As filed with the Securities and Exchange Commission on December 19, 1996

                                                     Registration No.-----------
--------------------------------------------------------------------------------
                                UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                              --------------------
                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                  PANACO, Inc.
             (Exact name of registrant as specified in its charter)

       Delaware                        1311                     43-1593374
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
 incorporation or organization)  Classification Code Number) Identification No.)

                         1050 West Blue Ridge Boulevard
                                 PANACO Building
                        Kansas City, Missouri 64145-1216
                                 (816) 942-6300
               (Address, including ZIP code, and telephone number,
        including area code, of registrant's principal executive offices)
             ------------------------------------------------------

                                   Copies to:

    Steven H. Goodman, Esq.          Louis J. Bevilacqua, Esq.
    Shughart Thomson & Kilroy, P.C.  Cadwalader, Wickersham & Taft
    Twelve Wyandotte Plaza           100 Maiden Lane
    120 West 12th Street             New York, New York  10038
    Kansas City, Missouri 64105

    As soon as practicable after Effectiveness of this Registration Statement
       (Approximate date of commencement of proposed sale to the public)

If any of the  securities  being  registered on this Form are to be offered on a
delayed or continuous  basis  pursuant to Rule 415 under the  Securities  Act of
1933  check  the  following:  [ ] If this form is filed to  register  additional
securities  for an offering  pursuant to Rule 462(b) under the  Securities  Act,
please  check  the  following  box and  list  the  Securities  Act  registration
statement number of the earlier  effective  registration  statement for the same
offering: [ ] If this form is a post-effective  amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration  statement number of the earlier registration statement for the
same  offering:  [ ] If  delivery  of this  prospectus  is  expected  to be made
pursuant to Rule 434, please check the following: [ ]
<TABLE>

                                          Calculation of Registration Fee
<CAPTION>
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
    Title of Each Class                            Proposed Maximum          Proposed Maximum
    of Securities to be        Amount to be            Offering                 Aggregate                 Amount of
        Registered            Registered (1)     Price per Share (2)          Offering Price          Registration Fees
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
<S>                             <C>      
     Common Stock, par          9,663,801
  value, $.01 per share.          Shares                $5.50                 $53,150,905.00              $16,106.33
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
</TABLE>

     (1)  Based  upon  the  maximum  number  of  shares  that may be sold in the
transactions described herein.
     (2) Estimated in accordance with Rule 457(g) & (c).
                        --------------------------------

         The Registrant hereby amends this  Registration  Statement on such date
or dates as may be necessary to delay its  effective  date until the  Registrant
shall file a further amendment which specifically  states that this Registration
Statement shall  thereafter  become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the  Registration  Statement shall be become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.
<PAGE>



                              CROSS-REFERENCE SHEET
                    Pursuant to Item 501(b) of Regulation S-K

                        Showing Location in Prospectus of
                    Information Required by Items of Form S-1
<TABLE>
<CAPTION>

Number and Caption                                                   Location in Prospectus

                                        
1.   Forepart of the Registration Statement
<S>     <C>    <C>    <C>    <C>    <C>    <C>
         and Outside Front Cover Page of
         Prospectus...........................................       Front Cover Page
2.   Inside Front and Outside Back Cover
         Pages of Prospectus..................................       Inside Front Cover Page; Other Matters
3.   Summary Information, Risk Factors and
         Ratio of Earnings to Fixed Charges...................       Prospectus Summary; Risk Factors
4.   Use of Proceeds..........................................       Use of Proceeds
5.   Determination of Offering Price..........................       Use of Proceeds
6.   Dilution.................................................       *
7.   Selling Security Holders.................................       Principal Shareholders; Selling Shareholders
8.   Plan of Distribution.....................................       Underwriting
9.   Description of Securities to be Registered...............       Front Cover Page; Description of
                       Capital Shares and Other Securities
10.  Interests of Named Experts and Counsel                          Legal Matters; Experts
11.  Information With Respect to the Registrant...............       Front Cover Page; Prospectus Summary;
                                                                     The Company; Selected Financial Data;
                                                                     Management's Discussion and Analysis of
                                                                     Financial Condition and Results of
                                                                     Operations; Management; Description of
                                                                     Capital Shares and Other Securities;  Index
                                                                     to Financial Statements
12.  Disclosure of Commission Position on
       Indemnification for Securities Act Liabilities.........       Other Matters


</TABLE>

*Omitted because answer is not applicable or negative.


                                

<PAGE>






     Information  contained  herein is subject to  completion  or  amendment.  A
registration  statement  relating  to these  securities  has been filed with the
Securities  and Exchange  Commission.  These  securities may not be sold nor may
offers to buy be accepted prior to the time the registration  statement  becomes
effective.  This  prospectus  shall  not  constitute  an  offer  to  sell or the
solicitation of an offer to buy nor shall there be any sale of these  securities
in any State in which such offer,  solicitation  or sale would be unlawful prior
to registration or qualification under the securities laws of any State.

     Subject to Completion, Dated December 19, 1996.


















                                

<PAGE>


PROSPECTUS
(Subject  to Completion)

                                                 [LOGO]


                                              8,403,305 Common Shares

                                                -------------------

     Of the up to 8,403,305 Common Shares, par value $.01 per share (the "Common
Shares"),  offered hereby (this  "Offering"),  6,000,000 Common Shares are being
offered  and sold by the Company and  2,403,305  are being sold  directly by the
Selling Shareholders.  See "Selling  Shareholders." The Company will not receive
any proceeds from the sale of Common Shares by the Selling Shareholders.
     The Common Shares are traded on the NASDAQ National Market under the symbol
"PANA".  On December 18, 1996, the last reported sale price of the Common Shares
was $5.125 per share. See "Description of Capital Stock Market Prices".
     The Common  shares are being  offered  through the  Underwriters  on a best
efforts basis.  The Offering will terminate on , unless  extended by the Company
and the Underwriters.

        An investment in the Common Shares offered hereby involves a high
            degree of risk. See "Risk Factors" beginning on page 5 for
         certain considerations relevant to an investment in the Common
                                     Shares.

  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
      SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
            PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
            ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>

-------------------------------- ---------------------- ------------------- ------------------ ---------------------
                                                                                                 Proceeds to the
                                       Price to            Underwriting        Proceeds to           Selling
                                        Public             Discount (1)        Company(2)        Shareholders (3)
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
<S>                              <C>                                                            
Per Share .........              $                      $                   $                  $
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
Total (4) ...........            $                      $                   $                  $
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
</TABLE>

     (1) The Company has agreed to indemnify the  Underwriters  against  certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting".
     (2) Before deducting expenses payable by the Company, estimated to be $ .
     (3)  Before  deducting  expenses  payable  by  the  Selling   Shareholders,
estimated to be $ .
     (4) The Company has granted the Underwriters a 30-day option to purchase up
to  an  aggregate  of  1,260,496   additional  Common  Shares  solely  to  cover
over-allotments, if any. If such option is exercised in full, the total Price to
Public,  Underwriting  Discount  and  Proceeds to Company  will be $ , $ and $ ,
respectively. See "Underwriting".
                              --------------------

         The shares of Common Shares are offered by the Underwriters, subject to
prior sale,  when, as and if issued to and accepted by them,  subject to certain
other  conditions.  The  Underwriters  reserve the right to withdraw,  cancel or
modify such offer and reject  orders in whole or in part.  It is  expected  that
delivery of the shares of Common Shares offered hereby will be made in New York,
New York on or about , 1996.

                          Nolan Securities Corporation

                      The date of this Prospectus is , 1996

IN  CONNECTION  WITH THE OFFERING,  THE  UNDERWRITERS  MAY  OVER-ALLOT OR EFFECT
TRANSACTIONS  WHICH  STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT  OTHERWISE  PREVAIL IN THE OPEN  MARKET.  SUCH
TRANSACTIONS  MAY BE EFFECTED ON THE NASDAQ  NATIONAL  MARKET,  IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. 
<PAGE>

                               PROSPECTUS SUMMARY

     The  following  summary is qualified  in its entirety by the more  detailed
information and consolidated  financial  statements and notes thereto  appearing
elsewhere in this Prospectus.  Unless the context otherwise requires, references
in  this  Prospectus  to  the  "Company"   shall  mean  PANACO,   Inc.  and  its
predecessors.  Unless otherwise noted herein, the information  contained in this
Prospectus  assumes  the  Underwriters'   over-allotment   option  will  not  be
exercised.  An investment in the Common Shares  offered  hereby  involves a high
degree of risk.  Investors should  carefully  consider the information set forth
under the heading "Risk  Factors".  See "Glossary of Selected Oil and Gas Terms"
for the definitions of certain terms used in this Prospectus.

                                   The Company

     PANACO,  INC.  (the  "Company")  is a  Delaware  corporation,  incorporated
October 4, 1991.  When used herein the word "Company"  includes its  predecessor
Pan  Petroleum  MLP,  which merged into the Company on  September  1, 1992.  The
Company is in the oil and gas  business,  acquiring,  developing  and  operating
offshore oil and gas  properties  in the Gulf of Mexico.  Including the recently
acquired  Amoco  Properties  (as defined  herein) and excluding the Bayou Sorrel
Field (as defined herein) which was recently sold, the Company owned oil and gas
properties  containing,  as of November 1, 1996,  Proved  Reserves of 2,920,000
Bbls of oil and 64,925,000 Mcf of gas. The SEC 10 Value of such Proved  Reserves
as of  September  1, 1996 was  $128,092,000.  See "Risk  Factors - Estimates  of
Reserves and Future Net  Revenue."  The Company  operates 52 offshore  wells and
owns interests in 71 offshore wells operated by others.  It operates nine of the
twenty-five  offshore  blocks  in which it owns an  interest.  In  addition  the
Company owns and operates some onshore properties which generate less than 3% of
its  revenues.  For a description  of the  properties  owned and the  activities
conducted by the Company, see "The Company" and "Property."

     Common  Shares are quoted on the  NASDAQ-National  Market  under the symbol
"PANA".

     The Company's Board of Directors  consists of nine persons,  three of which
are employees of the Company. See "Management - Officers and Directors."

     The Company's  headquarters  are located at 1050 West Blue Ridge Boulevard,
PANACO Building,  Kansas City, Missouri 64145-1216,  and its telephone number at
such offices is (816)942-6300, FAX (816) 942-6305. The Houston office is located
at 1100 Louisiana,  Suite 5110,  Houston,  Texas  77002-5220,  and the telephone
number is (713) 652-5110, FAX (713) 651-0928.

                                Business Strategy

     The Company's  objective is to enhance  shareholder value through sustained
growth in its reserve  base,  production  levels and  resulting  cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies  properties that may be acquired preferably
through negotiated transactions or, if necessary,  sealed bid transactions.  The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs,  have an established  production history and are candidates
for  exploitation.  Geologically  complex  fields with multiple  reservoirs  are
fields in which there are  multiple  reservoirs  at  different  depths and wells
which   penetrate  more  than  one  reservoir,   that  have  the  potential  for
recompletion  in more than one  reservoir.  Once  properties  are acquired,  the
Company  focuses  on  reducing  operating  costs  and  implementing   production
enhancements through the application of technologically  advanced production and
recompletion  techniques.  Over the past  five  years,  the  Company  has  taken
advantage  of  opportunities  to  acquire  interests  in a number  of  producing
properties which fit these criteria.
<PAGE>



                               Recent Developments

Amoco Acquisition

     On October 8, 1996, the Company  closed on its  acquisition of interests in
six offshore fields from Amoco Production  Company for $40.4 million (the "Amoco
Acquisition").  In  consideration  for such interests,  the Company issued Amoco
2,000,000  Common Shares and paid the sum of $32 million in cash.  The interests
acquired  include (1) a 33.3%  working  interest in the East Breaks 160 Field (2
Blocks)  and a 33.3%  interest in the High  Island 302 Field,  both  operated by
Unocal Corporation;  (2) an average 50% interest in the High Island 309 Field (2
Blocks),  a 12%  interest  in the High  Island  330 Field (3  Blocks)  and a 12%
interest  in the High  Island 474 Field (4  Blocks),  all  operated  by Phillips
Petroleum  Company;  and (3) a 12.5%  interest in the West  Cameron 180 Field (1
Block)  operated  by  Texaco  (collectively  the  "Amoco  Properties").  Current
production,  for the  interests  acquired,  is 680 barrels of oil per day and 12
MMcf of natural gas per day. See "Amoco Acquisition."

Explosion and Fire

     The Company experienced an explosion and fire on April 24, 1996 at its Tank
Battery  #3 located in the  Company's  West Delta oil and gas fields  (the "West
Delta Fields"), resulting in production from the West Delta Fields being shut-in
through  October 7, 1996,  when  production was resumed.  The loss of 67 days of
production  in the second  quarter and the entire third  quarter was a principal
contributor  to the loss of $.19 per share for the second and third  quarters of
1996. Until final resolution of the total repair costs the insurance  company is
advancing  funds to assist  the  Company  in  paying  for  repairs.  There is no
assurance  that  the  Company's  repair  costs  will be  fully  covered  by such
insurance or that the Company's  insurance  carriers may not seek reimbursement
of some of their advances.  The Company is considering  filing suits against the
employers of the persons who caused the  incidents.  No  assurance  can be given
that the company will successfully recover any amounts sought in any such suits.
The  repair  expenditures  on Tank  Battery  #3,  with the  delay  in  insurance
advances, also decreased working capital and increased long-term debt.

Sale of Bayou Sorrel

     Effective  September  1, 1996 the  Company  sold its  interest in the Bayou
Sorrel oil and gas field ( the "Bayou Sorrel  Field") to National  Energy Group,
Inc. for $11 million.  The Company received $9 million in cash and $2 million in
shares of National Energy Group,  Inc. common stock. The Company also retained a
3%  overriding  royalty  interest in the deep  rights of the field below  11,000
feet.

                                  The Offering
<TABLE>
<CAPTION>

<S>                                                                   <C>                 
Common Shares offered by the Company................................. 6,000,000 shares (a)

Common Shares offered by the Selling Shareholders.................... 2,403,305 shares

Common Shares offered hereby......................................... 8,403,305 shares (a)

Common Shares to be outstanding after this Offering..................20,350,255 shares (a)(b)

Use of Proceeds......................................................For repayment of existing long term debt,
                                                                     development of existing oil and gas
                                                                     properties and acquisition of additional oil
                                                                     and gas properties.
</TABLE>

NASDAQ National Market Symbol........................................PANA

     (a)  Exclusive  of the  Underwriters'  Over-Allotment  Option of  1,260,496
shares.
     (b)  Excludes   289,365  Common  Shares   issuable  upon  the  exercise  of
outstanding  warrants,  2,060,606  issuable upon the conversion of the Tranche A
Convertible  Subordinated  Notes, and up to 840,330 Common Shares which would be
issuable upon the exercise of warrants to be issued to the  Underwriters  should
all of the Common  Shares  offered  hereby be sold,  assuming no exercise of the
Underwriters' Over- Allotment Option.
<PAGE>

                             Summary Financial Data

     The following  table sets forth  summaries of certain  selected  historical
financial  and reserve  information  for the Company as of the dates and for the
periods  indicated.  Effective December 31, 1995, the Company changed its method
of  accounting  for oil and gas  operations  from the full  cost  method  to the
successful  efforts  method.  Prior periods have been restated to give effect to
this change. Future results may vary significantly from the amounts reflected in
the  information  set forth  hereafter  because of, among other reasons,  normal
production declines,  acquisitions, and changes in the price of oil and gas. See
"Risk Factors - Estimates of Reserves and Future Net Revenues" and "Risk Factors
- Recent Changes in Oil and Gas Prices."

<TABLE>
<CAPTION>
                                  As of and For the Nine Months               As of and For the Year
                                        Ended September 30,                      Ended December 31,
                                            (unaudited)

                                      1996(a)          1995             1995            1994              1993
                                 ---------------  --------------  ---------------- ------------------  -----------
Operations Data
<S>                              <C>                <C>             <C>              <C>               <C>       
Oil & Gas Sales...............   $    13,257,000    13,660,000      18,447,000       17,338,000        12,605,000
Funds Provided By
      Operations(b)...........         6,782,000     7,121,000       9,314,000       11,101,000         6,554,000
Exploration Expenses..........          0            2,174,000       8,112,000         0                 0
Provision for losses and
(gains) on disposition of
and write-down of asset.......          0             0                751,000        1,202,000         3,824,000
Depletion, depreciation &
        amortization..........         4,981,000     6,277,000       8,064,000        6,038,000         4,288,000
Net income (loss).............         (618,000)   (2,492,000)     (9,290,000)        1,115,000       (3,986,000)
Net Income (loss) per share               (0.05)         (.21)           (.81)              .11             (.53)

Balance Sheet Data
Oil and gas properties, net...   $    25,489,000     21,515,000     29,485,000       23,945,000        19,183,000
Total assets..................        44,444,000     26,795,000     36,169,000       29,095,000        24,432,000
Long-term debt................        25,137,000      8,865,000     22,390,000       12,500,000        12,465,000
Stockholders' equity..........        10,498,000     15,335,000      9,174,000       14,882,000         8,744,000
Book value per share..........   $           .85           1.38            .80             1.46              1.07

Oil and Gas Data
Production:
Oil and condensates (Bbls).......        203,000        122,000        170,000          137,000           180,000
Gas (Mcf).....................         4,590,000      7,578,000      9,850,000        8,139,000         5,586,000
Estimated Proved
      Reserves:
Oil and condensates (Bbls)(c)....      2,920,000       ---             900,000          943,000           745,000
Gas (Mcf)(c)..................        64,925,000       ---          46,711,000       41,582,000        43,696,000
SEC 10 Value(c)................  $   128,092,000       ---          72,432,000       47,159,000        58,185,000
</TABLE>

     (a) Results for the period ended  September  30, 1996,  were  substantially
affected by the  explosion  and fire.  See  "Recent  Explosion  and Fire".  Such
results include the results of operations through August 31 for the Bayou Sorrel
Field, which the Company sold effective September 1.
     (b) Funds provided by operations is revenues less lease operating  expenses
and production and ad valorem taxes.
     (c) Reserve information was not prepared as of September 30, 1996 and 1995.
Information  shown  is from a  reserve  report  prepared  by the  Company  as of
November 1, 1996, which includes the recent effect of
                                                         

<PAGE>



the Amoco  Acquisition  and excludes the Bayou Sorrel Field,  which was recently
sold.  No reserve  reports were  prepared as of November 1, 1996 by  independent
petroleum  engineers.  The reserve  information for the years ended December 31,
1995,  1994 and 1993 was derived by the  Company  from  reports  prepared by the
Company's  independent  petroleum  engineers.  See "Risk  Factors - Estimates of
Reserves and Future Net Reserves."

                                  RISK FACTORS

      Prospective  investors  should  carefully  read this entire  document  and
should give particular attention to the following risk factors.

Large Shareholders

      Richard A. Kayne  controls  four of the six lenders who  invested  through
Kayne,   Anderson  Investment   Management,   Inc.  with  respect  to  the  1993
Subordinated  Notes (the "1993  Subordinated  Notes").  These four  lenders  own
694,047 of the 816,526 shares acquired upon exercise of warrants held by the six
lenders. Mr. Kayne also controls five of the eight lenders on the 1996 Tranche A
Convertible  Subordinated  Notes (the "1996 Tranche A  Convertible  Subordinated
Notes"),  which could acquire  1,466,667 of the 2,060,606  shares  issuable upon
conversion  of such Notes.  See "The Company - Funding of Business  Activities -
Borrowings and Obligations," for information with respect to these transactions.
Carl C. Icahn  controls  High River  Limited  Partnership  which owns  1,095,000
shares.  Because of the substantial holdings of these shareholders,  they may be
able to  influence  the  outcome  of votes on  various  matters,  including  the
election  of  directors,   extraordinary  corporate  transactions,  and  certain
business combinations. See "Principal Shareholders".

Anti-takeover Provisions

      Documents  governing the Company's  affairs provide for or contain several
procedures,  provisions, and plans designed to reduce the likelihood of a change
in the  management or voting  control of the Company  without the consent of the
then incumbent  Board of Directors,  including a classified  Board of Directors,
"fair price" provisions,  the ability of the Board of Directors to issue classes
or series of preferred  shares,  restrictions  on the ability of shareholders to
call  meetings  and propose  business  at  meetings of the common  shareholders,
restrictions  on the ability of  shareholders to approve actions or proposals by
written consent rather than at meetings and  acceleration of vesting  provisions
in stock award and option plans upon a change in control.  These  provisions may
have the effect of reducing  interest in the Company as a potential  acquisition
target or  encouraging  persons  considering  an  acquisition or takeover of the
Company to negotiate  with the Company's  Board of Directors  rather than pursue
non-negotiated  acquisition or takeover  attempts,  although no assurance can be
given that they will have that effect.

      In 1995, the Company  adopted a Shareholder  Right Plan which may have the
effect of discouraging non-negotiated takeover attempts.

      In  addition,  the  Company  chose to be  governed  by Section  203 of the
Delaware General  Corporation Law, which prohibits business  combination between
the Company and any interested  shareholder of the Company for a period of three
years  following  the date on which that  shareholder  became an owner of 15% or
more of the  outstanding  voting shares of the Company unless certain  statutory
exceptions are satisfied.  Section 203 may also have the effect of  discouraging
non-negotiated takeover attempts.

      For a discussion of documents and provisions with potential  anti-takeover
effects,  see "The  Company  Funding of Business  Activities  -  Borrowings  and
Obligation," "Management - Other Compensation Arrangements - Long-term Incentive
Plan," "Description of Capital Shares - Certain  Anti-takeover  Provisions," and
"Description of Capital Shares - Shareholder Rights Plan."




                                                         

<PAGE>



Future Issuances of Shares

     Of the 40,000,000 Common Shares,  14,350,255 are presently issued,  leaving
25,649,745  shares  which  may be  issued  without  further  approval  from  the
shareholders.  If the  Company  issues  additional  Common  Shares or  preferred
shares,  the  interest in the assets,  liabilities,  cash flows,  and results of
operations  of the  Company  represented  by the Common  Shares may be  diluted.
Additional  issuances  may occur for many  reasons,  including  pursuant  to the
Company's Long-term Incentive Plan described in "Management - Other Compensation
Arrangements  -  Long-term  Incentive  Plan."  As of the date  hereof  there are
outstanding warrants to acquire 289,365 Common Shares, exercisable at prices per
share  ranging  from $2.00 to  $2.375.  In  connection  with this  Offering  the
Underwriters will receive warrants to acquire up to 840,330 Common Shares at the
price at which Common Shares are sold hereunder,  which warrants are exercisable
any time within two years of the date of this  Prospectus.  The exercise of such
warrants  would likely occur  primarily  when the exercise  prices are below the
then current  market  prices.  After the  expiration  of 180 days  following the
conclusion of this offering,  the Tranche A Convertible  Subordinated  Notes are
convertible into 2,060,606 Common Shares, at $4.125 per share.

General Market Conditions

       Revenues  generated  from the oil and gas  operations  of the Company are
highly  dependent  on the future  prices of and demand for oil and gas.  Various
factors beyond the control of the Company affect prices of oil, gas, and natural
gas liquids,  including the worldwide  supply of oil and gas, the ability of the
members  of  OPEC  to  agree  to and  maintain  production  controls,  political
instability or armed  conflict in  oil-producing  regions,  the price of foreign
imports,   the  levels  of  consumer  demand,  the  price  and  availability  of
alternative fuels and changes in existing  regulation.  Prices for oil, gas, and
natural gas  liquids  have  fluctuated  greatly  during the past few years,  and
markets for oil,  natural gas, and natural gas liquids  continue to be volatile.
The  currently  unsettled  energy  markets  make it  particularly  difficult  to
estimate  future  prices of oil,  natural gas, and natural gas liquids,  and any
assumptions  about future prices may prove  incorrect.  In addition,  demand for
natural gas and fuel oil can  fluctuate  significantly  with seasonal and annual
variations in weather  patterns because those products are used in large part as
heating  fuels.  See "Risk  Factors -  Estimates  of  Reserves  and  Future  Net
Revenues" and "The Company - Competition, Markets and Regulation".

Hedging of Production

      The Company's lenders have generally required it to reduce its exposure to
the  volatility  of crude oil and natural gas prices by hedging a portion of its
production.  In a typical hedge transaction,  the Company will have the right to
receive  from the  counter  party to the hedge,  the  excess of the fixed  price
specified in the hedge over a floating  price. If the floating price exceeds the
fixed price,  the Company is required to pay the counter  party this  difference
multiplied  by the  quantity  hedged,  regardless  of whether  the  Company  has
sufficient   production  to  cover  the  quantities   specified  in  the  hedge.
Significant  reductions in  production at times when the floating  price exceeds
the fixed price  could  require  the  Company to make  payments  under the hedge
agreements  even though  such  payments  are not offset by sales of  production.
However,  the Company  hedges up to, but not more than,  50% of its  anticipated
production.  Hedging  will also  prevent the  Company  from  receiving  the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.

Historical Operating Losses

      The Company has sustained losses in two of the past three years,  1993 and
1995.  No  assurance  may be given that the Company  will be  profitable  in the
future.  The Company  sustained losses in 1993 and 1995 primarily as a result of
an accounting  change in 1995 that required  property  write-downs in both years
and  expensing of three  unsuccessful  exploratory  wells in 1995.  On April 24,
1996,  the  Company  experienced  an  explosion  and fire at its West Delta Tank
Battery #3 which has been the primary  factor in a loss  through  September  30,
1996 of $.05 per share. As such, the Company can not assure a profit will result
for the year ended  December 31, 1996.  Due to the change in accounting  method,
any future  unsuccessful  exploratory  wells,  as well as adverse  events beyond
management's control, such as the fire, could also result in losses.

                                                         

<PAGE>



See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and the  consolidated  financial  statements  and the related notes
thereto included elsewhere herein.

Risks of Development, Exploration, and Other Activities

       The Company  engages in exploration  activities on  Undeveloped  Acreage,
drills development wells, and reworks and recompletes wells on the properties it
owns as well as on  properties  it may  acquire,  and  anticipates  that it will
expend a significant portion of its net cash flow for those activities. See "The
Company -  Acquisition,  Development  and Other  Activities."  Those  activities
involve a significant  degree of risk. For example,  the drilling of exploratory
and development wells involves risks such as encountering  unusual or unexpected
formations,  pressures,  and other  conditions  that could result in the Company
incurring  substantial losses. In addition,  all drilling is subject to the risk
of dry holes or a failure to produce oil or gas in  commercial  quantities.  The
degree of risk will vary depending on the geological features of the area.

Other Operating Risks

       The  Company  is also  subject  to all the  operating  hazards  and risks
normally incident to drilling for or producing,  processing and transporting oil
and gas, including blowouts, pollution, and fires, each of which could result in
damage to or destruction of oil and gas wells, producing formations, production,
pipeline,  or  processing  plants,  or persons or other  property.  Although the
Company  maintains  insurance  coverage  that is similar to that  maintained  by
comparable companies in the oil and gas industry, there can be no assurance that
the coverage will be adequate to insure fully against all risks.

