UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

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


   FOR THE QUARTER ENDED MARCH 31, 1997     COMMISSION FILE NO. 0-25214

                          KELLEY OIL & GAS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                           76-0082502
      (STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)            IDENTIFICATION NO.)

             601 JEFFERSON ST.
                SUITE 1100
              HOUSTON, TEXAS                           77002
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)           (ZIP CODE)

      Registrant's telephone number, including area code: (713) 652-5200

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

              TITLE OF CLASS               OUTSTANDING AT APRIL 30, 1997
               Common Stock                         98,315,093

<PAGE>
                  KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
                                      INDEX

PART I.  FINANCIAL INFORMATION
                                                                           PAGE
                                                                           ----
  Consolidated Balance Sheets as of December 31, 1996 and March 31, 1997
   (unaudited)............................................................  2

  Consolidated Statements of Income (Loss) for the three months ended
   March 31, 1996 and 1997 (unaudited)....................................  3

  Consolidated Statements of Cash Flows for the three months ended
   March 31, 1996 and 1997 (unaudited)....................................  4

  Notes to Consolidated Financial Statements (unaudited)..................  5

  Management's Discussion and Analysis of Financial Condition and 
   Results of Operations..................................................  6

PART II.  OTHER INFORMATION...............................................  9

                                        1
<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                  KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                 (IN THOUSANDS)

                                                        DECEMBER 31,  MARCH 31,
                                                           1996         1997
                                                         ---------    ---------
                                                                     (UNAUDITED)
ASSETS:
  Cash and cash equivalents ..........................   $   4,070    $     573
  Accounts receivable ................................      22,519       17,949
  Accounts receivable - drilling programs ............       1,533          720
  Prepaid expenses and other current assets ..........       1,347        1,859
                                                         ---------    ---------
    Total current assets .............................      29,469       21,101
                                                         ---------    ---------
  Oil and gas properties, successful efforts method:
    Unproved properties, net .........................      12,521       11,821
    Properties subject to amortization ...............     338,794      350,349
  Pipelines and other transportation assets, at cost .       4,689        4,689
  Furniture, fixtures and equipment ..................       1,700        1,904
                                                         ---------    ---------
                                                           357,704      368,763
  Less: Accumulated depreciation, depletion
   and amortization ..................................    (199,236)    (205,216)
                                                         ---------    ---------
    Total property and equipment, net ................     158,468      163,547
                                                         ---------    ---------
  Other non-current assets, net ......................       1,290        1,394
                                                         ---------    ---------
    TOTAL ASSETS .....................................   $ 189,227    $ 186,042
                                                         =========    =========

LIABILITIES:
  Accounts payable and accrued expenses ..............   $  31,093    $  38,401
  Accounts payable - drilling programs ...............       4,416          735
                                                         ---------    ---------
    Total current liabilities ........................      35,509       39,136
                                                         ---------    ---------
  Long term debt .....................................     184,253      175,735
                                                         ---------    ---------
    TOTAL LIABILITIES ................................     219,762      214,871
                                                         ---------    ---------

STOCKHOLDERS' DEFICIT:
  Preferred stock, $1.50 par value, 20,000 shares
   authorized at December 31, 1996 and March 31,
   1997; 1,746 and 1,745 shares outstanding at
   December 31, 1996 and March 31, 1997,
   respectively (liquidation value at December 31,
   1996 and March 31, 1997 of $48,219 and $49,363,
   respectively) .....................................       2,618        2,618
  Common stock, $.01 par value, 200,000 shares
   authorized at December 31, 1996 and March 31,
   1997, respectively; 98,293 and 98,295 shares
   outstanding at December 31, 1996 and March 31,
   1997, respectively ................................         983          983
  Additional paid-in capital .........................     273,096      273,099
  Accumulated deficit ................................    (307,232)    (305,529)
                                                         ---------    ---------
   TOTAL STOCKHOLDERS' DEFICIT .......................     (30,535)     (28,829)
                                                         ---------    ---------
  TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ........   $ 189,227    $ 186,042
                                                         =========    =========

See Notes to Consolidated Financial Statements.

