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

                                 FORM 10-K

     X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

        For the fiscal year ended December 31, 1997

                                    OR

             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the transition period from          to        

                       Commission file number 0-9976

                           ARCH  PETROLEUM  INC.
          (Exact name of registrant as specified in its charter)

                      DELAWARE                         83-0248900
           (State or other jurisdiction of          (I.R.S. Employer
           incorporation or organization)          Identification No.)

            777 Taylor Street, Suite II,
                  Fort Worth, Texas                       76102
      (Address of principal executive offices)         (Zip Code)

     Registrant's telephone number, including area code (817)332-9209
     Securities registered pursuant to Section 12(b) of the Act:  None
        Securities registered pursuant to Section 12(g) of the Act:

                                                Name of each exchange
              Title of each class                 on which registered
   Common Stock, par value $0.01 per share     NASDAQ National Market

   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        

   As of March 31, 1998, the  aggregate market value  of the  voting
   stock held by nonaffiliates of  the registrant was $33,132,000  based
   on the closing price reported by NASDAQ National Market.

   As  of  March 31, 1998, there  were 17,321,804  shares of the  regis-
   trants Common Stock outstanding.

                    Documents Incorporated by Reference

   Part III information is included in the Registrant's definitive proxy
   statement which will be filed within 45 days of the date of this Form
   10-K.
<PAGE>
                                TABLE OF CONTENTS



   PART I                                                           Page

        Item 1.   Business.........................................  3

        Item 2.   Properties.......................................  5

        Item 3.   Legal Proceedings................................  9

        Item 4.   Submission of Matters to a Vote of Security
                  Holders..........................................  9

   PART II

        Item 5.   Market for Company's Common Stock and Related
                  Shareholder Matters.............................. 10

        Item 6.   Selected Financial Data.......................... 11

        Item 7.   Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.............. 12

        Item 8.   Consolidated Financial  Statements  and
                  Supplemental Data................................ 16

        Item 9.   Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure.............. 41

   PART III
                                                                     
        Item 10.  Directors and Executive Officers of the Company.. 42

        Item 11.  Executive Compensation........................... 42

        Item 12.  Security Ownership of Certain Beneficial Owners
                  and Management................................... 42

        Item 13.  Certain Relationships and Related Transactions... 42

   PART IV

        Item 14.  Exhibits, Consolidated Financial Statement
                  Schedules, and Reports on Form 8-K............... 43

        Signatures................................................. 46

<PAGE>
                                  PART I

   ITEM 1.   BUSINESS

        Arch Petroleum Inc., a Delaware corporation, (together with  its
   subsidiaries, "the Company") primarily engages in oil and natural gas
   exploration, development, production, transportation and marketing in
   the Southwestern United States  and Western Canada.   The Company  is
   also active in the  acquisition of interests in  oil and gas  leases,
   both  producing  and  non-producing.  Subsidiaries  of  the   Company
   include:  Arch  Petroleum  Ltd. ("APL"), and Northern Arch  Resources 
   Ltd. ("NARL") both wholly-owned Canadian companies;  Arch  Production
   Company,  wholly- owned;  Saginaw  Pipeline Company, L.C. ("Saginaw")
   and  Industrial Natural Gas, L.C.  ("ING"), 95% membership  interest;
   and  Onyx  Pipeline  Company,  L.C., Onyx Gathering Company, L.C. and
   Onyx   Gas   Marketing   Company,   L.C.   (all  together,   "Onyx"),
   50% membership interest.  The Company sold  it's entire  interest  in
   Onyx  effective  June  30,  1997.   The Company  reduced its domestic
   long-term  debt by $7.8  million and recognized a pre-tax  book  gain
   of  approximately  $5.0   million.   Threshold   Development  Company
   ("TDC"), an oil and gas exploration company, owns approximately 13.9%
   of the Company's common stock as of December 31, 1997.


        The Company's shareholders, in a special meeting on January  31,
   1995,  approved   an  amendment   to   the  Company's   articles   of
   incorporation  whereby  the  number  of  authorized  shares  of   the
   Company's capital  stock  was  increased from  26,000,000  shares  to
   51,000,000 shares.  Common stock is designated for 50,000,000  shares
   and preferred stock is designated for the remaining 1,000,000 shares.
    The Company  has  reserved  9,090,909 shares  of  common  stock  for
   issuance upon conversion of the securities sold on October 20,  1994,
   in a private placement (the "Placement"), if necessary.  The  Company
   has also reserved  approximately 339,300 shares  of common stock  for
   issuance upon exercise of options  under its current incentive  stock
   option plan.

        The Company sold the following securities to four  institutional
   investors in the Placement: (a) 727,273 shares of its 8% Exchangeable
   Convertible Preferred Stock (the "Preferred Stock"), $.01 par  value,
   having  an  aggregate  liquidation  preference  of  $20,000,000,  (b)
   $500,000 aggregate principal amount of its 9.75% Series A Convertible
   Subordinated Notes due 2004 (the "Series A Notes") and (c) $4,500,000
   aggregate principal amount of its Adjustable Rate Series B Notes  due
   2004 (the "Series B Notes" and, together with the Series A Notes, the
   "Notes").  Gross proceeds from the Placement were $20 million for the
   Preferred Stock and $5 million for the Notes.  The proceeds were used
   to pay down the Company's revolving bank credit facility.

        See  Note  13   to  the consolidated  financial  statements  for
   information regarding  revenues,  operating profit  and  identifiable
   assets of the Company's segments.

   Recent Developments:

   Oil and Gas Operations
<PAGE>
        The  Company  acquired  Trax  Petroleums  Limited  ("Trax"),   a
   Canadian  oil   and   gas   exploration   and   development   company
   headquartered in Calgary, Alberta, Canada effective January 31, 1996.
   The  acquisition was  made through  Northern Arch  Resources Ltd.,  a
   wholly- owned Canadian subsidiary of  the Company.   The  acquisition
   purchase price was approximately $7.6  million.  The Company  changed
   the  name  of Trax to Arch  Petroleum Ltd. effective March  31, 1997.

        The Company consummated an agreement with Chevron U.S.A. Inc. to
   purchase certain oil and gas properties  for a cash consideration  of
   $17.9 million on March 31, 1994.   The Company borrowed the  purchase
   price through its bank credit facility.   The properties, located  in
   Lea County,  New  Mexico,  included interests  in  approximately  130
   producing oil  and  gas  wells.   The  Company  operates  and  has  a
   significant working interest in the majority of these properties. The
   has drilled and recompleted approximately 75 wells in this area since
   the purchase.

        The Company sold a volumetric production payment (the "VPP")  to
   Enron Reserve  Acquisition  Corp.  ("Enron")  for  $24.3  million  in
   November 1992.    The Company  contracted  to deliver  to  Enron  the
   equivalent of  approximately 17.9  Bcf of  natural gas  from  Company
   operated properties in  the Keystone  Ellenburger Field  ("Keystone")
   over  5.7  years  beginning  in  December  1992.    The  Company   is
   responsible for all costs of production, development and marketing of
   the dedicated  gas.    The  deferred  revenue  associated  with  this
   transaction is recognized as the dedicated gas is delivered to Enron.
   In  May 1993  the Railroad Commission  of Texas  ("RRC") amended  the
   field  rules  for  Keystone  reducing   the   allowable   production.   
   Subsequent to this ruling, the Company  has not been able to  produce
   sufficient gas to satisfy the monthly delivery obligation  to  Enron.  
   This created a gas delivery deficiency under  the  VPP.  During April
   1997, the RRC further reduced the allowable production from Keystone.
   See  Item 7,  Management's   Discussion  and  Analysis  of  Financial
   Condition  and  Results   of   Operations   and   Note   5   to   the
   consolidated financial statements, for  additional discussion of this
   matter.

   Natural Gas Pipeline Operations

        The Company  acquired  a  50% membership  interest  in  Onyx  in
   January 1993.   The Company entered  into an agreement  to sell  it's
   entire 50%  membership  interest in  Onyx  on  July 10,  1997.    The
   transaction was closed on July 31,  1997, and was effective June  30,
   1997.  Onyx owns four pipelines (approximately 25 miles) which supply
   natural gas  to four  electric power  plants  owned  by Central Power
   and Light ("CPL") in Nueces, Hidalgo, Webb and San Patricio Counties,
   in South Texas.  Onyx's  contract with  CPL includes a  provision for
   a portion  of the base load to the  four plants.  Onyx also  competes
   to supply additional quantities of gas which the plants require. Onyx
   also  owns  other  pipelines,  including  approximately  40  miles of
   gathering systems.

        The  Company,   in  conjunction   with  Central   States  Energy
   Corporation ("CSE"), formed Saginaw and ING in July 1992.  Concurrent
   with  this  event,  Saginaw  acquired  a  6_  pipeline  that  extends
   approximately 100 miles from Wichita Falls, Texas to Saginaw,  Texas.
   ING  was formed to market the  sales and transmission of natural  gas
   through the  Saginaw  pipeline.   The  Company  purchased  CSE's  20%
   membership interest in Saginaw  and ING on September  27, 1995.   The
   Company now owns a 95% membership interest in Saginaw and ING.

<PAGE>

   Principal Products and Markets:

        The Company's principal products are oil  and natural gas.   The
   principal markets for such products  are those wherein the  Company's
   oil and gas  properties are physically  located, and  the methods  of
   distribution of such products are by the sale of such products at the
   wellhead  to  appropriate  gathering   companies  operating  in   the
   geographic area of production.

        In its natural  gas marketing and  transmission activities,  the
   Company buys and  resells natural gas,  receiving a  gross margin  or
   spread equal to  the difference between  the purchase  price and  the
   resale price of such natural gas.  In addition, the Company  receives
   a fee for transmission of natural gas over pipeline systems owned  by
   the Company.

   Customers:

        The Company has sold and will continue to market its oil and gas
   products to a number of purchasers and does not believe that the loss
   of any single purchaser of its  crude oil, condensate or natural  gas
   production would adversely  affect its operations.   During the  year
   ended December 31,  1997, the Company  sold to  three customers  that
   represented 62% of total  revenues from oil and  gas sales:   Genesis
   Crude Oil, L.P.  (29%), Richardson Products  Company (21%) and  Enron
   Gas Marketing (12%).

        Onyx sold natural gas to approximately sixty customers in  1997.
   CPL  was the  largest customer of  the Company,  representing 50%  of
   gross revenues from pipeline sales.

   Backlog Orders and Government Contracts:

        The Company has no amount of  firm backlog orders, and is not  a
   party  to  any  material  contracts  the  termination  of  which   or
   renegotiation of terms of  which may be made  at the election of  any
   government.

   Competition:

        The  Company  competes   with  numerous   other  companies   and
   individuals in the search for and  the acquisition of attractive  oil
   and gas  properties  and  in the  marketing  of  oil and  gas.    The
   Company's competitors include major oil companies, other  independent
   oil  companies  and  individuals,   most  of  which  have   financial
   resources, staffs and facilities substantially in excess of those  of
   the Company.   The Company  is not a  major factor  in the  petroleum
   industry.

        Competition in  the acquisition  of oil  and gas  prospects  and
   properties has  become increasingly  intense in  recent years.    The
   Company's ability to acquire reserves in  the future will depend  not
   only on its ability  to develop its present  properties, but also  on
   its ability to select and acquire suitable prospects for  exploratory
   drilling or development.

<PAGE>

        Marketing competition  is affected  in  part by  the  production
   levels of crude oil, crude oil imports, the proximity of pipelines to
   producing properties and the regulation by states of allowable  rates
   of production.    All of  these  variable factors  are  dependent  on
   economic and political forces which cannot be accurately predicted in
   advance.

        Natural gas  marketing is  a  highly competitive  business.  The
   Company sells natural gas to customers  who can purchase natural  gas
   from  other  suppliers.    The  Company  competes  with   traditional
   regulated distribution companies as well  as an increasing number  of
   natural gas  producers, marketers  and brokers  for the  business  of
   buying, selling  and  transporting  natural  gas.    Other  entities,
   including unregulated  affiliates  of  regulated  pipeline  companies
   attempting to arrange direct sales of their own, have created natural
   gas marketing companies which also compete with the Company.

   Environmental Regulation:

        Production of oil and  gas by the Company  is affected by  state
   and federal regulations.   In most areas, the  production of oil  and
   gas is  regulated  by conservation  laws  and regulations  which  set
   allowable rates of  production and otherwise  control the conduct  of
   oil and gas  operations.  In  addition, the  Company's producing  and
   drilling operations  are  also subject  to  environmental  protection
   regulations established by  federal, state and  local agencies.   The
   Company  believes  that  it  is  currently  in  compliance  with  all
   applicable federal, state and local environmental regulations. 

        The Company does not believe that such environmental regulations
   in their present form have or will have any material effect upon  its
   capital expenditures  or earnings.    The Company's  competitors  are
   subject to the same regulations to which the Company is subject  and,
   therefore, such regulations  will not have  any material effect  upon
   competitive position.   The  Company does  not project  any  material
   capital expenditures  for environmental  control facilities  for  any
   succeeding year.

   Government Regulation:

        Federal regulation has had and is expected to continue to have a
   significant effect on  the natural  gas marketing  activities of  the
   Company.    Such  activities  are  affected  by  the  Federal  Energy
   Regulatory Commission ("FERC")  rules and orders  issued pursuant  to
   the Natural Gas Act and the Natural Gas Policy Act of 1978  ("NGPA").
    In general,  both  of these  acts  authorize the  FERC  to  regulate
   certain activities of  companies engaged in  the interstate sale  and
   transport of natural gas.

        Under  the  NGPA,  natural  gas  was  classified  according   to
   category, based  primarily  on the  age  of the  well  producing  the
   natural gas  and  the location,  character  and permeability  of  the
   formation from which the natural gas is produced, and price  ceilings
   were established for the various categories of natural gas.  Most  of
   the price ceilings established  by the NGPA  have been abolished  and
   many categories of natural  gas have been  deregulated.  The  Company
   must comply with the  price ceilings for the  very limited volume  of
   gas still subject to the price ceilings, if any.

<PAGE>

        The natural gas industry is presently in a state of  significant
   change because of  the adoption by  FERC of "Order  636".  The  Order
   directly affects  the natural  gas  pipeline companies  regulated  by
   FERC, primarily with  regard to natural  gas transportation  services
   provided by those companies.  In addition, because of Order 636, most
   of those  pipeline companies  are no  longer directly  acting as  gas
   suppliers to  the  natural  gas distribution  companies  serving  gas
   consumers  in  the  United  States.    Due  to  these  changes,   the
   distribution companies are forced to make new gas supply arrangements
   for their needs.

        All of these changes affect both  gas producers  and  marketers.  
   However, the  changes  have  not  materially  adversely  affected the
   Company operations.

        The states in which the Company conducts oil and gas  activities
   also regulate oil  and gas production.   Such rules  may control  the
   method of developing new fields, the maximum daily production allowed
   from a well and the operation of a well.

   Employees:

        The Company had 42 full-time employees as of February 28,  1998.
   These  employees are not represented by labor unions and the  Company
   considers its employee relations to be satisfactory.

   ITEM 2.  PROPERTIES

   General:

        The Company's corporate headquarters occupy approximately  9,745
   square feet of leased office space located in Fort Worth, Texas.  The
   Company also leases  2,200 square feet  of office  space in  Midland,
   Texas.  APL leases approximately 4,951 square feet of office space in
   Calgary, Alberta, Canada.  Saginaw leases  500 square feet of  office
   space in Wichita Falls, Texas.   The Company maintains field  offices
   in Kermit, Texas, and in Eunice and Artesia, New Mexico. 

   Oil and Gas Reserves:

        A description  of the  Company's net  quantity  of oil  and  gas
   reserves is  contained  in the  Unaudited  Supplemental Oil  and  Gas
   Disclosures  of  the accompanying  consolidated financial statements.  
   All domestic  oil and  gas reserves  were  estimated by  Ryder  Scott
   Company, independent  petroleum  engineers,  and are  detailed  in  a
   report prepared  for the  exclusive  use of  the  Company.   The  APL
   (Canadian) oil and gas reserves were estimated by Ryder Scott Company
   and Sproule Associates Limited, both independent petroleum  engineers
   in Canada in 1997 and 1996, respectively.  All such estimations  were
   made in accordance with regulations promulgated by the Securities and
   Exchange Commission ("SEC").  The  reserve reports are available  for
   examination at the corporate headquarters.

        The Company has no long-term  supply or similar agreements  with
   foreign governments or authorities.  The  Company has not filed  with
   or included in reports to any federal authority or agency, other than
   the SEC, any estimate of total proved net oil and gas reserves  since
   December 31,  1996.   All of  the Company's  production, acreage  and
   drilling activity is located in the United States and Western Canada.


        The Company operates in an industry that is subject to  volatile
   prices for its products.  Revenues from oil and gas production may be
   affected to a significant degree by  fluctuations in prices that  are
   brought on by factors beyond the Company's control.

<PAGE>

        The following table sets  forth a summary  of the Company's  oil
   and gas reserve quantities and present value of future net cash flows
   associated therewith. 