Replacement of Reserves

       In general,  the volume of production from natural gas and oil properties
declines as reserves  are  depleted.  Except to the extent the Company  acquires
properties  containing  proved reserves or conducts  successful  development and
exploration activities, or both, the proved reserves of the Company will decline
as reserves are produced.  The Company's  future  natural gas and oil production
is,  therefore,  highly  dependent  upon its  level of  success  in  finding  or
acquiring  additional  reserves.  The business of exploring  for,  developing or
acquiring reserves is capital intensive. To the extent cash flow from operations
is reduced and external  sources of capital become limited or  unavailable,  the
Company's  ability to make the  necessary  capital  investments  to  maintain or
expand its asset base of natural  gas and oil  reserves  could be  impaired.  In
addition,  there can be no  assurance  that the  Company's  future  development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.

Estimates of Reserves and Future Net Revenues

      Numerous  uncertainties exist in estimating  quantities of Proved Reserves
and future net  revenues.  Oil and gas  engineering  is a subjective  process of
estimating  underground  accumulations  of oil and gas that  cannot be  measured
exactly.  The  accuracy  of any  reserve  estimate is a result of the quality of
available  geologic  and  engineering  data,  geological   interpretation,   and
judgment. Actual results of drilling,  testing, and production after the date of
an estimate  may  indicate the need to revise the  estimate.  In  addition,  the
prices used affect the  calculation  of  quantities  of reserves  and future net
revenues.  A higher price can generally  result in a longer  estimated  economic
life for reserves and can increase  estimated  future net revenues  because both
the estimated reserves are larger and the price per reserve unit (Bbl or Mcf) is
higher.  Reserve  reports as of November 1, 1996 were  prepared by the  Company.
Reserve  information  for the years ended  December 31, 1995,  1994 and 1993 was
derived by the  Company  from  reports  prepared  by the  Company's  independent
petroleum engineers.

      SEC 10 Values presented in certain disclosures of reserves and the present
value of estimated future net revenues represent a reporting  convention adopted
by the SEC that uses  prices at the date of the reserve  presentation  and a 10%
discount rate. While SEC 10 Values provide a common basis for comparing oil and

                                                         

<PAGE>



gas companies subject to the rules and regulations of the SEC, the use of prices
on the  presentation  date may not represent the prices  ordinarily  received or
that will be received for oil and gas because of seasonal price  fluctuations or
other varying market conditions. SEC 10 Values are not necessarily indicative of
future results of operations.  Accordingly,  reserve  estimates set forth herein
may be  materially  different  from  the  quantities  of oil  and gas  that  are
ultimately  recovered,  and  estimates  of  future  net  revenues  may  also  be
materially different from the net revenues that are ultimately received.


Acquisitions

        Although  acquisitions  of oil and gas properties  with Proved  Reserves
involve less risk than are inherent in  exploratory or  developmental  drilling,
the criteria on which decisions to acquire properties are usually based (such as
the  estimates  of reserve  quantities  and the  projections  of future rates of
production,  future  development and production costs, and prices to be received
on sale)  may prove to be  incorrect,  and  consequently  adversely  affect  the
profitability of an acquisition.  The Company intends to continue  acquiring oil
and gas properties.  Although the Company performs a review of the properties to
be acquired that it believes is consistent with industry practices, such reviews
are  inherently  incomplete.  Generally,  it is not feasible to review  in-depth
every individual property involved in each acquisition.  Ordinarily, the Company
will focus its review  efforts on the  higher-valued  properties and will sample
the remainder.  However,  even an in-depth  review of all properties and records
may not necessarily  reveal existing or potential  problems nor will it permit a
buyer to become sufficiently  familiar with the properties to assess fully their
deficiencies and capabilities.  Inspections may not always be performed on every
facility, and environmental problems are not necessarily observable even when an
inspection is  undertaken.  Furthermore,  the Company must rely on  information,
including  financial,  operating  and  geological  information,  provided by the
seller of the properties without being able to verify fully all such information
and  without  the  benefit of knowing  the  history  of  operations  of all such
properties.

Environmental Risks

       The discharge of oil,  gas, or other  pollutants  into the air,  soil, or
water may give rise to  liability  to the  government  or third  parties and may
require the Company to incur  costs to remedy the  discharge.  Oil or gas may be
discharged in many ways,  including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and  transportation  facilities,
leakage from storage tanks,  and sudden  discharges  from damage or explosion at
processing  plants or oil or gas wells.  Hydrocarbons  tend to degrade slowly in
soil and water, which makes remediation costly, and discharged  hydrocarbons may
migrate  through soil to water  supplies or adjoining  property,  giving rise to
additional  liabilities.  A variety  of federal  and state laws and  regulations
govern the environmental aspects of oil and gas production,  transportation, and
processing and may, in addition to other law,  impose  liability in the event of
discharges  (whether  or  not  accidental),  a  failure  to  notify  the  proper
authorities of a discharge, and other noncompliance with those laws. The Company
has both an offshore  Regional  Spill  Response  Plan  (RSRP) and onshore  Spill
Prevention  Control  Countermeasure  Plans (SPCC).  Environmental  laws may also
affect the costs of the Company's acquisitions of oil and gas properties.

      The Company does not believe that its  environmental  risks are materially
different  from  those  of  comparable  companies  in the oil and gas  industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future,  result in a  curtailment  of  production  or  processing  or a material
increase in the costs of  production,  development,  or exploration or otherwise
adversely affect the Company's operations and financial condition. Pollution and
similar environmental risks generally are not fully insurable.

Governmental Regulation

        The Company's  business is subject to certain  federal,  state and local
laws  and  regulations  relating  to the  exploration  for and  development  and
production of oil and gas, as well as  environmental  and safety  matters.  Such
laws and regulations have generally become more stringent in recent years, often
imposing  greater  liability  on a  larger  number  of  potentially  responsible
parties. Because the requirements imposed by such laws

                                                         

<PAGE>



and  regulations  are frequently  changed,  the Company is unable to predict the
ultimate  cost of  compliance  with such  requirements  and their  effect on the
Company. See "The Company - Competition, Markets, Seasonality and Regulation".

Dependence On Key Personnel

        The success of the Company will depend almost  entirely upon the ability
of a small group of key executives to manage the business of the Company. Should
one or more of these  executives  leave the Company or become  unable to perform
his duties,  no assurance  can be given that the Company will be able to attract
competent new management.  The key executives do not have  employment  contracts
and the Company does not have "key man" life insurance.

                                 USE OF PROCEEDS

      The net  proceeds  to be  received  by the  Company  from  the sale of the
6,000,000  Common  Shares sold hereby  (assuming an offering price of $5.125 per
share)  are  estimated  to be  approximately  $28,598,000  ($37,137,437  if  the
Over-Allotment  Option is exercised  in full) after  deducting  the  anticipated
underwriting  discount and estimated offering  expenses.  The Company intends to
use $5 million to repay the 1993  Subordinated  Notes,  which  carry an interest
rate of 12% (due  December  31,  1999),  and are  repayable  at any time.  These
borrowings were made to finance development  activities.  The Company intends to
also prepay $8.5  million of the  Tranche B Bridge  Loan  Subordinated  Notes of
October 8, 1996,  which carry an interest  rate of 12% until August 8, 1997 (14%
thereafter),  are due October 8, 2003,  and are  prepayable  at any time.  These
funds were borrowed in connection with the Amoco Acquisition.  The remaining net
proceeds of this offering will be used to develop the properties acquired in the
Amoco Acquisition, particularly High Island 474 Field, 309 Field, and 330 Field.
Any further remaining net proceeds will be used for general corporate  purposes,
including further  development of properties owned by the Company in the Gulf of
Mexico, and for further  acquisitions of properties in the Gulf of Mexico deemed
appropriate by  management.  Although the Company  actively  reviews oil and gas
acquisition candidates,  it has not identified any specific acquisitions at this
time,  and no  assurances  can be made that the Company will be able to identify
and consummate  acquisitions  that it deems suitable.  Pending such use, the net
proceeds will be used to pay down the Company's Bank Facility. See "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations-
Liquidity  and  Capital  Resources".  See "The  Company  - Funding  of  Business
Activities - Borrowings and Obligations."

                                 CAPITALIZATION

      The  following  table sets forth the  consolidated  capitalization  of the
Company at November  30,  1996,  and as adjusted to reflect the  issuance of the
Common  Shares  offered by the Company  hereby at an assumed price of $5.125 per
share and the application of the net proceeds  therefrom as described in "Use of
Proceeds".  This  table  should  be read in  conjunction  with the  consolidated
financial  statements  of the Company,  including the notes  thereto,  contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>

                                                                  November 30, 1996
                                                               Actual       As Adjusted
<S>                                                     <C>                 <C>          
Long-term debt (less current maturities)                $    49,000         $      35,500
Stockholders' Equity:
      Preferred shares, $.01 par value, 5,000,000
        shares authorized; none issued or outstanding           ---                   ---
      Common Shares, $.01 par value, 40,000,000
        shares authorized; 14,350,255 shares issued
        and outstanding (20,350,255 as adjusted)(1)(2)          143                   203
      Additional paid-in capital                             31,470                60,008
      Retained Earnings (deficit)                          (10,214)             ( 10,214)
                                                          ---------          ------------
              Total Stockholders' Equity                     21,399                49,997
                                                         ----------          ------------
      Total capitalization                              $    70,399       $        85,497
                                                        ===========        ==============

</TABLE>

(1)   Excludes  289,365 Common Shares  issuable upon the exercise of outstanding
      warrants,  2,060,606  issuable  upon  the  conversion  of  the  Tranche  A
      Convertible  Subordinated  Notes,  and up to 840,330  Common  Shares which
      would be  issuable  upon the  exercise  of  warrants  to be  issued to the
      Underwriters  should  all of the  Common  Shares  offered  hereby  be sold
      (assuming no exercise of the Underwriters' Over-Allotment Option).
(2)   Exclusive of the Underwriters' Over-Allotment Option of 1,260,496 Shares.

<PAGE>

                          PRICE RANGE OF COMMON SHARES

      The Common  Shares are quoted on the National  Association  of  Securities
Dealers, Inc. Automated Quotation System  ("NASDAQ")-National  Market, under the
symbol "PANA".  They commenced  trading  September 21, 1989. The following table
sets  forth,  for the  periods  indicated,  the high and low closing bid for the
Common Shares. Information for fourth quarter 1996 is through December 18th.

                                   1994

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High  3 5/8               4 3/8                  4 5/8               4 1/4
Low   2 9/16              2 15/16                3 1/2               3 5/8

                                   1995

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High 4 5/16               4 7/8                  5 5/16              5
Low  3 5/8                4                      4 1/8               4
                                   1996

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High 5                    4 1/2                  6                   6 3/8
Low  3 7/16               3 11/16                3 3/8               4 9/16

     On December 18, 1996,  the last sale price of the Common Shares as reported
on  the  NASDAQ-  NM  was  $5.125  per  share.  There  are  approximately  6,000
shareholders of the Common Shares.

                                 DIVIDEND POLICY

         The Company has not paid any cash dividends on the Common  Shares.  The
Delaware General  Corporation Law, to which the Company is subject,  permits the
Company to pay  dividends  only out of its  capital  surplus  (the excess of net
assets over the aggregate par value of all outstanding capital shares) or out of
net  profits  for the  fiscal  year in which the  dividend  is  declared  or the
preceding fiscal year. The Bank Facility and the Subordinated  Notes require the
consent of the lenders to any dividends or  distributions  by the Company and to
any purchases by the Company of Common Shares.  The Company retains its earnings
and cash flow to finance the  expansion  and  development  of its  business  and
currently  does not intend to pay  dividends  on the Common  Shares.  Any future
payments of dividends  will depend on, among other factors,  the earnings,  cash
flow, financial condition, and capital requirements of the Company.

                         PRO FORMA FINANCIAL INFORMATION

         On October 8,1996,  the Company  completed the acquisition of interests
in thirteen  offshore  blocks  comprising  six fields in the Gulf of Mexico from
Amoco Production  Company.  Proved reserves at September 1, 1996 attributable to
the Amoco Properties were, net to the Company's interests,  1,953,000 barrels of
oil and  condensate  and 28.6 Bcf of natural gas,  based upon  internal  reserve
reports prepared by the Company. 

                              

<PAGE>



The  purchase  price  for the  assets  acquired  in this  transaction  was $40.4
million, paid by the issuance of 2,000,000 Common Shares and by payment to Amoco
of $32 million in cash.  Concurrently  with this transaction the Company entered
into a new Bank  Facility with First Union  National Bank of North  Carolina and
Banque  Paribas under which its reducing  revolver was increased to $40 million,
with an initial borrowing base of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to Tranche A Convertible and the Tranche B
Bridge Loan  Subordinated  Notes,  provided by lenders  investing through Kayne,
Anderson Investment Management, Inc.

         On July 26, 1995, the Company  completed the  acquisition of all of the
offshore  oil  and  gas  properties  in the  Gulf  of  Mexico  owned  by  Zapata
Exploration  Company,  the "Zapata  Properties." Proved reserves at December 31,
1994  attributable to the oil and gas interests  acquired,  net to the Company's
interest, were 308,000  barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's  independent  petroleum engineers
as of October 1,  1994.  The  purchase  price for the  Zapata  properties  and a
related  receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an  obligation  to pay a  production  payment to Zapata based on future
production. See "Properties - Zapata Properties."

     On November 22, 1996,  the Company  completed  its sale of the Bayou Sorrel
Field  to  National  Energy  Group,  Inc.  for a  sales  price  of $11  million,
consisting of $9,000,000 in cash and $2 million in National  Energy Group,  Inc.
common stock.

         Effective  December  31,  1995,  the  Company  changed  its  method  of
accounting  for oil  and  gas  operations  from  the  full  cost  method  to the
successful efforts method.  The information  provided in the Pro Forma Financial
Statements reflects this change.









<PAGE>
<TABLE>
<CAPTION>


                                  PANACO, Inc.
                        Pro Forma Combined Balance Sheet
                            As of September 30, 1996
                 (Amounts in thousands except number of shares )
                                   (Unaudited)

                                                                       Amoco                         Bayou
                                                     PANACO, Inc.    Properties                      Sorrel
                                                        As of        Pro Forma     PANACO, Inc.    Pro Forma     PANACO, Inc.
ASSETS                                                 9/30/96      Adjustments     Pro Forma     Adjustments     Pro Forma
                                                       (Note 1)       (Note 2)       Combined       (Note 3)       Combined
                                                    ---------------------------------------------------------------------------
CURRENT ASSETS
<S>                                                           <C>                           <C>                           <C> 
      Cash and cash equivalents                               $766                          $766                          $766
      Accounts receivable                                    4,435                         4,435                         4,435
      Accounts receivable - sale of                                                            0                             0
            Bayou Sorrel Field                              11,152                        11,152       (11,152)              0
      Prepaid expenses                                         359                           359                           359
      National Energy Group Common Stock                         0                             0          2,000          2,000
                                                    ---------------               ---------------               ---------------
            Total Current Assets                            16,712                        16,712                         7,560

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
      Oil and gas properties                                98,015         40,400        138,415                       138,415
      Less: accumulated depreciation, depletion
      and amortization                                    (77,526)                      (77,526)                      (77,526)
                                                    ---------------               ---------------               ---------------
            Net Oil and Gas Properties                      20,489                        60,889                        60,889

PROPERTY, PLANT AND EQUIPMENT (net)                            126                           126                           126

OTHER ASSETS
      Restricted deposits                                    1,733                         1,733                         1,733
      Other                                                    384                           384                           384
                                                    ---------------               ---------------               ---------------
            Total Other Assets                               2,117                         2,117                         2,117

TOTAL ASSETS                                               $39,444                       $79,844                       $70,692 

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable                                      $8,809                        $8,809                        $8,809
      Current portion of long-term debt                          0                             0                             0
                                                    ---------------               ---------------               ---------------
            Total Current Liabilities                        8,809                         8,809                         8,809

LONG-TERM DEBT                                              20,137         32,000         52,137        (9,152)         42,985

STOCKHOLDERS' EQUITY
      Preferred stock, ($.01 par value,
            5,000,000 shares authorized;
            no shares issued and outstanding)                    0                             0                             0
      Common stock, ($.01 par value,
            40,000,000 shares authorized and
            14,350,255 issued and outstanding)                 123             20            143                           143
      Additional paid-in capital                            23,090          8,380         31,470                        31,470
      Retained earnings (deficit)                         (12,715)              0       (12,715)                      (12,715)
                                                    ---------------               ---------------               ---------------
            Total Stockholders' equity                      10,498                        18,898                        18,898

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $39,444                       $79,844                       $70,692 

</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                  For the Nine Months Ended September 30, 1996
                  (Amounts in thousands except per share data)
                                   (Unaudited)


                                                                                 Amoco                      Bayou
                                                                               Properties                   Sorrel
                                                                               Pro Forma    PANACO, Inc.  Pro Forma   PANACO, Inc.
                                                                    Amoco       Adjustments  Pro Forma    Adjustments   Pro Forma
                                                   PANACO, Inc.  Properties     (Note 2)     Combined      (Note 3)     Combined
                                                  --------------------------- ------------- ------------ ---------------------------

REVENUES
<S>                                                   <C>            <C>                <C>     <C>          <C>            <C>    
      Oil and gas sales                               $13,257        $11,135            $0      $24,392      ($2,010)       $22,382

COSTS AND EXPENSES
      Lease operating                                   6,049          3,158           108        9,315         (733)         8,582
      Depreciation, depletion and amortization          4,981              0         5,629       10,610         (888)         9,722
      Exploration expenses                                  0              0             0            0             0             0
      Provision for losses and (gains) on
            disposition and write-down of assets          (4)              0             0          (4)             0           (4)
      General and administrative                          573              0             0          573             0           573
      Production and ad valorem taxes                     429              0             0          429         (239)           190
      West Delta fire loss                                500              0             0          500             0           500
                                                  ------------   ------------ ------------- ------------ ---------------------------
            Total                                      12,528          3,158         5,737       21,423       (1,860)        19,563
                                                  ------------   ------------ ------------- ------------ ---------------------------

NET OPERATING INCOME (LOSS)                               729          7,977       (5,737)        2,969         (150)         2,819
                                                  ------------   ------------ ------------- ------------ ---------------------------

OTHER INCOME (EXPENSE)
      Interest expense (net)                          (1,347)              0       (1,389)      (2,736)           588       (2,148)
                                                  ------------   ------------ ------------- ------------ ---------------------------

NET INCOME (LOSS) BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                            (618)          7,977       (7,126)          233           438           671

INCOME TAXES (BENEFIT)                                      0              0             0            0             0             0
 
NET INCOME (LOSS)                                      ($618)         $7,977      $(7,126)         $233          $438          $671 

EARNINGS (LOSS) PER COMMON SHARE                      ($0.05)                                     $0.01                       $0.04 
 
      Weighted average shares outstanding              12,253                        4,061       16,314                      16,314 

Cash flows from operations                                                                      $14,648                     $13,610 
      Cash flows from operations per share                                                        $0.90                       $0.83 

Cash flows                                                                                      $11,339                     $10,889 
      Cash flows per share                                                                        $0.70                       $0.67 


Note:       "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
            "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
            disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, Inc.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1995
                  (Amounts in thousands except per share data)
                                   (Unaudited)


                                                                                                     Pro Forma      PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments     Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
<S>                                                           <C>            <C>          <C>                 <C>        <C>    
      Oil and gas sales                                       $18,447        $3,623       $12,528             $0         $34,598

COSTS AND EXPENSES
      Lease operating                                           8,055         1,460         2,991            314          12,820
      Depreciation, depletion and amortization                  8,064             0             0         10,064          18,128
      Exploration expenses                                      8,112             0             0              0           8,112
      Provision for losses and (gains) on
           disposition and write-down of assets                   751             0             0              0             751
      General and administrative                                  690             0             0              0             690
      Production and ad valorem taxes                           1,078             0             0              0           1,078
           Total                                               26,750         1,460         2,991         10,378          41,579

NET OPERATING INCOME (LOSS)                                   (8,303)         2,163         9,537       (10,378)         (6,981)

OTHER INCOME (EXPENSE)
      Interest expense (net)                                    (987)             0             0        (1,921)         (2,908)

NET INCOME (LOSS) BEFORE INCOME TAXES                         (9,290)         2,163         9,537       (12,299)         (9,889)

INCOME TAXES (BENEFIT)                                              0             0             0              0               0

NET INCOME (LOSS)                                            ($9,290)        $2,163        $9,537      ($12,299)        ($9,889)    

EARNINGS (LOSS) PER COMMON SHARE                              ($0.81)                                                    ($0.64)

      Weighted average shares outstanding                      11,505                                      4,061          15,566

Cash flows from operations                                                                                               $20,700
      Cash flows from operations per share                                                                                 $1.33

Cash flows                                                                                                                $8,990
      Cash flows per share                                                                                                 $0.58


Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1994
                  (Amounts in thousands except per share data)
                                   (Unaudited)


                                                                                                     Pro Forma     PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments    Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
<S>                                                           <C>            <C>          <C>                 <C>       <C>    
      Oil and gas sales                                       $17,338        $7,540       $11,135             $0        $36,013

COSTS AND EXPENSES
      Lease operating                                           5,231         3,317         3,158            444         12,150
      Depreciation, depletion and amortization                  6,038             0             0          8,710         14,748
      Exploration expenses                                          0             0             0              0              0
      Provision for losses and (gains) on
           disposition and write-down of assets                 1,202             0             0              0          1,202
      General and administrative                                  587             0             0              0            587
      Production and ad valorem taxes                           1,006             0             0              0          1,006
           Total                                               14,064         3,317         3,158          9,154         29,693

NET OPERATING INCOME (LOSS)                                     3,274         4,223         7,977        (9,154)          6,320

OTHER INCOME (EXPENSE)
      Interest expense (net)                                  (1,623)             0             0        (1,757)        (3,380)

NET INCOME (LOSS) BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                                    1,651         4,223         7,977       (10,911)          2,940

INCOME TAXES (BENEFIT)                                              0             0             0              0              0

EXTRAORDINARY ITEM-LOSS ON EARLY
      RETIREMENT OF DEBT                                        (536)             0             0              0          (536)

NET INCOME (LOSS)                                              $1,115        $4,223        $7,977      ($10,911)         $2,404

EARNINGS (LOSS) PER COMMON SHARE                                $0.11                                                     $0.17

      Weighted average shares outstanding                      10,039                                      4,061         14,100

Cash flows from operations                                                                                              $22,857
      Cash flows from operations per share                                                                                $1.62

Cash flows                                                                                                              $18,890
      Cash flows per share                                                                                                $1.34


Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1993
                  (Amounts in thousands except per share data)
                                   (Unaudited)


                                                                                                     Pro Forma     PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments    Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
<S>                                                           <C>           <C>           <C>                 <C>       <C>    
      Oil and gas sales                                       $12,605       $11,823       $12,079             $0        $36,507

COSTS AND EXPENSES
      Lease operating                                           5,297         3,696         2,798            294         12,085
      Depreciation, depletion and amortization                  4,288             0             0          8,781         13,069
      Exploration expenses                                          0             0             0              0              0
      Provision for losses and (gains) on
           disposition and write-down of assets                 3,824             0             0              0          3,824
      General and administrative                                  542             0             0              0            542
      Production and ad valorem taxes                             754             0             0              0            754
           Total                                               14,705         3,696         2,798          9,075         30,274

NET OPERATING INCOME (LOSS)                                   (2,100)         8,127         9,281        (9,075)          6,233

OTHER INCOME (EXPENSE)
      Interest expense (net)                                  (1,886)             0             0        (1,641)        (3,527)

NET INCOME (LOSS) BEFORE INCOME TAXES                         (3,986)         8,127         9,281       (10,716)          2,706

INCOME TAXES (BENEFIT)                                              0             0             0              0              0

NET INCOME (LOSS)                                            ($3,986)        $8,127        $9,281      ($10,716)         $2,706    

EARNINGS (LOSS) PER COMMON SHARE                              ($0.53)                                                     $0.23

      Weighted average shares outstanding:                      7,584                                      4,061         11,645

Cash flows from operations                                                                                              $23,668
      Cash flows from operations per share                                                                                $2.03

Cash flows                                                                                                              $19,599
      Cash flows per share                                                                                                $1.68


Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.

</TABLE>


<PAGE>




               NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                              At September 30, 1996

1.       Basis of Presentation

         The Unaudited Pro Forma Balance Sheet presents the combined  effects of
the  acquisition of the Amoco  Properties,  which closed on October 8, 1996, and
the  sale of  Bayou  Sorrel  Field,  closed  on  November  22,  1996,  as if the
transactions had occurred on September 30, 1996. The Company's  balance sheet at
September  30,  1996 is adjusted  to reverse an earnest  deposit  made in August
1996, on the Amoco Acquisition of $5 million.

2.       Amoco Properties Pro Forma Adjustments

         The purchase price for the Amoco Properties was $32 million in cash and
2,000,000  Common  Shares,  valued  at  $4.20  per  share,  for a total of $40.4
million.  The increases in Long-Term Debt and Stockholders' Equity represent the
additional borrowing for the cash portion of the purchase price and the issuance
of 2,000,000 Common Shares to Amoco.

3.       Bayou Sorrel Pro Forma Adjustments

         The Company  sold the Bayou  Sorrel  Field on November 22, 1996 for $11
million,  consisting  of $9 million in cash and $2  million in  National  Energy
Group,  Inc.  common stock.  National  Energy Group,  Inc. also  reimbursed  the
Company  $152,000 for the amounts it had deposited in an escrow  account for the
plugging and abandonment obligations of the Field.

         The total cash proceeds from the sale of $9,152,000 are assumed to have
been all applied to the Company's Long-Term Debt balance at September 30, 1996.


     NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)
                  For the nine months ended September 30, 1996
              and the years ended December 31, 1995, 1994 and 1993.

1.       Basis of Presentation

         The Unaudited Pro Forma Statement of Income  (Operations)  for the nine
months ended September 30, 1996 presents the combined effects of the acquisition
of the Amoco Properties, which closed on October 8, 1996, the Zapata Properties,
closed  on July 26,  1995 and the sale of the  Bayou  Sorrel  Field,  closed  on
November 22,  1996,  as if all of these  transactions  had been  consummated  on
January 1, 1996.

         The Unaudited Pro Forma Statements of Income (Operations) for the years
ended  December  31, 1995,  1994 and 1993  present the  combined  effects of the
acquisition  of the Amoco  Properties,  which closed on October 8, 1996, and the
Zapata  Properties,  closed on July 26, 1995,  as if the  acquisitions  had been
consummated on January 1 of each of these years.

     Each period  presented  includes the issuance of 2,000,000 Common Shares to
Amoco Production Company in connection with the Amoco  Acquisition.  Each income
statement  presented also includes the 2,060,606 shares issuable upon conversion
of the 1996  Tranche A  Convertible  Subordinated  Notes,  as if the  conversion
occurred on January 1 of each period  presented  and the  resulting  decrease in
interest expense. 

