  Interest expense                                     (962)         (937)        (2,821)        (2,676)
  Other income (expenses)                              (141)           38           (142)            (1)
                                                   --------      --------       --------       --------
                                                       (918)         (230)        (2,611)        (1,832)
                                                   --------      --------       --------       --------

LOSS BEFORE INCOME TAXES                               (921)       (1,336)        (2,447)        (4,386)
Income tax benefit                                     (551)         (572)        (1,439)        (1,957)
                                                   --------      --------       --------       --------
NET LOSS                                           $   (370)     $   (764)      $ (1,008)      $ (2,429)
                                                   ========      ========       ========       ========
Net loss per common share - basic                  $  (0.04)     $  (0.09)      $  (0.12)      $  (0.28)
                                                   ========      ========       ========       ========
Net loss per common share - diluted                $  (0.04)     $  (0.09)      $  (0.12)      $  (0.28)
                                                   ========      ========       ========       ========

Weighted average number of common shares - basic      8,656         8,649          8,656          8,630

Weighted average number of common shares - diluted    8,680         8,685          8,672          8,699
</TABLE>

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

                                       2
<PAGE>
                            PETROCORP INCORPORATED
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (in thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                  For the nine months
                                                                  ended September 30,
                                                                 ---------------------
                                                                   1999         1998
                                                                 --------     --------
<S>                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                            $ (1,008)    $ (2,429)
  Net loss
  Adjustments to reconcile net loss to net
    cash provided by operating activities:
      Depreciation, depletion and amortization                      8,222       12,245
      Deferred income tax benefit                                  (1,439)      (1,957)
                                                                 --------     --------
                                                                    5,775        7,859

      Change in operating assets and liabilities:
        Accounts receivable                                           129        3,098
        Other current assets                                          116           10
        Accounts payable                                              725       (1,837)
        Accrued liabilities                                         1,276          382
     Other                                                           (112)        (253)
                                                                 --------     --------
          NET CASH PROVIDED BY OPERATING ACTIVITIES                 7,909        9,259
                                                                 --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of oil and gas properties                                   2,786
  Additions to oil and gas properties                              (2,850)     (15,177)
  Additions to plant and related facilities                           (97)        (789)
  Additions to other property, plant and equipment                    (13)         (67)
  Additions to other assets                                             -           (8)
                                                                 --------     --------
          NET CASH USED IN INVESTING ACTIVITIES                    (2,960)     (13,255)
                                                                 --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                      2,195       10,442
  Repayment of long-term debt                                      (2,769)      (8,621)
  Other                                                                            350
                                                                 --------     --------
          NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (574)       2,171
                                                                 --------     --------
Effect of exchange rate changes on cash                                82          (79)
                                                                 --------     --------
Net increase (decrease) in cash and cash equivalents                4,457       (1,904)
Cash and cash equivalents at beginning of period                    7,786        9,391
                                                                 --------     --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $ 12,243     $  7,487
                                                                 ========     ========
</TABLE>
  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 received expressions of
interest from third parties to purchase certain assets of, or merge with, the
Company.  On May 21, 1999, the Company announced that it had rejected as
inadequate all proposals received.  The Board of Directors, after consultation
with CIBC Oppenheimer, decided that the interests of all shareholders were best
served by not pursing a sale or merger at that time.

  After consideration of other strategic alternatives,  on August 3, 1999,
PetroCorp's Board of Directors entered into a Management Agreement with its
largest shareholder, Kaiser-Francis Oil Company, under which Kaiser-Francis will
provide management, technical and administrative support services for all
PetroCorp operations in the United States and Canada.   The Agreement received
shareholder approval on October 28, 1999 and was effective November 1, 1999. The
Company also had entered into an Interim Agreement with Kaiser-Francis to
provide certain services pending receipt of shareholder approval of the
Management Agreement.  As the Management Agreement was effective November 1,
1999, the Interim Agreement ceased as of October 31, 1999.

