<PAGE>
 
                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C.  20549

         [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934.

              For the Quarterly Period Ended  September 30, 1996
                                             -------------------

                                      OR

         [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934.

                          Commission File No. 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

--------------------------------------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last
                                   report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                  Yes   X                          No____ 
                      -----                        


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


                  Class                       Outstanding at August 31, 1996
     Common Stock, $.01 Par Value                      17,171,604
     ----------------------------                      ----------
<PAGE>
 
                              ARCH PETROLEUM INC.
                                     INDEX

<TABLE>
<CAPTION>
                                                                           Page
Part I.  FINANCIAL INFORMATION                                            Number
<S>                                                                       <C>

 Item 1.

CONSOLIDATED BALANCE SHEETS (Unaudited) -
     September 30, 1996 and December 31, 1995............................     3

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -
     Three months and nine months ended September 30, 1996 and 1995......     5

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
     Nine months ended September 30, 1996 and 1995.......................     6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (Unaudited).........................................................     7

  Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
     CONDITION AND RESULTS OF OPERATIONS.................................     8


Part II.  OTHER INFORMATION

  Item 1.
          Legal Proceedings..............................................    N/A

  Item 2.
          Changes in Securities..........................................    N/A

  Item 3.
          Defaults upon Senior Securities................................    N/A

  Item 4.
          Submission of Matters to a Vote of Security Holders............    N/A

  Item 5.
          Other Information..............................................    N/A

  Item 6.
          Exhibits and Reports on Form 8-K
            a. Exhibits..................................................    None
            b. Reports on Form 8-K.......................................    None

SIGNATURES...............................................................    11
</TABLE>

                                       2
<PAGE>
 
                              ARCH PETROLEUM INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
ASSETS                                           SEPTEMBER 30,  DECEMBER 31,
                                                     1996           1995
                                                 -------------  ------------
<S>                                              <C>            <C>
Current Assets:
  Cash and cash equivalents                      $   1,856,000  $  2,574,000
  Accounts receivable - trade                        9,171,000     6,986,000
  Accounts receivable - related parties                 23,000             -
  Prepaid expenses and other                           737,000       542,000
                                                 -------------  ------------
 
     Total current assets                           11,787,000    10,102,000
 
Property and Equipment, at cost:
  Oil and gas properties accounted for by the
     successful efforts method                      80,876,000    66,375,000
  Natural gas pipelines                             11,766,000    11,448,000
  Furniture, fixtures and other equipment            1,061,000       957,000
                                                 -------------  ------------
 
                                                    93,703,000    78,780,000
  Less accumulated depletion, depreciation
     and amortization                               17,912,000    12,968,000
                                                 -------------  ------------
 
      Net property and equipment                    75,791,000    65,812,000
 
Accounts receivable - related parties                1,410,000       939,000
Notes receivable - related parties                   1,730,000     1,645,000
Other                                                1,132,000     1,174,000
                                                 -------------  ------------
 
                                                 $  91,850,000  $ 79,672,000
                                                 =============  ============
</TABLE>


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

                                       3
<PAGE>
 
                              ARCH PETROLEUM INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY                             SEPTEMBER 30,  DECEMBER 31,
                                                                     1996           1995
                                                                --------------  -------------
<S>                                                             <C>             <C>
Current Liabilities:
 Accounts payable                                               $   10,355,000  $   9,552,000
 Accounts payable - related parties                                    587,000         75,000
 Current maturities of long-term debt                                1,118,000      1,111,000
 Preferred stock dividends payable                                     711,000        311,000
                                                                --------------  -------------

  Total current liabilities                                         12,771,000     11,049,000

Long-term debt, less current maturities                             27,673,000     17,821,000
Deferred revenue                                                    13,181,000     16,037,000
Convertible subordinated notes                                       5,000,000      5,000,000
Deferred federal income taxes                                        2,597,000      1,711,000
Note payable - minority interest holder                                694,000              -
Other liabilities                                                      346,000              -
Minority interest in consolidated subsidiaries                       1,019,000        459,000

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,
  17,171,604 and 17,141,404 shares issued and outstanding,
  respectively                                                         172,000        172,000

 Additional paid-in capital                                          6,012,000      5,944,000