2. Amoco and Zapata Properties Pro Forma Adjustments

         Additional  lease operating  expenses of $108,000 in 1996,  $314,000 in
1995  and  $444,000  in 1994  and  $294,000  in  1993  represent  the  estimated
additional  insurance  costs of  owning  the  Amoco  Properties  and the  Zapata
Properties.  These amounts are estimated using the Company's  current  insurance
rates for owning the

                              

<PAGE>



properties acquired or similar properties.

         Additional  depletion and depreciation  expense of $ 5,629,000 in 1996,
$10,064,000 in 1995,  $8,710,000 in 1994 and  $8,781,000 in 1993  represents the
estimated  depletion  and  depreciation  for assets  acquired in the  respective
acquisitions  assuming the price and proved  reserve  amounts were  identical to
those that existed at the time of the actual acquisitions.

         Additional interest expense of $1,389,000 in 1996,  $1,921,000 in 1995,
$1,757,000 in 1994 and $1,641,000 in 1993 represents the increased borrowings at
January 1 of each year. The purchase  price assumed for each  acquisition is the
same as at the actual date of  acquisition.  It is assumed  that cash on hand at
the  beginning of each year was used for the  acquisitions,  with the balance of
any cash  required  being funded with the  Company's  Bank Facility and the 1996
Subordinated Notes, using the rates in effect at the beginning of each such year
for the  Bank  Facility  and  12% for the  1996  Subordinated  Notes.  The  1996
Subordinated  Note  interest  is net of the  $8,500,000  assumed  to  have  been
converted at January 1 of each period.

3.       Bayou Sorrel Pro Forma Adjustments

         The  adjustments  with  respect to the sale of the Bayou  Sorrel  Field
represent  the  revenues  and expenses of the Field from January 1 to August 31.
Interest  expense is reduced to reflect the elimination of the financing for the
acquisition,  closed on December 28, 1995.  The purchase price for the Field was
$10,455,000 which included a related receivable of $600,000 and a brokers fee of
$205,000.


























 <PAGE>




                             SELECTED FINANCIAL DATA

         Selected  financial  data  for the  five  years  1991  through  1995 is
presented below.  Effective December 31, 1995, the Company changed its method of
accounting  for oil  and  gas  operations  from  the  full  cost  method  to the
successful efforts method.  The information  provided below reflects this change
for all  periods.  This data also  reflects a  retroactive  restatement  for all
periods  presented  to reflect the  merging of the  Company's  predecessor,  Pan
Petroleum  MLP,  into the Company  effective  September 1, 1992 and reflects the
acquisition of the West Delta offshore properties as of May 28, 1991,  accounted
for utilizing the"purchase" method.

Summary of Operations: ( Amounts in thousands except per share data)
<TABLE>
<CAPTION>

                               For the nine months ended                        For the year ended
                                     September 30,                                        December 31,
                                      (unaudited)                                         (unaudited)
                                        1996(a)       1995        1995     1994       1993        1992       1991
                                         ----         ----        ----     ----       ----        ----       ----
<S>                                  <C>              <C>        <C>      <C>        <C>         <C>         <C>  
Oil and Gas revenue                  $  13,257        13,660     18,447   17,338     12,605      13,335      8,149
Depreciation, depletion
 & amortization                         4,981          6,277      8,064    6,038      4,288      4,245       3,305
Lease operating expense                 6,049          5,729      8,055    5,231      5,297      5,762       3,728
Production and ad valorem taxes           429            810      1,078    1,006        754        867         635   
Exploration expenses                        -          2,174      8,112        -          -          -           -
Provision for losses and (gains)
 on disposition and write-downs
 of assets                                (4)             -         751     1,202      3,824         -        (91)
West Delta fire loss                      500             -          -         -          -          -          -
Net operating income (loss)               729        (1,772)    (8,303)     3,274    (2,100)      1,922        128
Interest (net)                          1,347            720        987     1,623      1,886      2,323      1,597
Net income (loss)                       (618)        (2,492)    (9,290)     1,115    (3,986)      (401)    (1,469)
Net income (loss) per
 Common Share                        $  (0.05)        (0.21)     (0.81)      0.11     (0.53)     (0.05)     (0.23)

Summary Balance Sheet Data:

Oil and Gas Properties (net)         $ 25,489         21,515     29,485   23,945      19,183     26,448     29,018
Total assets                           44,444         26,795     36,169   29,095      24,432     31,085     33,827
Long-term debt                         25,137          8,865     22,390   12,500      12,465     15,380     18,945
Stockholders' equity                   10,498         15,335      9,174   14,882       8,744     11,700     10,889
Dividends per Common Share           $   0.00           0.00       0.00     0.00        0.00       0.00       0.03
</TABLE>

(a) Results for the period ended September 30, 1996, were substantially affected
by the explosion and fire. See "Recent Explosion and Fire". Such results include
the results of operations  through  August 31 for the Bayou Sorrel Field,  which
was sold by the Company effective September 1.

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

For the nine months ended September 30, 1996 and 1995:

      The oil and gas industry has experienced  significant volatility in recent
years because of the  oversupply of most fossil fuels relative to the demand for
such  products  and other  uncertainties  in the  world  energy  markets.  These
industry  conditions  should be  considered  when this analysis of the Company's
operations is read.




 

<PAGE>



Results of Operations

      Effective  December 31, 1995 the Company  changed its method of accounting
for its oil and gas  operations  from the full  cost to the  successful  efforts
method. Prior periods have been restated.

     The Company  experienced  an  explosion  and fire on April 24, 1996 at Tank
Battery #3 in West Delta  resulting in the fields being shut-in from April 24th,
until being  returned to production  on October 7, 1996.  The loss of 67 days of
production  in the  second  quarter  and the  entire  third  quarter  and a loss
incurred in repairing the facility have been the principal  contributors  to the
loss of $.19 per share for the second and third quarters of 1996.

      The  decrease in  production  also  brought  about a decrease in operating
taxes  of  $178,000,  as a  portion  of the  production  from  West  Delta is in
Louisiana  State  waters  and is  subject  to State  severance  taxes.  Although
production  was shut-in for 67 days in the second  quarter and the entire  third
quarter,  resulting  in a decrease  in West Delta  lease  operating  expenses of
$805,000 from expected levels,  a large part of the lease operating  expenses in
West Delta are fixed expenses and continued throughout both quarters.

     The Company has repaired Tank Battery #3 and has received advances from its
insurance company on the  reimbursement of repair costs.  Until final resolution
of the total repair costs the insurance company is advancing funds to assist the
Company in paying for repairs.  There is no assurance that the Company's  repair
costs will be fully covered by such  insurance or that the  Company's  insurance
carriers may  not seek  reimbursement of some of their advances.  The Company is
considering  filing  suits  against the  employers of the persons who caused the
incidents.  No assurance can be given that the company will successfully recover
any amounts sought in any such suits.  in such suits.  The Company did not begin
receiving these  insurance  advances until the third quarter of 1996. The repair
expenditures,  coupled with the decrease in net operating  cash flows  discussed
above resulted in higher borrowing levels and interest expense.

      The resulting  decrease in revenues,  net of the corresponding  production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased  current assets by approximately  $1.9 million at the end of the third
quarter of 1996. The repair  expenditures  on Tank Battery #3, with the delay in
receiving insurance advances, also decreased cash and increased accounts payable
and long-term debt. These expenditures  impacted working capital and limited the
Company's ability to pay down its long-term debt.

      "Oil and natural gas sales" decreased only 3% for the first nine months of
1996 when compared to the same period in 1995 in spite of the explosion and fire
at West Delta.

      Natural gas  production  decreased 39% to 4,590,000 Mcf for the first nine
months of 1996 from 7,578,000 Mcf for the same period in 1995.  This decrease is
primarily due to two factors:  no production  from West Delta  Properties for 67
days in the second  quarter and the entire third  quarter,  due to the April 24,
1996 explosion and fire;  and higher  production in 1995 in West Delta from four
horizontal  wells drilled in 1994 that had declined  significantly by the end of
1995. These two factors were offset by the production from the Zapata Properties
and Bayou Sorrel  Field not owned during the first and second  quarters of 1995.
The Zapata  Properties were acquired on July 26, 1995 and the Bayou Sorrel Field
was acquired on December 27, 1995.

      Oil  production  was also  reduced by the West Delta  explosion  and fire,
however,  production  for the first nine months of 1996 increased 66% to 203,000
barrels from 122,000 barrels in the same period in 1995,  because oil production
from the Zapata  Properties and Bayou Sorrel Field more than offset the decrease
from the West Delta explosion and fire.

      On an Mcf equivalent basis, total oil and natural gas production decreased
30% for the first nine months in 1996 compared to the same period in 1995.

      These  reductions  in  production  were more than offset by higher oil and
natural gas prices in 1996 when  compared to 1995.  Natural gas prices  averaged
$2.65 per Mcf for the first nine  months in 1996  compared to $1.54 for the same
period in 1995.  Oil prices  also  increased  to $18.33 per barrel for the first
nine months in 1996 from $16.30 in 1995. The Company  entered into a natural gas
swap  agreement  beginning  January 1, 1996 for the sale of 15,000  MMBTU of gas
each day in 1996 with contract  prices ranging from $1.75 per MMBTU to $2.25 per
MMBTU. The hedge contract loss of $2.7 million  averaged $.57 per Mcf,  bringing
the net price received to $2.08 per Mcf for the first nine months of 1996.

 

<PAGE>



      "Depletion,  depreciation  and  amortization"  decreased 21% for the first
nine months of 1996  primarily  due to the  decreased  production  from the West
Delta Properties as a result of the explosion and fire.

      "Exploration  expenses"  in  1995  consist  of two dry  exploratory  wells
drilled on South  Timbalier  Block 33 and Eugene  Island  Block 50 in the second
quarter. The Company has not drilled any exploratory wells in 1996.

     "Lease  operating  expenses"  increased  due to the  addition  of the  five
offshore  Zapata  Properties  on July  26,  1995  and the  Bayou  Sorrel  Field,
purchased from Shell Western E & P, Inc. on December 26, 1995. The increase as a
percentage  of oil and  natural  gas sales from 42% for the first nine months of
1995 to 46% for the  same  period  in  1996 is  primarily  due to the  operating
expenses of the West Delta  Properties  which are fixed in nature and continued,
even with  production  from the fields being  shut-in due to the  explosion  and
fire.

     "Production and ad valorem taxes"  decreased to 3.2% of oil and natural gas
sales in the first nine  months of 1996 from 5.9% of oil and  natural  gas sales
for  the  same  period  in  1995.  A part  of the  decrease  is due to the  lost
production from the West Delta  Properties for 67 days in the second quarter and
the entire third quarter due to the  explosion  and fire. A large  percentage of
this  production  is in  Louisiana  State  waters which are subject to severance
taxes. The decrease is also due to the shift in the Company's production volumes
from  properties  subject to severance  taxes to properties in federal  offshore
waters (primarily the Zapata Properties) that are not subject to such taxes. 

     The "West  Delta fire loss" is the  Company's  expense  of  repairing  Tank
Battery #3, the central processing facility in the West Delta fields.

     "Interest  expense  (net)"  increased 87% for the first nine months of 1996
compared  to the same  period  in 1995 due to  higher  borrowing  levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field  acquisition.  The Company began an aggressive  debt
reduction program and through April 1996 it had reduced debt by $4 million.  The
April 24th West Delta  explosion and fire  resulting in decreased  discretionary
cash flows which  restricted  the Company's  ability to lower its long-term debt
levels  as  quickly  as  anticipated,  and  correspondingly  contributed  to the
increase in interest expense.

        The  Company  borrowed  $5 million on the Bank  Facility  in late August
1996,  for an earnest money deposit in connection  with the  acquisition  of the
Amoco Properties, which closed on October 8, 1996.

Liquidity and Capital Resources

        At  September  30,  1996,  57%  of  the  Company's   total  assets  were
represented  by  oil  and  gas  properties,  net  of  accumulated  depreciation,
depletion and amortization.

        In 1991, in connection with a debt financing which has subsequently been
repaid,  certain lenders received a net profits interest (NPI) in the West Delta
Properties,  which is a continuing  obligation with respect to these properties.
During the three months ended March 31, 1996,  payments with respect to this NPI
averaged $53,000 per month. Due to the explosion and fire at Tank Battery #3, no
NPI payments were made in the three months ended June 30 or September 30, 1996.

     Pursuant to existing agreements the Company is required to deposit funds in
escrow  accounts  to  provide a reserve  against  satisfaction  of its  eventual
responsibility  to plug and abandon  wells and remove  structures  when  certain
fields no longer produce oil and gas.Each month, until November 1997, $25,000 is
deposited in a bank escrow account,  to satisfy such obligations with respect to
a portion of its West Delta  Properties.  The Company has entered into an escrow
agreement  with Amoco  Production  Company under which the Company will deposit,
for the life of the fields,  in a bank escrow  account ten percent  (10%) of the
net cash flow, as defined in the  agreement,  from the Amoco  properties.  These
funds and interest earned thereon will be available for the expenses of plugging
wells and removing  structures when that time comes. The Company has established
the "PANACO East Breaks 110 Platform  Trust" at Bank One,  Texas, NA in favor of
the Minerals  Management  Service of the U.S.  Department of the Interior.  This
Trust  requires an initial  funding of $846,720 in December  1996, and remaining
deposits of $244,320  due at the end of each quarter in 1999 and $144,000 due at
the end of each  quarter in 2000 for a total of  $2,400,000.  In  addition,  the
Company has  $10,150,000 in surety bonds to secure its plugging and  abandonment
obligations;  including a  $4,100,000  bond which was  provided to the  original
sellers of the West Delta Properties; a $2,400,000 bond provided to the Minerals
Management  Service of the U.S Department of the Interior in connection with the
plugging and structure  removal  obligations for the Company's East Breaks Block
110 Platform;  and a $3,000,000 Area Wide Bond, a $300,000 Pipeline Right-of-Way
Bond, a $300,000  Supplemental  Bond and a $50,000  Operator's Bond provided the
Minerals Management Service.

     Under a swap  agreement  the Company has hedged the price of natural gas by
selling the  equivalent  of 15,000  MMBtu per day for 1996 at fixed prices which
range from $2.25 for January to $1.75 for July. If the closing price (settlement
price) on NYMEX for  natural  gas  futures is greater  than the swap price for a
given month the Company must pay that  difference to the bank which affected the
swap. If the settlement price is less than the swap price the bank must pay that
difference  to the  Company.  By  entering  into the swap in  December  1995 the
Company  locked in the fixed  prices on 15,000  MMBtu per day for each  month in
1996.  Because settlement prices have been above the fixed prices each month the
Company has been required to pay the  difference to the bank which  effected the
swap.  Since the  Company  sells its  natural gas on the spot market it realizes
prices which  approximate the settlement  prices on NYMEX,  less differences for
transportation  due to pipeline  locations that are varying distances from Henry
Hub,  Louisiana  which is the  delivery  point used for  natural  gas futures on
NYMEX.  Generally  these  differences  are  anticipatable  and not  significant.
However, to the extent that these differences become significant the Company may
realize  more or less on its spot sales of gas than was  anticipated  and may be
impacted  beneficially or detrimentally  by erratic  fluctuations in the natural
gas spot market or the futures  market on NYMEX.  Both such  eventualities  have
occurred so far this year. These erratic  fluctuations  which have characterized
the natural gas market in recent  months have  exposed the Company to market and
credit  risks.  In those months in which the spot price is below the  settlement
price,  the net amount  realized  by the Company on its total gas sales would be
proportionately  reduced by the swap agreements.  At present natural gas futures
on NYMEX for the  remaining  months of 1996 are all above the fixed prices under
the swap  agreement  and the  Company  anticipates  that this will result in its
realizing  less for its natural gas due to amounts  required for payments to the
bank under the swap  agreement.  Management  entered into the swap  agreement to
assure the Company of not receiving less than the fixed prices established under
the agreement for at least 15,000  MMBtu's of natural gas per day in 1996.  This
gave the Company assurance that it would be in a position to timely amortize its
long-term  debt.  Long-term debt had increased with  acquisitions  of the Zapata
Properties  and  Bayou  Sorrel  Field.   Management  has  generally  used  hedge
transactions  to protect its cash flows when  long-term debt has been higher and
refrained  from hedge  transactions  when  long-term  debt has been  lower.  For
accounting purposes,  gains or losses on swap transactions are recognized in the
production  month to which a swap  contract  relates.  The fair market  value of
these swap  transactions  at September 30, 1996 was  ($600,000)  due to the high
natural gas futures market prices on that date.

Capital Spending

        Through the nine months ended  September 30, 1996, the Company had spent
$11.8 million in capital expenditures,  including (1) a $5 million earnest money
deposit of the Amoco Properties,  which were subsequently acquired on October 8,
1996,  (2) the repair and  rebuilding  of the West Delta Tank  Battery #3 net of
insurance  advances  and (3)  development  of its oil  and gas  properties.  The
majority  of the  development  costs  were  incurred  to drill two  unsuccessful
development  wells in the  Bayou  Sorrel  Field and for the  Company's  share of
successfully  recompleting  two  wells on  Eugene  Island  Block  372,  which is
operated by Unocal Corporation.

 

<PAGE>





        During 1995, Shareholders' Equity increased $3,173,000, by virtue of the
exercise of options and warrants. During first quarter 1996 Shareholders' Equity
increased $1,837,000, as a result of the exercise of warrants.

For the years ended December 31, 1991 - December 31, 1995

Results of Operations

        During the years ended  December  31, 1991  through  1995,  "Oil and Gas
Revenue"  has  varied  due to  several  factors.  The prices of oil and gas have
fluctuated  widely  during the years shown.  Oil prices are  influenced by world
political  events as well as decisions  made by OPEC  regarding  the  production
quotas  of  its  members.  Prices  are  further  influenced  by  world  economic
conditions which affect industrial output and the need for oil.

         In 1995,  the  Company  sold  170,000  barrels of oil for an average of
$16.78 per barrel accounting for 15% of oil and gas revenue. In 1994 oil was 12%
of such revenue with 137,000 barrels at an average price of $15.35.  In 1993 oil
was 19% of such revenue with 180,000  barrel at an average  price of $16.69.  In
1992 oil was 25% of such  revenue with  174,000  barrels at an average  price of
$19.41.  In 1991 the Company sold 129,000 barrels of oil for an average price of
$19.68 per barrel; accounting for 29% of its oil and gas revenue.

           A large part of the changes affecting most operating accounts in 1992
was due to West Delta being operated for twelve months  compared with only seven
months in 1991.

         The average  natural gas price  received by the Company has  fluctuated
but generally  followed the trend of national gas prices.  By 1995,  gas revenue
contributed  85%  of  revenue  compared  with  46% in  1990.  While  1995  saw a
production  increase of 21%, the drop in natural gas prices to $1.58 offset most
of the benefit.  Part of the increase was due to the  acquisition  of the Zapata
Properties  in July 1995.  By drilling four  horizontal  wells and  recompleting
eight existing wells, the Company increased  production by 34% in 1994. With the
acquisition of the West Delta  Properties in 1991,  gas production  increased in
1992, 1993 and 1994 to 5,811,000, 5,586,000 and 8,139,000 Mcf, which sold for an
average price of $1.81,  $2.24 and $1.88 per Mcf,  before the effects of various
natural gas hedge  agreements.  In 1991,  the Company sold  3,714,000 Mcf for an
average price of $1.49.

         From time to time,  upon the  insistence of its lenders the Company has
entered into natural gas hedging  agreements which have the effect of raising or
lowering the price it receives for natural gas. In 1992 a contract  loss of $1.1
million  lowered the average price received per Mcf by $.19 to $1.73.  In 1993 a
contract loss of $3 million  lowered the average price  received per Mcf by $.54
to $1.72.

           The "depreciation,  depletion and amortization"  increase in 1995 was
primarily the result of the acquisition of the Zapata Properties for $2,748,000,
$1.5 million in  capitalized  costs on existing  properties  and the increase in
production bringing about an increase in the rate of depletion.  The increase in
1994 is due to the 1994 drilling and rework program increasing  capitalized cost
and the 34% increase in  production.  The expense for 1993  remained  relatively
constant over 1992 with only a slight decrease due to lower production.

         "Lease operating  expense" increased  significantly  during 1995 by (1)
$1,008,000  related to the  acquisition  of the Zapata  Properties in July which
added  interests on six  offshore  platforms  and 44 wells,  (2)  $1,105,000  of
additional   operating  expenses  on  the  West  Delta  Properties  to  maintain
production from some of the more rapidly  declining  wells,  and (3) $711,000 of
expensed items which might otherwise have been  capitalized.  Such expenses rose
from $.58 per Mcfe in 1994 (a year of very high  production) to $.74 per Mcfe in
1995,  after having been $.84,  $.84, and $.79 per Mcfe in 1991, 1992, and 1993,
respectively.

     "Production  and ad valorem  taxes"  increased 33% in 1994 due to increased
production from four horizontal  wells drilled in state waters on the West Delta
Properties in 1994.

     The "West  Delta fire loss" is the  Company's  expense  of  repairing  Tank
Battery #3, the central processing facility in the West Dela fields.

     The 1995 "exploration  expense"  consisted of dry hole exploratory costs of
$796,000 on Eugene Island Block 50,  $1,378,000 on South  Timbalier Block 33 and
$5,938,000  on West  Delta  Block 54.  The  Company  currently  plans no further
exploratory activity in these blocks.



<PAGE>




         The "provision for  write-downs of assets" in 1993,  1994 and 1995 were
for the  Company's  group of onshore  properties,  acquired in the early  1980's
which were becoming a less significant part of its operations.

         "Net operating income (loss)" for 1995 would have been $560,000 were it
not for the $8,112,000  exploratory  expenses and $751,000 property  write-down.
The  increased   production  in  1994,  along  with  $2.6  million  lower  asset
write-downs  brought about the large increase in 1994. The operating  income for
1993 decreased due to lower production, and an asset write-down of $3.8 million.
Net  operating  income  increased  from  1991  to  1992  primarily  due  to  the
realization  of the benefit of a large  number of expenses  incurred in 1991 and
again the ownership of the West Delta Properties for a full twelve months.

         The lower levels of long-term  debt that prevailed  throughout  most of
1995 resulted in a decrease in "Interest (net)." Long-term debt increased during
1995 to fund  the  acquisitions  of the  Zapata  Properties  in  July  and  more
importantly  the  acquisition  of the Bayou Sorrel Field in late  December.  The
decreases of 19% in 1993 and 13% in 1994 were due to the significant decrease in
long  term  debt  and the  refinancing  of such  debt on July 1,  1994 at  lower
interest rates. Interest expense increased  significantly in 1992 because of the
debt incurred to acquire the West Delta  Properties being in place a full twelve
months.

         "Net income (loss) per common share" is based upon the weighted average
number of shares  outstanding  of  11,504,615  for  1995,  10,039,042  for 1994,
7,583,761 for 1993, 7,314,041 for 1992, and 6,399,338 for 1991.

Liquidity and Capital Resources

         Cash flow from  operations  was used to reduce  long term  debt,  drill
wells, recomplete wells and acquire properties.

         On July 1, 1994 the Company  entered into a Credit  Agreement  with the
First Union National Bank of North  Carolina.  The loan was a reducing  revolver
designed to provide the Company up to $30 million  depending  upon the Company's
borrowing base. The principal amount of the loan was due July 1, 1998.

Capital Spending

         In 1995 the Company spent $8,112,000 on exploratory  drilling which did
not result in a discovery and  $1,497,000 on  developmental  costs.  During 1994
over $11,749,000 was spent on eight offshore  recompletions  and the drilling of
four horizontal wells. All four horizontal wells and all eight  recompletions in
1994  were   successful   and   offshore   natural  gas   production   increased
significantly.

         During the last part of 1993 the Company increased Stockholders' Equity
$1,163,000,  primarily by virtue of options and warrants being exercised. During
1994, the Company increased  Stockholders'  Equity $5,023,000,  primarily as the
result  of  such  exercises  of  options  and  warrants.  Likewise  most  of the
$3,173,000  increase in 1995 was from the exercise of options and  warrants.  As
explained  under "The  Company - Funding of  Business  Activities,"  the Company
issued   subordinated   notes  at  year-end  1993.  The  Company  utilized  this
$5,000,000,  along with equity proceeds and cash flow from operations  described
above, to drill the wells and perform the recompletions in 1994 and 1995.

                                   THE COMPANY
General

         PANACO,  Inc.  (the  "Company")  is a  Delaware  corporation  that  was
organized in October 1991.  Effective  September 1, 1992, Pan Petroleum MLP, the
Company's  predecessor,  was merged into the Company.  The Company is in the oil
and  gas  business,  acquiring,  drilling  and  operating  offshore  oil and gas
properties in the Gulf of Mexico.




<PAGE>



         Between  1984  and  1988 a  total  of  114  limited  partnerships  were
consolidated  into the Company's  predecessor.  With the acquisition of the West
Delta Properties in 1991, the Company shifted its emphasis offshore.  Additional
offshore  properties  were acquired in 1994,  1995 and 1996. In recent years the
Company  has  been  disposing  of  numerous  onshore  properties.   The  onshore
properties  presently  generate  less than 3% of the Company's  revenues.  These
onshore  property  sales  are  part  of  management's  plan  to  concentrate  on
properties  in the  Gulf of  Mexico,  which  the  Company  considers  to be more
profitable.

Business Strategy

     The Company's  objective is to enhance  shareholder value through sustained
growth in its reserve  base,  production  levels and  resulting  cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies  properties that may be acquired preferably
through negotiated transactions or, if necessary,  sealed bid transactions.  The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs,  have an established  production history and are candidates
for  exploitation.  Geologically  complex  fields with multiple  reservoirs  are
fields in which there are  multiple  reservoirs  at  different  depths and wells
which   penetrate  more  than  one  reservoir,   that  have  the  potential  for
recompletion  in more than one  reservoir.  Once  properties  are acquired,  the
Company  focuses  on  reducing  operating  costs  and  implementing   production
enhancements through the application of technologically  advanced production and
recompletion  techniques.  Over the past  five  years,  the  Company  has  taken
advantage  of  opportunities  to  acquire  interests  in a number  of  producing
properties which fit these criteria.

Business Activities

         The Company  owns  interests in 123 offshore  wells,  located  offshore
Louisiana  and Texas.  It also owns  interests  in 314 onshore  wells in Kansas,
Louisiana,  Oklahoma and Texas, but these interests generate less than 3% of its
revenues.  As of november  1, 1996,  these  properties,  including  the recently
acquired  Amoco  Properties  and  excluding  the Bayou  Sorrel  Field  which was
recently sold,  contained  estimated Proved Reserves of approximately  2,920,000
Bbls of oil and condensate and  approximately  64,925,000 Mcf of gas and the SEC
10 Value of such Proved Reserves was approximately  $128,092,000.  Approximately
21% of such Proved  Reserves  are  attributable  to oil and 79% to natural  gas,
based on six Mcf of gas being equivalent to one Bbl of oil. Information included
herein with  respect to Proved  Reserves  and the SEC 10 Value  thereof has been
prepared by the Company. See "Properties - Significant Proved Properties."