   <TABLE>
   <S>                        United States      Canada        Total
   Present value of           <C>             <C>           <C>
    discounted future
    net cash flows before
    income taxes:
     December 31, 1997         $60,289,500    $ 8,422,300   $ 68,711,800
     December 31, 1996         101,701,100     11,775,700    113,476,800
     December 31, 1995          64,296,200           -        64,296,200

   Proved developed and
    undeveloped reserves:
     Oil (Bbls)
     December 31, 1997           5,060,500        812,900      5,873,400
     December 31, 1996           3,861,000        856,900      4,717,900
     December 31, 1995           4,030,200           -         4,030,200                  
     Gas (Mcf)
     December 31, 1997          68,430,700      6,575,000     75,005,700
     December 31, 1996          59,120,900      1,136,000     60,256,900
     December 31, 1995          61,286,300           -        61,286,300

   Proved developed
    reserves:
     Oil (Bbls)
     December 31, 1997           4,475,600        693,800      5,169,400
     December 31, 1996           3,128,400        809,900      3,938,300
     December 31, 1995           2,993,600           -         2,993,600
     Gas (Mcf)
     December 31, 1997          65,324,800      6,489,000     71,813,800
     December 31, 1996          54,981,200        504,000     55,485,200
     December 31, 1995          55,628,500           -        55,628,500
</TABLE>

 
        The United States  figures above exclude  1.9 Bcf,  8.7 Bcf  and
   11.9 Bcf  of  proved  gas reserves   and   $436,400,  $2,960,600  and
   $11,672,700 of  discounted future  net  cash flows  (after  operating
   expenses and severance taxes)  at December 31,  1997, 1996 and  1995,
   respectively, which were sold to Enron in the VPP. See  the Unaudited
   Supplemental   Oil  and   Gas   Disclosures   in   the   accompanying
   consolidated financial  statements for  key factors  and   additional
   information related to the  Company's  reserve  estimates.


<PAGE>



   Wells Drilled:

        The following table shows the  wells drilled by or  participated
   in by the Company since 1995.  Gross wells refer to the total  number
   of wells in which  the Company has  an interest.   Net wells are  the
   gross wells  multiplied by  the Company's  working interest  in  each
   well.  A dry well is one that  is found to be incapable of  producing
   commercial amounts of oil or gas,  and a productive well is one  that
   is not dry.
<TABLE>
                                     Gross Wells               Net Wells
                                  Produc-                 Produc-
   <S>                            tive   Dry  Total       tive    Dry  Total
   Year Ended December 31, 1997:      <C>   <C>   <C>      <C>    <C>    <C>
     United States - Exploratory      2     1     3        1.5    1.0    2.5
     United States - Development    127     1   128       32.2     .5   32.7

     Canada - Exploratory             -     2     2          -    1.8    1.8
     Canada - Development             7     -     7        1.6      -    1.6

   Year Ended December 31, 1996:
     United States - Exploratory      1     2     3         .3    1.3    1.6
     United States - Development    150     -   150       24.4      -   24.4

     Canada - Exploratory             1     1     2         .3     .7    1.0
     Canada - Development             3     -     3        1.1      -    1.1

   Year Ended December 31, 1995:
     United States - Exploratory      -     4     4          -    2.2    2.2                                    
     United States - Development    110     -   110       13.4      -   13.4

     Canada - Exploratory             -     -     -          -      -      -
     Canada - Development             -     -     -          -      -      -

</TABLE>

<TABLE>

   Leases and Wells Owned:

        At  December  31,  1997,  the  Company  owned  interests  in the
   following acreage.

   <S>                    United States      Canada       Total                
   Developed acres:           <C>            <C>         <C>
     Gross                    67,017         35,223      102,240
     Net                      16,950          3,810       20,760

   Undeveloped acres:
     Gross                    74,435        106,705      181,140
     Net                      23,452         51,777       75,229
</TABLE>

        See also  the  discussion  of  Proposed  Drilling  Activity  and
   Acquisitions.  As of  December 31, 1997,  the Company's interests  in
   wells owned were as follows:
<TABLE>
        <S>              Total           United States           Canada
                    Gross       Net     Gross      Net      Gross       Net
        Type        Wells     Wells     Wells     Wells     Wells      Wells
                    <C>       <C>       <C>       <C>        <C>        <C>
        Oil         1,209     363.7     1,076     344.8      133        18.9
        Gas           134      62.8       131      62.2        3          .6
                    1,343     426.5     1,207     407.0      136        19.5

</TABLE>
<PAGE>
<TABLE>
   Production:

        The following table  reflects net quantities  of oil  (including
   condensate and natural gas liquids) and of gas produced, the  average
   price received per barrel of oil and  per Mcf of gas and the  average
   production (lifting) cost per equivalent barrel.


   <S>                                     1997         1996        1995
   Oil volumes (Bbl):                    <C>           <C>         <C>
     United States                        528,400      459,300     382,100
     Canada                               128,600      120,300        - 
            -    
        Total                             657,000      579,600     382,100


   Average Oil Prices ($/Bbl):
     United States                         $19.47       $21.59      $17.28
     Canada                                 19.17        18.81         -    
        Composite                          $19.41       $21.02      $17.28

   Gas volumes (Mcf):
     United States (1)                  5,076,500    6,596,400   7,382,900
     Canada                               182,500      152,200        -    
        Total                           5,259,000    6,748,600   7,382,900

   Average Gas Prices ($/Mcf):
     United States (1)                      $2.10        $1.73       $1.32
     Canada                                  1.08         1.06         -  
        Composite                           $2.07        $1.72       $1.32

   Average Lifting Cost per
    Equivalent Barrel (2):
      United States                         $5.76        $4.87       $4.45
     Canada                                  6.47         4.80         -   
        Composite                           $5.83        $4.86       $4.45

   (1)   Includes  production  payment  natural  gas  volumes  (Mcf)  of
   1,713,900, 2,751,100  and 3,090,400  at an  average price  of  $1.20,
   $0.83 and $1.11 for the years ended December 31, 1997, 1996 and 1995,
   respectively.

   (2)  Equivalent barrels are calculated  using a conversion factor  of
   six Mcf of gas to one barrel of oil.  Costs include severance and  ad
   valorem taxes.

</TABLE>
<PAGE>

   Proposed Drilling Activity and Acquisitions:

        The Company was very successful drilling new developmental wells
   and recompleting  existing  wells in  1997.   This  coming  year  the
   Company has budgeted approximately $16.6 million  to its oil and  gas
   capital expenditures program. Domestically, the Company has  budgeted
   $4.7 million  for  eight  new  wells  and  fifteen  recompletions  in
   southeast New  Mexico.  This area  continues  to lead  the  Company's
   growth both in production and  additional reserves. In total  current
   plans call for the drilling of approximately thirty new wells and the
   recompletion of approximately twenty-one existing wells in the United
   States for approximately $7.1 million.

        The Company  was also  successful  in the  development  drilling
   efforts by APL  in 1997.   Current  year plans  include eighteen  new
   wells for approximately $9.5 million.  APL also increased its acreage
   positions and expanded its 3-D seismic coverage in 1997.

        Saginaw also anticipates expansion  and growth opportunities  in
   the coming  year.   In  addition  to  the existing  business  of  gas
   transportation and marketing, it  is evaluating its participation  in
   several power generation projects.  Most of these projects  represent
   opportunities for  profitable activities  in  our existing  lines  of
   business while adding another  dimension  to  our  future  potential.

   ITEM 3.  LEGAL PROCEEDINGS

        From time to time the Company is involved in litigation  arising
   in the normal course of business.  In the opinion of management,  the
   Company's ultimate liability, if any, from lawsuits currently pending
   would not  materially affect  the  Company's financial  condition  or
   operations.

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No  matters  were   submitted  to  a   vote  of  the   Company's
   shareholders during the quarter ended December 31, 1997.

<PAGE>


                                  PART II

   ITEM 5.    MARKET  FOR COMPANY'S  COMMON  STOCK AND  RELATED  SHARE-
   HOLDER MATTERS

        The Company's common stock trades on the NASDAQ National  Market
   under the symbol " ARCH" .  The following  table sets forth the  high
   and low prices of the Company's  stock as reported by NASDAQ for  the
   period from January 1, 1996, through December 31, 1997.  These  price
   quotations represent prices  between dealers, do  not include  retail
   mark ups, mark  downs, commissions or  other adjustments  and do  not
   necessarily represent  actual  transactions.  On  March 31, 1998, the
   closing   price   for   the   Company's  common  stock  was  $ 2.500.

<TABLE>
              <S>                       1997                 1996             
              Quarter             High       Low        High      Low
                                 <C>       <C>        <C>        <C>

              First              $3.375    $2.250     $2.938     $1.938
              Second              3.281     2.438      2.688      2.000
              Third               3.875     2.938      2.750      1.688
              Fourth              3.688     2.219      3.031      2.250
</TABLE>
        There were  approximately 1,390  shareholders  of record  as  of
   December 31, 1997.

        No cash dividends have been paid  on common stock to date.   See
   Note 7  to  the  consolidated financial statements for discussion  of
   restriction related to common stock  dividends.  The Company  intends
   to maintain a policy of retaining  earnings for use in the  expansion
   of business. 

        Transfer Agent:                Harris Trust and Savings Bank
                                       P. O. Box 755
                                       Chicago, IL  60690-0755

        Investor Relations:            Arch Petroleum Inc.
                                       Attention: Larry Shannon
                                       777 Taylor Street, Suite II
                                       Fort Worth, Texas  76102



<PAGE>

   ITEM 6.   SELECTED FINANCIAL DATA

        The selected financial information  set forth below was  derived
   from the consolidated financial statements of the Company included in
   this report (see Item 8) and should be read in conjunction with  them
   and  Item  7  "Management's  Discussion  and  Analysis  of  Financial
   Condition and Results of Operations".
<TABLE>
   
   Year Ended December      1997      1996     1995     1994      1993
   31, (In Thousands,
   except per share data)

   OPERATING DATA:
   <S>                     <C>      <C>      <C>       <C>       <C>
   Operating revenues (1)  $80,862  $ 99,926 $66,590   $82,696   $44,148
   
   Oil and gas sales        23,622    23,748   16,379    8,730     8,105

   Pipeline sales           51,392    74,309   49,249   73,525    35,572

   Exploration expense       1,134       593      898    1,641       157

   Net income (loss)         2,828     3,022    (164)  (1,830)       176

   Preferred stock                                                     
   dividends                 1,600     1,600    1,600      311      -

   Net income (loss)
    available per common
    share - basic             0.07      0.08    (0.10)   (0.12)     0.01

   Weighted average
    common shares
    outstanding             17,294    17,159   17,141   17,183    17,054


   BALANCE SHEET DATA:

   Total assets            $93,171  $101,039  $79,672  $78,025   $51,069 

   Deferred revenue          2,123    12,528   16,037   20,690    21,499

   Non-recourse
    production
    payment obligation      13,317      -        -        -         -

   Long-term debt,                                                       
    less current
    maturities              30,000    30,134   17,821    9,632     6,500

   Convertible                                                         
    subordinated notes       5,000     5,000    5,000    5,000      -

   Convertible preferred                                               
    stock                   20,000    20,000   20,000   20,000      -

   Shareholders' equity     10,138     9,065    7,595    9,490    11,679
</TABLE>
<PAGE>
   No cash dividends have  been paid on common  stock  since  inception.  
   See Note 7  to  the  consolidated financial statements for discussion
   of restriction on common stock dividends.

   (1) - Operating revenues for 1997  include a gain of $5,046,000  from
   the sale of pipeline subsidiary.   See Note 3  to  the   consolidated
   financial statements.  Operating revenues for 1996 include a gain  of
   $1,037,000 from the sale of certain oil and gas properties.  See Note
   2 to the consolidated financial statements.


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

        With  the  exception  of  historical  information,   the matters
   discussed  herein  are  forward-looking statements that involve risks
   and  uncertainties  including,  but  not  limited  to,  oil  and  gas
   price fluctuations, economic conditions, reserve  estimates, interest
   rate   fluctuations,  the  regulatory  and  political   environments,
   estimated   volumes of gas  to be delivered  pursuant to the  VPP and
   other  risks  indicated  in  filings with the Securities and Exchange
   Commission.

        The  Company  operates  in  an  industry  that  is  subject   to
   volatile   prices for its products.  Cash  flows from operations  may
   be  affected  to  a significant degree by fluctuations in prices that
   are brought on by factors beyond the Company's control.

        The  following  review  of  operations  for  the   years   ended
   December  31, 1997,  1996  and  1995 should  be  read  in conjunction
   with  the  consolidated  financial  statements  presented  elsewhere. 

   CAPITAL RESOURCES AND LIQUIDITY

   Financial  Position.   At  December  31,  1997  the  Company's  total
   assets were $93.2 million compared to $101.0  million at December 31,
   1996.  Oil and gas properties increased  $11.5  million as  a  result
   of  development  drilling  as  well  as  the recompletion of existing
   wells,  chiefly  in  New Mexico and North Texas and $3.1 million as a
   result  of  additional  drilling  in  Canada.  The  Company's working
   capital  ratio  was  1.07  and  1.05  at  December 31, 1997 and 1996,
   respectively.

        The Company  participates in  two bank  credit  facilities:  the
   Third Restated Revolving Credit  Loan Agreement among the Company and
   Bank One, Texas, N.A., the Agent bank and other banks (the " Domestic
   Revolver"), and the Credit Agreement among APL and Bank  of Montreal,
   the Canadian Agent bank (the " Canadian Revolver" ).   Together,  the  
   agent bank and the  Canadian  Agent  bank (the "Lenders").   The  two
   credit facilities are separate bank revolvers.

<PAGE>

        The Company's Revolvers are in place for use  by the Company  at
   its discretion for certain activities including drilling, development
   and acquisition  of oil and gas properties.  The Company has borrowed
   $16.5 million  and  $13.5 million  against the  Domestic and Canadian
   Revolvers  at  December  31, 1997,   respectively.    The  Revolvers'
   borrowing base is the  amount that  the Lenders commit to loan to the
   Company based on the designated loan value established by the Lenders
   at their sole discretion and assigned to certain of the Company's oil
   and  gas properties  which serve as collateral for any loan which may
   be outstanding under the Revolvers.  The  Revolver facility is  $50.0
   million.  The borrowing base  was  redetermined and amended effective
   August 1, 1997, and the borrowing  base is currently allocated  $23.0
   million  Domestic  and  $14.0  million   Canadian.    The  Revolvers'
   borrowing  base  is  reviewed semiannually  by  the  Lenders at their
   discretion. A commitment fee of one half of one percent of the unused
   borrowing base accrues and is payable quarterly. The Revolvers mature
   on May 1, 1999. Borrowings under the Revolvers will, at the Company's
   option, bear interest either at the  Lenders'  Base Rate  or  a  rate
   based  on  the London Interbank Offered Rate (LIBOR).  The  effective
   interest rate was 8.15% at December 31, 1997.

        The Onyx Term Loan  Agreement  (the " Onyx  Note"),  which  Onyx
   entered  into  with  the  Bank  of  Scotland  on March 30, 1994 (last
   amended  September  30,  1994,  the  first  amendment), is a separate
   facility  and  provided  Onyx  with  $5.0 million.   The Onyx Note is
   collateralized   by   certain   of   Onyx's    pipelines,   gathering
   facilities and related transportation contracts.

        The Company closed the sale of its interest in Onyx on  July 31,
   1997, and realized approximately $8.1 million in  cash.  The  Company
   used  $7.8  million of the proceeds to pay down the Domestic Revolver
   as   of July 31, 1997.  As a result of the sale of Onyx,  the Company
   is  no  longer  a party to the Onyx Note described above and does not
   guarantee   that  facility  as  of   July 31, 1997.    All collateral
   requirements and security instruments  formerly  associated  with the
   Onyx  Note  were released  and  cleared  as regards to the Company as
   of July 31, 1997.

        The Revolvers  contain normal  and standard  covenants generally
   found in  lending agreements.   Among  other  things, these covenants
   prohibit  the  declaration  and  payment  of  cash  dividends on  the
   Company's common  stock.   In addition,  the  covenants stipulate the
   maintenance of financial  criteria including: a  minimum level of net
   worth, a certain current ratio, a certain debt to net worth ratio and
   a defined net  income in  excess of scheduled  interest and principal
   payments.   The   Company  is   currently   in  compliance with   the
   covenants in loan agreements.  The Company  has no other unused lines
   of credit.

<PAGE>

        The  Company  sold   727,273  shares   of  its  8%  Exchangeable
   Convertible  Preferred  Stock  having  a  liquidation  preference  of
   $20,000,000 and Convertible  Subordinated Notes of $5,000,000 in  the
   Placement in 1994.   The Preferred Stock  accrues annual dividends at
   the rate of $2.20 per share. Dividends are payable semiannually ($1.6
   million in 1997).  The Notes bear interest at 9.75%. Interest  on the
   unpaid principal  balance  of the  Notes  is payable quarterly  ($0.5
   million in 1997).

        The VPP sold to Enron generated $24.3 million cash in 1992.  The
   Company  contracted  to  deliver   to   Enron   the   equivalent   of
   approximately 17.9 Bcf of natural gas volumes from Keystone beginning
   December  1,    1992.   The  Company  is  responsible for  all  costs
   of  production,  development  and  marketing  of  these dedicated gas
   volumes.  The VPP gas reserves  dedicated   to   Enron  are  excluded
   from   the  Unaudited   Supplemental Oil and Gas Disclosures, herein.

        Certain rulings by the RRC in May  1993, which  affected all the
   Keystone operators, curtailed the production of natural gas from this
   field.  These production curtailments created delays in the Company's
   scheduled volume deliveries  to Enron.  The  VPP provides a mechanism
   to  remedy  both under  and over delivery  of scheduled volumes.  The 
   under deliveries of production payment volumes are  converted into  a
   volumetric  obligation  which  is  also  denominated  in dollars (the 
   "Remedy  Adjustment"),  which  is  calculated  on  a monthly basis by
   multiplying  the  deficient volumes by the market price of the gas at  
   the end of that month.  In addition, the VPP provides for interest at
   10%  per  year  on  the  outstanding Remedy  Adjustment.  This Remedy
   Adjustment  is  satisfied  by  proceeds received  from  the  sale  of  
   dedicated  hydrocarbons  from  Keystone   in   excess  of  the future
   scheduled   volume  deliveries.   The  Company remitted $0.3 million,
   $1.2 million  and $1.2  million  to Enron during 1997, 1996 and 1995,
   respectively,  in satisfaction of a portion of the Remedy Adjustment.

