<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  June 30, 1997
                                                -------------

                                      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 July 31, 1997
     Common Stock, $.01 Par Value                  17,171,804
     ----------------------------                  ----------
<PAGE>
 
                              ARCH PETROLEUM INC.
                                     INDEX

                                                                      Page
Part I.   FINANCIAL INFORMATION                                      Number
 
Item 1.
 
CONSOLIDATED BALANCE SHEETS -
                June 30, 1997 and December 31, 1996..................   3

CONSOLIDATED STATEMENTS OF OPERATIONS -
                Three and six months ended June 30, 1997 and 1996....   5

CONSOLIDATED STATEMENTS OF CASH FLOWS -
                Six months ended June 30, 1997 and 1996..............   6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................   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............................................. N/A
          b.    Reports on Form 8-K..................................  10


  SIGNATURES.........................................................  12

                                       2
<PAGE>
 
                              ARCH PETROLEUM INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                  (UNAUDITED)     (AUDITED)
ASSETS                                              JUNE 30,     DECEMBER 31,
                                                     1997           1996
                                                 -------------  -------------
<S>                                              <C>            <C>
Current Assets:
  Cash and cash equivalents                      $  2,740,000   $  3,192,000
  Accounts receivable - trade                      12,035,000     15,948,000
  Accounts receivable - related parties                91,000        275,000
  Prepaid expenses and other                        1,404,000        968,000
                                                 ------------   ------------
 
     Total current assets                          16,270,000     20,383,000
 
Property and Equipment, at cost:
  Oil and gas properties accounted for by the
     successful efforts method                     88,835,000     81,620,000
  Natural gas pipelines                            12,617,000     12,361,000
  Furniture, fixtures and other equipment           1,178,000      1,038,000
                                                 ------------   ------------
 
                                                  102,630,000     95,019,000
  Less accumulated depletion, depreciation
     and amortization                              22,801,000     19,617,000
                                                 ------------   ------------
 
        Net property and equipment                 79,829,000     75,402,000
 
Accounts receivable - related parties               1,643,000      1,551,000
Notes receivable - related parties                  1,816,000      1,759,000
Deferred income taxes                                 907,000        705,000
Other                                                 967,000      1,239,000
                                                 ------------   ------------
 
                                                 $101,432,000   $101,039,000
                                                 ============   ============
 
</TABLE>



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

                                       3
<PAGE>
 
                              ARCH PETROLEUM INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 (UNAUDITED)     (AUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY                               JUNE 30,     DECEMBER 31,
                                                                     1997           1996
                                                                -------------  -------------
<S>                                                             <C>            <C>
Current Liabilities:
 Accounts payable                                               $ 14,192,000   $ 16,253,000
 Accounts payable - related parties                                1,230,000      1,911,000
 Current maturities of long-term debt                              1,111,000      1,119,000
 Preferred stock dividends payable                                   311,000        311,000
                                                                ------------   ------------
 
  Total current liabilities                                       16,844,000     19,594,000
 
Long-term debt, less current maturities                           33,151,000     30,134,000
Deferred revenue                                                  11,544,000     12,528,000
Convertible subordinated notes                                     5,000,000      5,000,000
Deferred federal income taxes                                      4,000,000      3,450,000
Other liabilities                                                    235,000        186,000
Minority interest in consolidated subsidiaries                     1,528,000      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,
  17,271,804 issued and outstanding                                  172,000        172,000
 
 Additional paid-in capital                                        6,012,000      6,012,000
 
 Employee notes for stock purchases                               (1,054,000)    (1,022,000)
 
 Treasury stock, 100,000 shares                                     (206,000)      (206,000)
 
 Cumulative translation adjustment                                   (18,000)        37,000
 
 Retained earnings                                                 4,224,000      4,072,000
                                                                ------------   ------------
                                                                   9,130,000      9,065,000
                                                                ------------   ------------
 
                                                                $101,432,000   $101,039,000
                                                                ============   ============
</TABLE>