      The  Company   expects  to  hold  its  producing   properties   until  the
economically  recoverable reserves  attributable thereto are depleted,  although
the Company may sell any of its properties if management believes that such sale
would be in the Company's best interest.

Recent Explosion and Fire

        The Company  experienced  an explosion and fire on April 24, 1996 at its
Tank Battery #3 in West Delta, resulting in the production from the fields being
shut-in through October 7, 1996, when production resumed. The loss of 67 days of
production  in the second  quarter and the entire third  quarter was a principal
contributor  in the loss of $.19 per share for the second and third  quarters of
1996. Although the production was shut-in, and consequently there was a decrease
in West Delta lease operating expenses of $805,000 from expected levels, a large
part of the lease  operating  expenses  in West  Delta are  fixed  expenses  and
continued throughout both quarters.

     The Company has repaired Tank Battery #3 and is receiving advances from its
insurance  company.  Until  final  resolution  of the  total  repair  costs  the
insurance  company  is  advancing  funds to assist  the  Company  in paying  for
repairs.  The Company  began  receiving  these  insurance  advances in the third
quarter of 1996.  There is no assurance that the Company's  repair costs will be
fully covered by such  insurance or that the Company's  insurance  carriers  may
not seek  reimbursement  of some of their  advances.  The Company  plans to file
suits  against  the  employers  of the  persons  who  caused the  incidents.  No
assurance can be given that the Company will recover anything in such suits. The
repair expenditures, net of insurance advances, coupled with the decrease in net
operating cash flows  discussed  above resulted in higher  borrowing  levels and
interest  expense for the second and third quarters.  The resulting  decrease in
revenues and higher interest expense  decreased  current assets by approximately
$1.9 million at the end of the third quarter of 1996.




<PAGE>



Well Operations

     The  Company  operates  52  offshore  wells  and  owns  all of the  working
interests  in  substantially  all of those  wells.  The  Company's  71 remaining
offshore  wells  are  operated  by  third  party  operators,   including  Unocal
Corporation,  Phillips Petroleum Company, Texaco, Anadarko Petroleum Corporation
and Louisiana Land and Exploration Company. Operations are conducted pursuant to
joint operating  agreements that were in effect at the time the Company acquired
its interest in these  properties.  However,  the Company  considers these joint
operating agreements to be on terms customary within the industry.  The operator
of an oil and gas property supervises production,  maintains production records,
employs field personnel, and performs other functions required in the production
and  administration of such property.  The compensation paid to the operator for
such services  customarily  varies from  property to property,  depending on the
nature, depth, and location of the property being operated. Where properties are
operated by the  Company,  it generally  owns all of the working  interests or a
majority of the working  interest in the  property.  Therefore,  its revenue and
expense  associated  with  portions of  properties it operates for other working
interest holders is not material.

Acquisition, Development, and Other Activities

        The Company  utilizes  its  capital  budget for (a) the  acquisition  of
interests  in other  producing  properties,  (b)  recompletions  of its existing
wells, and (c) the drilling of development and exploratory wells.

      In recent years,  major oil companies have been selling  certain  offshore
properties to independent  oil companies  because they feel these  properties do
not have the remaining reserve potential needed by a major oil company.  Several
independent  oil companies have acquired these offshore  properties and achieved
significant success in further  exploitation of these properties.  Even though a
property  does not meet the  criteria  for  further  development  by a major oil
company,  that does not mean it is lacking further exploitation  potential.  The
majors  are  simply  moving  further  offshore  into  deeper  water and to other
countries  where  they can find and  produce  the  super-fields  that fit  their
criteria.  Present day technology permits drilling and completing wells in water
as deep as 10,000 feet.

      On October 8, 1996, the Company closed on its  acquisition of interests in
six  offshore  fields  from  Amoco  Production  Company  for $40.4  million.  In
consideration  for such  interests,  the Company issued Amoco  2,000,000  Common
Shares and paid the sum of $32 million in cash. The interests  acquired  include
(1) a 33.3% working interest in the East Breaks 160 Field (2 Blocks) and a 33.3%
interest in the High Island 302 Field, both operated by Unocal Corporation;  (2)
an average 50% interest in the High Island 309 Field (2 Blocks),  a 12% interest
in the High  Island 330 Field (3 Blocks)  and a 12%  interest in the High Island
474 Field (4 Blocks),  all  operated by Phillips  Petroleum  Company;  and (3) a
12.5%  interest  in the West  Cameron  180 Field (1 Block)  operated  by Texaco.
Current  production for the interests acquired is 680 barrels of oil per day and
12 MMcf per day of natural gas. See "Properties - Amoco Acquisition."

      Depending  on the sales  prices of oil and gas and its  ability to finance
such activities,  the Company may also drill  exploratory wells on properties it
acquires.  The Company does not currently have plans to drill  exploratory wells
during 1997 but will  evaluate  potential  prospects to  determine  the economic
benefit to the  Company  and may drill  exploratory  wells if the benefit to the
Company is reasonable when measured against the risks involved.

      The number and type of wells  drilled by the Company will vary from period
to period  depending on the amount of the capital budget available for drilling,
the cost of each well,  the  Company's  commitment to  participate  in the wells
drilled on  properties  operated by third  parties,  the size of the  fractional
working  interest  acquired  by the  Company  in each  well  and  the  estimated
recoverable reserves attributable to each well.

      Acquisitions of properties may include  acquisitions of working interests,
royalty interests,  net profits interests,  production payments, and other forms
of direct or indirect ownership interest or interests in oil and gas production.
The Company may also acquire general or limited partner  interests in general or
limited  partnerships  and interests in joint ventures,  corporations,  or other
entities that own, manage, or are formed to acquire, explore for, or develop oil
and gas properties or conduct other activities  associated with the ownership of
oil and gas  production.  The Company  may also  acquire or  participate  in the
expansion of natural gas  processing  plants and natural gas  transportation  or
gathering systems.



<PAGE>



      The success of the Company's acquisitions will depend on (a) the Company's
ability to  establish  accurately  the volumes of  reserves  and rates of future
production from producing  properties  being  considered for acquisition and the
future net revenues  attributable to reserves from such properties,  taking into
account  future  operating  costs,  market  prices  for oil and  gas,  rates  of
inflation,  risks  attendant to production of oil and gas, and a suitable return
on investment,  and (b) the Company's ability to purchase properties and produce
and  market  oil and gas  therefrom  at  prices  and  rates  that over time will
generate cash flows resulting in an attractive return on the initial investment.
The Company's  cash flow and return on  investment  will vary to the extent that
the Company's  production from an acquired property is greater or less than that
estimated at the time of  acquisition  because of, for  example,  the results of
drilling or improved recovery  programs,  the demand for oil and gas, or changes
in the  prices of oil and gas from the prices  used to  calculate  the  purchase
price for  producing  properties.  The Company will  evaluate  any  economically
feasible project that would enhance the value of its properties.  Such a project
may involve both the acquisition of developed and undeveloped properties and the
drilling of infield wells.

      The  Company  expects  that its  primary  activities  will  continue to be
concentrated  offshore in the Gulf of Mexico. The Company can, if it so chooses,
invest  in any  geographic  area.  Drilling  on  and  production  from  offshore
properties often involves higher costs than does drilling on and production from
onshore properties, but the production achieved on successful wells is generally
much greater.

      The Company may also seek to acquire oil and gas  companies  through stock
purchases,  asset  purchases,  and purchases of interests in  partnerships.  The
Company intends to pay for such possible  acquisitions  with its own securities,
cash or any other property, or any combination of the foregoing.  The consent of
the  Company's  lenders is  required  for any such  purchases.  See  "Funding of
Business Activities - Borrowings and Obligations".

Capital Spending

        Through the nine months  ended  September  30, 1996 the Company had made
$11.8  million in capital  expenditures  for (1) the earnest money deposit of $5
million for the Amoco Properties, which were subsequently acquired on October 8,
1996,  (2) the repair and  rebuilding  of the West Delta Tank Battery #3 (net of
insurance  advances) and (3) the development of its oil and gas properties.  The
majority  of the  development  costs  were  incurred  to drill two  unsuccessful
development  wells in the Bayou Sorrel Field and for the Company's  share of two
successful recompletions on Eugene Island Block 372, which is operated by Unocal
Corporation.  The sources of funds for capital  expenditures were cash flow from
operations,  borrowings  on the  Company's  Bank  Facility  and  proceeds of the
issuances of Common Shares.

Use of 3-D Seismic Technology

        The  use  of  3-D  seismic  and  computer-aided   exploration   ("CAEX")
technology is an integral component of the Company's acquisition,  exploitation,
drilling  and  business  strategy.  In  general,  3-D  seismic is the process of
obtaining  seismic data along multiple lines and grids within a large geographic
area. 3-D seismic differs from 2-D seismic in that it provides  information with
respect to multiple horizontal and vertical points within a geological formation
instead of  information  on a single  vertical line or multiple  vertical  lines
within the formation. By expanding the amount of data obtained with respect to a
geological formation, the user is better able to correlate the data and obtain a
greater  understanding  and image of the  formation.  While it is  impossible to
predict  with  certainty  the  specific  configuration  or  composition  of  any
underground  geological  formation,  3-D seismic  provides a mechanism  by which
clearer and more accurate projected images of complex geological  formations can
be obtained  prior to drilling for  hydrocarbons  therein.  In  particular,  3-D
seismic  delineates  smaller  reservoirs  with  greater  precision  than  can be
obtained with 2-D seismic.

      CAEX technology is the process of  accumulating  and analyzing the various
seismic, production and other data obtained relating to a potential prospect. In
general,  the process of prospect  evaluation  through CAEX technology  requires
inputting  various 2-D and 3-D seismic data obtained with respect to a prospect,
correlating  that data with  historical  well control and  production  data from
similar  properties and analyzing the available data through  computer  programs
and modeling techniques in order to project the likely geological composition of




<PAGE>



a prospect and potential  locations of  hydrocarbons.  This process  relies on a
comparison of actual data with respect to the prospect and historical  data with
respect to the  density and sonic  characteristics  of  different  types of rock
formations, hydrocarbons and other subsurface minerals, resulting in a projected
three  dimensional  image of the subsurface.  This modeling is performed through
the use of advanced interactive  computer  workstations and various combinations
of  available  computer  programs  that  have  been  developed  solely  for this
application.

     3-D  seismic  and CAEX  technology  have  been in  existence  since the mid
1970's;  however,  it was not until the late  1980's,  with the  development  of
improved  data  acquisition   equipment  and  techniques  capable  of  gathering
significant  amounts  of  data  through  a  large  number  of  channels  and the
availability  of improved  computer  technology  at reasonable  costs,  that the
method  became  economically  available to firms such as the  Company.  Prior to
that, it was the exclusive province of large multinational oil companies.

     The  Company  believes  that  its  application  of  3-D  seismic  and  CAEX
technology in the  exploration  of oil and natural gas provides it with a number
of benefits in the exploration, delineation and development process that are not
generally  available  to those who only use 2-D  seismic  data and  conventional
processing  methods.  In  particular,  the Company  believes  that, by obtaining
clearer and more accurate  projected  images of underground  formations  through
computer  modeling,  the  Company  is able to  specifically  identify  potential
locations  of  hydrocarbon  accumulations  based on the  characteristics  of the
formations  and  analogies   made  with  nearby  fields  and  formations   where
hydrocarbons  have been  found.  This  enhanced  data can be used to assist  the
Company in eliminating  prospects and prospect  locations  that might  otherwise
have been drilled had the Company  relied solely on 2-D seismic data.  This data
can be used to assist the Company in  identifying  the perceived  most desirable
location for the well to maximize the likelihood of a successful  exploratory or
development well and production from the reservoir.

      The Company  believes that the  collective  application of 3-D seismic and
CAEX technology enables a much more accurate definition of the risk profile of a
prospect than was previously available using traditional exploration techniques.
To the extent the Company is  successful  in  increasing  its  success  rate and
reducing its dry hole costs through the use of advanced  technology  the Company
believes it has a  competitive  advantage  over  companies  that do not use such
technology.

     The  Company  generated a prospect  in the  northern  portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding  royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently  completed on the western  portion of the  Company's  properties in
West Delta.

Marketing of Production

       Production  from the Company's  properties is marketed in accordance with
industry  practices,  which  include  the sale of oil at the  wellhead  to third
parties and the sale of gas to third parties at prices based on factors normally
considered in the  industry,  such as the spot price for gas or the posted price
for oil, and the quality of the oil and gas.

     The Company  markets all of its offshore oil  production  to Amoco,  Citgo,
Conoco,  Texaco, Unocal and Vastar. Citgo, Conoco,  Texaco, and Vastar each have
25%  calls(exclusive  rights to  purchase) on the oil  production  from the West
Delta Fields at their average  posted price for each month.  Amoco has a call on
all of the oil production from the Amoco  Properties at their posted prices.  If
the Company has a bona fide offer from a crude oil  purchaser  at a higher price
than Amoco's posted price, then Amoco must match that price or release the call.
Oil from the Zapata  Properties is currently being sold to Unocal and Amoco, but
can be sold to any crude oil purchaser of the Company's  choice.  Natural gas is
sold on the spot market.  There are numerous  potential  purchasers for offshore
gas.  Notwithstanding  this,  natural gas  purchased  by Tennoco  Gas  Marketing
Company  accounted  for 69% of the  revenues  in 1995.  There are  numerous  gas
purchasers  doing  business in the areas involved as well as natural gas brokers
and clearing houses. Furthermore, the Company can contract to sell

<PAGE>



the gas directly to end users. The Company does not believe that it is dependent
upon any one customer or group of customers for the purchase of natural gas.

      The Company's lenders have generally required it to reduce its exposure to
the  volatility  of crude oil and natural gas prices by hedging a portion of its
production.  In a typical hedge transaction,  the Company will have the right to
receive  from the  counter  party to the hedge,  the  excess of the fixed  price
specified in the hedge over a floating  price. If the floating price exceeds the
fixed price,  the Company is required to pay the counter  party this  difference
multiplied  by the  quantity  hedged,  regardless  of whether  the  Company  has
sufficient   production  to  cover  the  quantities   specified  in  the  hedge.
Significant  reductions in  production at times when the floating  price exceeds
the fixed price  could  require  the  Company to make  payments  under the hedge
agreements  even though  such  payments  are not offset by sales of  production.
However,  the Company  hedges up to, but not more than,  50% of its  anticipated
production.  Hedging  will also  prevent the  Company  from  receiving  the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.

Plugging and Abandonment Escrows

     Pursuant to existing agreements the Company is required to deposit funds in
escrow  accounts  to  provide a reserve  against  satisfaction  of its  eventual
responsibility  to plug and abandon  wells and remove  structures  when  certain
fields no longer produce oil and gas. Each month,  until November 1997,  $25,000
is deposited in a bank escrow account,  to satisfy such obligations with respect
to a portion of its West Delta  Properties.  The  Company  has  entered  into an
escrow  agreement  with Amoco  Production  Company  under which the Company will
deposit,  for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the  agreement,  from the Amoco  properties.
These funds and interest  earned  thereon will be available  for the expenses of
plugging  wells and removing  structures  when that time comes.  The Company has
established  the "PANACO East Breaks 110 Platform  Trust" at Bank One, Texas, NA
in favor of the  Minerals  Management  Service  of the  U.S.  Department  of the
Interior.  This Trust  requires an initial  funding of $846,720 in December 1996
and  remaining  deposits of $244,320  due at the end of each quarter in 1999 and
$144,000 due at the end of each quarter in 2000, for a total of  $2,400,000.  In
addition, the Company has $10,150,000 in surety bonds to secure its plugging and
abandonment  obligations;  including a $4,100,000 bond which was provided to the
original sellers of the West Delta Properties; a $2,400,000 bond provided to the
Minerals Management Service of the U.S. Department of the Interior in connection
with the plugging and  structure  removal  obligations  for the  Company's  East
Breaks Block 110 Platform;  and a $3,000,000 Area Wide Bond, a $300,000 Pipeline
Right-of- Way Bond, a $300,000  Supplemental Bond and a $50,000  Operator's Bond
provided the Minerals Management Service.

Insurance

     The Company maintains insurance coverage as is customary for companies of a
similar size  engaged in  operations  similar to the  Company's.  The  Company's
insurance  coverage includes  comprehensive  general liability  insurance in the
amount of $50 million per occurrence for personal injury and property damage and
cost of control and operators  extra expense  insurance of $3 million on onshore
wells,  $20  million on wells in  Louisiana  State  waters  and $50  million per
occurrence in Federal  offshore  waters.  The Company  maintains  $65 million in
property insurance on its offshore  properties.  There is no assurance that such
insurance  will be adequate to cover all such costs or that such  insurance will
continue to be available in the future or that such  insurance will be available
at premium  levels that justify its  purchase.  The  occurrence of a significant
event not fully insured or  indemnified  against  could have a material  adverse
effect on the Company's financial condition and operations.

Funding of Business Activities

      Cash  Flow  from  Operations.  Funding  for the  Company's  activities  is
provided  primarily by cash flow from operations,  however,  the Company may use
its Bank Facility and other sources described below.  Generally,  cash flow from
properties declines over time as production declines. The cash flow generated by
the Company's  activities,  would decline in the absence of (a) the  acquisition
and development of other oil and gas properties,  (b) increases in the Company's
production of oil and gas resulting from the development of its  properties,  or
(c)  increases  in the  prices  that  the  Company  receives  for  oil  and  gas
production.

      Issuance of Additional Common Shares and Other Securities. The Company may
issue additional  Common Shares or other securities for cash, to the extent that
market and other conditions permit, and use the proceeds to fund its activities.
Additional securities issued by the Company may be of a class preferred as



<PAGE>



to the Common Shares with respect to such matters as dividends  and  liquidation
rights and may also have other rights and preferences as determined by the Board
of  Directors.  The  Certificate  of  Incorporation  and  By-laws of the Company
generally  do not require the Company to obtain the consent of its  shareholders
for the issuance and sale of Common Shares or other securities.

      During 1995 Shareholders' Equity increased by $3,173,000, by virtue of the
exercise of options  and  warrants.  Through  September  30, 1996  Shareholders'
Equity increased by $1,837,000, as a result of the exercise of warrants.

      Borrowings and Obligations. The Company is permitted to incur indebtedness
for any Company purpose. It is currently expected that Company indebtedness will
consist  primarily of borrowings from commercial banks and credit  corporations,
the  sale of  debt  instruments,  and  possibly  by  advances  from  oil and gas
purchasers.

     On October 8, 1996, the Company  amended its bank facility with First Union
National Bank of North  Carolina (60%  participation),  and Banque  Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million  depending on the  Company's  borrowing
base, as determined by the lenders.  The Company's borrowing base at December 1,
1996 was $31 million,  with an availability  under the revolver of $3.5 million.
The principal  amount of the loan is due July 1, 1999.  However,  at no time may
the Company have outstanding borrowings under the Bank Facility in excess of its
borrowing base. Should the borrowing base ever be determined to be less than the
outstanding  principal owed, the Company must immediately pay that difference to
the  lenders.  Interest on the loan is computed at the bank's prime rate or at 1
to 1 3/4%  (depending  upon the  percentage of the facility being used) over the
applicable   London  Interbank  Offered  Rate  ("LIBOR")  on  Eurodollar  loans.
Eurodollar  loans can be for terms of one, two, three or six months and interest
on such loans is due at the  expiration of the terms of such loans,  but no less
frequently  than every three months.  Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over  LIBOR as long as the  Company  has in excess of  $13,500,000  in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. See "Use of Proceeds." Management
feels that this Bank  Facility  greatly  enhances its ability to make  necessary
capital  expenditures to maintain and improve production from its properties and
makes available to the Company  additional  funds for future  acquisitions.  The
bank facility is  collateralized  by a first mortgage on the Company's  offshore
properties.   The  loan  agreement   contains  certain  covenants   including  a
requirement to maintain a positive  indebtedness  to cash flow ratio, a positive
working  capital ratio, a certain  tangible net worth, as well as limitations on
future debt, guarantees, liens, dividends, mergers, material change in ownership
by management, and sale of assets.

      In 1991,  the Company  borrowed  $21,600,000  from New England Mutual Life
Insurance  Company,  NMB Post Bank,  Groep,  N.V.  (now ING Bank),  the  Lincoln
National  Life  Insurance  Company and En Cap 1989-1  Limited  Partnership.  The
balance  owed on this  facility was prepaid in 1994 with part of the proceeds of
the  Company's  Bank  Facility.  As part of the 1991  transaction  these  former
lenders received a net profits interest in part of the West Delta Properties.

     From time to time the Company has borrowed funds from institutional lenders
who are represented by Kayne, Anderson Investment Management,  Inc. In each case
these loans are due at a stated  maturity,  require payments of interest only at
12% per annum 45 days after the end of each calendar  quarter and are secured by
a  second  mortgage  on the  Company's  offshore  oil  and gas  properties.  The
respective loan documents contain certain  covenants  including a requirement to
maintain a net worth ratio,  as well as limitations on future debt,  guarantees,
liens, dividends,  mergers, material change in ownership by management, and sale
of assets. The loans are as follows:

      (a)  1993  Subordinated  Notes.  In 1993,  $5,000,000  was  borrowed,  due
December 31, 1999,  but  prepayable  at any time.  The Company may deliver up to
$1,000,000 in PIK (payment in kind) notes in  satisfaction  of interest  payment
obligations.  The lenders were issued,  and during 1996  exercised,  warrants to
acquire 816,526 Common Shares at $2.25 per share.

      (b) 1996 Tranche A  Convertible  Subordinated  Notes.  On October 8, 1996,
$8,500,000 was borrowed,  due October 8, 2003, but prepayable any time after May
8, 1998. The Notes are convertible  into 2,060,606 Common Shares on the basis of
$4.125 per share.  The  Company  may  deliver up to  $2,000,000  in PIK notes in
satisfaction of interest payment obligations.



<PAGE>




      (c) 1996  Tranche B Bridge Loan  Subordinated  Notes.  On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable at any time. Should
this loan not be prepaid by August 8, 1997 the interest  rate will increase from
12% to 14% per annum.  The Company may deliver PIK notes in satisfaction of this
additional interest.

     Management  intends to  pre-pay  the 1993  Subordinated  Notes and the 1996
Tranche B Bridge Loan Subordinated  Notes with a portion of the proceeds of this
Offering.

Competition, Markets, Seasonality and Regulation

      Competition. There are a large number of companies and individuals engaged
in the exploration for and development of oil and gas properties. Competition is
particularly  intense with respect to the  acquisition  of oil and gas producing
properties.  The Company  encounters  competition  from various  independent oil
companies in raising capital and in acquiring producing properties.  Many of the
Company's  competitors have financial  resources and staffs  considerably larger
than the Company.

      Markets.  The  ability of the  Company  to produce  and market oil and gas
profitably  depends on numerous  factors beyond the control of the Company.  The
effect of these factors  cannot be accurately  predicted or  anticipated.  These
factors include the availability of other domestic and foreign  production,  the
marketing  of  competitive  fuels,  the  proximity  and  capacity of  pipelines,
fluctuations  in supply and demand,  the  availability  of a ready  market,  the
effect of federal and state regulation of production, refining,  transportation,
and  sales  of  oil  and  gas,  political   instability  or  armed  conflict  in
oil-producing  regions,  and general national and worldwide economic conditions.
In recent years,  worldwide oil production  capacity and gas production capacity
in the United States  exceeded  demand and resulted in a substantial  decline in
the price of oil and natural gas in the United States.

      Since  early  1986,  certain  members  of the  Organization  of  Petroleum
Exporting  Countries  ("OPEC")  have, at various times,  dramatically  increased
their  production of oil,  causing a significant  decline in the price of oil in
the world market.  The Company cannot predict future levels of production by the
OPEC  nations,  the prospects for war or peace in the Middle East, or the degree
to which oil and gas prices will be affected, and it is possible that prices for
any oil, natural gas liquids,  or gas produced by the Company will be lower than
those currently available.

      The demand for gas in the United States has fluctuated in recent years due
to economic factors, a deliverability  surplus,  conservation and other factors.
This lack of demand has resulted in increased competitive pressure on producers.
However,  environmental  legislation  is  requiring  certain  markets  to  shift
consumption  from fuel oils to natural gas, thereby  increasing  demand for this
cleaner burning fuel.

      In view of the many uncertainties affecting the supply and demand for oil,
gas, and refined petroleum products, the Company is unable to predict future oil
and gas prices. In order to minimize these uncertainties the Company,  from time
to time, hedges prices on a portion of its production with futures contracts.

      Seasonality.  Historically the nature of the demand for natural gas caused
prices and demand to vary on a seasonal  basis.  Prices and  production  volumes
were  generally  higher  during the first and fourth  quarters of each  calendar
year.  For example,  during 1991 the price the Company  receives for its natural
gas fell from a high of $1.78 per Mcf in  January  to a low of $1.09 in July and
then climbed to a new high of $1.95 in December,  averaging  $1.49 for the year.
However, the substantial amount of gas storage becoming available in the U.S. is
altering this  seasonality.  During 1993, 1994 and 1995 the Company's gas prices
ranged from $2.78 to $1.64, $2.43 to $1.39 and $2.37 to $1.37,  averaging $2.13,
$1.88 and $1.58, respectively,  in each case, per Mcf. Gas prices averaged $2.08
per Mcf during the first nine months of 1996.  The Company sells its natural gas
on the spot  market  based  upon  published  index  prices  for  each  pipeline.
Historically  the net price  received by the  Company  for its gas has  averaged
about  $.10  per  MMbtu  below  the  NYMEX  Henry  Hub  index   price,   due  to
transportation differentials.  Fields that are located further offshore, such as
the Amoco  Properties,  will  generally sell their gas for as much as $.20 below
that index price.  Recent  pipeline index prices have been at historical  highs.
During December 1996 the Company sold its gas for an average of $2.86.

     Regulation.  The Company's  business is affected by  governmental  laws and
regulations, including price


<PAGE>



control, energy, environmental, conservation, tax and other laws and regulations
relating to the petroleum industry. For example, state and federal agencies have
issued rules and  regulations  that  require  permits for the drilling of wells,
regulate  the  spacing of wells,  prevent the waste of natural gas and crude oil
reserves,  and regulate  environmental and safety matters including restrictions
on the types,  quantities and  concentration  of various  substances that can be
released  into the  environment  in  connection  with  drilling  and  production
activities, limits or prohibitions on drilling activities on certain lands lying
within  wetlands and other  protected  areas,  and remedial  measures to prevent
pollution  from  current  and former  operations.  Changes in any of these laws,
rules and  regulations  could have a material  adverse  effect on the  Company's
business.  In view of the many  uncertainties  with  respect to current  law and
regulations,  including their  applicability to the Company,  the Company cannot
predict the overall effect of such laws and regulations on future operations.