                                       4
<PAGE>

  The Company incurred $1.1 million in restructuring costs during the first
quarter of 1999 in its pursuit of strategic alternatives to maximize shareholder
value.  Additional restructuring costs of $2.4 million were recorded in the
third quarter of 1999 primarily related to the implementation of the Management
Agreement with Kaiser-Francis. Included in these costs are retention costs along
with severance pay related to a reduction in personnel. Twenty-one employees
were terminated in the first nine months of 1999 with an additional 25 employees
expected to be terminated in the fourth quarter. Approximately $1.7 million of
the restructuring costs were accrued as of September 30, 1999 and are expected
to be paid by year-end.

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 income (loss) as presented
on the accompanying consolidated statement of operations.  The Company's
comprehensive income (loss) for the three and nine months ended September 30,
1999 and 1998 are as follows (amounts in thousands):


                                             For the three      For the nine
                                             months ended       months ended
                                             September 30,      September 30,
                                           ----------------   -----------------
                                             1999    1998      1999      1998
                                           -------  -------   -------   -------
Net loss                                   $  (370) $  (764)  $(1,008)  $(2,429)
Foreign currency translation income (loss)      89   (1,134)    1,179    (1,763)
                                           -------  -------   -------   -------
Comprehensive income (loss)                $  (281) $(1,898)  $   171   $(4,192)
                                           =======  =======   =======   =======

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.

NOTE 5- DEFERRED REVENUE:

  In March 1996, the Company sold its SW Oklahoma City Field gas gathering
system for $3.8 million.

                                       5
<PAGE>

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 was 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. As of September 30, 1999, the entire $2.1 million deferred revenue
had been recognized.

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, results of operations or cash flows.

                                       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         For the nine
                                                           months ended          months ended
                                                           September 30,         September 30,
                                                         -----------------     -----------------
                                                          1999       1998       1999       1998
                                                         ------     ------     ------     ------
<S>                                                     <C>        <C>        <C>        <C>
PRODUCTION:
  United States:
    Oil (MBbls)                                              78        106        242        326
    Gas (MMcf)                                            1,044      1,266      3,432      3,564
    Gas equivalents (MMcfe)                               1,512      1,902      4,884      5,520
  Canada:
    Oil (MBbls)                                              42         34        111        107
    Gas (MMcf)                                            1,066      1,159      3,254      3,383
    Gas equivalents (MMcfe)                               1,318      1,363      3,920      4,025
  Total:
    Oil (MBbls)                                             120        140        353        433
    Gas (MMcf)                                            2,110      2,425      6,686      6,947
    Gas equivalents (MMcfe)                               2,830      3,265      8,804      9,545
AVERAGE SALES PRICES:
  United States:
    Oil (per Bbl)                                        $19.75     $12.21     $15.27     $13.19
    Gas (per Mcf)                                          2.70       2.14       2.20       2.19
  Canada:
    Oil (per Bbl)                                         18.57      11.44      15.07      11.90
    Gas (per Mcf)                                          1.93       1.24       1.59       1.28
  Weighted average:
    Oil (per Bbl)                                         19.33      12.03      15.21      12.87
    Gas (per Mcf)                                          2.31       1.71       1.90       1.75
SELECTED DATA PER MCFE:
  Average sales price                                    $ 2.54     $ 1.78     $ 2.06     $ 1.86
  Production costs                                         0.60       0.54       0.55       0.57
  General and administrative expenses                      0.29       0.34       0.31       0.36
  Oil and gas depreciation, depletion and amortization     0.83       1.20       0.80       1.16
</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 received expressions of
interest from third parties to purchase certain assets of, or merge with, the
Company.  On May 21, 1999, the Company announced that it had rejected as
inadequate all proposals received. The Board of Directors, after consultation
with CIBC Oppenheimer, decided that the interests of all shareholders were best
served by not pursing a sale or merger at that time.