        During 1997,  the  RRC imposed further production limitations of
   natural  gas from  Keystone.  It became evident at that time that the
   Company  would  incur  significant  future  deficiencies and interest
   under  the  VPP.   Accordingly,  in 1997 the Company has reclassified
   amounts due under the Remedy Adjustment from Deferred revenue to Non-
   recourse  production   payment   obligation   in   the   accompanying
   financial statements.  At  December  31, 1997 the Company has treated
   the past  deficiencies  as  a repurchase of the volumetric production
   payment and therefore approximately  6.0 Bcf  associated  with  these
   deficiencies  have  been  restored   to   the   Company's   unaudited
   Supplemental Oil and Gas disclosures, herein.

        The Company  anticipates  that  the  RRC will continue to impose
   production  limitations   for  Keystone  in  1998  that  will  create
   additional deficiencies in scheduled volume deliveries. The scheduled
   volumes  deliverable  during  1998 under the VPP at December 31, 1997
   are   approximately  1.9  Bcf.   In  1997,  interest expense  of $1.0
   million   relating  to  the  Remedy  Adjustment  is  reflected in the
   accompanying  consolidated financial statements.

<PAGE>

   Sources and Uses of Capital Resources.   In 1997  the Company's chief
   sources of  funds were:   $8.1  million from  the sale of Onyx,  $6.3
   million from operations and  $1.4 million (net)  from its bank credit
   facilities.  These  funds  were primarily used to: fund $11.1 million
   of domestic drilling, primarily  in  New Mexico and North Texas, $3.1
   million  for  the  drilling   of   new   wells  in Canada,  including
   construction of supporting facilities  and pipelines and $1.6 million
   for preferred stock dividends.

        In 1996  the Company's chief sources of funds were $11.1 million
   (net)  from  its  bank   credit  facilities  and  $5.9  million  from
   operations.    These  funds  were  used  to:  purchase  its  Canadian
   subsidiary, APL,  for $7.6  million, to drill new  wells and  develop
   existing leases domestically and in APL for a total of  $7.9 million,
   to pay $1.6  million of  preferred stock dividends and  to fund  $1.8
   million in working capital changes.

        In 1995   the  Company's principal  sources  of funds  were $8.2
   million (net) from its  bank credit facilities  and $1.2 million from
   operations.  These funds  were consumed by:  funding $6.1 million for
   development of  existing  properties  in  New  Mexico  and  Texas and
   providing $1.8 million to financing activities including $1.6 million
   in preferred stock dividends and $0.2  illion  for  treasury  shares.

        The Company was very successful drilling new developmental wells
   and recompleting  existing  wells in  1997.   This  coming  year  the
   Company has budgeted approximately $16.6 million  to its oil and  gas
   capital expenditures program. Domestically, the Company has  budgeted
   $4.7 million  for  eight  new  wells  and  fifteen  recompletions  in
   southeast New  Mexico.  This area  continues  to lead  the  Company's
   growth both in production and  additional reserves. In total  current
   plans call for the drilling of approximately thirty new wells and the
   recompletion of approximately twenty-one existing wells in the United
   States for approximately $7.1 million.

        The Company was  also successful in  the developmental  drilling
   efforts by APL  in 1997.   Current  year plans  include eighteen  new
   wells for approximately $9.5 million.  APL also increased its acreage
   positions and expanded its 3-D seismic coverage in 1997.

        Saginaw also anticipates expansion  and growth opportunities  in
   the coming  year.   In  addition  to  the existing  business  of  gas
   transportation and marketing, it  is evaluating its participation  in
   several power generation projects.  Most of these projects  represent
   opportunities for  profitable activities  in  our existing  lines  of
   business while adding another dimension to our future potential.

<PAGE>


        The Company  believes  that  it has  sufficient  cash  flows and
   available borrowing  base in  the Revolvers  to  fund its anticipated
   drilling,  development  and  acquisition programs for 1998 as well as
   its  debt  service  and  preferred   stock   dividend   requirements.
   Additionally, the Company expects to meet its  current operating cash
   requirements  from  cash  flows  provided   by   current  operations.
   Management believes  that  the Company  can continue  to generate, or
   obtain through  other   alternatives, resources  sufficient  to  meet
   cash requirements for future acquisition opportunities.

   RESULTS OF OPERATIONS

                     Year ended December 31, 1997 compared to
                           year ended December 31, 1996

        The  Company  recorded net income before dividends of $2,828,000
   in  1997  as  ompared to net income of $3,022,000 before dividends in
   1996.   Total  revenues  and  expenses  decreased  as  a   result  of
   diminished natural gas pipeline segment  operations  after  the  sale
   of Onyx effective June 30, 1997.  Net income was  decreased primarily
   as a result of lower oil and gas prices during 1997.
   

        Revenues from oil  and gas  sales decreased $126,000 in 1997  as
   compared to 1996. Oil production increased to 657,000 barrels in 1997
   as compared  to 580,000 barrels in  1996, resulting  in a  $1,622,000
   sales increase.  The Company has begun realizing production  from the
   new wells drilled during 1997. The average price received for oil was
   $19.41 in  1997  as  compared to  $21.02  in  1996,  resulting  in  a
   $1,052,000 sales  decrease.   Gas production  in  1997  decreased  to
   5,259,000 Mcf as  compared to 6,749,000  Mcf in 1996, resulting in  a
   $2,553,000  sales  decrease.    The  decrease in  gas  production  is
   attributable  primarily  to  the  reduced allowable  production  from
   Keystone.  The average  price received for gas increased to $2.07  in
   1997 as compared  to $1.72 in  1996, resulting in a $1,857,000  sales
   increase.   The  average  price received  for gas  excluding  certain
   production payment volumes was $2.72 in 1997 as compared to  $2.32 in
   1996.

        Lease  operating  expenses  (" LOE")  related  to   oil  and gas
   properties increased $680,000  as a  result of the  new wells drilled
   during 1997 and general  increases in the cost  of services.  Lifting
   costs per equivalent barrel increased in  1997 to $5.83 from $4.86 in
   1996,  primarily  as  a  result  of  decreased  gas  production  from
   Keystone. Exploration expense increased $541,000 as a result of three
   uneconomic  exploratory  wells  drilled  by  the  Company  during the
   current year.

<PAGE>

        Depletion, depreciation and amortization increased only $207,000
   in  1997  primarily  as a result of the decreased gas production from
   Keystone.   General  and administrative  expenses remained relatively
   constant  primarily  as  a result of the Onyx sale effective June 30,
   1997.  Interest expense increased $1,183,000 in 1997 primarily due to
   interest  of  $1,049,000  related  to  the  VPP   Remedy  Adjustment.

        The Company recognizes a deferred tax asset in APL. No valuation
   allowance  was  provided  against this deferred tax asset since it is
   management's  belief  that  it  is  more  likely  than  not that this
   deferred  tax   asset   will   be  utilized.    See  Note 8  to   the
   consolidated financial statements.


                     Year ended December 31, 1996 compared to
                           year ended December 31, 1995

        The  Company  recorded net income before dividends of $3,022,000
   in  1996  as  compared  to a net loss of $164,000 before dividends in
   1995.  Net  income  increased  due to  higher oil  and gas  sales and
   improved  margins  on  pipeline  sales.    In  addition,  the Company
   recognized a pre-  tax gain of $1,037,000 on the  sale of certain oil
   and gas properties located in West Texas, in April  1996.  There  was
   also a  corresponding increase in  almost all categories of costs and
   expenses.

        Pipeline  sales  increased  $25,060,000  in  1996 as compared to
   1995, but were offset by an  increase in natural  gas   purchases  of
   $24,450,000.  The increase in sales and purchases is due primarily to
   the increase  in  the  cost  of  gas  which averaged $2.19 in 1996 as
   compared  to  $1.52  in  1995.  During 1996  natural gas  was sold at
   an average price of $2.38 as compared to $1.58 in 1995.  Gross margin
   increased by $610,000 in 1996 to $3,000,000.

        Revenues from oil and gas sales increased $7,369,000 in  1996 as
   compared to  1995.   Oil and gas revenues  attributable  to APL  were
   $2,425,000 during  1996.  Increased production  from  the New  Mexico
   properties  as  a  result of the development and exploitation program
   and  higher  average  oil  and  gas  prices  also  contributed to the
   increase in  sales.   Oil  production  increased  to 580,000  barrels
   in  1996  as  compared  to  382,000  barrels in  1995, resulting in a
   $3,414,000 sales  increase.  The  increase in  oil production  is due
   to the  Company's successful drilling and development program  in New
   Mexico as  well as the APL production (120,000 barrels).  The average
   price  received for  oil was $21.02 in 1996 as  compared to $17.28 in
   1995, resulting  in a   $2,163,000 sales  increase.    Gas production
   in  1996  decreased  to  6,749,000 Mcf as  compared to 7,383,000  Mcf
   in  1995, resulting in a $840,000  sales  decrease.     The  decrease
   in  gas   production  is   attributable   primarily  to  the  reduced
   allowable production from  Keystone.  The average  price received for
   gas  increased to $1.72  in   1996  as  compared  to  $1.32 in  1995,
   resulting  in  a  $2,632,000  sales   increase.   The  average  price
   received  for  gas  excluding  certain production payment volumes was
   $2.32 in 1996.

<PAGE>

        LOE  related  to  oil  and  gas  properties  increased  $905,000
   primarily as a result of the addition of the APL operations.  LOE was
   $699,000 for APL during 1996. The new wells successfully completed in
   New Mexico  also added  to LOE.  Lifting costs per equivalent  barrel
   (including APL operations) increased in 1996 to  $4.86 from $4.45  in
   1995.  Exploration expense decreased $305,000 in 1996 as  compared to
   1995.  Depletion,  depreciation and amortization (" DD&A")  increased
   $1,515,000  in  1996  as  a result of increased production, primarily
   from  the New Mexico operations, as well as the added APL operations.
   DD&A was $1,139,000 for APL in 1996.

        General  and  administrative expenses increased $852,000 in 1996
   as  compared  to  1995,  as  a  result  of increased  personnel costs
   and  the  addition  of  APL.  General and  administrative expense was
   $589,000  for  APL  in  1996.    Interest expense  increased $992,000
   as  a  result  of  the  increased  outstanding bank debt during 1996.

        For the years ended December 31, 1997, 1996 and 1995, the
   Company  recorded  income  tax expense  of $1,818,000, $1,438,000 and
   ($86,000) respectively, resulting in  effective  tax rates of  37.5%,
   32.3% and  (34.0%).   The  Company's provision  for income taxes  was
   less  than the  statutory  federal  rate  of  35%  due  to  statutory
   depletion deductionsin 1996 and 1995.  The Company  also   recognized
   a   deferred tax  asset  related  to  APL.   No  valuation  allowance
   was  provided   against   this   deferred   tax   asset  since it was
   management's  belief that it was  more  likely  than  not  that  this
   deferred tax asset would be utilized.  See Note 8 to the consolidated
   financial statements.

<PAGE>

   ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                            ARCH PETROLEUM INC.
      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


                                                                         Page

   Reports of Independent Accountants.................................... 17

   Consolidated Balance Sheets at December 31, 1997 and 1996............. 19

   Consolidated Statements of Operations for years ended December 31,
        1997, 1996 and 1995 ............................................. 21

   Consolidated Statements of Changes in Shareholders' Equity for
        years ended December 31, 1997, 1996 and 1995 .................... 22

   Consolidated Statements of Cash Flows for years ended December 31,
        1997, 1996 and 1995 ............................................. 23

   Notes to Consolidated Financial Statements............................ 24

   Unaudited Supplemental Oil and Gas Disclosures........................ 37

   Index to Exhibits..................................................... 44   

<PAGE>

        All other schedules and  compliance information are  omitted
        since the  required information  is not  present  or is  not
        present in amounts sufficient  to require submission of  the
        schedule, or because the information required is included in
        the consolidated financial statements and the notes thereto. 


                         




        REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


   To the Shareholders and Board of Directors of Arch Petroleum Inc.


        We have audited the  accompanying consolidated balance sheet  of
   Arch Petroleum Inc. (a Delaware  corporation) and subsidiaries as  of
   December  31,  1997,  and  the  related  consolidated  statements  of
   operations, changes in  shareholders' equity and  cash flows for  the
   year then ended.  These  financial  statements are the responsibility
   of the Company's management.  Our responsibility  is  to  express  an
   opinion on these financial statements based on our audit.

        We conducted  our audit  in accordance  with generally  accepted
   auditing standards.  Those standards require that we plan and perform
   the audit to obtain reasonable assurance about whether the  financial
   statements are  free of  material misstatement.   An  audit  includes
   examining, on  a  test basis,  evidence  supporting the  amounts  and
   disclosures in  the financial  statements.   An audit  also  includes
   assessing the accounting  principles used  and significant  estimates
   made by  management,  as well  as  evaluating the  overall  financial
   statement presentation.    We  believe  that  our  audit  provides  a
   reasonable basis for our opinion.

        In our  opinion,  the  financial statements  referred  to  above
   present fairly, in all material  respects, the financial position  of
   Arch Petroleum Inc.  and subsidiaries as  of December  31, 1997,  and
   the  results  of  their operations and their  cash flows for the year
   then ended December 31, 1997, in conformity  with  generally accepted
   accounting principles.



<PAGE>

   Fort Worth, Texas                            ARTHUR ANDERSEN LLP
   April 15, 1998

                    REPORT OF INDEPENDENT ACCOUNTANTS



   To the Shareholders and Board of Directors of Arch Petroleum Inc.


   In our opinion, the accompanying consolidated balance sheets and  the
   related  consolidated  statements  of   operations,  of  changes   in
   shareholders' equity  and  of  cash  flows  present  fairly,  in  all
   material respects, the financial position of Arch Petroleum Inc.  and
   its  subsidiaries  at  December   31,  1996,   and  the  results   of
   their  operations  and  their cash flows for each of the two years in
   the period  ended December  31, 1996,  in conformity  with  generally
   accepted accounting principles.   These financial statements are  the
   responsibility of the Company's management; our responsibility is  to
   express an opinion on these financial statements based on our audits.

   We  conducted  our  audits of  these  statements in  accordance  with
   generally accepted auditing standards which require that we plan  and
   perform the audit  to obtain reasonable  assurance about whether  the
   financial statements are  free of  material misstatement.   An  audit
   includes examining, on a test basis, evidence supporting the  amounts
   and disclosures in the financial statements, assessing the accounting
   principles used  and significant  estimates made  by management,  and
   evaluating the overall financial statement presentation.  We  believe
   that our audits provide a reasonable basis for the opinion  expressed
   above.