      The Company believes that its operations  comply in all material  respects
with all applicable laws and regulations and that the existence of such laws and
regulations  have  no  more  restrictive  effect  on  the  Company's  method  of
operations  than on other  similar  companies  in the  industry.  The  following
discussion  contains  summaries of certain laws and regulations and is qualified
in its entirety by reference thereto.

      Various  aspects of the  Company's  oil and  natural  gas  operations  are
regulated by  administrative  agencies under statutory  provisions of the states
where such  operations  are  conducted  and by certain  agencies  of the federal
government  for  operations of federal  leases.  The Federal  Energy  Regulatory
Commission  (the  FERC)  regulates  the  transportation  and sale for  resale of
natural gas in interstate  commerce pursuant to the Natural Gas Act of 1938 (the
"NGA") and the Natural  Gas Policy Act of 1978 (the  "NGPA").  In the past,  the
federal  government has regulated the prices at which oil and gas could be sold.
Currently,  sales by  producers  of  natural  gas,  and all sales of crude  oil,
condensate  and natural gas liquids can be made at  uncontrolled  market prices,
but Congress could reenact price controls at any time.  Deregulation of wellhead
sales in the natural gas industry  began with the enactment of the NGPA in 1978.
In 1989,  Congress enacted the Natural Gas Wellhead  Decontrol Act which removed
all NGA and NGPA price and nonprice controls affecting wellhead sales of natural
gas effective January 1, 1993.

     Commencing in April 1992, the FERC issued Order NOS. 636, 636-A,  and 636-B
("Order No. 636"),  which require  interstate  pipelines to provide  open-access
transportation on a basis that is equal for all gas shippers. Although Order No.
636 does not directly  regulate the  Company's  activities,  the FERC has stated
that it intends  for Order No. 636 to foster  increased  competition  within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order No. 636 will have on the
Company's  activities.  Although  Order No.  636,  assuming  it is upheld in its
entirety,  could  provide the Company  with  additional  market  access and more
fairly applied  transportation  service rates,  Order No. 636 could also subject
the Company to more restrictive pipeline imbalance  tolerances,  delivering more
or less than  anticipated  deliveries,  and greater  penalties  for violation of
those  tolerances.  The FERC has issued final orders in virtually  all Order No.
636  pipeline  restructuring  proceedings.  Appeals  of Order No. 636 as well as
orders in the  individual  pipeline  restructuring  proceedings,  are  currently
pending and Company  cannot predict the ultimate  outcome of court review.  This
review may result in the repeal, in whole or in part, of Order No. 636.

      The  FERC  has  announced  its  intention  to  reexamine  certain  of  its
transportation-related  policies,  including  the  manner  in  which  interstate
pipeline shippers may release  interstate  pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
the Company only indirectly,  the FERC's current rules and policies may have the
effect of enhancing  competition  in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions.  The Company cannot predict what action the FERC will take on
these  matters,  nor can it accurately  predict  whether the FERC's actions will
achieve the goal of  increasing  competition  in markets in which the  Company's
natural  gas is sold.  However,  the Company  does not  believe  that it will be
affected by any action taken in a manner that is materially  different  than the
effect upon other natural gas producers with which it competes.

      The FERC has  issued a policy  statement  on how  interstate  natural  gas
pipelines  can recover the costs of new pipeline  facilities.  While this policy
statement  affects the Company only  indirectly,  in its present  form,  the new
policy  should  enhance  competition  in  natural  gas  markets  and  facilitate
construction of gas supply



<PAGE>



laterals. However, requests for rehearing of this policy statement are currently
pending.  The  Company  cannot  predict  what action the FERC will take on these
requests.

      Sales of crude oil,  condensate  and gas  liquids by the  Company  are not
regulated and are made at market prices. The price the Company receives from the
sale of these products is affected by the cost of  transporting  the products to
market.  Effective  as of  January  1, 1995,  the FERC  implemented  regulations
establishing  an indexing  system for  transportation  rates for oil  pipelines,
which  would  generally  index  such  rates to  inflation,  subject  to  certain
conditions  and  limitations.  These  regulations  could  increase  the  cost of
transporting  crude oil, liquids and condensates by pipeline.  These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect,  if any, these  regulations will have on it,
but  other  factors  being  equal,   the   regulations   may  tend  to  increase
transportation costs or reduce wellhead prices for such conditions.

      Additional  proposals  and  proceedings  that might affect the oil and gas
industry  are pending  before  Congress,  the FERC and the  courts.  The Company
cannot predict when or whether any such proposals may become  effective.  In the
past,  the natural gas industry  historically  has been very heavily  regulated.
There is no assurance that the current  regulatory  approach pursued by the FERC
will continue indefinitely into the future. Notwithstanding the foregoing, it is
not anticipated  that compliance  with existing  federal,  state and local laws,
rules and regulations will have a material or significantly  adverse effect upon
the capital expenditures, earnings or competitive position of the Company.

      Extensive  federal,  state and local laws and  regulations  govern oil and
natural  gas   operations   regulating  the  discharge  of  materials  into  the
environment or otherwise relating to the protection of the environment. Numerous
governmental  departments  issue rules and  regulations to implement and enforce
such laws which are often  difficult  and costly to comply  with and which carry
substantial  penalties for failure to comply.  Some laws,  rules and regulations
relating to protection of the environment may, in certain circumstances,  impose
"strict  liability" for environmental  contamination,  rendering a person liable
for  environmental  damages and response  costs without  regard to negligence or
fault  on the  part of such  person.  For  example,  the  federal  Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, also
known as the "Superfund"  law, imposes strict liability on an owner and operator
of a  facility  or  site  where a  release  of  hazardous  substances  into  the
environment  has  occurred and on  companies  that  disposed or arranged for the
disposal  of the  hazardous  substances  released at the  facility or site.  The
regulatory  burden on the oil and natural  gas  industry  increases  its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations  affect the  operations and costs of the Company.  While  compliance
with environmental  requirements  generally could have a material adverse effect
upon the capital expenditures,  earnings or competitive position of the Company,
the Company believes that other independent  energy companies in the oil and gas
industry likely would be similarly affected.  The Company believes that it is in
substantial   compliance  with  current   applicable   environmental   laws  and
regulations and that continued  compliance with existing  requirements  will not
have a material adverse impact on the Company.

       Offshore  operations  of the Company are  conducted  on both  federal and
state  lease  blocks  of the Gulf of  Mexico.  In all  offshore  areas  the more
stringent  regulation  of the  federal  system,  as  implemented  by the Mineral
Management  Service of the  Department of the Interior,  are to be applicable to
state leases as well as federal  leases.  The Oil Pollution Act of 1990 requires
operators  of oil and gas leases on or near  navigable  waterways to provide $35
million in  "financial  responsibility",  as defined in the Act.  At present the
Company is satisfying the financial  responsibility  requirement  with insurance
coverage.

Employees

      The Company has thirteen full time  employees,  some of whom are officers.
The  Company  utilizes  an  additional  thirty-two  contract  personnel  in  the
operation of the offshore  properties,  and uses  numerous  outside  geologists,
production engineers, reservoir engineers, geophysicists and other professionals
on a consulting basis.





<PAGE>



Office Facilities

      The Company's  headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building,  Kansas City, Missouri 64145-1216,  and its telephone number is
(816) 942-6300, FAX (816) 942-6305. The Houston, Texas office is located at 1100
Louisiana, Suite 5110, Houston, Texas 77002-5220,  telephone (713) 652-5110, FAX
(713) 651-0928.

Legal Proceedings

      The Company is presently a party to several  legal  proceedings,  which it
considers to be routine and in the ordinary  course of its business.  Management
has no knowledge of any pending or threatened claims that could give rise to any
litigation which management believes would be material to the Company.

                                   PROPERTIES

      The  Company's  offshore  properties  are located  offshore  Louisiana and
Texas.  The following table sets forth certain  information  with respect to the
Company's significant properties as of November 1, 1996. Such properties account
for 97% of the aggregate SEC 10 Value of its properties.

                          Significant Proved Properties

<TABLE>
<CAPTION>
                                                                     Proved Reserves
                                                         Oil               Gas                SEC 10
Property                         Area                   (Bbls)            (Bcf)                Value

<S>                                                   <C>                 <C>          <C>             
AMOCO PROPERTIES             Offshore TX              1,820,000           28.1         $     56,929,000
WEST DELTA PROPERTIES        Offshore LA                566,000           25.2         $     46,403,000
ZAPATA PROPERTIES            Offshore TX & LA           208,000            9.6         $     20,076,000
</TABLE>


Amoco Acquisition

        On  August  26,  1996  the  Company  entered  into a  Purchase  and Sale
Agreement  with  Amoco  Production  Company to acquire  Amoco's  interest  in 13
offshore   blocks   comprising   six  fields  in  the  Gulf  of  Mexico  ("Amoco
Properties"). The acquisition closed October 8, 1996. Current production, net to
the working interests acquired, is 680 barrels of oil per day and 12 MMcf of gas
per day of natural  gas.  The  purchase  price for the assets  acquired  in this
transaction was $40.4 million,  paid by the issuance of 2,000,000 Common Shares,
at $4.20 per share, and by payment to Amoco of $32,000,000 in cash.

      In  addition to the  interests  acquired,  the  Company  purchased a 33.3%
interest in a 12.67 mile 12" pipeline  connecting East Breaks Block 160 platform
to the High Island  Offshore System  ("HIOS"),  a natural gas pipeline system in
the Gulf of Mexico and a 33.3% interest in a 17.47 mile 10" pipeline  connecting
the East Breaks Block 160 platform to the High Island Pipeline System  ("HIPS"),
a crude oil pipeline system in the Gulf of Mexico. HIOS and HIPS are the primary
natural gas and crude oil pipeline systems in that part of the Gulf of Mexico.

      The East  Breaks  Block 160  platform  also  serves a subsea well owned by
Mobil Oil Corporation in East Breaks Block 117. Under  agreements with Mobil the
owners of the East  Breaks  Block 160  platform  share in  certain  fees paid by
Mobil.








                                                       

<PAGE>



      The  following  table  lists  the  field  names,  block  numbers,  working
interests, net revenue interests and number of wells of the properties.

                                      Working        Net Revenue     Number of
        Field/Block                   Interest          Interest    Active Wells

     East Breaks 160 Field
     EB 160 (OCS 2647)                0.3333            0.2778           13
     EB 161 (OCS 2648)                0.3333            0.2778           10

     High Island A-302 Field
     HI A-302 (OCS 2732)              0.3333            0.2778            5

     High Island A-309 Field
     HI A-309 (OCS 2735)              0.4500            0.3750            9
     HI A-310 (OCS 3378)              0.5500            0.4583            8

     High Island A-330 Field
     HI A-330 (OCS 2421)              0.1200            0.1000           25
     HI A-349 (OCS 2743)              0.1200            0.1000            6
     WC 613 (OCS 3286)                0.1200            0.1000            3

     High Island A-474 Field
     HI A-474 (OCS 2366)              0.1200            0.1000           18
     HI A-489 (OCS 2372)              0.1200            0.1000           22
     HI A-499 (OCS 3118)              0.1310            0.1092            6
     HI A-475 (OCS 2367)              0.1200            0.1000            0

     West Cameron 180 Field
     WC 144 (OCS 1953)                0.1250            0.1042            7

      Average net production  from these fields during 1995 was 15.6 MMcf of gas
per day and 592  barrels of oil per day and cash flow net to the  interests  was
$9.5 million. These fields have potential for substantial reserve and production
increases.  Net  Probable  Reserves  of 10.8  Bcf  and 213 MBO and net  possible
reserves  of 21.0 Bcf and 323 MBO have been  identified  by the Company in third
party engineering. Many of the fields have additional reserve potential that has
not yet been quantified.

East Breaks 160 Field

      This field  consists  of two blocks,  East  Breaks 160 and 161.  The water
depth ranges from 900' to 1,100'. The Company owns a 33.3% working interest with
a 27.8% net revenue interest.  Unocal Corporation is the operator.  The 1995 net
cash flow was $2.8  million.  East Breaks 160 field  produces from an anticlinal
ridge  with 12  productive  horizons.  A  proprietary  3-D  survey  was shot and
processed in 1990.  Net proved  reserves are  estimated to be 15.2 Bcf and 1,641
MBO. The GA-2 and HB-2 reservoirs account for most of the reserves.
 An additional 1.8 Bcf and 77 MBO of net Probable Reserves have been identified.
Additional income is derived from processing fees from the Mobil Oil Corporation
recent  discovery  in adjacent  Block 117.  This subsea well is tied back to the
East Breaks 160 platform.  Management  believes there are numerous reservoirs in
the field which have not been adequately evaluated with wells.  Additional wells
on Blocks  160 and 161 as well as  adjacent  blocks are under  consideration  by
Unocal Corporation.


High Island A-302 Field

      High Island  Block A-302 is in  approximately  200' of water.  The Company
owns a  33.3%  working  interest  with a  27.8%  net  revenue  interest.  Unocal
Corporation is the operator. Production is from four producing

                                                      

<PAGE>



horizons on a faulted anticlinal structure. A speculative 3-D survey was shot in
1991 and processed in 1992. Net Proved  Reserves are estimated to be .3 Bcf. One
well is producing,  with one well scheduled to be recompleted in 1997 to exploit
net Probable  Reserves of 5.1 Bcf.  Management  believes these probable reserves
should  be  recoverable  from two  sands in an area  which  seismic  shows to be
undrained by the existing wells.

High Island A-309 Field

      High Island  A-309 field  consists  of two blocks,  High Island  A-309 and
A-310, in  approximately  200' of water. The Company owns a 45% working interest
in Block A-309 and a 55% working  interest in Block  A-310.  Phillips  Petroleum
Company  is the  current  operator.  The 1995 net  cash  flow was $5.9  million.
Production  is from three faulted  anticlines  with 18  productive  horizons.  A
proprietary  3-D  seismic  was shot in 1988 and  processed  in 1989.  Net Proved
Reserves are  estimated to be 7.3 Bcf.  One  additional  well will be drilled to
recover  the  estimated  4.8 Bcf in four  zones.  An  extensive  field study was
completed  in 1993.  Numerous  additional  wells  and  recompletions  are  under
consideration for 1997.

High Island A-330 Field

     The field  consists of three blocks,  High Island A-330,  High Island A-349
and West Cameron 613. The field is located in 280' of water.  The Company owns a
12%  working  interest  with a 10% net  revenue  interest.  Coastal  Oil and Gas
Corporation is the current operator.  Three wells have been recompleted in 1996.
This field produces from a faulted  anticline with 24 productive  horizons.  The
Company has 2-D seismic over this field,  but a 3-D seismic  survey was recently
shot. Significant upside potential was delineated by the 3-D seismic. A well has
been  proposed by the  operator for 1997 and other wells and  recompletions  are
under consideration.

High Island A-474 Field

      This field  consists of three full blocks in the High Island Area,  A-474,
A-489,  A-499,  and  part of Block A- 475.  The  water  depth is 250' to 285 and
Phillips  Petroleum  Company is the  operator.  The  Company  owns a 12% working
interest  with a 10% net  revenue  interest in Blocks  A-474 and A-489,  a 13.1%
working  interest  with a 10.9% net revenue  interest in Block A-499,  and a 12%
working  interest  with a 9% net revenue  interest in Block A-475.  There are 23
productive  horizons in this faulted  anticline.  A proprietary  3-D seismic was
shot in 1991 and processed in 1993. Net Proved Reserves are 3.6 Bcf and 174 MBO.
An additional 2.8 Bcf and 130 MBO of net probable reserves have been identified.
The most significant reserve base is the competitive G-15 Sand which has over 75
Bcf gross  reserves  remaining.  Phillips  is  currently  drilling a well and is
planning several recompletions and additional wells in 1997.

West Cameron 180 Field

      This field consists of a single block,  West Cameron 144, in 40' of water.
Texaco is the operator.  The Company owns a 12.5% working  interest with a 10.4%
net  revenue  interest.  The  producing  feature  is a north-  plunging  faulted
anticline  that  underlies  West  Cameron  Blocks  173 and 180.  There are three
productive  horizons.  Net Proved  Reserves are estimated to be 353 MMCF, all of
which are producing in one well.  Net probable  incremental  producing  reserves
from this well add another  375 MMCF.  Net  Probable  and  Possible  Undeveloped
Reserves of 16.4 Bcf are targeted by three proposed wells.

West Delta Properties

     These properties  consist of 13,565 acres in Blocks 52 through 56 and Block
58 in the West Delta Area,  offshore  Louisiana.  The properties  have 36 wells,
five of which were recently  drilled.  In 1994 the Company spent $6.9 million on
drilling four wells and the recompletion of eight wells on these properties. The
Company is the operator and generally owns 100% of the working interest, with an
87.5% net revenue  interest  with respect to these  properties.  Presently,  the
wells produce from depths ranging from 1,200 feet to 12,500 feet. Because of the
existing surface  structures and production  equipment,  additional wells can be
added on the properties with lower completion costs.
                                                     
<PAGE>



     The West  Delta  Properties  were  acquired  from  Conoco,  Inc.,  Atlantic
Richfield  Company  (now  Vastar  Resources,  Inc.),  OXY USA,  Inc.  and Texaco
Exploration and Production, Inc. in May 1991. During 1995 the properties had net
production  averaging  approximately  20,643 Mcf of natural  gas per day and 264
barrels of oil and condensate per day.

     During 1994 the Company  farmed out the deep rights  (below 11,300 feet) to
an 1,875 acre parcel in Block 58 to Energy Development Corporation which drilled
a successful  well to 16,500 feet.  Production  commenced  in April,  1995.  The
Company  retained a 12 1/2%  overriding  royalty  interest in that  acreage that
converts to 15% overriding  royalty interest at Payout. The well has produced as
much as 21,000  Mcf per day and 1,500  barrels  of  condensate  per day.  Energy
Development Corporation was subsequently acquired by Samedan Oil Corporation.

     The  Company  generated a prospect  in the  northern  portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding  royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently  completed on the western  portion of the  Company's  properties in
West Delta.

         The main  production  facility on the West Delta  Properties  is a four
platform  complex  designated  as Tank  Battery  #3.  There  are four  ancillary
platforms in the eastern portion of the properties connected to Tank Battery #3.
Three wells are on one of these  platforms.  In the western portion there is one
production  platform  designated  as Platform "D" in Block 58, with three wells.
The  remaining  30 wells are located on satellite  structures  connected to Tank
Battery  #3 or one of its  ancillary  platforms.  Eight  wells  produce  oil and
natural gas. The remaining wells produce only natural gas.

     The Company is replacing the pipeline  connecting  "D" Platform in Block 58
with Tank  Battery  #3 in Block 54 with two new 6"  pipelines.  For this  reason
production from Block 58 is currently shut-in.

         In  connection   with  the  acquisition  of  the  West  Delta  offshore
properties  the Company  provides  the sellers  with a  $4,100,000  plugging and
abandonment bond collateralized in part with a bank escrow account.
See "The Company - Plugging and Abandonment Escrows".

Zapata Properties

           On July 12th,  1995,  the Company  entered  into a Purchase  and Sale
Agreement with Zapata Exploration  Company ("Zapata") to acquire all of Zapata's
offshore oil and gas properties in the Gulf of Mexico. The properties consist of
East Breaks Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372,
South  Timbalier  Block 185 and West Cameron  Block 538,  totaling  31,134 gross
acres.  The  transaction  was closed July 26,  1995.  The  Company  took over as
operator of the East Breaks and West  Cameron  properties  effective at closing.
The East Cameron  property is operated by Anadarko  Petroleum  Corporation.  The
Eugene Island property is operated by Unocal Corporation and the South Timbalier
property is operated by Louisiana Land & Exploration Company. Proved reserves at
December 31, 1995  attributable  to the  Company's net working  interests,  were
222,000 Bbls and 15.3 Bcf of natural gas. Management has identified probable and
possible reserves  attributable to these properties.  During 1995, subsequent to
July 26th, the properties  produced 20,000 barrels of oil and 1.8 Bcf of natural
gas, net to the Company's interest.

         In addition to the mineral interests acquired,  the Company purchased a
100% interest in a 31 mile natural gas pipeline  connecting  the Company's  East
Breaks  110  platform  to the  High  Island  Offshore  System  and a 22 mile oil
pipeline  which  connects  the East  Breaks 110  platform  with the High  Island
Pipeline System. HIOS and HIPS are the primary natural gas and crude oil systems
in that part of the Gulf of Mexico.

         The Company's East Breaks 110 platform has significant  excess capacity
for both crude oil and natural gas. Prior to the  acquisition of the properties,
Zapata had entered  into a  Facilities  Sharing  Agreement  with AGIP  Petroleum
Company,  Inc. ("AGIP") to operate and process for AGIP's subsea wells in Blocks
112 and 157.  Under the Agreement  AGIP will pay certain fees to the Company and
split the cost of operating the East Breaks 110 platform with the Company, based
upon each  company's  proportion  of  production.  A  portion,  not to exceed $6
million,  of the monies  earned  pursuant  to this  Agreement  are being paid to
Zapata as part of the acquisition of the properties.


         The  purchase  price for the assets  acquired  in the  transaction  was
$2,748,000  in cash and the  obligation  to pay a  production  payment to Zapata
based upon future  production.  The production  payment is based upon production
from the East Breaks 109 Field after  production  of 12 Bcfe gross (10 Bcfe net)
measured from October 1, 1994. The Company will pay to Zapata $.4167 per Mcfe on
the next 27 Bcfe produced, if that much
<PAGE>



is produced. Payments to Zapata on this production payment are to be made by the
Company when it is paid for the oil or gas. The  Company's  oil and gas reserves
are calculated net of this production payment.

Bayou Sorrel Field

           As of December 27, 1995 the Company  acquired  from Shell Western E &
P, Inc.  all of its  interest in the Bayou  Sorrel  Field in  Iberville  Parish,
Louisiana.  The purchase price of the field and a related receivable of $600,000
was $10,455,000 in cash, including a $205,000 brokers' fee.

          Effective September 1, 1996 the Company sold the Bayou Sorrel Field to
National Energy Group, Inc. for $11 million.  The Company received $9 million in
cash and $2 million in shares of National Energy Group,  Inc. common stock.  The
Company  retained a 3%  overriding  royalty  interest  in the deep rights of the
field below 11,000 feet. The transaction closed November 22nd.


Oil and Gas Information

         The following tables set forth selected oil and gas information for the
Company. Future results may vary significantly from the amounts reflected in the
information  set forth herein because of normal  production  declines and future
acquisitions. The transaction closed November 22nd.

                             Proved Reserves (a) (b)

     The following table sets forth information as of November 1, 1996 as to the
estimated Proved Reserves attributable to the Company's properties.

Oil and liquids (Bbls):
       Proved Developed Reserves ............................    2,438,000
       Proved Undeveloped Reserves ..........................      482,000
                                                               -----------
           Total Proved Reserves ............................    2,920,000
Natural gas (Mcf):
       Proved Developed Reserves ............................   52,192,000
       Proved Undeveloped Reserves ..........................   12,733,000
                                                               -----------
           Total Proved Reserves ............................   64,925,000

     (a) Calculated by the Company in accordance  with the rules and regulations
of the SEC,  based upon  November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of gas, adjusted for basis differentials, BTU content of gas and
specific gravity of oil. The Company's independent reservoir engineers prepare a
reserve report as of the end of each calendar year.

     (b)  Includes  the  recently  acquired  Amoco  Properties  and excludes the
recently sold Bayou Sorrel Field.



                          Estimated Future Net Revenues
                          from Proved Reserves (a) (b)

         The following  table sets forth  information as of November 1, 1996  as
to the estimated future net revenues (before deduction of income taxes) from the
production  and  sale  of the  Proved  Reserves  attributable  to the  Company's
properties.
                                                    Proved            Total
                                                  Developed          Proved
                                                   Reserves         Reserves
Estimated Future net revenues (c):
         1996(2 mos.)......................    $  6,290,000         6,290,000

                                           

<PAGE>



         1997 .............................     35,573,000         36,847,000
         1998 .............................     25,008,000         31,607,000
         1999 .............................     16,910,000         22,331,000
         Thereafter .......................     53,627,000         79,623,000
                                              ------------       ------------
         Total ............................  $ 137,408,000   $    176,698,000
Present value (10%) of estimated future net
         revenues (SEC 10 Value)...........  $ 104,868,000   $    128,092,000

     (a) Calculated by the Company in accordance  with the rules and regulations
of the SEC,  based upon  November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of offshore gas, adjusted for basis  differentials,  BTU content
of gas  and  specific  gravity  of  oil.  The  Company's  independent  reservoir
engineers prepare a reserve report as of the end of each calendar year.

     (b)  Includes  the  recently  acquired  Amoco  Properties  and excludes the
recently sold Bayou Sorrel Field.

     (c) Estimated future net revenues represent estimated future gross revenues
from the  production  and sale of Proved  Reserves,  net of estimated  operating
costs,  future  development  costs estimated to be required to achieve estimated
future  production  and estimated  future costs of plugging  offshore  wells and
removing offshore structures.

                        Production, Price, and Cost Data

          The following  table sets forth certain  production,  price,  and cost
data  with  respect  to the  Company's  properties,  for the three  years  ended
December 31, 1995,  1994 and 1993 and the nine months ended  September  30, 1996
and 1995.
<TABLE>
<CAPTION>
 
                                                For the nine months                         For the years
                                                ended September 30,                       ended December 31,

                                               1996(a)           1995            1995           1994           1993
                                              -----              ----          ------           ----           ----
Oil:
<S>                                           <C>             <C>            <C>            <C>             <C>    
         Net Production (Bbls)(b)             203,000         122,000        170,000        137,000         180,000
         Revenue........................$.  3,724,000  $    1,989,000  $   2,853,000  $   2,103,000  $    3,003,000
         Average net Bbls per day                 741             447            466            375             493
         Average price per Bbl          $       18.34  $        16.30  $       16.78  $       15.35  $        16.69

Gas:
         Net Production(Mcf)(b)             4,590,000       7,578,000      9,850,000      8,139,000       5,586,000
         Revenue........................$   9,533,000  $   11,671,000  $  15,594,000  $  15,235,000  $    9,602,000
         Average net Mcf per day               16,800          27,800         27,000         22,300          15,300
         Average price per Mcf          $        2.08  $         1.54  $        1.58           1.87  $         1.72

Total Revenues..........................$  13,257,000  $   13,660,000  $  18,447,000  $  17,338,000  $   12,605,000




Production Costs:
         Production cost                    6,049,000     5,729,000       8,055,000      5,231,000       5,297,000
         Mcfe(c)                            5,808,000     8,310,000      10,870,000      8,961,500       6,666,000
         Production costs per Mcfe(c)            1.04           .69             .74            .58             .79
</TABLE>

------
(a)      The  information  shown for 1996 was impacted by the explosion and fire
         on April 24th at West Delta Tank  Battery #3,  which  resulted in those
         fields being off  production  until  October 7, 1996,  when  production
         resumed. For that reason management would not consider these production
         costs to be indicative of the future.  Also this  information  includes
         Bayou Sorrel Field  through  August 31, the date of its sale,  and does
         not include any information with respect to the recently acquired Amoco
         Properties.
(b)      Production  information  is net of all  royalty  interests,  overriding
         royalty  interest  and the  net  profits  interest  in the  West  Delta
         Properties owned by the Company's former lenders.
(c)      Oil production is converted to Mcfe  (Equivalent  Mcf) at the rate of 6
         Mcf per Bbl,  representing  the estimated  relative  energy  content of
         natural gas to oil.