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

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

<TABLE>
<CAPTION>
                                                Three Months Ended          Six Months Ended
                                                     June 30,                   June 30,
                                             -------------------------  -------------------------
                                                 1997          1996         1997         1996
                                             ------------  -----------  -----------  ------------
<S>                                          <C>           <C>          <C>          <C>
REVENUES:
 Oil and gas sales                           $ 5,170,000   $ 5,364,000  $11,464,000  $11,073,000
 Pipeline sales                               21,705,000    16,869,000   48,147,000   30,667,000
 Gain on sale of properties                            -     1,037,000            -    1,037,000
 Interest and other                              199,000       146,000      382,000      471,000
                                             -----------   -----------  -----------  -----------
                                              27,074,000    23,416,000   59,993,000   43,248,000
COSTS AND EXPENSES:
 Oil and gas lease operations                  1,887,000     2,176,000    3,989,000    4,338,000
 Natural gas purchases and
  pipeline operations                         20,883,000    15,598,000   46,207,000   29,017,000
 Exploration                                     127,000       127,000      202,000      178,000
 Depletion, depreciation and
  amortization                                 1,766,000     1,591,000    3,434,000    3,267,000
 General and administrative                    1,430,000     1,518,000    2,667,000    2,669,000
 Interest                                        819,000       685,000    1,583,000    1,362,000
 Foreign currency transaction (gain) loss        (66,000)       10,000       41,000      (29,000)
 Minority interest in income
  of consolidated subsidiaries                   141,000       372,000      448,000      410,000
                                             -----------   -----------  -----------  -----------
                                              26,987,000    22,077,000   58,571,000   41,212,000
                                             -----------   -----------  -----------  -----------
Income before income taxes
 and dividends                                    87,000     1,339,000    1,422,000    2,036,000
 
Income tax expense                                32,000       401,000      466,000      610,000
                                             -----------   -----------  -----------  -----------
 
Net income before dividends                       55,000       938,000      956,000    1,426,000
 
Dividends on preferred stock                     400,000       400,000      800,000      800,000
                                             -----------   -----------  -----------  -----------
 
Net income (loss)                            $  (345,000)  $   538,000  $   156,000  $   626,000
                                             ===========   ===========  ===========  ===========
 
Net income (loss) per common share                $(0.02)        $0.03        $0.01        $0.04
                                             ===========   ===========  ===========  ===========
 
Weighted average common and
 common equivalent shares
 outstanding                                  17,285,000    17,231,000   17,287,000   17,234,000
                                             ===========   ===========  ===========  ===========
</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>
                                                                       Six Months Ended
                                                                           June 30,
                                                                  ---------------------------
                                                                      1997          1996
                                                                  ------------  -------------
<S>                                                               <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                       $   956,000   $  1,426,000
 Adjustments to reconcile to net cash from operations:
  Depletion, depreciation and amortization                          3,434,000      3,267,000
  Deferred revenue                                                   (739,000)    (1,198,000)
  Deferred income taxes                                               357,000        610,000
  Interest on notes receivable and other                              (90,000)       (97,000)
  Minority interest in net income of consolidated subsidiaries        448,000        410,000
  Gain on sale of properties                                                -     (1,037,000)
  Foreign currency transaction (gain) loss                             41,000        (29,000)
                                                                  -----------   ------------
                                                                    4,407,000      3,352,000
 
 Change in accounts receivable                                      4,097,000     (1,848,000)
 Change in other current assets                                       388,000       (385,000)
 Change in accounts receivable - related parties                      (92,000)      (330,000)
 Change in accounts payable and other current liabilities          (3,135,000)      (246,000)
 Production payment remedy adjustment                                (245,000)      (927,000)
                                                                  -----------   ------------
 
   Net operating cash flows                                         5,420,000       (384,000)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                              (7,865,000)    (3,759,000)
 Proceeds from sale of properties                                           -      1,585,000
 Notes receivable and other assets                                   (216,000)        12,000
 Investment in subsidiary                                                   -     (7,645,000)
                                                                  -----------   ------------
 