                                        2
<PAGE>
                  KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

                                                                THREE MONTHS
                                                               ENDED MARCH 31,
                                                            --------------------
                                                              1996        1997
                                                            --------    --------
Oil and gas revenues ....................................   $ 12,704    $ 18,398
Gas marketing revenues, net .............................        394         549
Interest and other income ...............................        314         163
                                                            --------    --------
  Total revenues ........................................     13,412      19,110
                                                            --------    --------

Production expenses .....................................      2,572       2,370
Exploration costs .......................................      1,640       1,049
General and administrative expenses .....................      2,633       2,180
Interest and other debt expenses ........................      6,398       5,828
Depreciation, depletion and amortization ................      5,681       5,980
                                                            --------    --------
  Total expenses ........................................     18,924      17,407
                                                            --------    --------

Net income (loss) before income taxes ...................     (5,512)      1,703
Income taxes ............................................       --          --
                                                            --------    --------
Net income (loss) .......................................     (5,512)      1,703
Less: Preferred stock dividends .........................       --          --
                                                            --------    --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ............   $ (5,512)   $  1,703
                                                            ========    ========

Income (loss) per share:
  Primary and assuming full dilution:
    Net income (loss) ...................................   $   (.08)   $    .02
                                                            ========    ========

Average common and common equivalent shares outstanding .     68,305     100,162

See Notes to Consolidated Financial Statements.

                                        3
<PAGE>
                  KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)
                                   (UNAUDITED)

                                                               THREE MONTHS
                                                              ENDED MARCH 31,
                                                           --------------------
                                                             1996        1997
                                                           --------    --------
OPERATING ACTIVITIES:
Net income (loss) ......................................   $ (5,512)   $  1,703
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation, depletion and amortization .............      5,681       5,980
  Dry hole and impairment costs ........................        (40)       --
  Accretion and amortization of debt expenses ..........      1,117       1,064
Changes in operating assets and liabilities:
  Decrease (increase) in accounts receivable ...........     (3,145)      5,383
  Increase in prepaid expenses and other current assets      (1,425)       (512)
  Increase in other non-current assets .................     (1,074)       (186)
  Increase in accounts payable and accrued expenses ....      1,022       3,627
                                                           --------    --------
Net cash provided by (used in) operating activities ....     (3,376)     17,059
                                                           --------    --------

INVESTING ACTIVITIES:
Capital expenditures ...................................     (7,139)    (11,059)
Proceeds from sale of equipment ........................        251        --
                                                           --------    --------
Net cash used in investing activities ..................     (6,888)    (11,059)
                                                           --------    --------

FINANCING ACTIVITIES:
Proceeds from long term borrowings .....................      8,000       4,000
Principal payments on long term borrowings .............    (30,000)    (13,500)
Proceeds from sale of common stock .....................     48,000           3
Syndication costs charged to equity ....................     (3,968)       --
                                                           --------    --------
Net cash provided by (used in) financing activities ....     22,032      (9,497)
                                                           --------    --------
Increase (decrease) in cash and cash equivalents .......     11,768      (3,497)
Cash and cash equivalents, beginning of period .........      6,352       4,070
                                                           --------    --------
Cash and cash equivalents, end of period ...............   $ 18,120    $    573
                                                           ========    ========

See Notes to Consolidated Financial Statements.

                                        4
<PAGE>
                  KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

      The accompanying consolidated financial statements of Kelley Oil & Gas
Corporation (the "Company") have been prepared by the Company in accordance with
generally accepted accounting principles and reflect all adjustments (consisting
of normal recurring adjustments) necessary for a fair statement in all material
respects of the results for the interim periods presented. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the full year. The accounting policies
followed by the Company are set forth in Note 1 to the financial statements in
its Annual Report on Form 10-K for the year ended December 31, 1996.

      Certain financial statement items in the interim 1996 period have been
reclassified to conform to the interim 1997 presentation. In addition, gas
marketing revenues and cost of gas sold have been presented on a net basis for
the periods presented and are reflected in the "Gas marketing revenues, net" on
the Consolidated Statements of Income (Loss).