  After consideration of other strategic alternatives,  on August 3, 1999,
PetroCorp's Board of Directors entered into a Management Agreement with its
largest shareholder, Kaiser-Francis Oil Company, under which Kaiser-Francis will
provide management, technical and administrative support services for all
PetroCorp operations in the United States and Canada.   The Agreement received
shareholder approval on October 28, 1999 and was effective November 1, 1999. The
Company also had entered into an Interim Agreement with Kaiser-Francis to
provide certain services pending receipt of shareholder approval of the
Management Agreement.  As the Management Agreement was effective on November 1,
1999, the Interim Agreement ceased as of October 31, 1999.

  The Company incurred $1.1 million in restructuring costs during the first
quarter of 1999 in its pursuit of strategic alternatives to maximize shareholder
value.  Additional restructuring costs of $2.4 million were recorded in the
third quarter of 1999 primarily related to the implementation of the Management
Agreement with Kaiser-Francis (see discussion below).

  Coupled with previously implemented cost reductions, the Management Agreement
is expected to reduce the Company's annual general and administrative costs
(before capitalization) by approximately $4.5 million, or $0.50 per share, from
1998 levels.

RESULTS OF OPERATIONS

Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998

  Overview.  The Company recorded net income of $1.1 million, or $0.13 per
share, before restructuring charges, during the third quarter of 1999.  This
compares to a net loss of $764,000, or $0.09 per share, recorded in the third
quarter of 1998.  This improvement results from lower operating expenses and
higher product prices.  The Company recorded a $2.4 million ($1.5 million after-
tax) restructuring charge in the third quarter of 1999.  Reflecting the impact
of the restructuring charge, the Company recorded a $370,000 net loss, or $0.04
per share, for the quarter.  Excluding the restructuring charge, the Company's
cash flow before changes in operating assets and liabilities increased 44% to
$4.2 million.

                                       8
<PAGE>

  Revenues.  Total revenues increased 25% to $7.7 million in the third quarter
of 1999 compared to $6.2 million in the third quarter of 1998.  The Company's
natural gas production decreased 13% to 2,110 MMcf from 2,425 MMcf, while its
oil production declined 14% to 120 MBbls from 140 Mbbls, resulting in the
Company's overall production declining 13% to 2,830 MMcfe from 3,265 MMcfe.  The
decrease in natural gas production is primarily the result of normal production
declines coupled with a temporary reduction in  throughput at the Company's
Canadian Hanlan-Robb gas processing facility as a result of a plant segment
being repaired during the third quarter of 1999.  The decline in oil production
reflects normal production declines from two of the Company's U.S. oil
properties.

  The Company's average U.S. natural gas price increased 26% to $2.70 per Mcf in
the third quarter of 1999 while the average Canadian natural gas price increased
56% to $1.93 per Mcf. The Company's composite average oil price increased 61% to
$19.33 per barrel in the third quarter of 1999.  The improvement in prices
partially offset by the decline in production volumes resulted in a 23% increase
in oil and gas revenues to $7.2 million in the third quarter of 1999 from $5.8
million in the prior year quarter.

  Plant processing revenues increased 25% to $426,000 from $340,000, reflecting
the impact of new third party gas processed through the Company's Canadian
Hanlan-Robb gas processing plant.

  Production Costs.  Production costs decreased 5% to $1.7 million in the third
quarter of 1999 as a result of the Company's cost reduction efforts.  However,
production costs per Mcfe increased 11% to $0.60 per Mcfe as a result of lower
production volumes.

  Depreciation, Depletion & Amortization (DD&A).  Total DD&A decreased 36% to
$2.8 million in the third quarter of 1999 from $4.3 million in the third quarter
of 1998.  The decrease reflects the impact of a lower oil and gas DD&A rate,
resulting from a U.S. oil and gas property valuation adjustment recorded in the
fourth quarter of 1998, and lower production volumes.  The composite oil and gas
DD&A rate decreased 31% to $0.83 per Mcfe from $1.20 per Mcfe.