<PAGE>

                               Productive Wells(a)

         The  following  table sets forth the number of  productive  oil and gas
wells, as of the date hereof, attributable to the Company's properties.

Gross productive offshore wells (b):                            Company Operated

         Oil     . . . . . . . . . . . . . . . 33. . . . .  . . . . . .  10
         Gas   . . . . . . . . . . . . . . . . 90. . . . . .  . . . . .  42
                                               --                        --
           Total  . . . . . . . . . . . .  . .123 . . . . . .  . . . . . 52

Net productive offshore wells (c):
         Oil   . . . . . . . . . . . . . .. . . 1. . . . . .  . . . . .. 10
         Gas . . . . . . . . . . . . . . .. . .49 . . . . . .  . . . . ..38
                                               --                        --
           Total  . . . . . . . . . . . .  . . 64 . . . . . .  . . . . ..48

-----
(a)      Productive  wells  consist  of  producing  wells and wells  capable  of
         production,  including  shut-in wells and water  disposal and injection
         wells.  One or more completions in the same borehole are counted as one
         well.
(b)      A "gross  well" is a well in which a working  interest  is  owned.  The
         number  of  gross  wells  represents  the sum of the  wells  in which a
         working interest is owned.
(c)      A "net well" is deemed to exist when the sum of the fractional  working
         interests in gross wells equals one. The number of net wells is the sum
         of the fractional working interests in gross wells.

                                Leasehold Acreage

         The  following  table sets forth the  developed  acreage as of the date
hereof attributable to the Company's properties, excluding onshore acreage which
is no longer significant.

Developed offshore acreage (a):
         Gross acres (b)..........................  103,771
         Net acres (c)............................   43,645

(a)      Developed acreage is acreage assignable to productive wells.
(b)      A "gross  acre" is an acre in which a working  interest  is owned.  The
         number  of  gross  acres  represents  the sum of the  acres  in which a
         working interest is owned.
(c)      A "net acre" is deemed to exist when the sum of the fractional  working
         interests in gross acres equals one. The number of net acres is the sum
         of the fractional working interests in gross acres.










                                                      

<PAGE>





                               Drilling Activities

         The following  table sets forth the number of gross  productive and dry
wells in which the  Company had an  interest,  that were  drilled and  completed
during  the three  years  ended  December  31,  1995 and the nine  months  ended
September 30, 1996.  Such  information  should not be  considered  indicative of
future  performance,  nor should it be assumed  that  there is  necessarily  any
correlation  between the number of productive  wells drilled and the oil and gas
reserves  generated  thereby  or the costs to the  Company of  productive  wells
compared to the costs to the Company of dry wells.

                         Developmental Wells           Exploratory Wells
                       Completed        Dry         Completed         Dry
                      Oil     Gas    Oil    Gas    Oil     Gas     Oil    Gas
                      ---     ---    ---    ---    ---     ---     ---    ---
1993                   3       0      0      0      0       0       0      0
1994                   5       4      0      0      0       1       0      0    
1995                   0       0      0      0      0       0       0      3
1996 (9 mos)           0       0      2      0      0       0       0      0
                     ----    ----   ----   ----   -----   ----    ----   ----
Total                  8       4      2      0      0       1       0      3


Title to Oil and Gas Properties

         In the case of acquired  properties title opinions are obtained.  Prior
to  the  commencement  of  drilling   operations  a  thorough   drillsite  title
examination is conducted and curative work performed with respect to significant
defects.


Undeveloped Acreage and Unproved Properties

          The  Company  does  not  hold  interest  in a  significant  amount  of
Undeveloped Acreage to which no Proved Reserves have been assigned. However, the
Company  retained a 3% overriding  royalty  interest in depths below 11,000 feet
when it sold the Bayou Sorrel  Field,  and no reserves  have been  attributed to
these depths.



                                                        

<PAGE>




                                   MANAGEMENT
                             Officers and Directors

         The Company has a classified Board of Directors.  Directors are elected
to serve for  three-year  terms and  until  their  successors  are  elected  and
qualified.  One-third of the  directors  stand for  election  each year as their
terms expire.  The Board of Directors consists of three employees of the Company
and six independent directors.

         Officers  are  elected by and serve at the  discretion  of the Board of
Directors.

         Set forth below are the names,  ages,  and positions of the persons who
are executive officers and directors of the Company.

                                Director
          Name             Age    Since              Position

H. James Maxwell ..........52      1992 Chairman of the Board, President,
                                        Chief Executive Officer, and Director(a)
Bob F. Mallory ............64      1992 Chief Operating Officer,  Executive Vice
                                        President and Director(a)
Larry M. Wright ...........52      1992 Executive Vice President and
                                        Director(b)
Robert G. Wonish ..........43      ---  Vice President

Edward A. Bush.............53      ---  Vice President

William J. Doyle ..........45      ---  Vice President

Todd R. Bart ..............32      ---  Chief Financial Officer, Secretary and
                                        Treasurer
A. Theodore Stautberg, Jr..50      1993 Director(c)-Compensation Committee

Donald W. Chesser .........57      1992 Director(a)

James B. Kreamer ..........56      1993 Director(c)

N. Lynne Sieverling .......59      1992 Director(b)-Audit and Compensation
                                        Committees
Mark C. Barrett............46      1996 Director(b)-Audit and Compensation
                                        Committees
Michael Springs............47      1996 Director(c)-Audit Committee


(a)      These persons are designated as Class II directors,  with their term of
         office expiring at the annual meeting of shareholders in 1998.
(b)      These persons are  designated as Class I directors,  with their term of
         office expiring at the annual meeting of shareholders in 1997.
(c)      These persons are designated as Class III directors, with their term of
         office expiring at the annual meeting of shareholders in 1999.

         Set forth below are descriptions of the principal  occupations,  during
at least the past five years,  of the directors  and  executive  officers of the
Company.

     H. James Maxwell received a B.A. degree in Economics from the University of
Missouri-Kansas City 

<PAGE>



and  received  his Law Degree from that same  university  in 1972.  Mr.  Maxwell
practiced  securities  law from  1972 to 1984,  and was a  frequent  author  and
speaker on oil and gas tax and securities law. He served as a General Partner of
Castle Royalty Limited  Partnership from 1984 to 1988,  Managing General Partner
of PAN Petroleum MLP from 1987 to 1992,  both of which were  predecessors of the
Company, and President, CEO and Chairman of the Company from 1992 to date. He is
a member of the Executive Committee and Personnel Committee.

         Bob F. Mallory  received his Ph.D.  in Geology from the  University  of
Missouri in 1968 and a B.A. in Geology from the  University  of Wichita in 1961.
He began  consulting in the oil industry in 1980. He served as a General Partner
of Castle Royalty Limited Partnership from 1984 to 1988, as a General Partner of
PAN  Petroleum  MLP from 1987 to 1992,  both of which were  predecessors  of the
Company, and Executive Vice President and Chief Operating Officer of the Company
from  1992 to date.  He is a member of the  Executive  Committee  and  Personnel
Committee.

         Larry M.  Wright  received  his B.S.  Degree  in  Engineering  from the
University of Oklahoma in 1966.  From 1966 to 1976 he was with Union Oil Company
of  California  (UNOCAL).  From 1976 to 1980,  he was with  Texas  International
Petroleum  Corporation,  ultimately as division operations manager. From 1980 to
1981,  he was  with  what  is now  Transamerica  Natural  Gas  Company  as  Vice
President-Exploration  and  Production.  From  1981-1982,  he  was  Senior  Vice
President of Operations for Texas International Petroleum Corporation, and, from
1983 to 1985, he was Executive  Vice President of Funk Fuels Corp., a subsidiary
of  Funk  Exploration.  From  1985  to  1993,  Mr.  Wright  was  an  independent
consultant.  From 1993 to date, he has served as Executive Vice President of the
Company. He is a member of the Executive Committee and Personnel Committee.

         Robert G. Wonish  received his B.S. in Mechanical  Engineering  in 1975
from the University of Missouri-Rolla.  He was a production  engineer with Amoco
from 1975 to 1977, Napeco,  Inc. from 1977 to 1979;  Division Operation Engineer
with Texas  International  from 1979 to 1980;  Production  Manager  with  Cliffs
Drilling  Company  from  1980 to 1984  and  District  Superintendent  with  Ladd
Petroleum  Corporation  from  1985 to  1991.  He then  worked  as a  consultant,
starting with the Company in 1992, and became an employee in 1993.

     Edward A. Bush  received his B.S.  Degree in Geology  from Baldwin  Wallace
College in 1964 and his M.A. in Geology from Bowling  Green State  University in
1966. He served in various  geological  and  exploration  capacities  with Exxon
(1968-75),  Union Texas Petroleum  (1975-79),  Home Petroleum  Corp.  (1979-81),
Traverse Oil Co. (1981-83) and Sohio Petroleum Co. (1983-85).  From 1985 to 1995
he served first as Exploration  Manager,  then Vice President of Exploration and
later Vice  President of Operations  for Columbia Gas Devp.  Corp.  From 1995 to
1996 he served as Vice  President-Exploration  and then the  President of Howell
Petroleum Corp.

         William J. Doyle received his Masters in Geology in 1975 from Texas A&M
University  and his B.S. in Earth Sciences from the University of New Orleans in
1973.  From 1975 to 1978 he was a geologist  with Mobil Oil focusing on offshore
Gulf of Mexico  projects.  From 1978 to the present he has worked as an employee
and consultant for various oil and gas  exploration  companies  operating in the
Gulf Coast. He joined the Company as a consulting geologist in 1992 and became a
Vice President in 1995.

     Todd R. Bart  received his B.B.A.  in  Accounting  from  Abilene  Christian
University in 1987. He worked in the energy industry with Pennzoil  Company from
1987 to 1990 and the public  accounting firm of Arthur Andersen and Company from
1990 until 1992. From 1992 to 1995 he worked for Yellow Freight System,  Inc., a
trucking company, in financial  accounting and reporting.  He joined the Company
as  Controller in 1995 and was elected Chief  Financial  Officer,  Treasurer and
Secretary in 1996.  He received his C.P.A.  designation  in Texas in 1990 and in
Kansas in 1993, and is a member of the A.I.C.P.A.

     A. Theodore Stautberg, Jr. has since 1981 been the President and a director
of Triumph  Resources  Corporation and its parent  company,  Triumph Oil and Gas
Corporation of New York.  Triumph  engages in the oil and gas business,  assists
others in  financing  energy  transactions,  and  serves as  general  partner of
Triumph
                                                        

<PAGE>



     Production L.P. Mr.  Stautberg is also the president of Triumph  Securities
Corporation  and BT Energy  Corporation.  Prior to forming  Triumph in 1981, Mr.
Stautberg was a Vice President of Butcher & Singer,  Inc., an investment banking
firm, from 1977 to 1981.  From 1972 to 1977, Mr.  Stautberg was an attorney with
the  Securities  and  Exchange  Commission.  Mr.  Stautberg is a graduate of the
University of Texas and the University of Texas School of Law.

     Donald W.  Chesser  received  his  B.B.A.  in  Accounting  from  Texas Tech
University  in 1963 and has  served  with  several  CPA firms  since  that time,
including eight years with Elmer Fox and Company. From 1977 to 1981, he was with
IMCO  Enterprises,  Inc. Since 1982 he has been a  shareholder  and President of
Chesser & Company, P.A., a CPA firm. He is also President of Financial Advisors,
Inc., a registered investment advisor.
 
     James B. Kreamer  received his B.S.  Degree in Business from the University
of Kansas in 1963 and has been  active in  investment  banking  since that time.
Since 1982 he has managed his personal investments.

         N. Lynne  Sieverling  received his B.S.  Degree in Accounting  from the
University  of  Kansas  in 1959 and has  practiced  as a CPA  since  graduation,
serving 17 years as a partner with the accounting firm of Coopers & Lybrand. Mr.
Sieverling  has also been  actively  involved in the oil and gas industry  since
1984 both as an  investor  and as an  operator  of oil and gas leases in Kansas,
Oklahoma  and  North  Dakota.  

         Mark   C.   Barrett    received    his   B.S.    Degree   in   Business
Administration/Accounting  in 1972 and is  licensed  to  practice as a Certified
Public  Accountant  in both  Kansas and  Missouri.  He was a partner in the firm
Drees  Dunn  Lubow and  Company  from 1974  until  1981.  He  founded  Barrett &
Associates, a CPA firm, in 1981 and is the president and majority shareholder in
that firm. His CPA firm served as the Company's  independent  public accountants
from 1985 to 1995.

     Michael  Springs  graduated from the Medical Field Service  School,  Brooke
Hospital,  San Antonio,  Texas in 1971 and the  University  of Missouri,  Kansas
City,  in 1969 with a degree in  Business.  He is the  President  and founder of
Ortho-Care, Inc. of Kansas City, Missouri and Ortho-Care Southeast of Charlotte,
North  Carolina.  Ortho-Care,  Inc. is a  manufacturer  of  orthopedic  fracture
management and sports  medicine  products,  and holds a number of patents in the
field. Mr. Springs is also controlling partner in Ortho-Implants,  a distributor
of total joint replacement prosthesis.

         None  of  the  officers  or  directors  serve  pursuant  to  employment
agreements.

Board of Directors

         The Board of Directors has the  responsibility  for establishing  broad
corporate policies and for the overall  performance of the Company,  although it
is not involved in day-to-day operating details.  Directors are kept informed of
the Company's business by various reports and documents, as well as by operating
and financial reports presented at Board and committee  meetings by the Chairman
and other officers.

         Meetings of the Board of Directors are held  regularly each quarter and
there is also a  meeting  following  the  annual  meeting  of the  shareholders.
Additional  meetings,  including  meetings by telephone  conference call, of the
Board may be called whenever needed.  The Board of Directors of the Company held
six (6) meetings in 1995,  two of which were  meetings by  telephone  conference
call.  Each  director  attended  all  meetings of the Board,  except for the two
telephone  conference  calls, of which James B. Kreamer was not connected either
time and  Allen H.  Sweeney  and  Thomas  E.  Clark ( then  directors)  were not
connected on one conference call.

Committees of the Board

         The  committees  established  by the Board of Directors to assist it in
the discharge of its  responsibilities  are described  below.  The  biographical
information  on each director  identifies  the committee  memberships  currently
held.

                                                        

<PAGE>



         The  Executive  Committee  has  three  members,  all of whom  are  also
officers of the Company.  The Committee  meets on call  whenever  needed and has
authority to act on most matters  during the intervals  between Board  meetings.
The Executive Committee also serves as the Personnel Committee.

         The Audit  Committee has three members,  none of whom is an employee of
the Company. The Committee meets with management to consider the adequacy of the
internal controls of the Company and the objectivity of its financial reporting;
the  Committee  also meets with the  independent  accountants  concerning  these
matters.   The  Committee  recommends  to  the  Board  the  appointment  of  the
independent  accountants,  subject to  ratification  by the  shareholders at the
annual meeting.  The independent  accountants  periodically  meet alone with the
Committee and have unrestricted access to the Committee.  The Committee met once
in 1995.

         The  Compensation  Committee  has  three  members,  none  of whom is an
employee of the Company.  It makes  recommendations to the Board with respect to
the  compensation  of  management  of the  Company and the  Company's  Long-Term
Incentive Plan. The Committee met twice in 1995.

Compensation of Directors

          Directors  receive  travel  expenses  incurred in  attending  Board of
Directors or committee meetings.  Officers of the Company who serve as directors
do not receive special  compensation  for serving on the Board of Directors or a
committee thereof.  However, during 1995 Messrs.  Stautberg,  Chesser,  Sweeney,
Kreamer and Sieverling,  the then non-employee directors, were each issued 1,039
Common  Shares as a $5,000  bonus.  In 1995 Mr.  Chesser was issued  warrants to
acquire  25,000  Common Shares at $2.50 per share,  which  expired  December 31,
1995, for services  performed for the Company in 1991.  During 1995 he exercised
those warrants. See "Certain Relationships and Related Transactions," herein.

     Newly  elected  non-employee  directors  are granted a one-time  restricted
stock award in Common  Shares equal in value to $10,000 upon their being elected
to the Board. See "Long-Term Incentive Plan," herein.

                            Long-Term Incentive Plan

         The  Company's  Long-Term  Incentive  Plan  (the  "Long-Term  Incentive
Plan"),  adopted in 1992,  provides for the granting to certain officers and key
employees of the Company and its participating  subsidiaries incentive awards in
the form of stock options,  stock appreciation  rights ("SARs"),  Common Shares,
and cash awards. The Long-Term  Incentive Plan is administered by a committee of
non-employee members of the Board of Directors with respect to awards to certain
executive  officers  of the  Company  but may be  administered  by the  Board of
Directors  with  respect to any other  awards  (either,  the "Plan  Committee").
Except for certain automatic awards, the Plan Committee has discretion to select
the employees to be granted  awards,  to determine the type,  size, and terms of
the awards, to determine when awards will be granted,  and to prescribe the form
of the instruments evidencing awards.

         Options,  which include  nonqualified stock options and incentive stock
options,  are rights to purchase a specified  number of Common Shares at a price
fixed at the time the option is granted.  Payment may be made with cash or other
Common  Shares  owned by the  optionee  or a  combination  of both.  Options are
exercisable at the time and on the terms that the Plan Committee determines. The
payment  of the  option  price  can be made  either  in  cash  or by the  person
exercising the option turning in to the Company  shares  presently  owned by the
person,  which would be valued at the then current market price. SARs are rights
to receive a payment,  in cash or Common Shares or both, based on the value of a
Common  Share.  A stock  award is an award of Common  Shares or  denominated  in
Common Shares that may be subject to a restriction against transfer as well as a
repurchase  option  exercisable  by  the  Company.  During  the  period  of  the
restriction,  the employee may be given the right to vote and receive  dividends
on the shares  covered by  restricted  stock  awards.  Cash awards are generally
based on the extent to which pre-established performance goals are achieved over
a  pre-established  period  but may also  include  individual  bonuses  paid for
previous,  exemplary  performance.  It  is  currently  expected  that  the  Plan
Committee  will  determine  performance  objectives  and award levels before the
beginning of each plan year.

                                                        

<PAGE>



         The  Long-term  Incentive  Plan  provides for the issuance of a maximum
number  of Common  Shares  equal to 20% of the  total  number  of Common  Shares
outstanding from time to time. Unexercised SARs, unexercised options, restricted
stock, and performance  units under the Long-term  Incentive Plan are subject to
adjustment in the event of a stock dividend,  stock split,  recapitalization  or
combination  of  the  Company,  merger,  or  similar  transaction  and  are  not
transferable except by will and by the laws of descent and distribution.  Except
when a participant's employment terminates as a result of death, disability,  or
retirement under an approved retirement plan or following a change in control in
certain  circumstances,  an award generally may be exercised (or the restriction
thereon may lapse) only if the participant is an officer,  employee, or director
of the Company or a  subsidiary  at the time of exercise or lapse or, in certain
circumstance,  if the exercise or lapse occurs within 180 days after  employment
is terminated.

         The  Long-term   Incentive  Plan  allows  for  the  satisfaction  of  a
participant's  tax  withholding  with respect to an award by the  withholding of
Common Shares issuable  pursuant to the award or the delivery by the participant
of  previously  owned  Common  Shares,  in either case valued at the fair market
value, subject to limitations the Plan Committee may adopt.

         Awards  granted  pursuant to the Long-term  Incentive  Plan may provide
that, upon a change of control of the Company, (a) each holder of an option will
be granted a  corresponding  SAR,  (b) all  outstanding  SARs and stock  options
become  immediately  and  fully  vested  and  exercisable  in full,  and (c) the
restriction  period on any restricted  stock award shall be accelerated  and the
restriction  shall expire.  Options and SARs will remain  exercisable  for their
original  terms whether or not  employment  is terminated  following a change in
control.

         The Long-term  Incentive Plan may be amended by the Board of Directors,
except that under current law no amendment that materially  increases the number
of Common Shares  subject to the Long-term  Incentive Plan or that makes certain
other material changes may be made without  shareholder  approval.  No grants or
awards  may  be  made  under  the  Long-term  Incentive  Plan  after  the  tenth
anniversary  of the Closing  Date.  No  shareholder  approval will be sought for
amendments to the Long-term  Incentive Plan except as required by law (including
Rule  16b-3  under the  Exchange  Act) or the rules of any  national  securities
exchange on which the Common Shares are then listed.

         There are no incentive  awards  pertaining  to stock  options,  SARs or
Common Shares issued or outstanding under the Long-term Incentive Plan.

         Under the Company's  Long-Term  Incentive  Plan  beginning in 1996, all
employees on December 31 of each year share a bonus equal to 5% of the Company's
pre-tax net income, computed in accordance with GAAP, exclusive of extraordinary
and  non-recurring  items.  The  bonuses  will be paid to all full time (1,000 +
hours)  employees  at December  31. The bonus will be paid upon  delivery of the
independent audit. The bonus shall be allocated to the full time employees based
upon their salary at December 31 of that year.

         Each non-employee  director of the Company who becomes a director will,
on the day after the first  meeting  of the  Board of  Directors  at which  that
director is in attendance,  automatically be granted a restricted stock award of
the  number  of  Common  Shares  that  have a value of  $10,000,  which  will be
calculated based on the average trading price of the Common Shares during the 60
days immediately preceding the date of grant. These restricted stock awards will
vest over two years,  with  one-third  vesting six months  following the date of
grant,  another one-third vesting on the first anniversary of the date of grant,
and the last one-third vesting on the second anniversary of the date of grant so
long as the  non-employee  director  remains a director of the  Company  through
those vesting dates.

         Each non-employee  director will be entitled to vote each share subject
to these  restricted  stock  awards  from the date of grant until the shares are
forfeited,  if ever.  The Long-term  Incentive  Plan requires each  non-employee
director  to make an  election  under  Section  83(b) of the Code to include the
value of the  restricted  stock in his income in the year of grant and  provides
for cash awards to the non-employee  directors in amounts  sufficient to pay the
federal income taxes due with respect to the award.


                                                        
<PAGE>



         The following table shows  information with respect to restricted stock
awards owned by non-employee directors.

         Name                Date of Grant          Shares               Price
      ----------             -------------          ------               -----
Michael Springs              September 4, 1996       2,447               $4.09
Mark C. Barrett              September 4, 1996       2,447                4.09
                                                     -----
Total                                                4,894

                          Employee Stock Ownership Plan

         In 1994,  the  shareholders  approved the adoption of the PANACO,  Inc.
Employee Stock Ownership Plan ("ESOP").  The primary purposes of the ESOP are to
enable  participants to acquire ownership in the Company and to provide a source
of equity capital to the Company.  The ESOP provides for the  establishment of a
trust to hold ESOP assets which will  primarily  consist of Common Shares of the
Company. The ESOP will be administered by a committee of the Board of Directors.
Subject to the discretion of the Board of Directors,  the Company may contribute
up to fifteen percent (15%) of the participant's  (including employees and other
consultants to the Company)  annual  compensation to the ESOP. The ESOP does not
allow contributions by participants in the Plan.

         Company  contributions  to the ESOP may be in the form of Common Shares
or cash.  Cash  contributions  may be used,  at the  discretion  of the Board of
Directors,  to purchase  Common Shares in the open market or from the Company at
prevailing prices.

         The  allocation  of ESOP  assets is  determined  by a formula  based on
participant compensation.  Participation in the ESOP requires completion of more
than one thousand  (1,000)  hours of service to the Company  within  twelve (12)
consecutive months.

         The ESOP is  intended  to satisfy any  applicable  requirements  of the
Internal  Revenue Code of 1986 and the Employee  Retirement and Income  Security
Act of 1974.  The Company has been  advised that its  contributions  to the ESOP
will be deductible for Federal Income Tax purposes,  and the  participants  will
not recognize  income on their  allocated share of ESOP assets until such assets
are distributed.

         As of  September  30,  1996,  the ESOP  owned of record  59,865  Common
Shares,  allocable  to the  years  prior to 1996,  and  will,  subject  to Board
approval,  be issued 20,460 Common Shares for the first three  quarters of 1996.
Such Common Shares are owned beneficially by the employees of the Company.

                                            Summary Compensation Table

         The  following  table sets forth the  annual  compensation  paid to the
Company's Chief Executive Officer and each executive officer whose  compensation
exceeds $100,000 during 1995.
<TABLE>
<CAPTION>

                                                                             Long-Term Incentive Plan
                                     Annual Compensation                        Awards           Payouts
                                                                                 Securities
                                                      Other       Restricted     Underlying    LTIP       All
Name and Principal                Salary   Bonus      Annual         Stock        Options    Payouts     Other
      Position           Year     ($)(1)    ($)      Comp. ($)    Award(s) ($)      (#)        ($)    Comp.($)(2)
-----------------------------   ------------------------------    ------------    --------------------------------
<S>                      <C>    <C>            <C>        <C>           <C>        <C>          <C>      <C>   
H. James Maxwell         1995   153,500        0          0             0          24,615       0        22,500
  President and Chief    1994   120,000        0          0             0          22,857       0        18,000
  Executive Officer      1993    80,000        0          0             0         115,000       0           0

Larry M. Wright          1995   147,300        0          0             0             0         0        22,100
  Executive Vice         1994   134,000        0          0             0             0         0        20,000
  President              1993   120,000        0          0             0             0         0           0



                                                       

<PAGE>



Robert G. Wonish         1995     92,100       0          0             0             0         0        13,800
  Vice President         1994     78,800       0          0             0             0         0        11,800
                         1993     77,000       0          0             0             0         0           0
</TABLE>

(1)      The 1993 salary figures for Messrs.  Wright and Wonish include payments
         made to them as independent  consultants  before becoming  employees of
         the Company in that year.
(2)      The   other   compensation   figures   for  1995  and  1994   represent
         contributions  to the  accounts of the  employees  under the  Company's
         Employee Stock Ownership Plan. The Plan was adopted in 1994.

           Aggregated Option( Warrants) Exercises in Last Fiscal Year
                        and Fiscal Year End Option Values

         The following  table  provides  information  relating to the number and
value of Common Shares subject to options  exercised  during 1995 or held by the
named executive officers as of December 31, 1995.