 Employee notes for stock purchases                                 (1,010,000)      (965,000)

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

 Cumulative translation adjustment                                      86,000              -

 Retained earnings                                                   3,515,000      2,650,000
                                                                --------------  -------------
                                                                     8,569,000      7,595,000
                                                                --------------  -------------

                                                                $   91,850,000  $  79,672,000
                                                                ==============  =============
</TABLE>

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

                                       4
<PAGE>
 
                              ARCH PETROLEUM INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                              Three Months Ended          Nine Months Ended
                                                September 30,               September 30,
                                          --------------------------  --------------------------
                                              1996          1995          1996          1995
                                          ------------  ------------  ------------  ------------
<S>                                       <C>           <C>           <C>           <C>
REVENUES:
 Oil and gas sales                        $  5,964,000  $  4,475,000  $ 16,806,000  $ 12,344,000 
 Pipeline sales                             16,941,000    13,892,000    47,607,000    36,537,000
 Gain on sale of properties                          -             -     1,037,000             -
 Interest and other                            166,000       374,000       642,000       719,000
                                          ------------  ------------  ------------  ------------
                                            23,071,000    18,741,000    66,092,000    49,600,000
COSTS AND EXPENSES:
 Lease operations                            1,906,000     1,982,000     5,951,000     5,483,000
 Natural gas purchases and
  pipeline operations                       16,160,000    13,166,000    45,183,000    34,829,000
 Exploration                                   312,000       507,000       490,000       830,000
 Depletion, depreciation and
  amortization                               1,829,000     1,744,000     5,094,000     3,940,000
 General and administrative                  1,166,000     1,084,000     3,830,000     3,103,000
 Interest                                      717,000       495,000     2,077,000     1,356,000
 Foreign currency transaction gain             (19,000)            -       (47,000)            -
 Minority interest in income
  of consolidated subsidiaries                 149,000       257,000       560,000       317,000
                                          ------------  ------------  ------------  ------------
                                            22,220,000    19,235,000    63,138,000    49,858,000
                                          ------------  ------------  ------------  ------------
 Net income (loss) before income taxes
  and dividends                                851,000      (494,000)    2,954,000      (258,000)
 
 Deferred federal income tax expense
  (benefit)                                    256,000      (167,000)      886,000       (88,000)
                                          ------------  ------------  ------------  ------------
 
 Net income (loss) before dividends            595,000      (327,000)    2,068,000      (170,000)
 
 Dividends on preferred stock                  400,000       400,000     1,200,000     1,200,000
                                          ------------  ------------  ------------  ------------
 
 Net income (loss)                        $    195,000  $   (727,000) $    868,000  $ (1,370,000)
                                          ============  ============  ============  ============
 
 Net income (loss) per common share       $       0.01  $     (0.04)  $       0.05  $      (0.08)
                                          ============  ============  ============  ============
 
 Weighted average common and
  common equivalent shares
  outstanding                               17,196,000    17,233,000    17,232,000    17,198,000
                                          ============  ============  ============  ============
</TABLE>

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

                                       5
<PAGE>
 
                              ARCH PETROLEUM INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                                              September 30,
                                                                      -----------------------------
                                                                          1996             1995
                                                                      --------------    -----------
<S>                                                                  <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                                   $  2,068,000       $  (170,000)
 Adjustments to reconcile to net cash from operations:
  Depletion, depreciation and amortization                              5,094,000         3,940,000
  Deferred revenue                                                     (1,772,000)       (2,679,000)
  Deferred income taxes                                                   886,000           (88,000)
  Interest on notes receivable and other                                 (144,000)         (148,000)
  Minority interest in net income of consolidated subsidiaries            560,000           317,000
  Gain on sale of properties                                           (1,037,000)              -
  Foreign currency transaction gain                                       (47,000)              -
                                                                     ------------       -----------
                                                                        5,608,000         1,172,000
 
 Change in accounts receivable                                         (1,237,000)       (1,917,000)
 Change in other current assets                                          (175,000)          197,000
 Change in accounts receivable - related parties                         (471,000)         (311,000)
 Change in accounts payable and other current liabilities                 318,000           770,000
 Production payment remedy adjustment                                  (1,084,000)         (781,000)
                                                                     ------------       -----------
 