  General and Administrative Expenses.  General and administrative expenses
decreased 27% to $826,000  in the third quarter of 1999 from $1.1 million in the
third quarter of 1998 as a result of the Company's focus on reducing costs,
including a 35% reduction in personnel in the third quarter of 1999 compared to
the third quarter of 1998.

  Restructuring Costs.  The Company recorded a $2.4 million restructuring charge
in the third quarter of 1999 primarily related to the Company's implementation
of the Management Agreement with Kaiser-Francis.  Included in this charge are
retention costs along with severance pay related to a reduction in personnel.
Eleven employees were terminated in the third quarter with an additional 25
employees expected to be terminated in the fourth quarter.  Approximately $1.7
million of the charge was accrued as of September 30, 1999 and is expected to be
paid by year-end.

  Investment and Other Income.  Investment and other income decreased to
$185,000 in the third quarter of 1999 from $669,000 in the third quarter of
1998.  During the third quarter of 1998, the settlement of certain gas contract
disputes were recognized.

  Interest Expense.  Interest expense increased 3% to $962,000 in the third
quarter of 1999 from $937,000 in the prior year quarter, reflecting the impact
of increased interest rates on the Company's revolving bank debt.

  Income Taxes.  The Company recorded a $551,000 income tax benefit with an
effective tax rate of 60% on a pre-tax loss of $921,000 in the third quarter of
1999.  The Company recorded a U.S. pre-tax loss of $1.9 million and Canadian
pre-tax income of $963,000.  The Company's U.S. tax benefit with an effective

                                       9
<PAGE>

tax rate of 38% was partially reduced by its Canadian tax provision with a low
effective tax rate of only 18%, resulting in a consolidated tax benefit with an
effective rate of 60%.  The Company recorded an income tax benefit of $572,000
with an effective tax rate of 43% on a pre-tax loss of $1.3 million in the third
quarter of 1998.

Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998

  Overview.  The Company recorded net income of $1.2 million, or $0.13 per
share, before restructuring charges, during the first nine months of 1999.  This
compares to a net loss of $2.4 million, or $0.28 per share, recorded in the
first nine months  of 1998.  This improvement results from lower operating
expenses coupled with higher product prices.  The Company recorded a $3.5
million ($2.2 million after-tax) restructuring charge in the first nine months
of 1999.  Reflecting the impact of the restructuring charge, the Company
recorded a $1.0 million net loss, or $0.12 per share, for the nine-month period.
Excluding the restructuring charge, the Company's cash flow before changes in
operating assets and liabilities increased 19% to $9.3 million.

  Revenues.  Total revenues increased 4% to $19.6 million in the first nine
months  of 1999 compared to $18.8 million in the first nine months of 1998.  The
Company's  natural gas production decreased 4% to 6,686 MMcf from 6,947 MMcf,
while its oil production declined 18% to 353 MBbls from 433 Mbbls, resulting in
the Company's overall production declining 8% to 8,804 MMcfe from 9,545 MMcfe.
The decrease in natural gas production is primarily the result of normal
production declines coupled with a temporary reduction in throughput at the
Company's Canadian Hanlan-Robb gas processing facility as a result of  a plant
segment being repaired during the third quarter of 1999.  Additionally, gas
volumes are down to due the sale of certain non-strategic natural gas properties
in 1998.  The decline in oil production reflects normal production declines from
two of the Company's U.S. oil properties.

   The Company's average U.S. natural gas price increased slightly to $2.20 per
Mcf in the first nine months of 1999,  while the average Canadian natural gas
price increased 24% to $1.59 per Mcf. The Company's composite average oil price
increased 18% to $15.21 per barrel in the first nine months of 1999. The
increase in product prices, though partially offset by the lower production
volumes, resulted in a 2% increase in oil and gas revenues to $18.1 million in
the first nine months of 1999 from $17.7 million in the prior year period.