   Price Waterhouse LLP

   Fort Worth, Texas
   March 25, 1997
<PAGE>
<TABLE>
                            ARCH PETROLEUM INC.
                        CONSOLIDATED BALANCE SHEETS


                                             December 31,   December 31,
                                                  1997          1996
   <S>                                         <C>            <C>
   ASSETS

   Current Assets:
      Cash and cash equivalents                $2,160,000     $3,192,000
      Accounts receivable - trade               3,585,000     15,948,000
      Accounts receivable - related parties       729,000        423,000
      Prepaid expenses and other                  544,000        968,000

         Total current assets                   7,018,000     20,531,000

   Property and Equipment, at cost:
      Oil and gas properties accounted for
         by successful efforts method          99,178,000     81,620,000
      Natural gas pipelines                     5,657,000     12,361,000
      Furniture, fixtures and other equipment   1,033,000      1,038,000

                                              105,868,000     95,019,000
      Less accumulated depletion,
         depreciation and amortization         25,320,000     19,617,000

         Net property and equipment            80,548,000     75,402,000

   Accounts receivable - related parties        1,406,000      1,403,000
   Notes receivable - related parties           1,874,000      1,759,000
   Deferred income taxes                        1,511,000        705,000
   Other                                          814,000      1,239,000

                                              $93,171,000   $101,039,000



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

</TABLE>
<PAGE>

<TABLE>

                            ARCH PETROLEUM INC.
                        CONSOLIDATED BALANCE SHEETS


                                               December 31,    December 31,
                                                   1997           1996
   LIABILITIES AND SHAREHOLDERS' EQUITY
   <S>                                           <C>            <C>
   Current Liabilities:
      Accounts payable                           $6,239,000     $16,193,000
      Accounts payable - related parties               -          1,971,000
      Current maturities of long-term debt             -          1,119,000
      Preferred stock dividends payable             311,000         311,000

         Total current liabilities                6,550,000      19,594,000

   Long-term debt, less current maturities       30,000,000      30,134,000
   Non-recourse production payment obligation    13,317,000            -
   Deferred revenue                               2,123,000      12,528,000
   Convertible subordinated notes                 5,000,000       5,000,000
   Deferred federal income taxes                  5,770,000       3,450,000
   Other liabilities                                273,000         186,000
   Minority interest in consolidated
    subsidiaries                                       -          1,082,000

   Exchangeable convertible preferred
    stock, $.01 par value, 727,273
    shares authorized, issued and
    outstanding                                  20,000,000      20,000,000

   Shareholders' Equity:
      Preferred stock, $.01 par value,
       1,000,000 shares authorized,
       727,273 issued as exchangeable
       convertible preferred stock                     -               -    

      Common stock, $.01 par value,
       50,000,000 shares authorized,
       17,321,804 and 17,271,804
       shares issued and outstanding,
       respectively                                 173,000         172,000

      Additional paid-in capital                  6,137,000       6,012,000

      Employee notes for stock purchases         (1,047,000)     (1,022,000)

      Treasury stock, 100,000 shares               (206,000)       (206,000)

      Cumulative translation adjustment            (219,000)         37,000

      Retained earnings                           5,300,000       4,072,000

         Total shareholders' equity              10,138,000       9,065,000

   Commitments and contingencies
    (Note ____)

</TABLE>                                        $93,171,000    $101,039,000
<PAGE>

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





<TABLE>

                            ARCH PETROLEUM INC.
                 CONSOLIDATED STATEMENTS OF OPERATIONS


   <S>                                        Year Ended December 31,
                                          1997          1996         1995
   Revenues:                          <C>           <C>           <C>
     Oil and gas sales                $23,622,000   $23,748,000   $16,379,000
     Pipeline sales                    51,392,000    74,309,000    49,249,000
     Interest and other                   802,000       832,000       962,000
     Gain on sale of properties         5,046,000     1,037,000          -    
                                       80,862,000    99,926,000    66,590,000


   Costs and Expenses:
     Oil and gas lease operations       8,761,000     8,081,000     7,176,000
     Natural gas purchases and
      pipeline operations              49,175,000    71,309,000    46,859,000
     Exploration                        1,134,000       593,000       898,000
     Depletion, depreciation and
      amortization                      7,111,000     6,904,000     5,389,000
     General and administrative         5,197,000     5,060,000     4,208,000
     Interest                           4,040,000     2,857,000     1,865,000
     Foreign currency transaction loss    492,000        40,000          -    
     Minority interest in income of
      consolidated subsidiaries           448,000       622,000       445,000

                                       76,358,000    95,466,000    66,840,000

   Income (loss) before income taxes
    and dividends                       4,504,000     4,460,000      (250,000)

   Income tax expense (benefit)         1,676,000     1,438,000       (86,000)

   Net income (loss)                    2,828,000     3,022,000      (164,000)

   Dividends on preferred stock         1,600,000     1,600,000     1,600,000

   Net income (loss) available to
     common shareholders             $  1,228,000    $1,422,000   $(1,764,000)

   Net income (loss) available
     per common share -                $     0.07    $     0.08   $     (0.10)
     basic and diluted

   Weighted average common 
     shares outstanding - basic        17,294,000    17,159,000    17,141,000
</TABLE>


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


<PAGE>


<TABLE>

                                                    ARCH PETROLEUM INC.
                                 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                       Years Ended December 31, 1997, 1996 and 1995


                                                                            Employee
                                                    Additional                Notes      Cumulative
                   Common     Treasury    Common     Paid-in    Treasury    for Stock    Translation      Retained   Shareholders'
<S>                Shares      Shares      Stock     Capital     Stock      Purchases    Adjustment       Earning       Equity
Balance -
    December      <C>                   <C>         <C>        <C>         <C>            <C>           <C>           <C>
     31, 1994     17,186,404            $  172,000  $5,809,000             $  (905,000)                 $ 4,414,000   $ 9,490,000

Preferred
 stock dividends        -                     -           -                       -                      (1,600,000)   (1,600,000)
Purchase
 of treasury
 shares                 -      100,000        -           -    $ (206,000)        -                            -         (206,000)
Issue stock
 as compensation      30,000      -           -         60,000       -            -                            -           60,000
Issue stock for
 interest in
 subsidiary           25,000      -           -         75,000       -            -                            -           75,000
Repayment of
 employee note          -         -           -           -          -          14,000                         -           14,000
Interest on
 employee notes         -         -           -           -          -         (74,000)                        -          (74,000)
Net loss                -         -           -           -          -            -                        (164,000)     (164,000)

Balance -
    December
     31, 1995     17,241,404   100,000     172,000   5,944,000   (206,000)    (965,000)                   2,650,000     7,595,000

Preferred
 stock dividends        -         -           -           -          -            -                      (1,600,000)   (1,600,000)
Exercise of
 stock options           400      -           -          1,000       -            -                            -            1,000
Issue stock
 as compensation      30,000      -           -         67,000       -            -                            -           67,000
Interest on
 employee notes         -         -           -           -          -         (57,000)                        -          (57,000)
Translation
 adjustment             -         -           -           -          -            -       $  37,000            -           37,000
Net income              -         -           -           -          -            -            -          3,022,000     3,022,000

Balance -
    December
     31, 1996     17,271,804   100,000     172,000   6,012,000   (206,000)  (1,022,000)      37,000       4,072,000     9,065,000

Preferred
 stock dividends        -         -           -           -          -            -            -         (1,600,000)   (1,600,000)
Exercise of
 stock options        20,000      -           -         39,000       -            -            -               -           39,000
Issue stock 
 as compensation      30,000      -          1,000      86,000       -            -            -               -           87,000
Interest on
 employee notes         -         -           -           -          -         (64,000)        -               -          (64,000)
Repayment of
 employee note          -         -           -           -          -          39,000         -               -           39,000
Translation
 adjustment             -         -           -           -          -            -        (255,000)           -         (256,000)
Net income              -         -           -           -          -            -            -          2,828,000     3,074,000

Balance -
    December
     31, 1997     17,321,804   100,000   $ 173,000  $6,137,000 $ (206,000)$ (1,047,000)    (219,000)    $ 5,300,000  $ 10,138,000


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

</TABLE>
<PAGE>


<TABLE>

                             ARCH PETROLEUM INC.
                   CONSOLIDATED STATEMENTS OF CASH FLOWS




                                           Year Ended December 31,
   <S>                                  1997          1996          1995
   Cash flows from operating         <C>           <C>           <C>
    activities:
     Net income (loss)               $2,828,000    $3,022,000    $ (164,000)
     Adjustments to reconcile to
       net cash provided (used) by
       operations:
     Depletion, depreciation and
       amortization                   7,111,000     6,904,000     5,389,000
     Deferred taxes                   1,676,000     1,438,000       (86,000)
     Deferred revenue                (2,050,000)   (2,309,000)   (3,457,000)
     Dry hole costs and other           915,000       387,000       340,000
     Interest on notes receivable
       and other                       (179,000)     (213,000)     (198,000)
     Interest on production
      payment obligation              1,049,000          -             -
     Issue shares for compensation       87,000        64,000        35,000
     Minority interest in net income
       of consolidated subsidiaries     448,000       622,000       445,000
     Foreign currency transaction
       loss                             492,000        40,000          -
     Gain on sale of assets          (5,046,000)   (1,037,000)         -     
                                      7,331,000     8,918,000     2,304,000

  Change in accounts receivable       3,299,000    (8,266,000)      319,000
     Change in other current assets     308,000      (406,000)       93,000
     Change in accounts receivable
       - related parties               (401,000)     (612,000)         -
     Change in accounts payable and
       other current liabilities     (3,882,000)    7,466,000      (352,000)
     Production payment remedy
       adjustment                      (312,000)   (1,200,000)   (1,196,000)

   Net operating cash flows           6,343,000     5,900,000     1,168,000

   Cash flows from investing
     activities:
     Capital expenditures           (14,551,000)   (9,334,000)   (6,428,000)
     Proceeds from sale of assets,
      net of cash disposed            7,260,000     1,601,000          -
     Notes receivable and other
       assets                           (80,000)     (181,000)     (101,000)
     Acquisition of subsidiary             -       (7,645,000)         -     

   Net investing cash flows          (7,371,000)  (15,559,000)   (6,529,000)

   Cash flows from financing
     activities:
     Proceeds from bank borrowings   13,000,000    26,504,000    11,800,000
     Payments of bank debt           (11,564,000)  (15,371,000)  (3,612,000)
     Proceeds from note payable -
       minority interestholder            82,000       744,000         -
     Purchase of treasury shares
       from related party                   -             -        (206,000)
     Preferred stock dividends        (1,600,000)   (1,600,000)  (1,600,000)
     Other                                78,000          -            -     

   Net financing cash flows               (4,000)   10,277,000    6,382,000

   Change in cash and cash
     equivalents                      (1,032,000)      618,000    1,021,000

   Cash and cash equivalents at
     beginning of period               3,192,000     2,574,000    1,553,000

   Cash and cash equivalents at    
     end of period                 $   2,160,000   $ 3,192,000   $2,574,000

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

</TABLE>

<PAGE>

                              ARCH PETROLEUM INC.
                  Notes to Consolidated Financial Statements

   1.   SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

   Organization and Basis of Presentation:

        Arch Petroleum Inc., a Delaware corporation, (together with  its
   subsidiaries,"the Company") engages primarily in oil and natural  gas
   exploration, development, production, transportation and marketing in
   the Southwestern United States  and Western Canada.   The Company  is
   also active in the  acquisition of interests in  oil and gas  leases,
   both  producing  and  non-producing.  Threshold  Development  Company
   ("TDC"), an oil and gas exploration company, owns approximately 13.9%
   of the Company's common stock as  of December 31, 1997. Two of  TDC's
   shareholders are also officers and directors of the Company.

        The Company acquired Trax Petroleums  Ltd. on January 31,  1996,
   which  was  subsequently  renamed  Arch  Petroleum  Limited   ("APL")
   effective  March 31, 1997.   See Note 4.   The Company's consolidated
   financial statements include the results of APL from the January  31,
   1996 acquisition date.

        In  a  special  meeting  on  January  31,  1995,  the  Company's
   shareholders approved  an  amendment  to the  Company's  articles  of
   incorporation  whereby  the  number  of  authorized  shares  of   the
   Company's capital  stock  was  increased from  26,000,000  shares  to
   51,000,000 shares.  Common stock is designated for 50,000,000  shares
   and preferred stock is designated for the remaining 1,000,000 shares.
   The  Company  has  reserved  9,090,909 shares  of  common  stock  for
   issuance upon conversion  of the  securities in  a private  placement
   (the "Placement"), if  necessary.  See  Note 7.      The Company  has
   also reserved  339,300  shares  of common  stock  for  issuance  upon
   exercise  of  options  under its current incentive stock option plan.

        The consolidated financial  statements include  the accounts  of
   the Company  and  its subsidiaries:  APL and  Northern Arch Resources
   Ltd. ("NARL"), both wholly-owned Canadian companies; Arch  Production
   Company,  wholly-owned;  Saginaw  Pipeline  Company, L.C. ("Saginaw")
   and  Industrial Natural Gas, L.C.  ("ING"), 95% membership  interest;
   and  Onyx  Pipeline  Company, L.C., Onyx  Gathering Company, L.C. and
   Onyx   Gas   Marketing  Company, L.C.  (all  together,  "Onyx"),  50%
   membership interest.  The  Onyx  interests  were  sold in July  1997.
   See Note  3.   All significant intercompany balances and transactions
   are eliminated.

   Pervasiveness of Estimates:

        The preparation  of  financial  statements  in  conformity  with
   generally accepted accounting principles requires management to  make
   estimates and assumptions that effect the reported amounts of  assets
   and liabilities, and related revenues and expenses, and disclosure of
   gain and loss contingencies at the date of the financial  statements.
   Actual results could differ from those estimates.

<PAGE>

   Supplemental Cash Flow Information:

        Cash paid for interest was $2,811,000, $2,731,000 and $1,466,000
   during 1997, 1996, and 1995,  respectively. The Company issued  stock
   as compensation  to  a  third party  totaling  $87,000,  $67,000  and
   $60,000 during 1997, 1996 and 1995,  respectively.  The Company  paid
   $241,000 in income taxes in 1997.   During 1996 and 1995 the  Company
   paid no income taxes.

   Revenue Recognition:

        The Company recognizes revenues as quantities of oil and gas are
   sold or volumes of gas are transported, and utilizes the  entitlement
   method of accounting for  gas imbalances.  Under this  method the gas
   segment   recognizes   revenue  for   its   proportionate   share  of
   volumes sold.   Any  over-produced  amount is  recorded  as  deferred
   revenue and any under-produced amount is recorded as current  revenue
   and revenue receivable.  The Company had no significant over or under
   produced positions as of December 31, 1997 and 1996.

        The natural gas pipeline  segment also utilizes the  entitlement
   method,  recognizing   a   receivable   or  payable   for   over   or
   underdelivered volumes, as applicable.  As  of December 31, 1997  and
   1996, the Company had net imbalance receivables of nil and  $298,000,
   respectively.

   Foreign Currency Translation:

        The assets  and  liabilities of  APL  are translated  into  U.S.
   dollars at  current exchange  rates, and  revenues and  expenses  are
   translated  at  average  exchange  rates  for  the  year.   Resulting
   translation adjustments  are reflected  as  a separate  component  of
   shareholders' equity.


        The  Canadian  dollar  is   the  functional  currency  of   APL.
   Transaction  gains  and   losses  that  arise   from  exchange   rate
   fluctuations on transactions denominated in a currency other than the
   functional currency  are included  in the  results of  operations  as
   incurred.

   Cash and Cash Equivalents:

        Cash and  cash equivalents  consist of  cash in  banks and  cash
   investments in immediately available interest bearing accounts.

<PAGE>

   Property and Equipment:

        The Company follows the successful efforts method of  accounting
   for costs  incurred  in  oil  and  gas  exploration  and  development
   operations, all  of which  are conducted  in  the United  States  and
   Western Canada.  Under this method, the Company capitalizes all costs
   to acquire mineral interests in oil and gas properties, to drill  and
   equip exploratory wells which discover proved reserves, and to  drill
   and equip development wells.  Exploration costs, including geological
   and geophysical costs, delay rentals  and exploratory dry holes,  are
   charged to expense when  incurred.  The  Company does not  capitalize
   internal costs such as salaries and  related fringe benefits paid  to
   employees  directly  engaged  in  the  acquisition,  exploration  and
   development  of  oil  and  gas  properties  or  any  other   directly
   identifiable general and  administrative costs  associated with  such
   activities.

        Under the successful  efforts method all  costs capitalized  are
   aggregated  on  an  area  basis  and  depleted  using  the  units-of-
   production  method  based  upon  proved  reserves  as  estimated   by
   independent petroleum engineers.

        Interest  is  capitalized  in  accordance  with  the  guidelines
   established in Statement of  Financial Accounting Standards  ("SFAS")
   No. 34,  "Capitalization of  Interest Cost",  during the  periods  of
   drilling (or preparation  for drilling)  and completing  of wells  or
   construction of  natural  gas pipelines.    The Company  has  had  no
   significant capitalized interest since 1994.

        Costs of unproved properties  that are individually  significant
   are  evaluated  at least  annually for impairment of  net book value.  
   Costs of proved properties that are abandoned or retired are  charged
   against  accumulated   reserves  for   depreciation,  depletion   and
   amortization for their respective  area and a  loss is recognized  to
   the extent of any excess.

        Depreciation of property and equipment,  other than oil and  gas
   properties but including natural gas pipelines, is determined on  the
   straight-line method using  estimated useful lives,  which vary  from
   two to thirty years.

        Maintenance and  repairs are  charged to  expense; renewals  and
   betterments are capitalized.  Upon sale or retirement of  depreciable
   assets other than proved oil and gas properties, the cost and related
   accumulated depreciation  are  removed  from the  accounts,  and  the
   resulting gain or loss is included in operations.

   Impairment of Assets:

        Effective January 1,  1996, the  Company adopted  SFAS No.  121,
   "Accounting for the  Impairment of  Long-Lived Assets  and for  Long-
   Lived Assets  to  Be Disposed  Of",  which  had no  impact  upon  the
   Company's financial condition or results of operations.  As required,
   the Company  periodically evaluates the  realizability  of its  long-
   lived assets based  upon  expectations  of  undiscounted  cash  flows  
   before interest.   An impairment loss is recognized if the sum of the
   expected undiscounted cash flows from the use of the  asset  is  less
   than the book value of the asset. Generally, the amount of impairment
   loss is measured as the difference between the net book value and the
   estimated fair value of the assets. There was no impairment provision
   required in 1997 or 1996.

<PAGE>

   Keystone Ellenburger Field

        A  water  lifting  program   was  encouraged  by  the   Railroad
   Commission of Texas ("RRC") in 1993 to enhance future recovery of oil
   and gas from the Keystone  Ellenburger Field ("Keystone") in  Winkler
   County, Texas.   The capitalized  water lifting  program costs  arose
   from the recovery, transportation and re-injection of formation water
   in Keystone.  The most significant costs are the following: rental of
   submersible electric  pumps  used  to produce  the  formation  water,
   electricity to power the submersible pumps and above-ground injection
   pumps, water disposal  facilities and pipelines.   The  wells in  the
   water lifting program, as well as the water disposal facilities  used
   to collect  and transport  the water,  are used  exclusively for  the
   lifting and  re-injection of  formation water  and  are  specifically
   identified by the Company.

        The RRC amended the field rules in May 1993, regarding formation
   water production in Keystone.   Subsequent to  this ruling and  until
   February 1995  the  Company    produced  approximately  18.9  million
   barrels of formation  water, thus  earning and  accumulating a  bonus
   production allowable of approximately 9.5 million Mcf of natural gas.
   As  a result, the Company incurred  high water lifting costs  without
   realizing the related  natural gas  revenues during  this water  lift
   period. 


        The Company ceased capitalizing  water lifting program costs  on
   January 31, 1995 concurrent  with the issue  of modified field  rules
   and commenced amortization of the deferred water production costs  as
   the bonus  production  allowable  is produced.    The  Company's  net
   capitalized water production costs were $4.4 million and $4.6 million
   at December  31,  1997  and 1996,  respectively.    These  costs  are
   included in proved  oil and gas  properties.   The Company  amortized
   approximately $188,000 and $563,000 of the deferred water  production
   costs in 1997 and 1996, respectively.