<TABLE>
<CAPTION>
                                                                  Number of
                                                             securities underlying      Value of unexercised
                        Securities                           unexercised options             in-the-money
                         acquired           Value            at fiscal year-end ($)     options at year-end($)(2)
          Name          on Exercise (#)   Realized ($)(1)   Exercisable/unexercisable   Exercisable/Unexercisable
---------------------------------------   ---------------   -------------------------   -------------------------
<S>                      <C>                 <C>                     <C>   <C>                  <C>    <C>
H. James Maxwell         250,972             410,129                -0- / -0-                  -0-  / -0-
Larry M. Wright              0                  0               250,000 / -0-               549,375 / -0-
Robert G. Wonish             0                  0                   -0 -/ -0-                  -0-  / -0-
</TABLE>

(1)      Value  realized is  calculated  based upon the  difference  between the
         options exercise price and the market price of the Common Shares on the
         date of  exercise  multiplied  by the  number  of  shares  to which the
         exercise price relates.
(2)      Value of unexercised  in-the-money  options is calculated  based on the
         difference  between the option  exercise price and the closing price of
         the  Common  Shares at  year-end,  multiplied  by the  number of shares
         underlying  the options.  The closing price on December 29, 1995 of the
         Common Shares was $4.4375.

                        Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>

                     Number of       Percent of
                      Securities    total options
                     Underlying      granted to    Exercise or    Market price
                        Options      employees     Base price        at date       Expiration    Grant Date
          Name         Granted      in fiscal year  ($/Share)      of grant($)         Date        Value($)
<S>                   <C>    <C>        <C>          <C>             <C>            <C>   <C>       <C>   
H. James Maxwell      24,615 (1)        33%          2.03125         4.0625         12/31/95        50,000
Larry M. Wright           -0-           -0-            N/A             N/A             N/A             N/A
Robert G. Wonish          -0-           -0-            N/A             N/A             N/A             N/A
</TABLE>

(1)      Mr. Maxwell's options were exercised in 1995.




                                                        

<PAGE>



                                                TOTAL RETURN GRAPH


                                                PERFORMANCE GRAPHS

         The  following  Performance  Graph  compares  the annual  change of the
cumulative total shareholder return , assuming reinvestment of dividends,  of an
assumed $100 investment on January 1, 1991 in (1) Common Shares,  (2) the NASDAQ
Market  Index  and (3) a peer  group of all  crude  petroleum  and  natural  gas
exploration  and  production  companies  (SIC Code 1311)  listed on NASDAQ.  The
Company began trading on NASDAQ September 21, 1989.


                              FISCAL YEAR ENDING
COMPANY       12/31/90  12/31/91 12/31/92  12/31/93  12/31/94 12/29/95 11/29/96*

PANACO, Inc.   100.00    214.37   130.49    195.73    298.26   330.88   391.46
PEER GROUP     100.00    109.81   116.29    139.38    125.19   144.76   213.62  
BROAD MARKET   100.00    128.38   129.64    155.5     163.26   211.77   257.90 


* 1996 IS BASED ON 11 MONTHS, ENDING 11/29/96.
























                                                        

<PAGE>



                                              PRINCIPAL SHAREHOLDERS

         The following table sets forth  information  with respect to record and
beneficial ownership of Common Shares by (a) each executive officer and director
of the Company,  (b) all  executive  officers and  directors of the Company as a
group,  and (c) for each person who  beneficially  owns 5% or more of the Common
Shares as of November 15, 1996.
<TABLE>
<CAPTION>

                                                                              Shares Owned
Name and Positions of Owners                                        Of Record               Beneficially

                                                                Number   Percent        Number       Percent
H. James Maxwell; Chief Executive Officer,
<S>                                                            <C>        <C>          <C>      <C>      <C> 
President, Chairman of the Board & Director ..............     313,386    2.18         322,971  (1)      2.01
Larry M. Wright; Executive Vice President &
Director .................................................     395,000    2.75         654,999 (1)(2)    4.08
Bob F. Mallory; Chief Operating Officer,
Executive Vice President & Director ......................     228,030    1.59         233,030  (1)      1.45
Robert G. Wonish; Vice President .........................      12,000     .08          18,328  (1)       .11
William J. Doyle; Vice President .........................           -     .00           4,405  (1)       .03
A. Theodore Stautberg, Jr.; Director .....................       6,137     .04           6,137            .04
Donald W. Chesser; Director ..............................       1,039     .01           1,039            .00
Michael Springs; Director ................................       3,096     .02           3,096  (3)       .02
James B. Kreamer; Director ...............................      51,055     .36          51,055            .32
N. Lynne Sieverling; Director ............................       8,137     .06           8,137            .05
Mark C. Barrett; Director.................................       2,447     .02           2,447  (3)       .02

All directors and officers as a group (13 persons) .......   1,020,327    7.11       1,305,644  (1)      8.13

Carl C. Icahn  ...........................................   1,095,000    7.63       1,095,000  (4)      6.82
c/o Icahn Associates Corp.
114 West 47th Street, 19th Fl
New York, NY  10036
Richard A. Kayne .........................................     694,047    4.84       2,160,714 (5)(6)   13.45
Kayne, Anderson Investment Management, Inc.
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Amoco Production Company..................................   2,000,000   13.94       2,000,000          12.45
550 WestLake Park Blvd.
Houston, TX 77079
Attn.: John M. Kaffenes
</TABLE>

     (1) Includes shares held in the Company's Employee Stock Ownership Plan for
each officer as follows:  Mr. Maxwell - 9,585 shares, Mr. Wright - 9,999 shares,
Mr.  Mallory - 5,000  shares,  Mr.  Wonish - 6,328  shares and Mr. Doyle - 4,405
shares, and for all directors and officers as a group - 35,307 shares.
     (2) Includes  250,000  shares  issuable  pursuant to currently  exercisable
warrants.
     (3) These persons were each issued 2,447 shares upon election as a director
in 1996.
     (4) Mr. Icahn is the sole  shareholder of Riverdale  Investors Corp,  Inc.,
the general  partner of High River  Limited  Partnership,  the record  holder of
these shares.
     (5) Mr. Kayne has sole voting power with respect to  investments  of Kayne,
Anderson  Investment  Management,  Inc.,  which is the  general  partner of KAIN
Non-Traditional, L.P., which is the general partner of: Offense Group Associates
Limited;  Opportunity  Associates,  L.P.;  ARBCO  Associates,  L.P.;  and Kayne,
Anderson  Non-Traditional  Investments,  L.P.;  the record holders of 694,047 of
these  shares were some of the  lenders  with  respect to the 1993  Subordinated
Notes.
     (6) Mr. Kayne has sole voting power with respect to  investments  of Kayne,
Anderson Investment & Management,  Inc., which is the general partner of Offense
Group Associates,  L.P.; Kayne,  Anderson  Non-Traditional  Investments,  L. P.;
ARBCO  Associates,  L. P.;  Kayne,  Anderson  Offshore  Limited and  Opportunity
Associates,  L. P.; the  beneficial  holders of 1,466,667  shares  issuable upon
conversion of some of the 1996 Tranche A Convertible Subordinated Notes.
<PAGE>

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         A. Theodore Stautberg, Jr., a director of the Company since 1993, is an
officer,  director and beneficial shareholder of Triumph Securities Corporation,
which  is  participating  in  this  Offering  as  a  finder,  and  will  receive
one-seventh of the 7% Underwriters discount.

         During 1996 two new non-employee  directors were each issued restricted
stock awards of 2,447 Common Shares upon election to the Board.

         Mark C. Barrett  became a director of the Company on September 4, 1996.
For the years 1985 through 1995 his CPA firm, Barrett and Associates,  served as
the Company's independent accountants. During 1995 his CPA firm was paid $53,400
for accounting services, including the audit.

         Those  entities  which  invest  through  Kayne,   Anderson   Investment
Management, Inc., that were the lenders in connection with the 1993 Subordinated
Notes,  own 816,526 Common Shares by virtue of their exercise of warrants issued
to them in 1993 and exercised in first quarter 1996. They are paid interest with
respect to the 1993  Subordinated  Notes,  which  totaled  $600,000 in 1995.  In
addition, the Company is required to pay certain expenses, including legal fees,
of those lenders, of which there were none during 1995.

         During 1995 Donald W. Chesser, a director who is not an employee of the
Company was issued  warrants to acquire  25,000 Common Shares at $2.50 per share
for past  services  to the  Company.  The  warrants,  which  would have  expired
December 31, 1995, were all exercised during 1995.

         During 1995 each of the five  directors  who are not  employees  of the
Company  were  issued a stock  bonus of $5,000,  paid by the  issuance  of 1,039
Common Shares.

          Employees of the Company are eligible to receive stock  awards,  stock
options,  stock  appreciation  rights,  and  performance  units  pursuant to the
Company's Long-Term Incentive Plan.

         The Company has several procedures,  provisions,  and plans designed to
reduce the  likelihood of a change in the  management  or voting  control of the
Company  without  the  consent  of  the  incumbent  Board  of  Directors.  These
provisions  may have the effect of  strengthening  the ability of  officers  and
directors  of the Company to continue as officers  and  directors of the Company
despite changes in share ownership of the Company.

         Under the terms of the Company's Long-Term Incentive Plan, three of the
officers and directors  surrendered Common Shares in January 1995 in exercise of
outstanding  options during 1995.  The following  table sets forth the number of
shares  surrendered and market value thereof and the number of options exercised
and the aggregate exercise price thereof.

                       Shares          Market        Options     Aggregate
                   Surrendered (a)     Value ($)    Exercised    Price ($) (b)
                   ---------------     ---------    ---------    -------------
H. James Maxwell       24,615           99,998        43,100        100,245

                                     

<PAGE>



Bob F. Mallory         24,615           99,998        42,400        100,018
Thomas E. Clark(c)     24,615           99,820        38,900        100,137

(a)      Persons  surrendering  shares in  payment of the  exercise  price of an
         option were granted new options for a like number of shares at $2.03125
         expiring December 31, 1995.
(b)      Differences between the value of the share surrendered and the exercise
         prices were paid in cash by the person exercising the option.
(c)      Mr. Clark is a former officer and director.

         Messrs.  Maxwell  and  Mallory  are the  partners  of 1050  Blue  Ridge
Building  Partnership,  which owns a 5,200  square foot office  building at 1050
West Blue  Ridge  Boulevard,  Kansas  City,  Missouri,  which  they lease to the
Company  on a triple  net basis for  $4,000  per month for a term of ten  years,
expiring  in 2003.  The lease was  approved  by the  Board of  Directors,  which
determined that the rate was as good or better than that which could be obtained
from a non-affiliated party.

                              SELLING SHAREHOLDERS
<TABLE>
<CAPTION>

         The following  table sets forth  information as of November 15, 1996 as
adjusted to reflect the sale of the Common Shares offered  hereby,  with respect
to the Common Shares offered by the Selling Shareholders.

                                                 Shares Owned                       Shares     Shares Beneficially
         Name and Positions of                  Before Offering                    Offered        Owned After
              Beneficial Owners              Directly        Beneficially           Hereby          Offering
<S>                                         <C>             <C>         <C>         <C>         <C>       <C>  
H. James Maxwell; Director, President       313,386         322,971(2)  2.01%       30,000      292,971   1.82%
and CEO of the Company................
Offense Group Associates Limited       (1)  163,305         599,669(2)  3.73        70,000      529,669   3.30
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Opportunity Associates, L.P...........  (1)  40,826         137,796(2)  0.86        40,826       96,970   0.60
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
ARBCO Associates, L.P.................  (1) 285,785         722,149(2)  4.49        70,000      652,149   4.06
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Kayne, Anderson Non-Traditional
   Investments, L.P...................  (1) 204,131         604,495(2)  3.77        70,000      570,495   3.55
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Evanston Insurance Company............  (1)  81,653          81,653     0.51        81,653                0.00
   P.O. Box 2009
   Glen Allen, VA 23058-2009
Nobel Insurance Company...............  (1)  40,826          40,826     0.25        40,826                0.00
   3010 LBJ Freeway, Suite 320
   Dallas, TX 75234
Amoco Production Company..............    2,000,000       2,000,000    12.45     2,000,000                0.00
   550 WestLake Park Blvd.
   Houston, TX 77079

                Total.................    3,129,912       4,509,559    28.07%    2,403,305    2,142,254  13.33%
</TABLE>

(1)      These firms are the Company's lenders under the 1993 Subordinated Notes
         described  under  "Funding  of  Business  Activities  -  Borrowing  and
         Obligations."  In 1993 these lenders were issued  warrants to acquire a
         total of 816,526  Common  Shares at an exercise  price of $2.25 anytime
         prior to December 31, 1998,  all of which were  exercised  during first
         quarter 1996.
(2)      Includes  436,364,   96,970,   436,364,   and  436,364  Common  Shares,
         respectively,   issuable   upon   conversion  of  the  1996  Tranche  A
         Convertible Subordinated Notes.

                                                        

<PAGE>



               DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES

         The  authorized  capital  shares of the Company  consists of 40,000,000
Common Shares,  par value $.01 per share, and 5,000,000  preferred  shares,  par
value $.01 per share.  The  following  description  of the capital  share of the
Company does not purport to be complete or to give full effect to the provisions
of  statutory  or common law and is subject in all  respects  to the  applicable
provisions of the Company's  Certificate of  Incorporation  and the  information
herein is qualified in its entirety by this reference.

Common Shares

         The Company is  authorized  by its  Certificate  of  Incorporation,  as
amended,  to issue 40,000,000  Common Shares,  of which  14,350,255  shares were
issued  and  outstanding  as of the  date  hereof  and are  held  by over  6,000
shareholders.

         The  holders of Common  Shares are  entitled to one vote for each share
held on all matters  submitted to a vote of common  holders.  The Common  Shares
have no cumulative voting rights,  which means that the holders of a majority of
the Common Shares  outstanding  can elect all the directors if they choose to do
so. In that event, the holders of the remaining shares will not be able to elect
any directors.

         Each Common Share is entitled to participate  equally in dividends,  as
and when declared by the Board of Directors,  and in the  distribution of assets
in the  event of  liquidation,  subject  in all  cases to any  prior  rights  of
outstanding preferred shares. The Common Shares have no preemptive or conversion
rights,  redemption  rights, or sinking fund provisions.  The outstanding Common
Shares are duly authorized, validly issued, fully paid, and nonassessable.

Warrants

         The Company has  outstanding  warrants to acquire 289,365 Common Shares
at  prices  ranging  from  $2.00  to  $2.375.  These  warrants  contain  limited
provisions for adjustment of the number of shares in the event of a subdivision,
combination or reclassification of Common Shares. They do not have any rights to
demand  registration  or "piggy back" rights in the event of a  registration  of
Common Shares.

         A group of the  Company's  lenders,  pursuant to the 1993  Subordinated
Notes,  acquired 816,526 Common Shares upon the exercise of warrants,  which are
restricted  securities  within the meaning of the Securities Act of 1933 and can
only be sold pursuant to an exemption from  registration or an offering which is
the subject of an effective registration statement.  The holders of these shares
have demand registration rights and "piggy back" rights in the event the Company
registers an offering of its Common  Shares.  Six of those  lenders are offering
Common Shares pursuant to this Prospectus. See "Selling Shareholders".  See also
"The Company - Funding of Business Activities - Borrowing and Obligations."

         The  Company  has  agreed  to  grant  to  the   Representative  of  the
Underwriters,  or its designees, warrants to purchase Common Shares equal to 10%
of the aggregate number of Common Shares sold pursuant to this  Prospectus.  The
warrants  will expire two years from the date of this  Prospectus.  The exercise
price per warrant will equal the Public Offering Price. See  "Underwriting." The
warrants will be  exercisable  at any time and from time to time, in whole or in
part,   during  said  two  year  term.   The   Company  has  also   granted  the
Representative,  or his designee,  "piggy back" registration rights with respect
to the Common Shares underlying the warrants.

Convertible Securities

         A group  of the  Company's  lenders,  pursuant  to the 1996  Tranche  A
Convertible Subordinated Notes issued October 8, 1996, have the right to convert
$8,500,000  in notes into  2,060,606  Common  Shares at $4.125 per share,  which
Common  Shares  would  be  restricted  securities  within  the  meaning  of  the
Securities  Act of 1933  and can  only be sold  pursuant  to an  exemption  from
registration  or an offering  which is the subject of an effective  registration
statement. The holders of these shares, after conversion, will have the right to

                                                       

<PAGE>



demand  registration  of the  shares  or "piggy  back" in the event the  Company
registers an offering of its Common Shares.

Preferred Shares

         Pursuant to the Company's Certificate of Incorporation,  the Company is
authorized to issue  5,000,000  preferred  shares,  and the  Company's  Board of
Directors,  by  resolution,  may  establish  one or more  classes  or  series of
preferred  shares  having the number of shares,  designations,  relative  voting
rights,   dividend  rates,   liquidation  and  other  rights  preferences,   and
limitations that the Board of Directors fixes without any shareholder approval.

         A number of preferred shares equal to one share for every one hundredth
of one Common Share  outstanding has been reserved for issuance  pursuant to the
Company's  Shareholder Rights Plan, and designated as Series A Preferred Shares.
No shares of this Series A Preferred Shares have been issued or are outstanding.
Other than the  designation as Series A, the Series A Preferred  Shares have not
had designations,  preferences and rights established by the Board of Directors.
See "Shareholder  Rights Plan," below. The designations,  preferences and rights
will be established  if and when any of the Series A Preferred  Shares are to be
issued.

Transfer Agent

         The transfer  agent,  registrar and dividend  disbursing  agent for the
Common Shares is American Stock  Transfer and Trust  Company,  6201 15th Avenue,
Brooklyn, New York 11204.

Shareholder Rights Plan

         On  August  2,  1995,  the  Board  of  Directors  declared  a  dividend
distribution  of one Right for each  outstanding  Common Share of the Company to
the  shareholders of record on August 3, 1995,  (the "Record Date").  Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
one share of the Series A Preferred Shares (the "Preferred Shares"),  or in some
circumstances,  Common  Shares,  other  securities,  cash  or  other  assets  as
summarized below, at a price of $30.00 per share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement  (the  "Rights  Agreement")  between the Company  and  American  Stock
Transfer and Trust Company, as Rights Agent.

     The  Shareholder  Rights  Plan was  designed  to reduce the  likelihood  of
inadequate bids, partial bids, market  accumulations and front-end loaded offers
to acquire the Company's  Common  Shares,  which are not in the best interest of
all the  Company's  shareholders.  The  adoption  of the Plan  communicates  the
Company's  intention to resist such  actions as are not in the best  interest of
all  shareholders  and provides  time for the Board of Directors to consider any
offer and seek alternative  transactions to maximize shareholder value. The Plan
was adopted upon the advice of the Company's investment bankers in 1995.

         Until  the  earlier  to occur of (i) the date of a public  announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 20%
or more  of the  outstanding  Common  Shares  or (ii)  ten  days  following  the
commencement  or announcement of an intention to make a tender offer or exchange
offer that would result in a Person or group beneficially  owning 20% or more of
such  outstanding  Common  Shares (the  earlier of such dates  being  called the
"Distribution  Date," the Rights will be  evidenced,  with respect to any of the
Company's Common Share  certificates  outstanding as of the Record Date, by such
Common  Share  certificate.  The  Rights  Agreement  provides  that,  until  the
Distribution  Date, the Rights will be transferred with and only with the Common
Shares.  Until the Distribution Date (or earlier redemption or expiration of the
Rights),  new  Common  Share  certificates  issued  after the  Record  Date upon
transfer  or  new  issuance  of  the  Common  Shares  will  contain  a  notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier  redemption or expiration of the Rights),  the surrender for transfer of
any of the Company's  Common Share  certificates  outstanding  as of the Record,
will also constitute the transfer of the Rights associated with the Common

                                                        

<PAGE>



Shares  represented by such  certificate.  As soon as practicable  following the
Distribution  Date,  separate   certificates   evidencing  the  Rights  ("Rights
Certificates")  will be mailed to holders  of record of the Common  Shares as of
the  close  of  business  on the  Distribution  Date and  such  separate  Rights
Certificates alone will evidence the Rights.

         The Rights are not exercisable until the Distribution  Date. The Rights
will  expire on August 4,  2005,  unless  earlier  redeemed  by the  Company  as
described below.

         The Purchase  Price  payable,  and the number of  Preferred  Shares (or
Common  Shares,  other  securities,  cash or other assets,  as may be necessary)
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent  dilution (i) in the event of a stock  dividend on, or a subdivision,
combination or  reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred  Shares of certain  rights or warrants to subscribe for
Preferred Shares or convertible securities at less than the current market price
of the  Preferred  Shares  or (iii)  upon the  distribution  to  holders  of the
Preferred  Shares of  evidences of  indebtedness  or assets  (excluding  regular
periodic  cash  dividends  out of  earnings or  retained  earnings or  dividends
payable in the Preferred  Shares) or of  subscription  rights or warrants (other
than those referred to above).

         In the  event  that the  Company  were  acquired  in a merger  or other
business  combination  transaction of 50% or more of its assets or earning power
were sold, proper provision shall be made so that each holder of a Right,  other
than of Rights that are or were beneficially owned by an Acquiring Person (which
will thereafter be void) shall  thereafter  have the right to receive,  upon the
exercise thereof at the then current exercise price of the Right, that number of
common  shares of the acquiring  company  which at the time of such  transaction
would have a market value of two times the exercise  price of the Right.  In the
event that an Acquiring  Person becomes the  beneficial  owner of 20% or more of
the  outstanding  Common  Shares,  proper  provision  shall be made so that each
holder of a Right,  other than of Rights that are or were beneficially  owned by
the Acquiring  Person (which will thereafter be void),  will thereafter have the
right to receive upon  exercise  that number of the Common Shares (or in certain
other  circumstances,  assets or other securities)  having a market value of two
times the exercise price of the Right.

         With certain  exceptions,  no adjustment in the Purchase  Price will be
required until  cumulative  adjustments  require an adjustment of at least 1% in
such Purchase Price. No fractional  shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth of one Preferred Share)
and, in lieu  thereof,  an  adjustment  in cash will be made based on the market
price of the  Preferred  Shares on the last  Trading  Date  prior to the date of
exercise.

         At any time prior to 5:00 P.M. Kansas City,  Missouri time on the tenth
calendar day after the first date after the public announcement that a person or
group of affiliated or associated persons has acquired  beneficial  ownership of
20% or  more  of the  outstanding  Common  Shares  of the  Company  (the  "Share
Acquisition Date"), the Company may redeem the Rights in whole, but not in part,
at a price of $0.005 per Right (the  "Redemption  Price").  Following  the Share
Acquisition  Date,  but prior to an event listed in Section  13(a) of the Rights
Agreement,  the  Company  may  redeem the  Rights in  connection  with any event
specified in Section 13(a) in which all shareholders are treated alike and which
does  not  include  the  Acquiring  Person  or  his  Affiliates  or  Associates.
Thereafter,  the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding Common
Shares in a  transaction  or series of  transactions  not involving the Company.
Immediately upon the action of the Board of Directors of the Company electing to
redeem the Rights,  the Company shall make announcement  thereof,  and upon such
election,  the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.

         Until a Right is exercised,  the holder thereof,  as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.

         The  provisions of the Rights  Agreement may be amended by the Board of
Directors in order to cure any ambiguity or correct any defect or inconsistency,
extend the Redemption Period and, prior to the

                                                        

<PAGE>



Distribution  Date,  to make changes  deemed to be in the best  interests of the
holders  of the  Rights  or,  after the  Distribution  Date,  to make such other
changes which do not adversely affect the interests of the holders of the Rights
(excluding  the  interests  of any  Acquiring  Person  and  its  affiliates  and
associates).

Certain Anti-takeover Provisions

         The  provisions  of the  Company's  Certificate  of  Incorporation  and
By-laws  summarized  in the  following  paragraphs  may be  deemed  to  have  an
anti-takeover effect and may delay, defer, or prevent a tender offer or takeover
attempt  that a  shareholder  might  consider to be in that  shareholder's  best
interests,  including  attempts  that might  result in a premium over the market
price for the shares held by shareholders.  In addition,  certain  provisions of
Delaware law and the Company's  Long-term Incentive Plan may be deemed to have a
similar effect.

         Certificate of Incorporation and By-laws. The Board of Directors of the
Company  is  divided  into  three  classes.  The term of  office of one class of
directors expires at each annual meeting of shareholders,  when their successors
are  elected  and  qualified.   Directors  are  elected  for  three-year  terms.
Shareholders  may remove a director  only for cause.  In  general,  the Board of
Directors,  not the Company's shareholders,  has the right to appoint persons to
fill vacancies on the Board of Directors.

         Pursuant to the Company's  Certificate of Incorporation,  the Company's
Board of Directors,  by resolution,  may establish one or more classes or series
of preferred  shares having the number of shares,  designation,  relative voting
rights,  dividend  rates,  liquidation  and  other  rights,   preferences,   and
limitations that the Board of Directors fixes without any shareholder  approval.
Any rights, preferences,  privileges, and limitations that are established could
have the effect of impeding or  discouraging  the  acquisition of control of the
Company.

         The  Company's  Certificate  of  Incorporation  contains a "fair price"
provision that requires the  affirmative  vote of the holders of at least 80% of
the voting shares of the Company and the affirmative vote of at least two-thirds
of the voting shares of the Company not owned,  directly or  indirectly,  by the
Related Person (hereafter defined) to approve any merger, consolidation, sale or
lease of all or substantially all of the assets of the Company, or certain other
transactions  involving  any  Related  Person.  For  purposes  of the fair price
provision,  a "Related Person" is any person  beneficially owning 10% or more of
the voting shares of the Company who is a party to the  Transaction  at issue, a
director who is also an officer of the Company and is a party to the Transaction
at issue, an affiliate of either such person,  and certain  transferees of those
persons.  The voting  requirement  is not  applicable  to certain  transactions,
including  those that are approved by the  Company's  Continuing  Directors  (as
defined in the Certificate of  Incorporation)  or that meet certain "fair price"
criteria contained in the Certificate of Incorporation.

         The  Company's  Certificate  of  Incorporation  further  provides  that
shareholders  may act only at annual or special meeting of shareholders  and not
by written consent,  that special meetings of shareholders may be called only by
the  Board of  Directors,  and  that  only  business  proposed  by the  Board of
Directors may be considered at special meetings of shareholders.

         The Company's  Certificate of Incorporation also provides that the only
business  (including  election of directors) that may be considered at an annual
meeting of shareholders,  in addition to business proposed (or persons nominated
to be  directors)  by the  directors  of the Company,  is business  proposed (or
persons  nominated to be directors) by  shareholders  who comply with the notice
and disclosure requirements of the Certificate of Incorporation. In general, the
Certificate of Incorporation requires that a shareholder give the Company notice
of  proposed  business  or  nominations  no later than 60 days before the annual
meeting  of  shareholders  (meaning  the  date on  which  the  meeting  is first
scheduled and not  postponements or adjournments  thereof) or (if later) 10 days
after  the  first  public  notice  of the  annual  meeting  is  sent  to  common
shareholders.  In general,  the notice must also  contains  certain  information
about the shareholder proposing the business or nomination,  his interest in the
business,  and (with respect to nominations for director)  information about the
nominee  of the nature  ordinarily  required  to be  disclosed  in public  proxy
solicitations.  The shareholder must also submit a notarized letter from each of
his nominees stating the nominee's

                                                        

<PAGE>



acceptance of the nomination and indicating the nominee's  intention to serve as
director if elected.