   Plant processing revenues increased 31% to $1.3 million from $1.0 million,
reflecting the impact of new third party gas processed through the Company's
Canadian Hanlan-Robb gas processing plant.

   Production Costs. Production costs decreased 12% to $4.8 million in the first
nine months of 1999 as a result of the Company's cost reduction efforts.
Production costs per Mcfe decreased 4% to $0.55 per Mcfe.

   Depreciation, Depletion & Amortization (DD&A).  Total DD&A decreased 33% to
$8.2 million in the first nine months of 1999 from $12.2 million in the first
nine months of 1998.  The decrease reflects the impact of a lower oil and gas
DD&A rate, resulting from a U.S. oil and gas property valuation adjustment
recorded in the fourth quarter of 1998, and lower production volumes.  The
composite oil and gas DD&A rate decreased 31% to $0.80 per Mcfe from $1.16 per
Mcfe.

   General and Administrative Expenses.  General and administrative expenses
decreased 22% to $2.7 million in the first nine months of 1999 from $3.5 million
in the first nine months of 1998 as a result of the Company's focus on reducing
costs, including a 25% reduction in personnel in the first nine months of 1999
compared to the same period in 1998.

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<PAGE>

  Restructuring Costs.  The Company recorded a $3.5 million restructuring charge
in the first nine months of 1999 related to the Company's pursuit of strategic
alternatives to maximize shareholder value and related to the Company's
implementation of the Management Agreement with Kaiser-Francis.   Included in
this charge are retention costs along with severance pay related to a reduction
in personnel.  Twenty-one employees were terminated during the first nine months
of 1999 with an additional 25 employees expected to be terminated in the fourth
quarter.  Approximately $1.7 million of the charge was accrued as of September
30, 1999 and is expected to be paid by year-end.

  Investment and Other Income.  Investment and other income decreased to
$352,000 in the first nine months of 1999 from $845,000 in the first nine months
of 1998.  During the third quarter of 1998 the  settlement of certain gas
contract disputes were recognized

  Interest Expense.  Interest expense increased 5% to $2.8 million in the first
nine months of 1999 from $2.7 million in the prior year period.  This increase
reflects the impact of additional debt associated with the completion of a
producing property acquisition in South Texas in June 1998 and increased
interest rates on the Company's revolving bank debt.

  Income Taxes.   The Company recorded a $1.4 million income tax benefit with an
effective tax rate of 59% on a pre-tax loss of $2.4 million in the first nine
months of 1999.  The Company recorded a U.S. pre-tax loss of $4.3 million and
Canadian pre-tax income of $1.8 million.  The Company's U.S. tax benefit with an
effective tax rate of 39% was partially reduced by the Canadian tax provision
with a low effective tax rate of only 13%, resulting in the consolidated income
tax benefit with an effective rate of 59%.  The Company recorded an income tax
benefit of $2.0 million with an effective tax rate of 45% on a pre-tax loss of
$4.4 million in the first nine months 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 September 30, 1999, the
Company had working capital of $2.6 million as compared to $2.1 million at
December 31, 1998. Excluding the $3.5 million restructuring charge,  cash
provided by operating activities before changes in operating assets and
liabilities was $7.9 million and $9.3 million for the nine months ended
September 30, 1999 and 1998, respectively.

  The Company's total capital expenditures, including capitalized internal
costs, were $3.0 million and $16.0 million for the nine months ended September
30, 1999 and 1998, respectively.

  No oil and gas property sales occurred in the first nine months of 1999, while
sales of non-strategic properties totaled $2.8 million in the first nine months
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 was 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.  As of  September 30,
1999, the entire $2.1 million deferred revenue had been recognized.