   Net Income Available Per Common Share:

        Effective December 31, 1997, the  Company adopted SFAS No.  128,
   "Earnings per  Share" which  prescribes standards  for computing  and
   presenting earnings  per share  and supersedes  APB Opinion  No.  15,
   "Earnings per Share."  In accordance with SFAS  No. 128,  net  income
   (loss)  available  per  common share has been calculated based on the
   weighted average shares outstanding during  the year  and net  income
   (loss)  available  per  common  share-assuming  dilution,  has   been
   calculated  assuming  the  exercise  or  conversion  of  all dilutive
   securities as  of   the beginning of the period, or as of the date of
   issuance,  if  later.    Net   income   (loss)  available  to  common
   shareholders  is net  income (loss) reduced by dividends on preferred
   stock.  
        As of December 31, 1997  and 1996, there were 119,000 and 88,000
   dilutive  shares of stock options, respectively, which did not effect
   the EPs computation.   As  of  December  31, 1995, stock options were
   anti-dilutive.   The  only  other potentially dilutive securities the
   Company has outstanding as of December 31, 1997, 1996 and 1995,  were
   exchangeable convertible preferred stock and convertible subordinated
   notes, which were convertible into 7,273,000 and 1,818,000 shares  of
   common stock, respectively, in each of these periods.

<PAGE>

   Income Taxes:

        Deferred tax  liabilities  and  assets are  recognized  for  the
   anticipated future tax effects  of temporary differences between  the
   financial statement basis and the tax  basis of the Company's  assets
   and liabilities using the current tax rates in effect at year-end.  A
   valuation allowance for deferred  tax assets is  recorded when it  is
   more likely than  not that the  benefit from the  deferred tax  asset
   will not be realized.

   Stock Based Employee Compensation:

        In October 1995, the Financial Accounting Standards Board issued
   SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation",  which
   establishes accounting  and  reporting standards  for  various  stock
   based compensation plans.  SFAS No. 123 encourages the adoption of  a
   fair value based method of accounting for employee stock options, but
   permits continued application of the accounting method prescribed  by
   Accounting  Principles   Board  Opinion   No.  25   ("Opinion   25"),
   "Accounting for Stock Issued to Employees".  The Company has  elected
   to continue to apply the provisions of Opinion 25.  Under Opinion 25,
   if the  exercise price  of the  Company's  stock options  equals  the
   market value  of  the underlying  stock  on  the date  of  grant,  no
   compensation expense is recognized.  SFAS No. 123 requires disclosure
   of pro forma information regarding net income and earnings per  share
   as if the Company had accounted for its employee stock options  under
   the fair value method of the statement.  See Note 12.

   Estimated Fair Value of Financial Instruments:

        SFAS  No.  107  "Disclosures  about  Fair  Value  of   Financial
   Instruments" requires the disclosure of  the estimated fair value  of
   financial instruments.   The estimated fair  value amounts have  been
   determined by  the Company  using  available market  information  and
   appropriate valuation  methodologies.   Unless otherwise  noted,  the
   estimated  fair  values  of   the  Company's  financial   instruments
   approximate their carrying value.

        Exchangeable  convertible   preferred  stock   and   convertible
   subordinated notes:  In determining the  estimated fair value of  the
   Preferred Stock and  Notes, the Company  used market-based prices  of
   similar securities recently traded.  The estimated fair value of  the
   Preferred Stock was $19.0 million and  $18.8 million at December  31,
   1997 and 1996, respectively, as compared  with the carrying value  of
   $20 million  at  December  31, 1997  and  1996,  respectively.    The
   estimated fair value of the Notes  was $4.8 million and $4.7  million
   at December  31, 1997  and 1996,  respectively,  as compared  to  the
   carrying  value  of  $5  million  at  December  31,  1997  and  1996,
   respectively.

   Reclassification:

        Certain amounts in prior years have been reclassified to conform
   to classifications adopted in 1997.

<PAGE>

   Concentration of Credit Risk:

        The  Company  is  exposed  to   credit  risk  with  respect   to
   receivables and related  party receivables  from entities  associated
   and involved with  the oil and  gas industry.   The Company  performs
   ongoing credit evaluations and generally does not require collateral.
   The  Company's  cash and  cash equivalents  are maintained  in  major
   banks.  As  a result, the  Company believes the  credit risk in  such
   instruments is minimal.


<TABLE>

   2.   PROPERTY AND EQUIPMENT
   <S>
   A summary of property and
    equipment is as follows:
                                                 December 31,   December 31,
                                                        1997        1996
   Oil and gas properties:                        <C>            <C>
     Unproved properties                          $3,398,000     $3,059,000
     Proved properties                            95,780,000     78,561,000
                                                  99,178,000     81,620,000
     Less accumulated depreciation and
        depletion of proved properties            24,007,000     17,821,000
        Net oil and gas properties                75,111,000     63,799,000

   Natural gas pipelines                           5,657,000     12,361,000
     Less accumulated depreciation                   603,000      1,202,000
        Net natural gas pipelines                  5,054,000     11,159,000

   Furniture, fixtures and other equipment         1,033,000      1,038,000
     Less accumulated depreciation                   650,000        594,000
        Net furniture, fixtures and other
         equipment                                   383,000        444,000

        Net property and equipment               $80,548,000    $75,402,000

        The Company sold  its working and  royalty interests in  certain
   oil and gas  properties located  in West  Texas for  net proceeds  of
   $1,570,000 effective April 30, 1996.   The Company recognized a  pre-
   tax gain of $1,037,000 on the sale of the properties.

</TABLE>
<PAGE>



   3.   SALE OF ONYX

        The Company entered into an agreement on July 10, 1997, to  sell
   it's entire 50%  membership interest in  Onyx.   The transaction  was
   closed on  July 31,  1997, and  was  effective June  30, 1997.    The
   proceeds consisted of a $6.3 million sales price plus a $1.8  million
   repayment to  the Company  for advances  formerly  made to  Onyx  for
   pipeline construction  and  other  uses.   The  Company  reduced  its
   domestic long-term debt by $7.8 million, concurrently, and recognized
   a pre-tax book gain of approximately $5.0 million.

        The following unaudited pro forma information has been  prepared
   as  if the sale transaction has occurred on January 1, 1996  and that
   the  proceeds  from  the sale had been used to retire domestic  long-
   term  bank  debt.   Management believes that the unaudited pro  forma
   information presented is not necessarily indicative of the  financial
   results as they may be in the future or as they might have  been, had
   the  Company  been  able  to  utilize  proceeds from the sale  at the
   beginning  of such period, to develop existing leases and to  acquire
   additional  oil  and  gas properties.  This information is  presented
   for comparative purposes only.
<TABLE>
        <S>                                     Year ended December 31,
        (In thousands, except per share data)     1997           1996
                                                 <C>            <C>
        Revenues                                 30,686         28,689
        Net income (loss) before dividends         (231)         2,963
        Net income (loss) per share - basic        (.11)           .08

</TABLE>

   4.   ACQUISITION OF TRAX PETROLEUMS LIMITED

        The Company    acquired  Trax  Petroleums  Limited  ("Trax"),  a
   Canadian     oil  and   gas  exploration   and  development   company
   headquartered in Calgary, Alberta, Canada effective January 31, 1996.
   The  acquisition of 100% of the common stock of Trax was made through
   NARL.  The Trax headquarters remains in Calgary. The aggregate acqui-
   sition   purchase   price   was   approximately $7,645,000 at January
   31, 1996.   As  described  in Note 1, Trax changed   its name to Arch
   Petroleum   Ltd.  ("APL")   effective   March 31,  1997.  The Company
   accounted for the acquisition of APL as a purchase.   No goodwill was
   recorded as the total purchase  price was allocated to the net assets
   of APL.

<PAGE>


   5.   VOLUMETRIC PRODUCTION PAYMENT 

        The Company sold a volumetric production payment (the "VPP")  to
   Enron Reserve Acquisition Corp. ("Enron") for $24,300,000 on November
   30, 1992.   The Company contracted to deliver to Enron the equivalent
   of approximately  17.9 Bcf  of natural  gas from  Keystone  beginning
   December 1,  1992.   The  Company is  responsible  for all  costs  of
   production, development and marketing of these dedicated gas volumes.
   The  VPP  gas  reserves  dedicated  to  Enron  are  excluded from the
   Unaudited  Supplemental  Oil  and Gas Disclosures, herein.

        Certain  rulings  by the RRC in May 1993, which affected all the
   Keystone operators, curtailed the production of natural gas from this
   field.  These production curtailments created delays in the Company's
   scheduled  volume  deliveries to Enron.  The VPP provides a mechanism
   to  remedy  both  under  and over delivery of scheduled volumes.  The
   under  deliveries  of production payment volumes are converted into a
   volumetric   obligation   which   is   denominated   in  dollars (the
   "Remedy  Adjustment"),  which  is  calculated  on a month ly basis by
   multiplying  the  deficient volumes by the market price of the gas at
   the  end  of  that month.  In addition, the VPP provides for interest
   at  10%  per  year on the outstanding Remedy Adjustment.  This Remedy
   Adjustment  is  satisfied  by  proceeds  received  from  the  sale of
   dedicated  hydrocarbons  from  Keystone  in  excess  of  the   future
   scheduled  volume  deliveries.      The  Company  remitted  $312,000,
   $1,200,000  and  $1,196,000  to  Enron  during  1997,  1996 and 1995,
   respectively,  in satisfaction of a portion of the Remedy Adjustment.
   
        During  1997,  the RRC imposed further production limitations of
   natural  gas  from Keystone.  It became evident at that time that the
   Company  would  incur  significant  future  deficiencies and interest
   under  the  VPP.    Accordingly, in 1997 the Company has reclassified
   amounts  due  under  the  Remedy  Adjustment from Deferred Revenue to
   Non-recourse  Production  Payment  Obligation  in  the   accompanying
   financial statements.   At December 31, 1997, the Company has treated
   the  past  deficiencies  as a repurchase of the volumetric production
   payment  and  therefore  approximately  6.0 Bcf associated with these
   deficiencies   have   been  restored   to   the  Company's  Unaudited
   Supplemental Oil and Gas  disclosures  herein  and approximately $4.2
   million  net  has  been  capitalized  in  oil and gas property costs.
   Repayment of the   Remedy  Adjustment  is  recourse  only  to  future
   production from Keystone.
        
        The  Company  anticipates  that  the RRC will continue to impose
   production   limitations  for  Keystone  in  1998  that  will  create
   additional  deficiencies  in  scheduled   volume   deliveries.    The
   scheduled  volumes deliverable during 19 98 under the VPP at December
   31, 1997  are  approximately  1.9 Bcf.    The Non-recourse obligation
   recorded  as a result of the Remedy Adjustment is approximately $13.3
   million at December 31, 1997.

<PAGE>

        The Company recognizes deferred revenue as deliveries of natural
   gas  are made under the VPP.  The Company recognized deferred revenue
   of  $2,050,000, $2,309,000 and $3,457,000 during 1997, 1996 and 1995,
   respectively.    Deferred  revenue  was amortized at $1.20, $1.11 and
   $.83 during 1997, 1996 and 1995, respectively.  The amortization rate
   was  reduced  in  year s prior  to 1997 to provide for the additional
   volumes  that  would  be delivered to Enron as interest on the Remedy
   Adjustment.  In  1997,  interest expense of  $1,049,000  relating  to
   the Remedy Adjustment is  reflected  in the accompanying consolidated
   financial statements.


   6.LONG-TERM DEBT

   A summary of long-term debt is as follows:
<TABLE>
                                                        December 31,
                                                   1997           1996
   <S>                                          <C>            <C>
   Bank credit facilities                       $30,000,000    $28,009,000
   Term note                                           -         2,500,000
   Note payable - minority interest holder             -           744,000

        Less current maturities                        -         1,119,000
                                                $30,000,000    $30,134,000
</TABLE>
        The Company  entered  into two  new  bank credit  facilities  on
   February  20,  1996:    the  Third  Restated  Revolving  Credit  Loan
   Agreement among  the Company  and Bank  One, Texas,  N.A., the  Agent
   bank, and  other  banks  (the "Domestic  Revolver")  and  the  Credit
   Agreement among APL  and Bank of  Montreal, the  Canadian Agent  bank
   (the "Canadian  Revolver").    The consolidated  borrowing  base  was
   increased to $37,000,000 from $35,000,000 by third amendment to  both
   revolvers on August 1, 1997.  The maturity date of both revolvers was
   extended from  May 1,  1998 to  May 1,  1999 by  fourth amendment  on
   November 1, 1997.   Each of  the revolvers is  described briefly,  as
   follows:

        Domestic Revolver

        The Domestic Revolver is a modification of the Company's  former
   revolver with Bank One, Texas, N.A. and its participant, the Bank  of
   Scotland.   The principal  changes to  the former  revolver were  the
   inclusion of the Bank  of Montreal as  an additional participant  and
   the introduction of  certain language, terms  and concepts such  that
   the Domestic Revolver and the Canadian Revolver will be  accommodated
   in pari  passu sharing  and general  administration.   This  facility
   amends, restates and supersedes in its entirety the former  revolver.
<PAGE>

        The  facility's  commitment  is  $50,000,000  and  the   current
   domestic borrowing  base  is  $33,000,000.   The  borrowing  base  is
   designated the "U.S. Allocated Borrowing Base" to distinguish it from
   the  related  "Canadian  Allocated  Borrowing  Base"  contained   and
   described in the Canadian Revolver below.   As of the first  business
   day of each  calendar quarter,  so long as  no event  of default  has
   occurred and  is continuing,  the Company  may  allocate all  or  any
   portion of  its  Consolidated  Borrowing  Base  (the  U.S.,  Domestic
   Revolver borrowing base plus  the APL properties, Canadian  borrowing
   base, the "CBB") to the Canadian  facility provided that such  amount
   shall not  be  less than  the  outstanding balance  of  the  Canadian
   Revolver at  that  time.    The current  allocation  of  the  CBB  is
   $23,000,000 to the Domestic Revolver and $14,000,000 to the  Canadian
   Revolver.

        The Company  may  select  an  interest  rate  option  with  each
   borrowing  advance  ($500,000  minimum,  in  increments of  $100,000)
   between a Floating  Base Rate ("FBR")  or an  Interbank Offered  Rate
   ("IOR").  The FBR is the rate of interest announced from time to time
   by the Agent  bank and  usually will  track the  U.S. national  prime
   rate.  The IOR is generally the London interbank market rate in place
   two business days before the commencement of an interest period of  a
   Eurodollar advance.   A Eurodollar  advance is  the principal  amount
   under a note with respect to which an IOR is selected.  For  purposes
   of the  IOR,  the effective  interest  rate occurring  on  Eurodollar
   advance  notes  will  be  increased  relative  to    Borrowing   Base
   Percentage ("BBP"), the aggregate of the unpaid principal balance  of
   the Domestic Revolver  and the  Canadian Revolver  to the  CBB.   The
   effective interest rate increase  ranges from a low  of 1.75% if  the
   BBP is less than 25% to a high of 2.50% if the BBP is more than 75%.


        There is a  commitment fee of  one-half of  one percent for  the
   unused borrowing base  which accrues  and is  payable quarterly.  The
   effective interest rate was 8.09% in  1997.  The security  collateral
   requirements include essentially  all of  the Company's  oil and  gas
   properties.

        Canadian Revolver

        The Canadian Revolver is similar to the Domestic Revolver in all
   significant aspects.    The loans  under  the Canadian  Revolver  are
   guaranteed by the Company ("the Guaranty") and are secured by,  among
   other things,  a first  lien on  65% of  the issued  and  outstanding
   shares of NARL's common  stock and a  first lien on  the oil and  gas
   properties of the  Company which serve  as security  in the  Domestic
   Revolver.   The Guaranty  is intended  to rank  pari passu  with  the
   Companys' obligations  under the  Domestic  Revolver.   The  Canadian
   Revolver is also guaranteed by NARL.   The facility 's commitment  is
   US $14,000,000 and the current Canadian  borrowing base is set at  US
   $4,000,000. 

        The various interest  rates used  in the  Canadian Revolver  are
   based on  the LIBOR  or Prime  Rate and  are adjusted  for applicable
   margins based on the ratio of aggregate outstanding balances relative
   to CBB (similar  to the Domestic  Revolver) and range  from a low  of
   0.75% if the CBB is less  than 25% to a high of  2.25% if the CBB  is
   more than 75%.

<PAGE>

        The proceeds of each advance may  be used to acquire  additional
   borrowing base properties, to drill and recomplete oil and gas  wells
   and for  general  corporate  purposes.    Repayments  shall  be  made
   relative to  the  currency  used in  each  borrowing.  The  effective
   interest rate was 8.14% in  1997.  There is  a commitment fee of  one
   half of one percent for the  unused borrowing base which accrues  and
   is payable on the first day of each quarter.

        The APL borrowing base, which is currently US $4,000,000, is the
   loan value  determined  by  the  Canadian  Agent  bank  in  its  sole
   discretion based  on  its calculations  of  value of  borrowing  base
   properties utilizing current and  customary procedures and  standards
   for petroleum industry customers.