   Net investing cash flows                                        (8,081,000)    (9,807,000)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from bank borrowing                                       6,000,000     21,504,000
 Payments of bank debt                                             (3,064,000)   (12,305,000)
 Payment of preferred stock dividends                                (800,000)      (800,000)
 Proceeds from note payable - minority interest holder                 73,000        694,000
                                                                  -----------   ------------
 
   Net financing cash flows                                         2,209,000      9,093,000
                                                                  -----------   ------------
 
Change in cash and cash equivalents                                  (452,000)    (1,098,000)
 
Cash and cash equivalents at beginning of period                    3,192,000      2,574,000
                                                                  -----------   ------------
 
Cash and cash equivalents at end of period                        $ 2,740,000   $  1,476,000
                                                                  ===========   ============
</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 1997
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,
1996.  The Company extended the maturity date of notes receivable from certain
key employees to May 13, 1999.  The results of operations for the three months
and six months ended June 30, 1997 and 1996 are not necessarily indicative of
the results to be expected for a full year.

     On July 10, 1997, the Company entered into an agreement to sell it's entire
50% membership interest in Onyx Pipeline Company, L.C. and its affiliates
(together "Onyx").  The transaction was closed on July 31, 1997, and is
effective June 30, 1997.  The proceeds consist of a $6.0 million sales price
plus a $1.8 million repayment to the Company for advances formerly made to Onyx
for pipeline construction and other costs.  The Company reduced its domestic
long term debt by $7.8 million, concurrently, and will recognize a pre-tax book
gain of approximately $6.0 million in the third quarter.  See Item 5 for further
discussion of the transaction.

                                       7
<PAGE>
 
                              ARCH PETROLEUM INC.
                     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
-------------------------------

     In 1997 the Company's principal sources of funds were $5.0 million from
operations and $2.2 million, net of repayments, from its Revolvers.  These funds
were primarily consumed by funding $6.4 million of development in existing U.S.
properties, primarily in New Mexico and North Texas, and $1.5 million for the
drilling of wells in Canada, including construction of supporting facilities and
pipelines.

     The Company's 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 $20.5 million and $11.0 million against the
Domestic and Canadian Revolvers at June 30, 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 June 1, 1997, and the borrowing base is currently U.S. $21.0
million and Canadian $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 effective interest rate
realized was 8.12% at June 30, 1997.

     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 (9.00% at June 30, 1997). Interest on
the unpaid principal amount of the note is payable quarterly. The unpaid
principal ($1.9 million at June 30, 1997), is payable in eighteen quarterly
installments ending on March 31, 1999. Current maturities of the Onyx Note total
$1.1 million at June 30, 1997. 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 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 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.

     On July 31, 1997, the Company closed the sale of its interest in Onyx and
realized approximately $7.8 million in cash. The Company will recognize a gain
of approximately $6.0 million on the transaction in the third quarter. The
transaction is more fully described in Item 5. The $7.8 million proceeds were
used 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 are
released and clear as regards the Company as of July 31, 1997.

     Since December 31, 1996 through the date of this report, the Company
successfully completed twenty-eight wells in Texas, New Mexico and Alberta as
part of its 1997 drilling program.  In the United States, twenty-six new wells
have been drilled and completed (nine during the second quarter).  In Canada
during the first quarter, two wells have been completed successfully.

     The Company believes it has sufficient cash and unused borrowing base in
the Revolvers to fund its anticipated drilling, development and acquisition
programs for 1997 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,

                                       8
<PAGE>
 
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.


RESULTS OF OPERATIONS
---------------------

                  SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
                  ------------------------------------------
                        SIX MONTHS ENDED JUNE 30, 1996
                        ------------------------------

     The Company recorded net income before dividends of $956,000 in 1997 as
compared to net income of $1,426,000 before dividends in 1996.  The decrease in
net income was entirely attributable to the gain on sale of certain oil and gas
properties recognized in 1996.