NOTE 2 - PREFERRED STOCK

      In January 1996, the Company suspended the payment of the quarterly
dividend on its $2.625 Convertible Exchangeable Preferred Stock (the "Preferred
Stock") scheduled for February 1, 1996. As of March 31, 1997, $5.7 million or
$3.28 per share in dividends were in arrears, increasing the total liquidation
value to $49.4 million. On April 15, 1997, the Board of Directors of the Company
declared a dividend of $2.625 per preferred share (approximately $4.6 million)
which was paid on May 1, 1997. Future dividends on the Preferred Stock are
prohibited under the Company's existing credit facility.

NOTE 3 - EARNINGS PER SHARE

      In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per
Share." SFAS 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for computing
EPS previously found in Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and makes them comparable to international EPS standards. This
statement is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. Considering the guidelines as prescribed by SFAS 128, management
believes that the adoption of this statement will not have a material effect on
EPS and thus pro forma EPS, as suggested for all interim and annual periods
prior to required adoption, have been omitted.

NOTE 4 - LEGAL PROCEEDINGS

      As previously disclosed, following Kelley Oil's announcement of the
initial proposal for the consolidation in August 1994, four separate lawsuits
were filed against Kelley Oil and its directors relating to the consolidation.
In November 1994, Kelley Oil entered into a memorandum of understanding with the
plaintiffs in three of the lawsuits, providing for a proposed settlement based
on a revised consolidation proposal negotiated by a special committee of Kelley
Oil's non-management directors and the settling plaintiffs. A stipulation and
agreement of compromise, settlement and release reflecting the terms of the
proposed settlement was filed in the United States District Court for the
Southern District of Texas on November 23, 1994. At a hearing held on the same
date, the court approved the consolidation of all four lawsuits and the
certification of a Unitholder class requested by the settling parties. On March
3, 1995, following a hearing on the fairness of the settlement, the court
entered a final order approving the settlement, dismissing the consolidated
lawsuits with prejudice and reducing the award of attorneys' fees and
disbursements contemplated by the stipulation to $1,479,000, payable $300,000 in
cash and the balance at the election of the Company in either cash or common
stock, the market value of the common stock to be determined by the weighted
average sales prices of shares of common stock for the ten (10) business days
immediately preceding the payment date, plus interest from the date the case is
no longer subject to review in any court.

      On April 29, 1997, the U.S. Court of Appeals for the Fifth Circuit
affirmed the final judgment and order of the District Court.

                                        5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

      INTRODUCTION. The Company and its consolidated subsidiaries ("Kelley") are
engaged in oil and natural gas exploration, development, production and
acquisition. Kelley's activities are concentrated primarily in two geographic
areas: north Louisiana and south Louisiana. Kelley's core natural gas properties
in north Louisiana are located in the Sailes, Sibley, West Bryceland and Ada
fields of Webster and Bienville Parishes, while its core properties in south
Louisiana are concentrated in Terrebonne Parish. Production is primarily from
the Hosston (north Louisiana) and Miocene (south Louisiana) formations.

      HEDGING ACTIVITIES. Kelley periodically has used forward sales contracts,
natural gas swap agreements and options to reduce exposure to downward price
fluctuations on its natural gas production. The swap agreements generally
provide for Kelley to receive or make counterparty payments on the differential
between a fixed price and a variable indexed price for natural gas. Gains and
losses realized by Kelley from hedging activities are included in oil and gas
revenues and average sales prices. Kelley's hedging activities also cover the
oil and gas production attributable to the interest in such production of the
public unitholders in Kelley's subsidiary partnerships. Through natural gas swap
agreements, approximately 64% of Kelley's natural gas production for the first
quarter of 1997 was affected by Kelley's hedging transactions at an average
NYMEX quoted price of $2.56 per MMBtu before transaction and transportation
costs. As of March 31, 1997, approximately 38% of Kelley's anticipated natural
gas production for the remainder of 1997 had been hedged by natural gas swap
agreements at an average NYMEX quoted price of $2.29 per MMBtu before
transaction and transportation costs. Hedging activities reduced revenues by
approximately $2.1 million in the first quarter of 1997 as compared to estimated
revenues had no hedging activities been conducted. At March 31, 1997, the fair
market value of the Company's existing hedging instruments for future production
months approximated $2.0 million.