        Term Note

        The Onyx  Term  Loan Agreement  (the  "Onyx Note"),  which  Onyx
   entered into with the Bank of Scotland on March 30, 1994, as amended,
   is a separate facility and provided  Onyx with $5,000,000.  The  Onyx
   Note bears  interest at  national prime  rate  plus one-half  of  one
   percent.  Interest  on the  unpaid principal  amount of  the note  is
   payable quarterly.    The  unpaid  principal  totaled  $2,501,000  at
   December 31, 1996, and was payable in eighteen quarterly installments
   ending on  March 31,  1999.   Current  maturities  of the  Onyx  Note
   totaled  $1,111,000  at  December  31,  1996.    The  Onyx  Note   is
   collateralized by certain of  Onyx's pipelines, gathering  facilities
   and related transportation contracts.  In addition, the Onyx Note was
   guaranteed by the Company.  Onyx also had a note payable of  $785,000
   including interest of  $41,000 as of  December 31,  1996, payable  to
   Sejita Natural Gas, L.C., a 50%  interest holder in Onyx.  This  note
   was  subordinated  to  the  Company's  bank  debt  and  was  due   on
   August  31, 1999.

        The  Company  sold its interest in Onyx effective June 30, 1997.  
   As a result of the sale, the Company is no longer a party to the Onyx
   Note described above and does not guarantee that facility as of  July
   31, 1997.    All  collateral requirements  and  security  instruments
   formerly associated  with the  Onyx Note were released  and clear  as
   regards the Company as of July 31, 1997.

        Both the  Domestic and  Canadian  Revolvers contain  normal  and
   standard covenants  generally found  in  lending agreements.    Among
   other things, these covenants prohibit the declaration and payment of
   cash dividends  on the  Company's common  stock.   In  addition,  the
   covenants stipulate the maintenance of financial criteria  including:
   a minimum level of net worth, a certain current ratio, a certain debt
   to net worth ratio  and a defined net  income in excess of  scheduled
   interest and principal payments.  The  Company and APL are  currently
   in compliance with  the covenants in  loan  agreements.   The Company
   has no other unused lines of credit. 

   7.   EXCHANGEABLE CONVERTIBLE PREFERRED STOCK
          AND CONVERTIBLE SUBORDINATED NOTES

<PAGE>

        On October 20, 1994, the  Company sold the following  securities
   to four institutional investors  (the "Investors") in the  Placement:
   (a) 727,273 shares of its 8% Exchangeable Convertible Preferred Stock
   (the  "Preferred  Stock"),  $0.01  par  value,  having  an  aggregate
   liquidation  preference  of   $20,000,000,  (b)  $500,000   aggregate
   principal amount of its 9.75% Series A Convertible Subordinated Notes
   due  2004  (the  "Series  A  Notes")  and  (c)  $4,500,000  aggregate
   principal amount of its Adjustable Rate Series B Notes due 2004  (the
   "Series B Notes" and, together with the Series A Notes, the "Notes").
   The Series  B  Notes currently  bear interest  at an  annual rate  of
   9.75%.  Gross proceeds  from the Placement  were $20,000,000 for  the
   Preferred Stock and $5,000,000 for the Notes.  The proceeds were used
   to pay down the Company's bank  debt.  The Company incurred  $916,000
   of debt  issuance costs  related to  the Placement,  which are  being
   amortized  over  the  period  the  Preferred  Stock  and  Notes   are
   outstanding.

        The Preferred  Stock accrues  annual dividends  at the  rate  of
   $2.20 per  share and  the dividends  are cumulative.   Dividends  are
   payable April 20 and October 20 of each year and commenced April  20,
   1995.   The Company  paid $1,600,000  in dividends  on the  Preferred
   Stock in 1997, 1996 and 1995.  If dividends remain  unpaid  for  more
   than one semiannual period, the holders of  the  Preferred Stock have
   the right to elect two additional directors to the Company's board of
   directors until such time that  all  cumulative  dividends have  been
   paid.  The Preferred Stock has a liquidation preference of $27.50 per
   share  and is exchangeable  in whole  at the  option of  the Company,
   for its 10.563% Series C Convertible Subordinated Notes due 2004 (the
   "Series C Notes").   The Series  C Notes  possess attributes  similar
   to  the   Series  A  Notes,  except for the  higher rate  of interest
   associated   with   the  Series  C  Notes.   The  Preferred Stock  is
   exchangeable on April 20 and October 20 of each year.

        After October  20, 1998,  and upon  the achievement  of  certain
   stated objectives  for the  market price  of  its common  stock,  the
   Company earns  the right  to require  the conversion  of all  of  the
   Preferred Stock and the Notes into common stock of the Company.   The
   market price objectives are  as follows: after  August 20, 1998,  the
   closing price of the  Company's common stock  on the NASDAQ  National
   Market System, or similarly recognized system, must list for a period
   of sixty consecutive trading days at a price equal to or greater than
   125% of a certain target price.  The target price ranges from  $2.837
   at October 20, 1998  to $2.764 at  October 20, 2003.   Each share  of
   Preferred Stock is  convertible, at  any time  at the  option of  the
   holder thereof, into shares of common stock of the Company, par value
   $0.01 per share, at a price of $2.75 per share.  Based on the  number
   of shares (17,321,804) of the  Company's common stock outstanding  at
   December 31,  1997,  if  all  the  Preferred  Stock  and  Notes  were
   converted into  common stock  of the  Company, 26,412,713  shares  of
   common  stock  would  be  outstanding.    Upon  such  conversion  the
   institutional investors, being Travelers, Travelers Life, Connecticut
   General and CIGNA Mezzanine would own  16.6%, 4.2%, 4.9% and 8.9%  of
   the Company's common stock, respectively.

<PAGE>

        The Preferred Stock entitles each holder  to one vote per  share
   on an as converted basis.   The vote or consent  of at least 66  2/3%
   (or at  least  a  majority  in the  event  the  Investors  and  their
   affiliates own less than 66 2/3% of the Preferred Stock and Notes  on
   an as  converted  basis) of  the  issued and  outstanding  shares  of
   Preferred Stock,  voting as  a separate  class, is  required for  the
   Company to (a) issue or authorize the issuance of any class or series
   of equity securities senior  to the Preferred  Stock, (b) change  the
   par value of  the Preferred Stock,  (c) alter or  change the  powers,
   preferences or special rights of the shares of Preferred Stock or any
   other provision of the Company's  Certificate of Incorporation so  as
   to affect  the  shares  of  Preferred  Stock  adversely,  (d)  merge,
   consolidate or  amalgamate  with other  person  or (e)  sell,  lease,
   transfer or  otherwise dispose  of all  or substantially  all of  the
   assets of the Company.

        Interest on the unpaid principal balance of the Notes is payable
   quarterly and commenced January 20, 1995.  The Company paid  $488,000
   in interest on the Notes in 1997, 1996 and 1995.  The Company has the
   option at any time on or after October 20, 1998, to prepay the  Notes
   in whole  or  in  part, together  with  accrued  interest,  plus  the
   applicable prepayment  premium  (expressed  as a  percentage  of  the
   principal amount to be prepaid).  The prepayment premium ranges  from
   3.150% at October 20, 1998 to 0.525% at October 20, 2003.

        On or after October 20, 1998, the Preferred Stock is redeemable,
   in whole or  in part  at any time  at the  option of  the Company  at
   redemption prices ranging from $28.366 per share at October 20,  1998
   to $27.644 per share at  October 20, 2003.   On October 20, 2004  all
   outstanding shares of the Preferred Stock are mandatorily  redeemable
   by the  Company  at  a  price  of  $27.50  plus  accrued  and  unpaid
   dividends.

<PAGE>



   8.   INCOME TAXES

        Deferred taxes are  provided for  temporary differences  between
   the financial reporting  basis and federal  income tax  basis of  the
   Company's assets, liabilities and other tax attributes.  Deferred tax
   liabilities and assets are comprised of the following at December 31:
<TABLE>
     <S>                                                1997        1996
     Domestic:
        Gross deferred tax liabilities:            <C>         <C>
          Depreciation, depletion and
           intangible drilling costs               $12,942,000 $ 9,628,000
          Volumetric production payment                   -        547,000

                                                    12,942,000  10,175,000

        Gross deferred tax assets:
          Net operating loss carryforwards           3,452,000   4,884,000
          Volumetric production payment              1,712,000        -
          Statutory depletion carryforwards          1,042,000   1,042,000
          Alternative minimum tax credit
           carryforwards                               778,000     698,000
          Investment tax credit carryforwards           98,000      98,000
          Other                                         90,000       3,000
                                                     7,172,000   6,725,000

        Long term deferred tax liability            $5,770,000  $3,450,000

     Foreign:
        Gross deferred tax assets:
          Net operating loss carryforwards           $ 109,000   $  24,000
          Excess of net tax basis over
          book basis of property                     1,279,000     477,000
          Excess of net tax basis over
          book basis of liabilities                    123,000     122,000
          Other                                           -         82,000

        Long term deferred tax asset                $1,511,000   $ 705,000
</TABLE>
   The components of income (loss)
    before income taxes are as follows:
<TABLE>
                                              Year Ended December 31,
        <S>                                1997         1996        1995
                                        <C>          <C>         <C>
        Domestic                        $6,683,000   $5,260,000  $ (250,000)
        Foreign                         (2,179,000)    (800,000)    -     
                                        $4,504,000   $4,460,000  $ (250,000)
<PAGE>

   The income tax provision consisted
    of the following:
                                              Year Ended December 31,
                                           1997         1996        1995
        Current:
          U.S. Federal                  $   89,000   $  107,000  $     -     
          Foreign                             -            -           -     
                                            89,000      107,000        -     

        Deferred:
          U.S. Federal                   2,427,000    1,611,000     (86,000)
          Foreign                         (840,000)    (280,000)       -     
                                         1,587,000    1,331,000     (86,000)

        Income tax expense (benefit)    $1,676,000   $1,438,000   $ (86,000)

</TABLE>

   The provision for income taxes differs from the amount determined  by
   applying  the  U.S.  federal  statutory rate to income before  income
   taxes as a result of the following differences:
<TABLE>
                                               Year Ended December 31,
                                           1997        1996           1995
          <S>
          Provision based on federal       <C>         <C>           <C>
           statutory rate                  35.0%       34.0%         (34.0%)

          Statutory depletion                -         (3.1%)        (21.2%)

          Effects on foreign taxes           -         (0.2%)           -     

          State tax and other               2.5%        1.6%          21.2%

                                           37.5%       32.3%         (34.0%)

</TABLE>
        At December 31, 1997, the Company has gross domestic tax benefit
   carryforwards of approximately  $9,148,000, $3,656,000, $692,000  and
   $38,000  relating  to  net  operating  losses,  statutory  depletion,
   alternative  minimum  tax   credits  and   investment  tax   credits,
   respectively, and gross foreign tax benefits of $245,000 relating  to
   net operating losses which expire at various dates beginning in 2000,
   except for  statutory depletion  which does  not have  an  expiration
   date. 

        As a result  of the acquisition  of Trax, the  utilization of  a
   portion of the Company's deferred  assets are subject to  limitations
   imposed by various Canadian tax authorities.  However, based upon the
   Company's Canadian  reserves  and  its estimated  future  net  income
   related thereto, it  is management's belief  that it  is more  likely
   than not that its Canadian deferred  tax  assets  will  be  utilized.

<PAGE>

   9.   TRANSACTIONS WITH RELATED PARTIES

        The  Board  of  Directors   of  the  Company  authorized   notes
   receivable from key employees and directors  in 1991, 1992 and  1993,
   for purposes of exercising stock options.  The notes bear interest at
   the Domestic Revolver interest rate and all of the notes are  secured
   by stock certificates  that were issued  upon exercise  of the  stock
   options by  each employee.   The  notes  mature May  13, 1999.    The
   balances due to the Company in this regard, including interest,  were
   $1,047,000  and   $1,022,000  at   December   31,  1997   and   1996,
   respectively.   These  amounts  are  offset  against  equity  on  the
   Company's consolidated  balance  sheet.    There  have not  been  any
   additional notes of this nature since 1993.

        The Board of Directors of the  Company also authorized one  time
   cash advances  to certain  officers in  1993  in exchange  for  notes
   receivable.  These notes also bear interest at the Domestic  Revolver
   interest rate and are  secured by stock  certificates of the  Company
   owned by those  individuals.   The notes mature  May 13,  1999.   The
   notes,  including  interest,  total  $1,872,000  and  $1,759,000   at
   December 31, 1997  and 1996,  respectively.   The Company  recognized
   interest  income  on  all  its  outstanding  notes  receivable   from
   officers, directors  and  key  employees of  $179,000,  $174,000  and
   $188,000 during 1997, 1996 and 1995, respectively.

        Onyx had transactions  in the ordinary  course of business  with
   Corpus Christi Gas  Marketing ("CCGM").   CCGM's president serves  as
   one of  Onyx's  Managers.   At  December 31,  1996,  Onyx had  a  gas
   imbalance payable of $120,000 to CCGM.

        The consolidated  financial statements  include certain  amounts
   and balances that arise from transactions with related parties:
  <TABLE>
                             At December 31, 1997    At December 31, 1996
                             Accounts    Accounts    Accounts    Accounts
        <S>                 Receivable    Payable    Receivable   Payable
                            <C>         <C>          <C>         <C>
        TDC, net            $2,135,000  $     -      $1,551,000  $     -     
        CCGM                    -             -         275,000   1,911,000
        Cedar Energies, Inc.    -             -            -
                                                                     60,000

                            $2,135,000  $     -      $1,826,000  $1,971,000


</TABLE>
<PAGE>
<TABLE>
                  For Year Ended           For Year Ended          For Year Ended

                 December 31, 1997        December 31, 1996      December 31, 1995
              Purchases     Sales      Purchases      Sales   Purchases    Sales
                  From         To         From          To        From        To
<S>           <C>          <C>         <C>          <C>         <C>        <C>

CCGM          $10,246,000  $1,518,000  $10,196,000  $1,120,000  $ 39,000   $ 265,000
Sejita                                                                            
Natural Gas          -           -            -           -        8,000        -
Libra                                                                             
Marketing            -           -            -           -        5,000        -
Cedar             
Energies,         
Inc.              157,000        -          266,000       -      239,000        -
Puma                                                                                
Resources            -           -             -          -         -        171,000

              $10,403,000  $1,518,000   $10,462,000 $1,120,000  $291,000   $ 436,000
</TABLE>
        The Company  rented an aircraft from TDC, on an as-needed basis,
   prior to 1997.  Charges for this service were  billed to the  Company
   based on time used.   Rental charges amounted to $20,000  and $39,000
   for  the years  ended December 31, 1996  and 1995, respectively.  TDC
   is  the operator of certain wells in North Texas in which the Company
   owns interests.   The  increase  in  the receivable  from TDC in 1997
   primarily relates  to  revenues  earned  for  1997  production   from
   those wells.   TDC  paid  the  Company  those  revenues subsequent to
   December 31, 1997.  Commencing January 1, 1997,the net unpaid balance
   due  to   the Company  by  TDC  accrues interest  at  the   Company's
   Domestic  Revolver  interest  rate.   Under agreement  with  TDC, the
   Company has  the right of offset with TDC.  Accordingly, the 1997 and
   1996  TDC balances  are  shown  net  in  the  financial   statements.

10.  MAJOR CUSTOMERS

        The  following  major  customers represent 10% or more  of total
   operating  revenues  by industry segment for the years ended December
   31, 1997, 1996 and 1995:
<TABLE>
     <S>
     Oil and Gas                        1997        1996         1995
                                         <C>         <C>          <C>
     Genesis Crude Oil, L.P.             29%         32%          13%
     Enron Gas Marketing                 12%         23%          31%
     Richardson Products Company         21%          *            *
     Chevron U.S.A. Inc.                  *          12%          31%
</TABLE>
        The Company's principal products are  oil and  natural  gas. The
   principal  market for such  products  is  primarily  the Southwestern
   United States  and Western  Canada where in the Company's oil and gas
   properties are physically located.  The  methods of  distribution  of
   such products  are by the sale of such products at  the  wellhead  to
   appropriate  gathering  companies operating in the geographic area of
   production.
<TABLE>
     <S>

     Natural Gas Pipelines              1997        1996         1995
                                         <C>         <C>          <C>
     Central Power and Light             50%         61%          58%
</TABLE>
        In  its  natural  gas marketing and transmission activities, the
   Company buys  and resells natural gas, receiving  a gross  margin  or
   spread equal  to the  difference between the purchase price  and  the
   resale price of such  natural gas.  In addition, the Company receives
   a fee  for transmission of  natural gas over  pipeline  systems owned
   by the Company.

     *   -   Less than 10% in period.

<PAGE>

11.  COMMITMENTS AND CONTINGENCIES

Commitments:

        The Company leases office  space, an airplane, office equipment
   and vehicles under various lease agreements with primary lease terms
   ranging from three to five years. Rental expense on these leases was
   $365,000,  $249,000  and  $202,000  in  the years ended December 31,
   1997,  1996  and  1995,  respectively.    Aggregate  future  minimum
   rental  payments required pursuant to noncancellable  leases  are as
   follows:  1998  - $377,000,  1999 - $313,000,  2000 - $211,000, 2001
   - $131,000 and  2002 - $3,000.

   Contingencies:

        The Company has entered into employment agreements with  certain
   key employees in 1996 and 1997.  In the event that following a change
   of control  employment  is terminated  for  those key  employees  for
   reasons specified in  the agreements, the  employees would receive  a
   lump sum  payment at  the time  of termination  as specified  in  the
   agreement.  There is  a calculated ceiling in  the agreement.  As  of
   February  28,  1998,  the   maximum  payout  attributable  to   these
   employment agreements is approximately $975,000.

        From time to time the Company is involved in litigation  arising
   in the normal course of business.  In the opinion of management,  the
   Company's ultimate liability, if any, from lawsuits currently pending
   would not  materially affect  the  Company's financial  condition  or
   operations.