     Pipeline sales increased $17,480,000 in 1997 as compared to 1996, but were
offset by an increase in natural gas purchases of $17,190,000.  The increase in
sales and purchases is due primarily to the increase in volumes delivered to a
major customer of Onyx. Gross margin increased to $2,324,000 in 1997 as compared
to $2,026,000 in 1996.

     Revenues from oil and gas sales increased $391,000 in 1997 as compared to
1996.  Oil production increased to 307,000 barrels in 1997 as compared to
280,000 barrels in 1996, resulting in a $539,000 increase in sales.  The Company
has begun realizing production from the new wells drilled in the first quarter
of 1997.  The average price received for oil was $20.58 in 1997 as compared to
$20.06 in 1996, resulting in a $160,000 increase in sales.  Gas production in
1997 decreased to 2,684,000 Mcf as compared to 3,419,000 Mcf in 1996, resulting
in a $1,171,000 decrease in sales.  The decrease in gas production is
attributable primarily to the reduced allowable production from the Keystone
Ellenburger field ("Keystone").  The average price received for gas increased to
$1.92 in 1997 as compared to $1.59 in 1996, resulting in a $869,000 increase in
sales.  The average price received for gas excluding certain production payment
volumes was $2.67 in 1997 as compared to $2.11 in 1996.

     Lease operating expenses ("LOE") related to oil and gas properties
decreased $349,000, attributable in part to improved efficiencies in the
Company's Canadian operations. Lifting costs per equivalent barrel increased in
1997 to $5.29 from $5.10 in 1996, as a result of decreased gas production from
Keystone. Interest expense increased $221,000 as a result of the increased
outstanding bank debt during 1997.


                 THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
                 --------------------------------------------
                       THREE MONTHS ENDED JUNE 30, 1996
                       --------------------------------

     The Company recorded net income before dividends of $55,000 in 1997 as
compared to net income of $938,000 before dividends in 1996.  The decrease in
net income was attributable primarily to the gain on sale of oil and gas
properties recognized in 1996 as well as lower margins on pipeline sales in
1997.

     Pipeline sales increased $4,836,000 in 1997 as compared to 1996, but were
offset by an increase in natural gas purchases of $5,264,000.  The increase in
sales and purchases is due primarily to the increase in volumes delivered to a
major customer of Onyx.  Gross margin decreased to $1,028,000 in 1997 as
compared to $1,456,000 in 1996.

     Revenues from oil and gas sales decreased $194,000 in 1997 as compared to
1996.  Oil production increased to 165,000 barrels in 1997 as compared to
143,000 barrels in 1996, resulting in a $473,000 increase in sales.  The Company
has begun realizing production from the new wells drilled in the first quarter
of 1997.  The average price received for oil was $19.34 in 1997 as compared to
$21.11 in 1996, resulting in a $293,000 decrease in sales.  Gas production in
1997 decreased to 1,171,000 Mcf as compared to 1,475,000 Mcf in 1996, resulting
in a $484,000 decrease in sales.  The decrease in gas production is attributable
primarily to the reduced allowable production from Keystone.  The average price
received for gas increased to $1.69 in 1997 as compared to $1.59 in 1996,
resulting in a $111,000 increase in sales.  The average price received for gas
excluding certain production payments volumes was $2.17 in 1997 as compared to
$2.14 in 1996.

     Lease operating expenses related to oil and gas properties decreased
$289,000 reflecting lower operating costs in the Company's U.S. operations.
Lifting costs per equivalent barrel decreased in 1997 to $5.24 from $5.60 in
1996, primarily as a result of the increased oil production from the Company's
drilling program.

     Interest expense increased $134,000 as a result of the increased
outstanding bank debt during 1997.  The effective tax rate increased to 36% in
1997 from 30% in 1996 due to the payment of provincial taxes in Canada during
1997.

                                       9
<PAGE>
 
                                   PART II.