    Net operating cash flows                                            2,959,000          (870,000)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                                  (6,881,000)       (4,717,000)
 Proceeds from sale of properties                                       1,585,000               -
 Notes receivable and other assets                                        (45,000)              -
 Investment in subsidiary                                              (7,645,000)              -
                                                                     ------------       -----------
 
    Net investing cash flows                                          (12,986,000)       (4,717,000)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from bank borrowing                                          23,004,000         8,600,000
 Payments of bank debt                                                (13,589,000)       (2,834,000)
 Payment of preferred stock dividends                                    (800,000)         (800,000)
 Proceeds from note payable - minority interest holder                    694,000               -
 Purchase of treasury shares                                                  -            (205,000)
 Issue common shares                                                          -             135,000
                                                                     ------------       -----------
 
    Net financing cash flows                                            9,309,000         4,896,000
 
Change in cash and cash equivalents                                      (718,000)         (691,000)
 
Cash and cash equivalents at beginning of period                        2,574,000         1,553,000
                                                                     ------------       -----------
 
Cash and cash equivalents at end of period                           $  1,856,000       $   862,000
                                                                     ------------       -----------
 </TABLE>



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

                                       6
<PAGE>
 
                              ARCH PETROLEUM INC.
             CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

     In the opinion of Arch Petroleum Inc. (the "Company"), the accompanying
consolidated financial statements, which have not been audited by independent
public accountants, contain all adjustments necessary to present fairly the
Company's consolidated financial position, the results of its operations and its
cash flows for the periods reported. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions are eliminated. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. Certain prior amounts have been reclassified to conform with 1996
presentation. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K as of December 31,
1995. The results of operations for the three months and nine months ended
September 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for a full year.

     Effective January 31, 1996, the Company acquired 100% of the outstanding
common stock of Trax Petroleums Limited (Trax), a Canadian oil and gas
exploration and development company headquartered in Calgary, Alberta, Canada.
The results of Trax have been consolidated with the Company beginning February
1, 1996. The following unaudited pro forma information has been prepared as if
the acquisition had occurred at the beginning of each period presented, and is
provided for comparative purposes only. The pro forma information presented is
not necessarily indicative of the combined financial results as they may be in
the future or as they might have been for the period had the acquisition been
consummated at the beginning of such period.

<TABLE> 
<CAPTION> 
                                                  Nine Months Ended
                                                     September 30,
                                              -------------------------
     (In thousands except per share data)        1996           1995
                                              ----------     ----------
     <S>                                      <C>            <C> 
     Revenues                                 $   66,409     $   51,425
     Net income (loss) before dividends            2,150         (2,464)
     Net income (loss) per common share       $     0.06     $    (0.21)
</TABLE> 

     The Company has 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
Trax and Bank of Montreal, the Canadian Agent bank, and other financial
institutions (the Canadian Revolver and, together with the Domestic Revolver,
the Revolvers). The two credit facilities are separate bank revolvers. The
lenders in the Domestic Revolver (the U.S. lenders) and the lenders in the
Canadian Revolver (the Canadian lenders and, together with the U.S. lenders, the
Lenders) have entered into an associated Intercreditor Agreement.

     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 Companys oil and gas
properties which serve as collateral for any loan which may be outstanding under
the Revolvers. The Domestic Revolver facility is $50.0 million and the borrowing
base is currently $30.0 million. The Canadian Revolvers initial commitment is
U.S. $11.0 million. 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, 1998. 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 average actual interest rate was 7.99% at September
30, 1996.

     Effective April 30, 1996, the Company sold its working and royalty
interests in certain oil and gas properties located in West Texas for net
proceeds of $1,585,000. The properties represented less than 3% of the Company's
total reserves (equivalent barrel basis) as of January 1, 1996. The Company
recognized a pre-tax gain of $1,037,000 on the sale of the properties.

                                       7
<PAGE>
 
                     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,
interest rate fluctuations, the regulatory and political environments and other
risks indicated in filings with the Securities and Exchange Commission.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     At September 30, 1996, the Companys total assets increased to $91.9 million
from $79.7 million at December 31, 1995. The assets of Trax (acquired January
31, 1996) accounted for $10.2 million of the increase. In addition, oil and gas
properties (excluding Trax) increased $4.7 million primarily as a result of
successful development drilling and recompletion of existing wells in New
Mexico.