   12.  STOCK OPTIONS

        The Company's 1993  Stock Option plan  ("the  93 Plan" ), is  an
   incentive stock option plan under which 1,660,000 shares are reserved
   for issuance to employees in the  ten year period commencing June  1,
   1993.  The  exercise price  will be set by  the 93 Plan Committee  in
   its best judgement but shall not be less than 100% of the fair market
   value per share at grant date.  The majority of currently outstanding
   options vest over a three year period (33%, 66%, 100%).

        Unaudited  pro  forma  information  regarding  net  income   and
   earnings per share is required by SFAS No. 123, if material, and  has
   been determined  as if  the Company  had accounted  for its  employee
   stock options under  the fair value  method of that  statement.   The
   fair value of  each option grant  is estimated on  the date of  grant
   using the  Black-Scholes  option  pricing model  with  the  following
   weighted average  assumptions  used  for grants  in  1997  and  1995,
   respectively:  no dividend yield, expected volatility of 48% and 37%,
   risk free interest rate of 6% and  7% and expected lives of four  and
   five years.  There were no option grants during 1996.

        For purposes of pro forma disclosures, the estimated fair  value
   of the  options is  amortized to  expense over  the options'  vesting
   period.   Applying  the effect  of  the  pro forma  expense  did  not
   materially affect  the Company's  1997, 1996  and 1995  reported  net
   income (loss) and income (loss) per common share.

<PAGE>

        Stock option transactions, in the period from January 1, 1995 to
   December 31, 1997 are summarized below:                                     
<TABLE>

                           1997               1996               1995
 
                                 Wtd.              Wtd.              Wtd.
                                 Avg.              Avg.              Avg.
                              Exercise           Exercise          Exercise
                     Shares     Price   Shares     Price   Shares    Price

   <S>              <C>        <C>     <C>         <C>    <C>        <C>
   Outstanding
   at beginning       
   of year          319,300    $1.84   361,700     $1.84  292,700    $1.81

   Granted           75,000     2.89      -                75,000     1.94
   Exercised        (20,000)    2.00      (400)     1.81
   Forfeited        (35,000)    1.97   (42,000)     1.81   (6,000)    1.81


   Outstanding at
   end of year      339,300    $2.05   319,300     $1.84  361,700    $1.84

   Exercisable at  
   end of year      242,600    $1.87   259,300     $1.82  230,300    $1.82

   Weighted average
   fair value of
   options granted    
   during the year    $1.32               -                $0.85
</TABLE>
<PAGE>

   The  following  table  summarizes  information  about  the  options
   outstanding at December 31, 1997:
<TABLE>
                                                Wtd.     Wtd.              Wtd.
                                                Avg.     Avg.              Avg.
                            Range of           Contrac Exerci             Exerci
                                                tual      se                se
   Grant Date   Expiration   Prices   Outstan  Life in  Price  Exercisa   Price
                   Date                ding     Years             ble

     <S>          <S>        <C>      <C>        <C>     <C>    <C>       <C>
     July 7,      May 31,    
      1993         2003      $1.81    214,300    5.41           214,300
     May 20,      May 20,     
      1995         2000       1.81     50,000    2.39            20,000
     March 1,     March 1,               
      1997         2002       2.56     30,000    4.16              -
     April 8,     April 8,    
      1997         2002       2.69     10,000    4.25              -
     May 26,      May 26,                                            
      1997         2002       2.91     10,000    4.40              - 
     July 9,      July 9,
      1997         2000       3.22     10,000    2.50             3,300
     September    September                                             
     15, 1997     15, 2000    3.44     15,000    2.70             5,000
                                
                             $1.81 -  339,300    4.59    $2.05  242,600    $1.87
                             $3.44
</TABLE>

     At December 31, 1997, 1,310,700 shares were available for grant.

<PAGE>

   13.    GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION

        The  Company  operates in  two  industry  segments:   oil    and
   gas   exploration,   development  and   production and  natural   gas
   marketing,  transportation  and  distribution.    In  addition,   the
   Company has  oil  and gas  operations  in  the  United    States  and
   Western  Canada.    Operating  profit  by   segment  is   defined  as
   revenues less operating  expenses.  Income and expense items excluded
   from  operating  profit   include:   interest  income,  other income,
   interest expense, minority interest and income  taxes.   Identifiable
   assets are those assets used exclusively in  the  operations  of each
   business segment.  Operating results for the  oil  and gas segment of
   the Company are  significantly affected by  the  Company's ability to
   acquire reserves in the  future through the  development  of existing
   properties and also its  ability  to  select  and   acquire  suitable
   prospects for exploratory  drilling  or  development.    The  buying,
   selling and  transporting of natural gas  by the  Company's  pipeline
   segment  is  a  highly  competitive  business.    The Company markets
   natural gas to customers who can purchase natural  gas  from  various
   suppliers.   Marketing  of  both  oil and  natural  gas  is  affected
   in  part  by  domestic  production  levels,  imports,  the  proximity
   of pipelines to producing properties and  the  regulation  by  states
   of allowable rates  of production.  Cash  flow  from  operations  for
   all  segments  may  be  affected  to    a    significant  degree   by
   fluctuations in  prices that  are  brought   on   by  factors  beyond
   the Company's control.  All of these variable  factors  are dependent
   on  economic  and  political  forces  which  cannot   be   accurately
   predicted in advance.

        Financial information  by geographic and  industry  segment  for
   the years ended December 31, 1997, 1996 and 1995 follows.  Prior to
   1996, the Company operated only in the United States.

<PAGE>
<TABLE>
                                                     Natural Gas
   (In thousands)                       Oil and Gas   Pipelines      Total
   <S>                                  <C>          <C>         <C>
   1997
   Identifiable assets                  $   86,721   $    6,450  $   93,171
   Revenues (1)                             23,750       56,438      80,188
   Exploration costs and expenses            1,134         -          1,134
   Depletion, depreciation and
   amortization                              6,782          329       7,111
   Operating income                          1,703        6,615       8,318
   Capital expenditures                     14,108          443      14,551

   1996
   Identifiable assets                  $   75,785   $   25,254  $  101,039
   Revenues (1)                             24,914       74,309      99,223
   Exploration costs and expenses              593         -            593
   Depletion, depreciation and
   amortization                              6,460          444       6,904
   Operating income                          5,758        1,475       7,233
   Capital expenditures                      8,421          913       9,334

   1995
   Identifiable assets                  $   61,547   $   18,125  $   79,672
   Revenues                                 16,599       49,249      65,848
   Exploration costs and expenses              898         -            898
   Depletion, depreciation and
   amortization                              4,973          416       5,389
   Operating income                            648          670       1,318
   Capital expenditures                      6,164          264       6,428


   (In thousands)                      United States    Canada       Total       

   1997
   Identifiable assets                  $   79,343   $   13,828  $   93,171
   Revenues (1)                             77,521        2,667      80,188
   Exploration costs and expenses              401          733       1,134
   Depletion, depreciation and
   amortization                              5,627        1,484       7,111
   Operating income (loss)                   9,737      (1,419)       8,318
   Capital expenditures                     11,471        3,080      14,551

   1996
   Identifiable assets                 $    89,672   $   11,367    $101,039
   Revenues (1)                             96,785        2,438      99,223
   Exploration costs and expenses              200          393         593
   Depletion, Depreciation and
   amortization                              5,763        1,141       6,904
   Operating income (loss)                   7,447       (214)        7,233
   Capital expenditures                      6,991        2,343       9,334

</TABLE>
<PAGE>

   15.  UNAUDITED QUARTERLY FINANCIAL DATA

        A summary  of  consolidated financial  data  for 1997  and  1996
   follows (in thousands, except per share amounts):
<TABLE>
                              First     Second      Third    Fourth
                             Quarter    Quarter    Quarter   Quarter

      Year Ended December
      31, 1997
      <S>                    <C>        <C>        <C>       <C>
      Operating                       
      revenues (1) (3)       $  33,142  $  27,307  $ 12,634  $   7,779
      Exploration costs and                                      
      expenses                      75        127       649        283
                                  
      Gross profit (3)           3,975      2,644     6,554      1,508
      Net income (loss)            900         55     2,919     (1,046)
      Net income (loss) per     
      share (2) " basic         $ 0.03     $(0.02)    $0.15     $(0.08)
      Net income per share       
      (2) " diluted                N/A        N/A     $0.12        N/A 

      Year Ended December
      31, 1996

      Operating
      revenues (1)             $19,765    $23,416   $23,071    $33,674
      Exploration costs and                                      
      expenses                      51        127       312        103
      Gross                                                      
      profit                     2,523      3,924     2,864      3,728
      Net income                   488        938       595      1,001
      Net income per share      
      (2) - basic               $ 0.01     $ 0.03    $ 0.01     $ 0.04
      Net income per share        
      (2) - diluted                N/A        N/A       N/A        N/A
</TABLE>
        Gross  profit  represents  income  before income taxes excluding
   general  and  administrative   expense,  interest  expense,   foreign
   currency  transaction  loss  and  minority  interest  in  income   of
   consolidated subsidiaries.

   (1) - Includes gain on sale of natural gas pipeline of $5,046,000  in
   1997 and  gain  on  sale  of  domestic  oil  and  gas  properties  of
   $1,037,000 in 1996.
 
   (2) - After dividends on preferred stock.

   (3) - Includes $224,000, $233,000, $273,000 and none which  has  been
   reclassified  as  additional   gas   sales   in  accordance  with the
   accounting for the Remedy Adjustments disccused in Note 5.


<PAGE>
<PAGE>

                             ARCH PETROLEUM INC.                        
              Unaudited Supplemental Oil and Gas Disclosures

                     Estimates of Reserves and Future
                   Production Performance Are Subjective
                    and May Change Materially as Actual
                 Production Information Becomes Available

        The following table sets forth the  proved oil and gas  reserves
   of the Company for the years ended December 31, 1997, 1996 and  1995,
   and the changes therein.  All of the Company's oil and gas activities
   are located within the United States and Western Canada.  None of the
   Company's reserves are subject to long-term supply agreements with  a
   governmental agency.
<PAGE>
<TABLE>


   <S>                            United States       Canada      Total
   Natural Gas (Mcf)
   Net proved reserves,            <C>              <C>         <C>
    December 31, 1994              61,546,200           -       61,546,200

      Extensions and discoveries    4,138,000           -        4,138,000
      Production                   (4,291,900)          -       (4,291,900)
      Revision of previous
       estimates                     (106,000)          -         (106,000)
   Net proved reserves,
    December 31, 1995              61,286,300           -       61,286,300

      Purchases of minerals
       in place                          -         1,015,200     1,015,200
      Sales of minerals
         in place                  (1,191,500)          -       (1,191,500)
      Extensions and discoveries    1,776,000        273,000     2,049,000
      Production                   (3,845,200)      (152,200)   (3,997,400)
      Revisions of previous
       estimates                    1,095,300           -        1,095,300
   Net proved reserves,
    December 31, 1996              59,120,900      1,136,000    60,256,900

      Extensions and discoveries    3,889,000      5,246,000     9,135,000
      Production                   (3,362,600)      (181,200)   (3,543,800)
      Revisions of previous
       estimates (1)                8,783,400        374,200     9,157,600

   Net proved reserves,
    December 31, 1997              68,430,700      6,575,000    75,005,700

   Oil (Bbl)
   Net proved reserves,
    December 31, 1994               3,586,400           -        3,586,400

      Extensions and discoveries    1,126,000           -        1,126,000
      Production                     (382,100)          -         (382,100)
      Revision of previous
       estimates                     (300,100)          -         (300,100)
   Net proved reserves,
    December 31, 1995               4,030,200           -        4,030,200

      Purchases of minerals
       in place                          -           682,500       682,500
      Sales of minerals in place      (37,700)          -          (37,700)
      Extensions and discoveries      395,000        294,700       689,700
      Production                     (459,300)      (120,300)     (579,600)
      Revision of previous estimates  (67,200)          -          (67,200)
   Net proved reserves,
    December 31, 1996               3,861,000        856,900     4,717,900

      Extensions and discoveries      793,500         82,500       876,000
      Production                     (528,400)      (128,600)     (657,000)         
      Revision of previous                          
       estimates                      934,400          2,100       936,500

   Net proved reserves,
    December 31, 1997               5,060,500        812,900     5,873,400

</TABLE>
   (1) - Includes approximately 6.0 Bcf associated with deficiencies of
   the Remedy Adjustment as discussed in Note 5.

<PAGE>
<TABLE>
                                     United States     Canada      Total
   <S>
   Proved developed reserves:         <C>           <C>          <C>
   Natural gas (Mcf)
        December 31, 1995             55,628,500         -       55,628,500
        December 31, 1996             54,981,200      504,000    55,485,200
        December 31, 1997             65,324,800    6,489,000    71,813,800

   Oil (Bbl)
        December 31, 1995              2,993,600         -        2,993,600
        December 31, 1996              3,128,400      809,900     3,938,300
        December 31, 1997              4,475,600      693,800     5,169,400
</TABLE>
        The Company's proved reserves exclude 1.9 Bcf, 8.7 Bcf and  11.9
   Bcf  of  gas  reserves   at  December  31,   1997,  1996  and   1995,
   respectively, which  were sold  under the  VPP in  December 1992  for
   $1.30 per  Mcf.    The  Company is  required  to  deliver  these  gas
   production volumes through July 1998  and thereafter under the  terms
   of the VPP agreement.   The revenue  associated with these  reserves,
   which is deferred,  is recognized as  production is  delivered.   


   Costs Incurred in Oil and Gas Activities

        Costs incurred in oil and gas property acquisition,  exploration
   and development activities are set forth below:
<TABLE>
                                  United States      Canada         Total
   1995
   <S>                             <C>           <C>            <C>
   Acquisition of properties:
     Proved                        $  274,000    $       -      $  274,000
     Unproved                         108,000            -         108,000

   Exploration                        898,000            -         898,000

   Development                      4,937,000            -       4,937,000

   1996
   Acquisition of properties:
     Proved                        $   442,000   $  6,667,000   $7,109,000
     Unproved                             -         2,185,000    2,185,000

   Exploration                         125,000      1,590,000    1,715,000

   Development                       5,514,000        400,000    5,914,000

   1997
   Acquisition of properties:
     Proved                         $   78,000   $    220,000   $  298,000
     Unproved                           17,000        322,000      339,000

   Exploration                         623,000        733,000    1,356,000

   Development                      10,323,000      1,792,000   12,115,000
</TABLE>
<PAGE>

   Standardized Measure of Discounted Future Net Cash Flows and  Changes
   Therein Relating to Proved Oil and Gas Reserves

<TABLE>
                             United States        Canada         Total
   1995
   <S>                        <C>              <C>            <C>
   Future cash inflows        $182,785,400     $      -       $182,785,400
   Future production and
    development costs           66,311,500            -         66,311,500
   Future income tax
    expenses                    22,434,000            -         22,434,000

   Future net cash flows
    undiscounted                94,039,900            -         94,039,900
   10% annual discount
    for estimated timing
    future net cash flows       42,127,800            -         42,127,800
   Standardized measure of
    discounted future net
    cash flows                 $51,912,100     $      -        $51,912,100

   1996
   Future cash inflows        $309,315,400     $29,589,400    $338,904,800
   Future production and
    development costs          118,878,800      12,846,900     131,725,700
   Future income tax
    expenses                    50,507,300       3,898,600      54,405,900

   Future net cash flows
    undiscounted               139,929,300      12,843,900     152,773,200
   10% annual discount
    for estimated timing
    of cash flows               65,201,200       3,758,500      68,959,700

   Standardized measure of
    discounted future net
    cash flows                $ 74,728,100    $  9,085,400    $ 83,813,500

   1997
   Future cash inflows        $239,670,400    $ 21,085,100    $260,755,500
   Future production and
    development costs          117,082,300       8,470,600     125,552,900
   Future income tax expenses   27,908,300       1,527,300      29,435,600

   Future net cash flows
    undiscounted                94,679,800      11,087,200     105,767,000
   10% annual discount
    for estimated timing
    of cash flows               40,516,200       3,684,700      44,200,900

   Standardized measure of
    discounted future net
    cash flows                $ 54,163,600    $  7,402,500    $ 61,566,100
</TABLE>
<PAGE>

        Future net cash flows  were computed using  year end prices  and
   costs.  For  the reserve reports  as of December  31, 1997, 1996  and
   1995, respectively, the average  domestic prices were $16.89,  $24.97
   and $18.82  for oil  and $2.25,  $3.60 and  $1.76 for  gas.  For  the
   reserve reports as of December 31, 1997, and 1996, respectively,  the
   average foreign prices were $16.31 and $25.41 for oil and $1.12   and
   $1.84 for gas.  Oil and gas  prices at December 31, 1996 were  higher
   than those realized  on average  by the  Company over  the past  five
   years.  Also,  prices at the  end of the  first quarter  of 1998  are
   below those at  the end  of 1997.   Changes  in prices  could have  a
   material effect on reserve estimates and related future net cash flow
   amounts.