      The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. The Company has not experienced
counterparty nonperformance on these agreements and does not anticipate any in
future periods.

RESULTS OF OPERATIONS

      The following table sets forth certain operating data regarding net
production, average sales prices, production expenses and revenues associated
with the Company's oil and natural gas operations for the periods indicated.

                                                            THREE MONTHS ENDED
                                                                  MARCH 31,
                                                           ---------------------
                                                              1996        1997
                                                           ---------   ---------
NET PRODUCTION DATA:
  Oil and other liquid hydrocarbons (Mbbls) ............          65          47
  Natural gas (Mmcf) ...................................       4,868       7,076
  Natural gas equivalent (Mmcfe) .......................       5,258       7,358
AVERAGE SALES PRICE PER UNIT:
  Oil and other liquid hydrocarbons (per Bbl) ..........   $   19.74   $   21.25
  Natural gas (per Mcf) ................................        2.39        2.45
  Natural gas equivalent (per Mcfe) ....................        2.46        2.49
COST PER MCFE:
  Lease operating expenses .............................   $     .40   $     .24
  Severance taxes ......................................         .09         .08
  General and administrative expenses ..................         .49         .30
  Depreciation, depletion and amortization
     (oil and gas activities) ..........................        1.07         .80
  Interest expense, excluding accretion
     and amortization ..................................         .94         .65

                                        6
<PAGE>
      The Company's oil and gas revenues of $18.4 million for the first quarter
of 1997 increased 44.9% compared to $12.7 million in the same period of 1996
primarily as a result of an increase in gas production of 45.4%.

      For the first quarter of 1997, revenues from natural gas marketing and
transportation operations, net of associated costs, increased 25% to $0.5
million from $0.4 million for the same period in 1996.

      Production expenses for the first quarter of 1997 decreased 7.7% to $2.4
million from $2.6 million in the same period last year, primarily reflecting
lower average costs on north Louisiana production, which is increasing in
proportion to other higher cost production, offset by higher overall production
levels. On a unit basis, production expenses decreased $0.32 per Mcfe in the
first quarter of 1997 compared to $0.49 per Mcfe in the quarter last year.

      Exploration costs totaled $1.0 million in the first quarter of 1997 and
$1.6 million in the corresponding period of 1996, a decrease of 37.5%, primarily
the result of a reduction in lease rental expense reflecting the joint
exploration agreement effective December 1996 in south Louisiana with Williams
Production - Gulf Coast Company, L.P. ("Williams"). Pursuant to the agreement,
Williams purchased a 50% interest in the Company's 27,000 net acre position as
well as 23 wells and related facilities in the Houma Embayment in Terrebonne
Parish, Louisiana.

      General and administrative expenses of $2.2 million in the first quarter
of 1997 decreased 15.4% compared to $2.6 million in the corresponding period
last year, reflecting efficiencies obtained in the realignment of the workforce.
This decrease is somewhat offset by a reduction in 1997 in the level of general
and administrative expenses either being capitalized or allocated to exploration
expense. On a unit basis, general and administrative expenses were $0.30 per
Mcfe in the first quarter of 1997 compared to $0.49 per Mcfe in the
corresponding quarter of 1996.

      Interest and other debt expenses of $5.8 million in the first quarter of
1997 decreased 9.4% from $6.4 million in the same period of 1996. The decrease
in interest expense resulted primarily from lower interest rates under the
10 3/8% Senior Subordinated Notes than under the 13 1/2% Senior Notes retired in
October 1996, and lower debt amortization expenses as a result of the
refinancing of the 13 1/2% Senior Notes and the bank credit facility. These were
partially offset by higher average debt levels during the current period. See
"Liquidity and Capital Resources." In addition to its 1997 interest expense of
$4.8 million, the Company recorded non-cash charges in the first quarter of 1997
of $0.3 million for amortization of debt issuance costs, $0.2 million for
accretion of note discount and $0.5 million for accretion of debt valuation
discount.