     In 1996 the Companys principal sources of funds were $9.4 million from its
Revolvers, $3.0 million from operations and $1.6 million from sale of
properties. These funds were primarily consumed by funding $7.6 million for the
acquisition of Trax and funding $6.9 million of development in existing
properties, primarily in New Mexico and the drilling of prospects in Alberta,
Canada. Discretionary cash flows (net income adjusted for non-cash charges)
increased to $5.6 million in 1996, compared to $1.2 million in 1995, reflecting
increased oil and gas sales and improved margins on pipeline sales.
Discretionary cash flows are available for capital expenditures, debt service
and dividend payments.

     The Companys Revolvers are in place for use by the Company at its
discretion including drilling, development and acquisition of oil and gas
properties. The Company has borrowed $17.5 million and $8.5 million against the
Domestic and Canadian Revolvers at September 30, 1996, 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 Companys oil and gas properties
which serve as collateral for any loan which may be outstanding under the
Revolvers. The Domestic Revolver facility is $50.0 million and the borrowing
base is currently $30.0 million. The Canadian Revolvers initial commitment is
U.S. $11.0 million. 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, 1998. Borrowings under the Revolvers will, at the Companys option, bear
interest either at the Lenders Base Rate or a rate based on the London Interbank
Offered Rate (LIBOR). The average actual interest rate was 7.99% at September
30, 1996.

     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 $5.0 million. The Onyx Note bears interest at national prime
rate plus one-half of one percent (8.75% at September 30, 1996). Interest on the
unpaid principal amount of the note is payable quarterly and commenced on June
30, 1994. The unpaid principal ($2.8 million at September 30, 1996), is payable
in eighteen quarterly installments ending on March 31, 1999. Current maturities
of the Onyx Note total $1.1 million at September 30, 1996. The Onyx Note is
collaterlized by certain of Onyx's pipelines, gathering facilities and related
transportation contracts. In addition, the Onyx Note is guaranteed by the
Company.

     Both the Revolvers and Onyx Note 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 Companys 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 Onyx are currently not in
default with the loan agreements. Neither the Company nor Onyx has any other
unused lines of credit.

     The Company has sufficient cash and unused borrowing base in the Revolvers
to fund its anticipated drilling, development and acquisition programs for 1996
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. The Company operates in an industry that is subject to volatile
prices for its products. Cash flow from operations may be affected to a
significant degree by fluctuations in prices that are brought on by factors
beyond the Company's control.

                                       8
<PAGE>
 
RESULTS OF OPERATIONS
---------------------

               NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
               ------------------------------------------------
                     NINE MONTHS ENDED SEPTEMBER 30, 1995
                     ------------------------------------

     The Company recorded net income before dividends of $2,068,000 in 1996 as
compared to a net loss of $170,000 before dividends in 1995. Net income
increased $2,238,000. Net income was increased by the gain on sale of certain
oil and gas properties, as well as increased oil and gas sales and improved
margins on pipeline sales. Net income was reduced by an increase in almost all
costs and expenses.

     Pipeline sales increased $11,070,000 in 1996 as compared to 1995, but were
offset by an increase in natural gas purchases of $10,228,000. The increase in
sales and purchases is due primarily to the increase in the cost of gas which
averaged $1.99 in 1996 as compared to $1.46 in 1995. During 1996 natural gas was
sold at an average price of $2.23 as compared to $1.53 in 1995. Gross margin
increased to 6.3% in 1996 as compared to 5.9% in 1995.

     Revenues from oil and gas sales increased $4,462,000 in 1996 as compared to
1995. Oil and gas revenues attributable to Trax were $1,588,000 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 432,000
barrels in 1996 as compared to 281,000 barrels in 1995, resulting in a
$2,615,000 increase in sales. The increase in oil production is due to the
Companys successful drilling and development program in New Mexico as well as
the Trax production (88,000 barrels). The average price received for oil was
$20.03 in 1996 as compared to $17.34 in 1995, resulting in a $1,159,000 increase
in sales. Gas production in 1996 decreased to 5,072,000 Mcf as compared to
5,678,000 Mcf in 1995, resulting in a $790,000 decrease in sales. The decrease
in gas production is attributable primarily to the reduced allowable production
from the Keystone Ellenburger field. The average price received for gas
increased to $1.61 in 1996 as compared to $1.30 in 1995, resulting in a
$1,542,000 increase in sales. The average price received for gas excluding
certain production payment volumes was $2.13 in 1996.