        The standardized measure of discounted future net cash flows  at
   December 31, 1997, 1996  and 1995, as presented  in the table  above,
   excludes future net cash flows associated  with the VPP as  described
   in Note 5.   The discounted future  net  cash  flows  related to  the
   VPP approximates $436,400, $2,960,600 and $11,672,700  which  amounts
   are  net  of  discounted  future  production  costs  of   $1,856,000,
   $3,831,000, and  $1,912,700  at December  31,  1997, 1996  and  1995,
   respectively. The Company operates in an  industry that is subject to
   volatile  prices  for  its  products.   The  standardized measure  of
   discounted future net cash  flows may  be affected  to a  significant
   degree  by  fluctuations in  prices that  are brought  on by  factors
   beyond the Company's control. The following are the principal sources
   of change in the standardized measure  of  discounted future net cash
   flows:
<PAGE>
<TABLE>

                                    United States     Canada       Total
   <S>                               <C>           <C>          <C>
   December 31, 1994                 $48,520,400   $      -     $48,520,400

     Net changes in prices
      and costs, exclusive of
      properties purchased and
      sold                             2,736,100          -       2,736,100
     Net change in income taxes          174,100          -         171,000
     Sales of oil and gas
      produced, net of production
      costs                           (6,001,800)         -      (6,001,800)
     Revisions of previous
      quantity estimates              (1,464,900)         -      (1,464,900)
     Extensions and discoveries,
      less related costs               9,241,100          -       9,241,100
     Changes in estimated future
      development costs               (5,899,500)         -      (5,899,500)
     Development costs incurred
      previously estimated               740,700          -         740,700
     Accretion of discount             4,852,000          -       4,852,000
     Timing and other                   (986,100)         -        (986,100)

   December 31, 1995                  51,912,100          -      51,912,100

     Purchases of minerals in
      place                            2,176,600     9,473,800   11,650,400
     Sales of minerals in place         (595,800)         -        (595,800)
     Net changes in prices
      and costs, exclusive of
      properties purchased and
      sold                            46,473,300          -      46,473,300
     Net change in income taxes      (14,589,000)   (2,757,700) (17,346,700)
     Sales of oil and gas
      produced, net of production
      costs                          (11,479,600)   (1,420,500) (12,900,100)
     Revisions of previous
      quantity estimates                 961,900          -         961,900
        961,900
     Extensions and discoveries,
      less related costs               5,719,000     3,789,800    9,508,800
     Changes in estimated
      future operating costs         (13,709,200)         -     (13,709,200)
     Changes in estimated
      future development costs          (232,400)         -        (232,400)
     Development costs incurred
      previously estimated             3,742,000          -       3,742,000
     Accretion of discount             5,191,200          -       5,191,200
     Timing and other                   (842,000)         -        (842,000)
</TABLE>
<PAGE>
<TABLE>
   <S>                                <C>            <C>         <C>
   December 31, 1996                  74,728,100     9,085,400   83,813,500
     
     Net changes in prices and
      costs, exclusive of properties  
      purchased and sold             (48,688,400)   (4,479,500) (53,167,900)
     Net change in income taxes       20,847,300     1,612,500   22,459,800
     Sales of oil and gas
      produced, net of
      production costs               (11,695,700)   (1,612,000) (13,307,700)
     Revisions of previous
      quantity estimates               9,593,100       420,600   10,013,700
     Extensions and discoveries,
      less related costs              12,535,200     2,788,800   15,324,000
     Changes in estimated future
      development costs               (2,085,400)     (293,300)  (2,378,700)
     Development costs incurred
      previously estimated             3,389,100       572,400    3,961,500
     Accretion of discount             7,472,800       908,500    8,381,300
     Timing and other                (11,932,500)   (1,600,900) (13,533,400)

   December 31, 1997                 $54,163,600    $7,402,500  $61,566,100
</TABLE>
<PAGE>

   Results of Operations from Oil and Gas Producing Activities
<TABLE>
                                 United States       Canada        Total

   1995
   <S>                            <C>             <C>           <C>
   Revenues                       $16,599,000     $      -      $16,599,000

   Production costs                (7,176,000)           -       (7,176,000)
   Exploration expenses              (898,000)           -         (898,000)
   Depletion, depreciation
    and amortization               (4,973,000)           -       (4,973,000)

                                    3,552,000            -        3,552,000
   Income tax expense              (1,208,000)           -       (1,208,000)

   Results of operations          $ 2,344,000     $      -        $2,344,000

   1996
   Revenues                       $21,439,000     $ 2,438,000   $ 23,877,000

   Production costs                (7,591,000)       (490,000)    (8,081,000)
   Exploration expenses              (200,000)       (393,000)      (593,000)
   Depletion, depreciation
    and amortization               (5,321,000)     (1,139,000)    (6,460,000)

                                    8,327,000         416,000      8,743,000
   Income tax (expense) benefit    (2,681,000)        280,000     (2,401,000)

   Results of operations          $ 5,646,000     $   696,000   $  6,342,000

   1997
   Revenues                       $21,083,000     $ 2,667,000   $ 23,750,000

   Production costs                (7,912,000)       (850,000)    (8,762,000)
   Exploration expenses              (401,000)       (733,000)    (1,134,000)
   Depletion, depreciation
    and amortization               (5,298,000)     (1,484,000)    (6,782,000)

                                    7,472,000        (400,000)     7,072,000
   Income tax (expense) benefit    (2,516,000)        840,000     (1,676,000)

   Results of operations           $4,956,000     $   440,000   $  5,396,000
</TABLE>

   ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE

        On September 18, 1997,  the Company filed  Form 8-K pursuant  to
   changing its independent accountants.





                                  PART III


<PAGE>

   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        Reference is made to the material under the captions,  "Election
   of Directors" in  the Registrant's definitive  Proxy Statement to  be
   filed on  or  about  May 4,  1998,  pursuant  to  Regulation  14A  in
   connection with its Annual Meeting of Shareholders to be  held on May
   29, 1998, which is incorporated herein by reference.

   ITEM 11.  EXECUTIVE COMPENSATION

        Reference  is   made  to   the  material   under  the   caption,
   "Compensation  of   Executive   Officers  and   Directors"   in   the
   Registrant's definitive Proxy Statement to be filed on or  about  May
   4, 1998,  pursuant to  Regulation 14A in  connection with its  Annual
   Meeting of  Shareholders  to  be  held on  May  29,  1998,  which  is
   incorporated herein by reference.

   ITEM 12.  SECURITY  OWNERSHIP  OF   CERTAIN  BENEFICIAL  OWNERS   AND
   MANAGEMENT

        Reference  is   made  to   the  material   under  the   caption,
   "Outstanding  Voting   Securities   of  the   Company   and   Certain
   Shareholders" in the  Registrant's definitive Proxy  Statement to  be
   filed  on  or  about  May  4,  1998, pursuant  to Regulation  14A  in
   connection with its Annual Meeting of Shareholders to be held on  May
   29, 1998, which is incorporated herein by reference.

   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Reference is made  to the  material under  the caption  "Certain
   Relationships  and   Related   Transactions"  in   the   Registrant's
   definitive  Proxy  Statement  to be filed  on or about May  4,  1998,
   pursuant to Regulation 14A in connection  with its Annual Meeting  of
   Shareholders to be held on May 29, 1998, which is incorporated herein
   by reference.




                                  PART IV

   ITEM 14.  EXHIBITS, CONSOLIDATED  FINANCIAL STATEMENT  SCHEDULES, AND
             REPORTS ON FORM 8-K

   A.   Consolidated Financial Statements and Schedules

        1.   Consolidated Financial Statements

             Consolidated financial statements and supplemental data are
   shown by index thereto, page 16.

        2.   Consolidated Financial Statement Schedules

             There are  no  consolidated financial  statement  schedules
             which are required to be filed (SEC Release No. 33-7118) or
             the related amounts are  not present in amounts  sufficient
             to require submission of the schedule.

        3.   Exhibits

             The exhibits listed on  the accompanying index to  exhibits
             (page 44) are filed by reference as part of this Form 10-K.
<PAGE>

   B.   Reports on Form 8-K

        No reports on  Form 8-K  were filed  by the  Company during  the
   quarter ended December 31, 1997.





                            ARCH PETROLEUM INC.
                             INDEX TO EXHIBITS

   Exhibit 4.1      Term Loan  Agreement, dated  March 30,  1994,  between
                    Onyx Pipeline Company,  L.C., Onyx Gathering  Company,
                    L.C., Onyx  Gas Marketing  Company, L.C.  and Bank  of
                    Scotland, incorporated herein by reference to  Exhibit
                    4.4 to Amendment  No. 1 to  Forms S-3  dated July  14,
                    1994.

   Exhibit 4.2      Certificate of Designation  of Preferences and  Rights
                    of Exchangeable  Convertible  Preferred Stock  of  the
                    Company,  dated  October  20,  1994,  filed  with  the
                    Secretary of State of Delaware, incorporated herein by
                    reference to Exhibit 4.1 to Form 8-K dated October 20,
                    1994.

   Exhibit 4.3      Certificate of Incorporation  of Arch Petroleum  Inc.,
                    incorporated herein  by reference  to Exhibit  4.1  to
                    Form S-8 dated December 17, 1997.

   Exhibit 4.4      Certificate   of   Amendment    of   Certificate    of
                    Incorporation of Arch  Petroleum Inc.,  as filed  with
                    the Delaware Secretary of State on December 22,  1994,
                    incorporated herein  by reference  to Exhibit  4.2  to
                    Form S-8 dated December 17, 1997.

   Exhibit 4.5      Certificate of Correction to Certificate of  Amendment
                    of Arch  Petroleum Inc.,  as filed  with the  Delaware
                    Secretary of  State  on  May  21,  1992,  incorporated
                    herein by reference to Exhibit  4.3 to Form S-8  dated
                    December 17, 1997.

   Exhibit 4.6      Certificate   of   Amendment    of   Certificate    of
                    Incorporation of Arch  Petroleum Inc.,  as filed  with
                    the Delaware Secretary of  State on February 8,  1995,
                    incorporated herein  by reference  to Exhibit  4.4  to
                    Form S-8 dated December 17, 1997.

   Exhibit 4.7      Certificate of Designation  of Preferences and  Rights
                    of Exchangeable  Convertible Preferred  Stock of  Arch
                    Petroleum Inc.,  incorporated herein  by reference  to
                    Exhibit 4.5 to Form S-8 dated December 17, 1997.

   Exhibit 4.8      By-laws of Arch Petroleum Inc., incorporated herein by
                    reference to Exhibit  4.6 to Form  S-8 dated  December
                    17, 1997.

   Exhibit 4.9      Arch  Petroleum   Inc.   1993   Stock   Option   Plan,
                    incorporated herein  by reference  to Exhibit  4.7  to
                    Form S-8 dated December 17, 1997.

<PAGE>

   Exhibit 5.1      Opinion of Weil,  Gotshal &  Manges LLP,  incorporated
                    herein by reference to Exhibit  5.1 to Form S-8  dated
                    December 17, 1997.

   Exhibit 10.1     Purchase and Sale Agreement, dated November 24,  1992,
                    between the  Company  and  Enron  Reserve  Acquisition
                    Corp., incorporated  herein  by reference  to  Exhibit
                    10.1 to Form 10-K/A-1 for the year ended December  31,
                    1993.

   Exhibit 10.2(a)  Financing  Statement,  dated  January  15,  1993,
                    between the Company and Onyx Gathering Company,  L.C.,     
                    incorporated herein by reference to Exhibit 10.2(a) to
                    Form 10-K/A-1 for the year ended December 31, 1993.

   Exhibit 10.2(b)  Pledge Agreement, dated January 15, 1993, between
                    the  Company   and  Onyx   Gathering  Company,   L.C.,
                    incorporated herein by reference to Exhibit 10.2(b) to
                    Form 10-K/A-1 for the year ended December 31, 1993.

   Exhibit 10.2(c)  Promissory Note, dated January 15, 1993,  between
                    the  Company   and  Onyx   Gathering  Company,   L.C.,
                    incorporated herein by reference to Exhibit 10.2(c) to
                    Form 10-K/A-1 for the year ended December 31, 1993.

   Exhibit 10.2(d)  Loan Agreement, dated  January 15, 1993,  between
                    the  Company   and  Onyx   Gathering  Company,   L.C.,
                    incorporated herein by reference to Exhibit 10.2(d) to
                    Form 10-K/A-1 for the year ended December 31, 1993.

   Exhibit 10.3     Agreement of  Purchase  and Sale,  dated  January  15,
                    1993, between Onyx  Gathering Company,  L.C. and  Onyx
                    Pipeline Company, incorporated herein by reference  to
                    Exhibit 10.3  to  Form  10-K/A-1 for  the  year  ended
                    December 31, 1993.

   Exhibit 10.5(a)  Second Restated Revolving Credit Loan  Agreement,
                    dated March  31, 1994,  between the  Company and  Bank
                    One, Texas, N.A., incorporated herein by reference  to
                    Exhibit 10.5 (a) to Form  10-K/A-1 for the year  ended
                    December 31, 1993.

   Exhibit 10.5(b)  Revolving Promissory Note, dated March 31,  1994,
                    between  the  Company  and  Bank  One,  Texas,   N.A.,
                    incorporated herein by reference  to Exhibit 10.5  (b)
                    to Form 10-K/A-1 for the year ended December 31, 1993.

   Exhibit 10.6     Asset Sale Agreement, dated January 20, 1994,  between
                    the Company  and  Chevron  U.S.A.  Inc.,  incorporated
                    herein by reference  to Item  7(C) to  Form 8-K  dated
                    March 31, 1994.

   Exhibit 10.7(a)  Securities  Purchase  Agreement,   dated  as   of
                    October 15, 1994,  between the  Company and  Travelers
                    Indemnity, incorporated herein by reference to Exhibit
                    10.1 to Form 8-K dated October 20, 1994.

<PAGE>

   Exhibit 10.7(b)  Securities  Purchase  Agreement,   dated  as   of
                    October 15, 1994,  between the  Company and  Travelers
                    Life, incorporated herein by reference to Exhibit 10.2
                    to Form 8-K dated October 20, 1994.

   Exhibit 10.7(c)  Securities  Purchase  Agreement,   dated  as   of
                    October 15, 1994, between the Company and  Connecticut
                    General, incorporated herein  by reference to  Exhibit
                    10.3 to Form 8-K dated October 20, 1994.

   Exhibit 10.7(d)  Securities  Purchase  Agreement,   dated  as   of
                    October  15,  1994,  between  the  Company  and  Cigna
                    Mezzanine, incorporated herein by reference to Exhibit     
                    10.4 to Form 8-K dated October 20, 1994.

   Exhibit 10.8(a)  Cash Offer   Circular by Arch  Petroleum Inc.  to
                    purchase all of the  Common Shares of Trax  Petroleums
                    Limited, incorporated herein  by reference to  Exhibit
                    10.8(a) to From 8-K/A-1 dated January 31, 1996.

   Exhibit 10.8(b)  Notice  of   Guaranteed  Delivery,   incorporated
                    herein by reference to Exhibit 10.8(b) to Form 8-K/A-1
                    dated January 31, 1996.

   Exhibit 10.8(c)  Letter    of    Acceptance    and    Transmittal,
                    incorporated herein by reference  to Exhibit 10.8(c)  
                    to Form 8-K/A-1 dated January 31, 1996.

   Exhibit 10.9     Third Restated Revolving  Credit Loan Agreement  dated
                    February 20, 1996, among Arch  Petroleum Inc. and Bank
                    One,  Texas,  N.A.,   as  Agent,   and  other   Banks,
                    incorporated herein by  reference to  Exhibit 10.9  to
                    Form 8-K/A-1 dated January 31, 1996.

   Exhibit 10.10    Credit Agreement, dated as of February 20, 1996, among
                    Trax Petroleums  Limited  and  Bank  of  Montreal,  as
                    Agent, and other Financial Institutions,  incorporated
                    herein by reference to  Exhibit 10.10 to Form  8-K/A-1
                    dated January 31, 1996.

   Exhibit 23.1     Consent of Price Waterhouse LLP.

   Exhibit 23.2     Consent of Price  Waterhouse LLP, incorporated  herein
                    by  reference  to  Exhibit  23.1  to  Form  S-8  dated
                    December 17, 1997.

   Exhibit 23.3     Consent of  Weil, Gotshal  & Manges  LLP (included  in
                    Exhibit 5.1),  incorporated  herein  by  reference  to
                    Exhibit 23.2 to Form S-8 dated December 17, 1997.

   Exhibit 24.1     Power  of  Attorney  (see  pages  II-8  and  II-9   of
                    Registration  Statement  on  Form  S-8),  incorporated
                    herein by reference to Exhibit 24.1 to Form S-8  dated
                    December 17, 1997.


                                    SIGNATURES
<PAGE>

        Pursuant to  the requirements  of Section  13  or 15(d)  of  the
   Securities Exchange Act of 1934, the registrant has duly caused  this
   Annual Report  to  be  signed  on  its  behalf  by  the  undersigned,
   thereunto duly authorized.


   ARCH PETROLEUM INC.
   Registrant


   By: /s/Larry Kalas
        Larry Kalas, April 15, 1998
        Director, President and Chief Executive Officer
        (Principal Executive Officer)

   By: /s/Fred Cantu
        Fred Cantu, April 15, 1998
        Treasurer and Chief Financial Officer
        (Principal Accounting and Financial Officer)

      Pursuant to the requirements of  the  Securities Exchange Act of
   1934, this report has been signed below by the following persons on
   behalf  of  the registrant and in the  capacities  and on the dates
   indicated.

   By: /s/Johnny Vinson
        Johnny Vinson, April15, 1998
        Director

   By: /s/Randall W. Scroggins
        Randall W. Scroggins, April 15, 1998
        Director

   By: /s/Richard O. Harris
        Richard O. Harris, April 15, 1998
        Director

   By: /s/C. Randall Hill
        C. Randall Hill, April 15, 1998
        Director

   By: /s/John F. Gilsenan
        John F. Gilsenan, April 15, 1998
        Director

   By: /s/Dale R. Haley
        Dale R. Haley, April 15, 1998
        Director
                                                       
<PAGE>