      Depreciation, depletion and amortization ("DD&A") increased 5.3% from $5.7
million in the first quarter of 1996 to $6.0 million in the current period,
primarily as a result of higher first quarter 1997 production which was
partially offset by a reduction in the units-of-production DD&A rate for oil and
gas activities from $1.07 per Mcfe in the first quarter 1996 to $0.80 per Mcfe
in the current period.

      Kelley recognized net income of $1.7 million in the first quarter of 1997
and a net loss of $5.5 million in the same period last year. The earnings
improvement reflects higher gas production and prices and lower exploration
costs and general and administrative and interest expenses.

      The results of operations for the quarter ended March 31, 1997 are not
necessarily indicative of results to be expected for the full year.

LIQUIDITY AND CAPITAL RESOURCES

      LIQUIDITY. Net cash provided by operating activities during the first
three months of 1997 aggregated $17.1 million. Funds used in investing and
financing activities were comprised of capital expenditures of $11.1 million and
net principal retirements of $9.5 million on bank borrowings, respectively. As a
result of these activities, cash and cash equivalents decreased from $4.1
million at December 31, 1996 to $0.6 million as of March 31, 1997. As of March
31, 1997, Kelley had a working capital deficit of $18.0 million, compared to a
working capital deficit of $6.0 million at the end of 1996. The working capital
deficit at March 31, 1997 includes interest payable of $7.4 million which was
substantially paid in April 1997. The balance of the working capital deficit
will be funded through operations and/or bank borrowings under existing lines of
credit.

                                        7
<PAGE>
      CAPITAL RESOURCES. The credit facility provides for a maximum $125 million
revolving credit loan and matures, with all amounts owed thereunder becoming due
and payable, effective December 12, 2000. Borrowings under the credit facility
are subject to a borrowing base to be determined semi-annually by the lenders
(based in part on the proved oil and gas reserves and other assets of Kelley)
which may be redetermined more frequently at the election of the lenders or the
borrowers. Initially, the borrowing base is $57.5 million. At March 31, 1997,
$4.0 million was outstanding under the credit facility.

      At March 31, 1997, the Company has $190.7 million face amount of debt
outstanding, requiring $19.2 million in annual cash interest payments. The
outstanding Preferred Stock is cumulative, requiring dividends to accumulate at
the rate of $4.6 million annually, and carries liquidation preferences over the
Common Stock totaling $49.4 million at March 31, 1997, including such dividend
arrearages. On April 15, 1997, the Board of Directors of the Company declared a
dividend of $2.625 per preferred share (approximately $4.6 million), which was
paid on May 1, 1997. The Company has not declared the quarterly dividends of
$0.65625 for February 1, 1997 and May 1, 1997, aggregating approximately $2.3
million. Further dividends are prohibited under the existing credit facility.

      Pursuant to the second stage of Contour's equity investment in the
Company, Contour has committed to provide an additional $27.0 million in equity
financing upon satisfaction of certain conditions, including the absence of any
Company debt repurchase or redemption obligations, but in no event later than
January 2000. While exercise of such commitment cannot be assured prior to
January 2000, any proceeds received pursuant to such commitment will reduce
Kelley's dependence on outside financing to support subsequent drilling and
acquisition activities.

      CAPITAL COMMITMENTS. Kelley's 1997 capital expenditure budget provides for
$34.3 million to be expended primarily on development drilling in north
Louisiana. In the first three months of 1997, the Company participated in
drilling 15 gross (6.83 net) wells, all of which were found productive. The 1997
drilling performance reflects lower risk operations in north Louisiana. Kelley,
with its partner, continues to explore in south Louisiana under an agreement
which allows the Company to retain exposure to this prolific region while
minimizing the capital cost associated with exploration. As of the end of the
quarter, Kelley was participating in the drilling/completing of 8 gross wells.

      In addition, Kelley has an active program for ongoing evaluation of
opportunities meeting its acquisition criteria. There can be no assurance that
attractive acquisition candidates will be available to the Company on terms it
deems reasonable or that any completed acquisition will ultimately prove to be a
successful undertaking by the Company.