  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

                                       11
<PAGE>

fund certain debt repayments. During 1998 and 1999, the Company borrowed $14.0
million to fund additional acquisitions and other debt repayments. At September
30, 1999, the Company had a total of $27.0 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.
Effective July 1, 1999, the spread ranges from 1.375% to 2.0% on Eurodollar
loans and .375% to 1.0% on Prime loans. The Company's average interest rate
under this facility was approximately 6.5% during the first nine months 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. At September 30, 1999, the remaining principal
balance for the Series A Notes was nil and the remaining balance of the Series B
Notes was $19.1 million.  Current maturities of the Series B Notes total  $3.5
million.   Interest on the Series A Notes was adjustable, based on a spread of
115 basis points over the London Interbank Offered Rate (LIBOR).  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 held constant over the life of the
remaining reserves.  Due to low oil and gas prices at December 31, 1998, 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 note holders have
waived such provisions until January 1, 2000.

  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 September
30, 1999, the nonrecourse long-term notes payable balance was $3.5 million, of
which $948,000 was classified as "current."

  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 hardware and

                                       12
<PAGE>

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.

  As previously described, the Company has entered into a Management Agreement
with its largest shareholder, Kaiser-Francis Oil Company, under which Kaiser-
Francis will provide management, technical and administrative support services
for all PetroCorp operations.  Such services will also include the use of
Kaiser-Francis' internal business systems and processes which are currently
estimated by Kaiser-Francis to be more than 98% Year 2000 compliant.

  The Company estimates that it is more than 98% complete in obtaining its goal
to be Year 2000 compliant by year-end 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.

THE ABOVE IS A YEAR 2000 READINESS DISCLOSURE UNDER THE "YEAR 2000 INFORMATION
AND READINESS DISCLOSURE ACT" 15 U.S.C. SEC. 1.

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

                                       13
<PAGE>

in place in 1999 and 1998.

 Interest Rate Risk

  Total debt at September 30, 1999, included $22.6 million of fixed-rate debt
attributed to Series B Senior Notes and Nonrecourse Notes Payable, and $27.0
million of floating-rate debt attributed to the TD Bank Credit Agreement.  As a
result, the Company's annual interest cost 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 $270,000.

 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.

                                       14
<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) October 28, 1999 annual meeting of shareholders.

     (b) (1)   Approval of the Management Agreement between the Company and
               Kaiser-Francis Oil Company, a Delaware Corporation ("KFOC"),
               pursuant to which KFOC will provide management and administrative
               support services for all of the Company's operations and the
               operations of its wholly-owned subsidiaries, both in the United
               States and in Canada.

                                                              Abstentions and
                                 For     Withheld Authority   Broker Non-Votes
                              ---------  ------------------   ----------------

Including KFOC Shares         7,876,244        6,720                 -
Excluding KFOC Shares
("the Disinterested Shares")  3,548,787        6,720                 -

         (2)   Election of Directors

                                          Number of Votes
                       ----------------------------------------------------
                                                           Abstentions and
    Nominee               For       Withheld Authority     Broker Non-Votes
    -------            ---------    ------------------     ----------------

Gary R. Christopher    7,881,264           ---                   1,700
Stephen M. McGrath     7,880,911           353                   1,700


         (3)   Ratification of the Reappointment of PricewaterhouseCoopers LLP
               as the Company's independent accountants for the fiscal year
               ending December 31, 1999.



                                          Number of Votes
                       ----------------------------------------------------
                                                           Abstentions and
                          For       Withheld Authority     Broker Non-Votes
                       ---------    ------------------     ----------------

                       7,878,844          4,020                  100

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

                                       15
<PAGE>

               "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*  Management Agreement dated August 3, 1999 between PetroCorp
               Incorporated and Kaiser-Francis Oil Company (incorporated by
               reference to Annex A of the Company's proxy statement dated
               September 30, 1999).

          27   Financial Data Schedule
          ______________________________
          *  Incorporated by reference.

     (b)  Reports on Form 8-K

          Not Applicable

                                       16
<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:  November 12, 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)

                                       17