ITEM 5.   OTHER INFORMATION

     On July 10, 1997, the Company entered into an agreement to sell it's entire
50% membership interest in Onyx Pipeline Company, L.C. and its affiliates
(together "Onyx").  The transaction was closed on July 31, 1997, and is
effective June 30, 1997.  The proceeds consist of a $6.0 million sales price
plus a $1.8 million repayment to the Company for advances formerly made to Onyx
for pipeline construction and other costs.  The Company reduced its domestic
long term debt by $7.8 million, concurrently, and will recognize a pre-tax book
gain of approximately $6.0 million ($0.35 per common share) in the third
quarter.

     The following unaudited pro forma condensed balance sheet has been prepared
to reflect the sale transaction as of June 30, 1997. This pro forma condensed
balance sheet should be read in conjunction with the other financial statements
and notes thereto included elsewhere in this Form 10-Q.

<TABLE>
<CAPTION>
 
                                                                   June 30, 1997
                                                                   -------------
<S>                                                                <C>
PRO FORMA                                   
BALANCE SHEET:                              
                                            
ASSETS:                                     
 Cash and cash equivalents                                           $ 2,240,000
 Receivables and other current assets                                  4,569,000
                                                                     -----------
  Total current assets                                                 6,809,000
                                            
 Net property and equipment at cost                                   73,573,000
  Other assets                                                         5,329,000
                                                                     -----------
                                                                     $85,711,000
                                                                     ===========
                                            
                                            
LIABILITIES AND SHAREHOLDERS' EQUITY:       
 Accounts payable and accrued expenses                               $ 6,586,000
 Preferred stock dividends payable                                       311,000
                                                                     -----------
  Total current liabilities                                            6,897,000
                                            
 Long-term debt                                                       23,700,000
 Deferred revenue                                                     11,544,000
 Convertible subordinated notes                                        5,000,000
 Deferred federal income taxes                                         6,038,000
 Other liabilities                                                       235,000
 Exchangeable convertible preferred stock                             20,000,000
 Shareholders' equity                                                 12,297,000
                                                                     -----------
                                                                     $85,711,000
                                                                     ===========
 
</TABLE>

                                       10
<PAGE>
 
     The following unaudited pro forma condensed statements of operations have
been prepared as if the sale transaction had occurred on January 1, 1996 and
that the proceeds from the sale had been used to retire domestic long-term bank
debt. These statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Form 10-Q. Management
believes that the unaudited results of operations are 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 to develop
existing leases and to acquire additional oil and gas properties.

<TABLE>
<CAPTION>
 
                                                     Year Ended     Six Months Ended
                                                  December 31,1996   June 30, 1997
                                                  ----------------  ----------------
PRO FORMA
STATEMENTS OF OPERATIONS:
<S>                                               <C>               <C>
 
REVENUES:
 Oil and gas sales                                     $23,748,000       $11,464,000
 Pipeline sales                                          3,250,000         3,049,000
 Interest and other                                        654,000           350,000
 Gain on sale of properties                              1,037,000                 -
                                                       -----------       -----------
                                                        28,689,000        14,863,000
 
COSTS AND EXPENSES:
 Oil and gas lease operations                            8,675,000         4,190,000
 Natural gas purchases and pipeline operations           2,853,000         2,770,000
 Depletion, depreciation and amortization                6,636,000         3,303,000
 General and administrative                              4,235,000         2,212,000
 Interest                                                1,879,000         1,122,000
 Foreign currency transaction loss                          40,000            41,000
                                                       -----------       -----------
                                                        24,318,000        13,638,000
                                                       -----------       -----------
 
Net income before income taxes and dividends             4,371,000         1,225,000
 
Income tax expense                                       1,408,000           399,000
                                                       -----------       -----------
 
Net income                                               2,963,000           826,000
 
Dividends on preferred stock                             1,600,000           800,000
                                                       -----------       -----------
 
Net income available to common shareholders            $ 1,363,000       $    26,000
                                                       ===========       ===========
 
Net income available per common share                  $      0.08       $      -
                                                       ===========       ===========
 
</TABLE>

                                       11
<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:  August 13, 1997                         /s/ Fred Cantu
      ----------------                        -------------------------
                                               Fred Cantu
                                               Treasurer and
                                               Chief Financial Officer

                                       12