      The Company anticipates that, except for any significant property
acquisitions, business combinations or development required by exploratory
success (and subject to price stability), cash flow from operations, and
borrowings under the new credit facility will be adequate to fund Kelley's debt
service obligations, expected capital expenditure requirements and working
capital needs for the foreseeable future. To fully realize Kelley's objectives
for property development and acquisitions, however, the Company may be required
to pursue additional financing alternatives.

      INFLATION AND CHANGING PRICES. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.

FORWARD-LOOKING STATEMENTS

      FROM TIME TO TIME, THE COMPANY MAY PUBLISH FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, RELATING TO
MATTERS SUCH AS ANTICIPATED OPERATING AND FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, DEVELOPMENTS AND RESULTS OF THE COMPANY. ACTUAL PERFORMANCE,
PROSPECTS, DEVELOPMENTS AND RESULTS MAY DIFFER MATERIALLY FROM ANY OR ALL
ANTICIPATED RESULTS DUE TO ECONOMIC CONDITIONS AND OTHER RISKS, UNCERTAINTIES
AND CIRCUMSTANCES PARTLY OR TOTALLY OUTSIDE THE CONTROL OF THE COMPANY,
INCLUDING RATES OF INFLATION, NATURAL GAS PRICES, RESERVE ESTIMATES, RATES AND
TIMING OF FUTURE PRODUCTION OF OIL AND GAS, AND CHANGES IN THE LEVEL AND TIMING
OF FUTURE COSTS AND EXPENSES RELATED TO DRILLING AND OPERATING ACTIVITIES.

      WORDS SUCH AS "ANTICIPATED," "EXPERT," "ESTIMATE," "PROJECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS MAY BE MADE IN MANAGEMENT'S STATEMENTS (ORALLY OR IN WRITING)
INCLUDING PRESS RELEASES, AND IN FILINGS OF THE SEC, INCLUDING THIS REPORT.

                                      8
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      As previously reported, following Kelley Oil's announcement of the initial
proposal for the consolidation in August 1994, four separate lawsuits were filed
against Kelley Oil and its directors relating to the consolidation. In November
1994, Kelley Oil entered into a memorandum of understanding with the plaintiffs
in three of the lawsuits, providing for a proposed settlement based on a revised
consolidation proposal negotiated by a special committee of Kelley Oil's
non-management directors and the settling plaintiffs. A stipulation and
agreement of compromise, settlement and release reflecting the terms of the
proposed settlement was filed in the United States District Court for the
Southern District of Texas on November 23, 1994. At a hearing held on the same
date, the court approved the consolidation of all four lawsuits and the
certification of a Unitholder class requested by the settling parties. On March
3, 1995, following a hearing on the fairness of the settlement, the court
entered a final order approving the settlement, dismissing the consolidated
lawsuits with prejudice and reducing the award of attorneys' fees and
disbursements contemplated by the stipulation to $1,479,000, payable $300,000 in
cash and the balance at the election of the Company in either cash or common
stock, the market value of the common stock to be determined by the weighted
average sales prices of shares of common stock for the ten (10) business days
immediately preceding the payment date, plus interest from the date the case is
no longer subject to review in any court.

      On April 29, 1997, the U.S. Court of Appeals for the Fifth Circuit
affirmed the final judgment and order of the District Court.

ITEM 3.  ARREARAGES IN PAYMENT OF DIVIDENDS

      On April 15, 1997, the Company's Board of Directors declared a dividend of
$2.625 per share applicable to dividends for 1996 on its $2.625 Convertible
Exchangeable Preferred Stock to stockholders of record as of April 25, 1997,
which was paid May 1, 1997. The Company has not declared the quarterly dividends
of $0.65625 for February 1, 1997 and May 1, 1997, aggregating approximately $2.3
million.

                                        9
<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.


                                          KELLEY OIL & GAS CORPORATION

Date: May 15, 1997                        By: /s/  DAVID C. BAGGETT
                                                   David C. Baggett
                                               Senior Vice President and
                                                Chief Financial Officer
                                               (Duly Authorized Officer)
                                             (Principal Accounting Officer)

                                       10