     Lease operating expenses (LOE) related to oil and gas properties increased
$468,000, primarily as a result of the addition of the Trax operations. Trax LOE
was $309,000 during 1996. The new wells successfully completed in New Mexico
also added to LOE. Lifting costs per equivalent barrel (including Trax
operations) increased in 1996 to $4.76 from $4.47 in 1995. Exploration expense
decreased $340,000 in 1996 as compared to 1995. During 1995 the Company incurred
significant costs related to its 3-D seismic program. Depletion, depreciation
and amortization (DD&A) increased $1,154,000 in 1996 as a result of increased
production, primarily from the New Mexico operations, as well as the added Trax
operations. Trax DD&A was $776,000 in 1996.

     General and administrative expenses increased $727,000 in 1996 as compared
to 1995, as a result of increased personnel costs and the addition of Trax. Trax
general and administrative expense was $423,000 in 1996. Interest expense
increased $721,000 as a result of the increased outstanding bank debt during
1996.

                                        
               THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
               -------------------------------------------------
                     THREE MONTHS ENDED SEPTEMBER 30, 1995
                     -------------------------------------
                                        

     The Company recorded net income before dividends of $595,000 in 1996 as
compared to a net loss of $327,000 before dividends in 1995. Net income
increased $922,000. Net income was increased by higher oil and gas sales and
improved margins on pipeline sales. Net income was reduced primarily by
increased natural gas purchases.

     Pipeline sales increased $3,049,000 in 1996 as compared to 1995, but were
offset by an increase in natural gas purchases of $2,954,000. The increase in
sales and purchases is due primarily to the increase in the cost of gas which
averaged $2.21 in 1996 as compared to $1.42 in 1995. During 1996 natural gas was
sold at an average price of $2.29 as compared to $1.51 in 1995. Gross margin
decreased slightly to 5.9% in 1996 as compared to 6.5% in 1995.

     Revenues from oil and gas sales increased $1,489,000 in 1996 as compared to
1995. Oil and gas revenues attributable to Trax were $705,000 during 1996. Oil
production increased to 150,000 barrels in 1996 as compared to 104,000 barrels
in 1995, resulting in a $740,000 increase in sales. The increase in oil
production is due to the Companys successful drilling and development program in
New Mexico as well as the Trax production (31,000 barrels). The average price
received for oil was $21.67 in 1996 as compared to $15.89 in 1995, resulting in
a $868,000 increase in sales. Gas production in 1996 decreased to 1,653,000 Mcf
as compared to 2,258,000 Mcf in

                                       9
<PAGE>
 
1995, resulting in a $758,000 decrease in sales. The decrease in gas production
is attributable primarily to the reduced allowable production from the Keystone
Ellenburger field. The average price received for gas increased to $1.64 in 1996
as compared to $1.25 in 1995, resulting in a $642,000 increase in sales. The
average price received for gas excluding certain production payment volumes was
$2.15 in 1996.

     Lease operating expenses (LOE) related to oil and gas properties (including
Trax LOE of $159,000) decreased $76,000 during 1996. The decrease in LOE was due
primarily to the sale of properties effective April 30, 1996. Lifting costs per
equivalent barrel (including Trax operations) increased in 1996 to $4.61 from
$4.13 in 1995, primarily as a result of the decreased gas production from
Keystone. Exploration expense decreased $195,000 in 1996 as compared to 1995.
During 1995 the Company incurred significant costs related to its 3-D seismic
program. Interest expense increased $222,000 as a result of the increased
outstanding bank debt during 1996.

                                       10
<PAGE>
 
                                  SIGNATURES
                                  ----------


     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                             ARCH PETROLEUM INC.
                                             -------------------
                                                 (Registrant)


Date: November 13, 1996                           /s/ Fred Cantu
      -----------------                      ----------------------
                                                  Fred Cantu
                                                  Treasurer and
                                                  Chief Financial Officer

                                       11