         The  Certificate  of  Incorporation   also  restricts  the  ability  of
shareholders  to interfere  with the powers of the Board of Directors in certain
specified ways, including the constitution and composition of committees and the
election and removal of officers.

         The Certificate of Incorporation  provides that approval by the holders
of at least two-thirds of the outstanding voting shares is required to amend the
provisions  of the  Certificate  of  Incorporation  discussed  in the  preceding
paragraphs and certain other provisions,  except that approval by the holders of
at least 80% of the  outstanding  voting  shares of the Company,  together  with
approval by the holders of at least two-thirds of the outstanding  voting shares
not owned,  directly or indirectly,  by the Related Person, is required to amend
the fair price  provisions  and except that  approval of the holders of at least
80% of the  outstanding  voting  shares  is  required  to amend  the  provisions
prohibiting shareholders from acting by written consent.

         Delaware  Anti-takeover  Statute. The Company is a Delaware corporation
and is  subject to Section  203 of the  Delaware  General  Corporation  Law.  In
general,  Section 203 prevents an "interested shareholder" (defined generally as
a person owning 15% or more of the  Company's  outstanding  voting  shares) from
engaging  in a  "business  combination"  (as  defined in  Section  203) with the
Company for three years  following  the date that  person  became an  interested
shareholder unless (a) before that person became an interested shareholder,  the
Board of  Directors  of the  Company  approved  the  transaction  in  which  the
interested shareholder became an interested shareholder or approved the business
combination,  (b) upon  consummation  of the  transaction  that  resulted in the
interested  shareholder's  becoming an interested  shareholder,  the  interested
shareholder owns at least 85% of the voting shares of the Company outstanding at
the time the transaction  commenced  (excluding shares held by directors who are
also  officers of the  Company  and by employee  stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange  offer),  or (c)  following
the  transaction  in which that person  became an  interested  shareholder,  the
business  combination  is approved by the Board of  Directors of the Company and
authorized at a meeting of shareholders  by the affirmative  vote of the holders
of at least two-thirds of the outstanding voting shares of the Company not owned
by the interested shareholder.

         Under  Section  203,  these  restrictions  also do not apply to certain
business  combinations  proposed  by an  interested  shareholder  following  the
announcement  or  notification  of one  of  certain  extraordinary  transactions
involving the Company and a person who was not an interested  shareholder during
the  previous  three  years or who  became an  interested  shareholder  with the
approval  of a  majority  of the  Company's  directors,  if  that  extraordinary
transaction  is approved or not opposed by a majority of the  directors who were
directors  before any person  became an interested  shareholder  in the previous
three years or who were  recommended  for  election  or elected to succeed  such
directors by a majority of such directors then in office.

         Long-term  Incentive  Plan.  Awards  granted  pursuant to the Company's
Long-term  Incentive  Plan may  provide  that,  upon a change in  control of the
Company,  (a) each  holder of an option  will be granted a  corresponding  stock
appreciation  right,  (b) all outstanding  stock  appreciation  rights and stock
options become immediately and fully vested and exercisable in full, and (c) the
restriction  period on any restricted  stock award shall be accelerated  and the
restrictions shall expire.

         Debt.  Certain  provisions in the Bank Facility and Subordinated  Notes
may also impede a change in control,  in that they provide that the loans become
due if there is a change  in the  management  of the  Company  or a merger  with
another company.

                                  UNDERWRITING

         The  Company  and  the  Selling   Shareholders  have  entered  into  an
underwriting  agreement  dated the date of this  Prospectus  (the  "Underwriting
Agreement").  Subject to the terms and conditions of the Underwriting Agreement,
the Company and the Selling  Shareholders have appointed the Underwriters  named
below, for whom Nolan Securities  Corporation is acting as  Representative  (the
"Representative"), exclusive

                                                        

<PAGE>



agents to offer and sell  8,403,305  Common  Shares on behalf of the Company and
the  Selling  Shareholders,   on  a  "best  efforts,  all-or-none"  basis.  Such
appointment  will be exclusive and not subject to  termination by the Company or
the Selling Shareholders for a period of three months following the date of this
Prospectus.  The  Underwriters  have not made a firm  commitment to purchase any
Common Shares.  The number of Common Shares that each  Underwriter has agreed to
use its "best efforts" to sell, is set forth below  opposite each  Underwriter's
name:


         Underwriter                       Number of Shares

Nolan Securities Corporation                    8,403,305

             Total                              8,403,305

         The  Underwriting   Agreement  provides  that  the  obligation  of  the
Underwriters  are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions. The Underwriters are obligated to use
their "best efforts" to sell all of the Common Shares offered hereby (other than
those covered by the over-allotment option described below).

         The  Company  has  been   advised  by  the   Representative   that  the
Underwriters  propose to offer the Common  Shares  directly to the public at the
initial  public  offering  price per  share set forth on the cover  page of this
Prospectus (the "Public Offering Price"). Upon the closing of the sale of any of
the Common  Shares,  the Company will receive the net proceeds  therefrom  after
deducting a discount  equal to seven percent (7%) of the Public  Offering  Price
for each Common Share sold,  including  any  Over-Allotment  Option shares.  The
Underwriters have agreed to pay Triumph Securities Corporation  ("Triumph") as a
finder, an amount equal to one-seventh of such 7%. A. Theodore  Stautberg Jr., a
director of the Company, is also an officer, director and beneficial shareholder
of Triumph.

         The Company has granted to the  Underwriters an option,  exercisable by
the Representative within 45 days after the date of this Prospectus,  to require
the Company to offer and sell to an  additional  1,260,496  Common Shares at the
Public Offering Price per share, herein  "Over-Allotment  Option." To the extent
that such option is exercised,  each of the  Underwriters  has agreed to use its
best efforts to sell on behalf of the Company  approximately the same percentage
of  such  additional  shares  as  the  number  set  forth  above  next  to  such
Underwriter's  name in the  preceding  table bears to the total number of Common
Shares  offered by this  Prospectus.  This Option may only be exercised  for the
purpose  of  covering  any  over-allotments  in the sale of the  shares  offered
hereby.

         The  Company  has  agreed  to  grant  to  the  Representative,  or  its
designees,  warrants (the  "Warrants") to purchase Common Shares equal to 10% of
the  aggregate  number of Common Shares sold  pursuant to this  Prospectus.  The
Warrants  will expire two years from the date of this  Prospectus.  The exercise
price per Warrant will equal the Public  Offering  Price.  The Warrants  will be
exercisable at any time and from time to time, in whole or in part,  during said
two year term. The Company has also granted the  Representative  or his designee
"piggy back"  registration  rights with respect to the Common Shares  underlying
the Warrants.

         The Company has agreed to pay all expenses of the  Offering,  including
the fees and  expenses  of  counsel  to the  Underwriters  and the  expenses  of
qualifying  the  Common  Shares  for sale  under the laws of such  states as the
Representative  may designate,  including  expenses of counsel retained for such
purpose.

         In the Underwriting  Agreement,  the Company,  the Selling Shareholders
and the  Underwriters  have agreed to indemnify  each other against  liabilities
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact or omission or alleged omission of a material fact required to
be stated or necessary to make the  statements  made not misleading (in the case
of the  Underwriters  only to the extent such  statement or omission was made in
reliance  upon  or in  conformity  with  written  information  furnished  by the
Underwriters  for use  herein).  If such  indemnifications  are  unavailable  or
insufficient,  the Company,  the Selling  Shareholders and the Underwriters have
agreed to damage contribution arrangements between them

                                                       

<PAGE>



based upon relative  benefits  received  from this  Offering and relative  fault
resulting in such damage.

         The  Underwriters  do not intend to confirm  sales of the Common Shares
offered hereby to discretionary accounts.

         The Company,  its directors  and officers and the Selling  Shareholders
have agreed not to offer,  sell,  contract to sell or  otherwise  dispose of any
Common  Shares,  for a period  of 180  days  after  the date of this  Prospectus
without the prior written consent of the  Representative,  other than the Common
Shares offered hereby.

         The Public Offering Price has been determined by negotiations among the
Underwriters,  the  Company  and the  Selling  Shareholders.  Among the  factors
considered in such negotiations were certain financial and operating information
for recent  periods,  the future  prospects of the Company,  and its industry in
general,  the general  condition  of the  securities  markets at the time of the
Offering,  and the  market  prices  of  securities  and  certain  financial  and
operating information of companies engaged in activities similar to those of the
Company. There can, however, be no assurance that the prices at which the Common
Shares will sell in the public  market after the Offering will not be lower than
the price at which they are sold hereunder.

         Pursuant to the Underwriting  Agreement,  the Public Offering will take
place only if certain  material  conditions  are satisfied by the Company.  Such
material   conditions  include  that,  except  for  matters  disclosed  in  this
Prospectus  (i)  between  the  date of the  last  audited  financial  statements
included in the  Prospectus  and the Closing  Date,  the Company  shall not have
sustained any loss on account of fire, explosion,  flood, accident,  calamity or
any other cause, which materially  adversely affects its business or properties,
whether or not such loss is covered by insurance; (ii) there shall be no pending
or  threatened  action,  suit or  proceeding  before  any court or  governmental
agency,  authority or body or any  arbitrator  involving the Company that is not
adequately disclosed and there is no required contract or other document that is
not  adequately  disclosed;  (iii) the Company (1) shall be in  compliance  with
applicable  environmental laws, (2) has received all permits,  licenses or other
approvals required of the Company under applicable  environmental  laws, and (3)
shall be in compliance  with all such permits,  licenses or approvals;  (iv) the
material  agreements,  relating to the  Company  rights of  ownership,  lease or
operation of oil and gas properties, the acquisition of interests in oil and gas
properties,  or  exploration  for,  development  of or production of oil and gas
reserves  thereon  are  valid,  binding  and  enforceable  agreements;  (v)  the
statements  in  the  Prospectus  regarding  the  legal  matters,   documents  or
proceedings,  shall fairly  represent and summarize the  information  called for
with respect to such legal matters,  documents and  proceedings;  (vi) since the
date of the most recent financial  statements included in the Prospectus,  there
shall  have been no  material  adverse  change in the  condition  (financial  or
other),  earnings,  business or  properties  of the  Company;  (vii) the lock up
agreement  between the  Representative  and certain  shareholders,  officers and
directors  of the Company for sales and certain  dispositions  of Common  Shares
shall have been  delivered on a timely  basis;  and (viii) since the date of the
Registration  Statement,  no material  adverse  change in the  general  affairs,
business prospects,  properties,  management, condition (financial or otherwise)
or results of operations of the Company shall have occurred.

         The foregoing does not purport to be a complete  statement of the terms
and conditions of the Underwriting Agreement, copies of which are on file at the
offices of the  Company,  the  Representative  and the  Securities  and Exchange
Commission.

                         SHARES ELIGIBLE FOR FUTURE SALE

         As of the date  hereof the Company had  outstanding  14,350,255  Common
Shares,  warrants  exercisable for 289,365 Common Shares, and the 1996 Tranche A
Convertible  Subordinated  Notes which are  convertible  into  2,060,606  Common
Shares.  An additional  1,260,496  Common Shares may be sold if the Underwriters
exercise the  Over-Allotment  Option.  The  Underwriters  have also been granted
warrants to acquire 840,330 Common Shares if all shares offered hereby are sold,
assuming  they  do  not  exercise  the  Over-Allotment  Option.   Following  the
consummation of the Offering,  and assuming the Underwriters receive warrants to
acquire  840,330  Common Shares , the Company will then have  16,459,444  Common
Shares  available  for  issuance  at such  times and upon  such  terms as may be
approved by the Company's Board of

                                                        

<PAGE>



Directors. No prediction can be made as to the effect, if any, that future sales
or the  availability  of shares  for sale will have on the  market  price of the
Common Shares prevailing from time to time.  Nevertheless,  sales of substantial
amounts of Common  Shares of the Company in the public  market  could  adversely
affect the  prevailing  market  price of the Common  Shares and could impair the
Company's ability to raise capital through sales of its equity securities.

         After giving effect to the Offering, 3,436,358 Common Shares (including
shares  issuable  upon exercise of  outstanding  warrants and the 1996 Tranche A
Convertible  Subordinated Notes) will be held by executive  officers,  directors
and  affiliates  of  the  Company  and  may be  sold  pursuant  to an  effective
registration  statement  covering  such  shares or  pursuant  to Rule 144 of the
Securities Act, subject to the contractual restrictions described below.

         In  general,  under Rule 144,  as  currently  in  effect,  a person (or
persons  whose  shares  are  aggregated),   including  an  affiliate,   who  has
beneficially  owned  restricted  shares for at least two years,  is  entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding  Common Shares or (ii) an amount equal
to the average weekly  reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities  and  Exchange  Commission.  Sales under Rule 144 are also subject to
certain manner of sale limitations,  notice requirements and the availability of
current public information about the Company. Restricted shares properly sold in
reliance on Rule 144, are thereafter  freely tradeable  without  restrictions or
registration under the Securities Act, unless thereafter held by an affiliate of
the  Company.  In  addition,  affiliates  of the  Company  must  comply with the
restrictions  and  requirements  of Rule 144,  other than the  two-year  holding
period  requirement,  in order to sell Common  Shares  which are not  restricted
shares  (such as Common  Shares  acquired by  affiliates  of the Company in this
Offering).  As defined in Rule 144, an "affiliate" of an issuer is a person that
directly,  or  indirectly  through  one or more  intermediaries,  controls or is
controlled by, or is under common control with, such issuer. If three years have
elapsed since the later of the date of any acquisition of restricted shares from
the Company or from any affiliate of the Company, and the acquiror or subsequent
holder  thereof is deemed not to have been an  affiliate  of the  Company at any
time during the 90 days preceding a sale,  such person would be entitled to sell
such  shares in the public  market  pursuant to Rule  144(k)  without  regard to
volume limitations, manner of sale restrictions, or public information or notice
requirements.

         The lenders under the 1993 Subordinated Notes have the right to request
registration of 816,526  restricted shares which they received upon the exercise
of  warrants  issued  to  them at the  time  of the  borrowing  under  the  1993
Subordinated  Notes;  373,305 of which are being sold pursuant to this Offering.
The lenders  under the 1996 Tranche A  Convertible  Subordinated  Notes have the
right to receive  2,060,606 shares upon conversion of the Notes,  which may take
place  anytime  after 180 days from the date of this  Prospectus.  They have the
right to request  registration  with  respect to those  shares.  There can be no
assurance that the holders of such rights will not exercise  these  registration
rights in a manner and at a time which may adversely  impact the market price of
the Common Shares or business  plans of the Company or may adversely  affect the
Company's efforts to seek additional capital.

                                  OTHER MATTERS

Available Information

         The  Company  is  subject  to  the  informational  requirements  of the
Exchange Act, as amended, and, in accordance therewith,  files reports and other
information with the SEC.  Reports,  proxy and information  statements and other
information  filed by the Company  with the SEC  pursuant  to the  informational
requirements  of the  Exchange  Act may be  inspected  at the  public  reference
facilities  maintained  by the SEC at 450 Fifth  Street,  NW,  Judiciary  Plaza,
Washington,  D.C. 20549-1004,  and at the following Regional Offices of the SEC:
Chicago Regional Office, 500 West Madison Street, Suite 1400 , Chicago, Illinois
60661-2511,  and New York Regional Office,  7 World Trade Center,  New York, New
York  10048.  Copies  of such  material  may also be  obtained  from the  Public
Reference Section of the SEC, 450 Fifth Street, NW Washington,  D.C.  20549-1004
at prescribed rates. The Common Shares are traded on the NASDAQ National Market.
The

                                                        

<PAGE>



Company's registration  statements,  reports, proxy and information  statements,
and other  information  may also be  inspected at the  National  Association  of
Securities Dealers,  Inc., 1735 K Street, NW, Washington,  D.C. 20006. Copies of
such material may also be obtained  from the SEC EDGAR  archives on the Internet
at the following SEC address: HTTP://WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.

         The  Company  will  furnish to the  holders  of the  Common  Shares the
Company's annual reports  containing  audited  financial  statements and interim
reports containing unaudited financial statements.

         This Prospectus  constitutes a part of a Registration Statement on Form
S-1 filed by the Company with the SEC under the Securities  Act. This Prospectus
omits certain of the information  contained in the Registration  Statement,  and
reference is hereby made to the Registration  Statement for further  information
with respect to the Company and the securities  offered  hereby.  Any statements
contained  herein  concerning the provisions of any document filed as an exhibit
to  the  Registration  Statement  or  otherwise  filed  with  the  SEC  are  not
necessarily  complete and in each instance reference is made to the copy of such
document so filed.
Each such statement is qualified in its entirety by such reference.

SEC Position on Indemnification

         Insofar as indemnification for liabilities arising under the Securities
Act  may be  permitted  to  directors,  officers,  or  persons  controlling  the
registrant  pursuant  to  any  provisions  described  in  this  Prospectus,  the
registrant has been informed that in the opinion of the SEC such indemnification
is against  public  policy as expressed in the  Securities  Act and is therefore
unenforceable.

                                  LEGAL MATTERS

     The validity of the Common Shares offered  hereby,  including  those shares
offered by the Selling  Shareholders,  and certain  other legal  matters will be
passed upon for the Company by Shughart Thomson & Kilroy, Kansas City, Missouri,
counsel to the Company.  Certain legal  matters in connection  with the Offering
are being passed upon for the Underwriters by Cadwalader, Wickersham & Taft, New
York, New York.
                                     EXPERTS

         The  financial  statements  of the Company as of December  31, 1995 and
1994 and for each of the years in the three year period ended  December 31, 1995
and the audit of Schedules of Revenues, Direct Operating Expenses and Production
Taxes of the Zapata  Properties  and the Bayou  Sorrel Field for each of the two
years in the period ended  December 31, 1994 included  herein have been examined
by Barrett and Associates,  independent  certified  public  accountants,  to the
extent and for the periods indicated in their reports with respect thereto,  and
are included  herein in reliance  upon those  reports and upon the  authority of
that firm as experts in accounting  and  auditing.  On September 4, 1996 Mark C.
Barrett became a director of the Company.

         The  Schedule of Revenues  and Direct  Operating  Expenses of the Amoco
Properties  for each of the three years in the period  ended  December  31, 1995
included  herein have been examined by Arthur Andersen LLP,  independent  public
accountants, as indicated in their report with respect thereto, and are included
herein in  reliance  upon the  authority  of such firm as experts in giving such
reports.

         The firm of  Arthur  Andersen  LLP has been  engaged  to do the  annual
audits of the Company  commencing  with the year ending  December 31, 1996. They
have not audited any period of the Company during 1996.

         The information  with respect to the independent  reserve reports as of
December 31, 1995, 1994 and 1993 was prepared by the petroleum engineering firms
of Ryder Scott Company (offshore and Bayou Sorrel Field) and McCune Engineering,
P.E.  (onshore  other than Bayou Sorrel  Field),  and are  referenced  herein in
reliance  upon such firms as experts  with respect to such  information.  Dwayne
McCune, the sole proprietor

                                                      

<PAGE>



of McCune Engineering,  P.E., was an employee of the Company from September 1992
to July 1995. Other reserve information referenced herein was based upon reports
prepared by the Company, which is solely responsible for its content.



                     GLOSSARY OF SELECTED OIL AND GAS TERMS

     The following are  abbreviations  and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.

     "3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

     "Bank Facility" means the Company's  reducing  revolving bank facility with
First Union National Bank of North Carolina and Banque Paribas.

     "Bbl" means a barrel of oil and condensate or natural gas liquids, being 42
U.S. gallons.

     "Bcf" means billion cubic feet of natural gas.

     "Bcfe" means billion cubic feet of natural gas equivalents.

     "Block" means one offshore unit of lease acreage, generally 5,000 acres.

     "Btu" or  "British  Thermal  Unit" means the  quantity of heat  required to
raise the temperature of one pound of water by one degree Fahrenheit.

     "Condensate" means a hydrocarbon  mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.

     "Developed  acreage"  means oil and gas acreage spaced for or assignable to
productive wells.

     "Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

     "Dry hole" means a well found to be incapable  of  producing  either oil or
gas in sufficient quantities to justify completion as an oil or gas well.

     "Equivalent Bbls" means a measure of gas volumes representing the estimated
relative  energy  content of natural gas to oil,  being 6 Mcf of natural gas per
Bbl of oil.

     "Estimated  future net revenues"  means revenues from production of oil and
gas, net of all production  -related taxes, lease operating expenses and capital
costs.
        
     "Exploratory  well" means a well  drilled to find and produce oil or gas in
an unproved  area,  to find a new  reservoir in a field  previously  found to be
productive of oil and gas in another reservoir, or to extend a known reservoir.

     "Gross,"  when used  with  respect  to acres or wells,  refers to the total
acres or wells in which the Company has a working interest.

     "Group 3-D seismic" means seismic procured by a group of parties or shot on
a speculative basis by a seismic company.
                                                        

<PAGE>




     "MBbls" means thousands of barrels of oil.

     "MBOE" means one thousand barrels of oil equivalent.

     "Mbtu" means one thousand Btus.

     "Mcf" means thousand cubic feet of natural gas.

     "Mcfe" means thousand cubic feet of natural gas equivalents.

     "MMBbls" means millions of barrels of oil.

     "MMBOE" means one million barrels of oil equivalent

     "MMBtu" means one million British Thermal Units.

     "MMcf" means million cubic feet of natural gas.

     "MMcfe" means million cubic feet of natural gas equivalents.

     "Natural  gas  equivalents"  means a volume,  expressed in Mcf's of natural
gas,  that  includes  not only  natural  gas but also  liquids  converted  to an
equivalent quantity of natural gas on an energy equivalent basis. Equivalent gas
reserves are based on a conversion factor of 6 Mcf of gas per barrel of liquids.

     "Net," when used with  respect to acres or wells,  refers to gross acres or
wells multiplied,  in each case, by the percentage working interest owned by the
Company.

     "Net  pay"  means  the  thickness  of a  productive  reservoir  capable  of
containing hydrocarbons.

     "Net  production"  means  production  that is  owned  by the  Company  less
royalties and production due others.

     "NGLs" means the natural gas liquids such as ethane,  propane,  iso-butane,
normal butane and natural gasoline that have been extracted from natural gas.

     "Oil" means crude oil or condensate.

     "Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.

     "Overriding royalty interest" or "ORRI" means an interest in an oil and gas
property  entitling the owner to a share of oil and gas production free of costs
of exploration and production.

     "Payout" means that point in time when a party has recovered  monies out of
the production from a well equal to the cost of drilling and completing the well
and the cost of operating the well through that date.

     "Possible  reserves"  means  reserves  that are less certain than  probable
reserves and can be estimated  with a low degree of certainty,  insufficient  to
indicate whether they are more likely to be recovered than not.

     "Present  value of  future  net  revenues"  or  "Present  value  of  proved
reserves"  means the present value of estimated  future revenues to be generated
from the production of proved reserves  calculated in accordance with Securities
and  Exchange  Commission  guidelines,  net of estimated  production  and future
development  costs,  using prices and costs as of the date of estimation without
future  escalation,  except as otherwise  provided by contract,  without  giving
effect to non-property related expenses such as general and administrative
                                                        

<PAGE>



expenses,  debt service,  future income tax expense and depreciation,  depletion
and amortization, and discounted using an annual discount rate of 10%.

     "Probable  reserves"  means  reserves  that are less  certain  than  proved
reserves and can be estimated with a degree of certainty  sufficient to indicate
they are more likely to be recovered than not.

     "Production  costs" means costs  necessary for the  production of a well or
field and sale of oil and gas, including production and ad valorem taxes.

     "Productive  well"  means a well  that is  producing  oil or gas or that is
capable of production.

     "Proprietary 3-D seismic" means seismic privately procured and owned by the
procurer.

     "Proved  developed  nonproducing  reserves" means those reserves that exist
behind the casing if existing  wells or at minor depths below the present bottom
of such wells and that are  expected to be produced  through  these wells in the
predictable  future,  when the cost of  making  such oil and gas  available  for
production should be relatively small compared to the cost of a new well.

     "Proved  developed  producing  reserves"  means  those  reserves  that  are
expected  to be  produced  from  existing  completion  intervals  now  open  for
production in existing wells.

     "Proved  developed  reserves"  means  reserves  that can be  expected to be
recovered through existing wells with existing  equipment and operating methods.
Additional oil and gas expected to be obtained  through the application of fluid
injection or other improved  recovery  techniques for  supplementing the natural
forces and mechanisms of primary recovery will be included as "proved  developed
reserves"  only after  testing by a pilot  project or after the  operation of an
installed  program has confirmed  through  production  response  that  increased
recovery will be achieved.

     "Proved reserves" means the estimated  quantities of crude oil, natural gas
and natural gas liquids that geological and engineering  data  demonstrate  with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing economic and operating  conditions (i.e.,  prices and costs as of
the date the  estimate  is made).  Prices  include  consideration  of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.

          i.  Reservoirs  are  considered  proved if economic  producibility  is
     supported by either actual  production or conclusive  formation  test.  The
     area of a reservoir  considered proved includes (A) that portion delineated
     by drilling and defined by gas-oil and/or oil-water  contacts,  if any; and
     (B) the immediately  adjoining  portions not yet drilled,  but which can be
     reasonably  judged as  economically  productive  on the basis of  available
     geological  and  engineering  data. In the absence of  information on fluid
     contacts,  the lowest known structural  occurrence of hydrocarbons controls
     the lower proved limit of the reservoir.

          ii. Reserves that can be produced  economically through application of
     improved recovery  techniques (such as fluid injection) are included in the
     "proved"  classification when successful testing by a pilot project, or the
     operation of an installed  program in the reservoir,  provides  support for
     the engineering analysis on which the project or program was based.

          iii.  Estimates of proved  reserves do not include the following:  (A)
     oil that may become  available  from  known  reservoirs  but is  classified
     separately as "indicated  additional  reserve";  (B) crude oil, natural gas
     and natural gas  liquids,  the  recovery of which is subject to  reasonable
     doubt because of uncertainty as to geology,  reservoir  characteristics  or
     economic  factors;  (C) crude oil, natural gas and natural gas liquids that
     may occur in  undrilled  prospects;  and (D)  crude  oil,  natural  gas and
     natural gas liquids that may be recovered from oil shales,  coal, gilsonite
     and other such sources.

     "Proved  undeveloped  reserves"  means  reserves  that are  expected  to be
recovered from new wells

<PAGE>



on  undrilled  acreage,   or  from  existing  wells  where  a  relatively  major
expenditure  is required  for  recompletion.  Reserves on  undrilled  acreage is
limited to those drilling units offsetting  productive units that are reasonably
certain of production  when drilled.  Proved  reserves for other undrilled units
can be claimed only where it can be  demonstrated  with  certainty that there is
continuity  of  production  from the  existing  productive  formation.  Under no
circumstances are estimates of proved undeveloped  reserves  attributable to any
acreage for which an application of fluid  injection or other improved  recovery
technique is contemplated,  unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.

     "Recompletion"  means the completion for production of an existing wellbore
in another formation from that in which the well has previously been completed.

     "Reserves" means proved reserves.

     "Royalty" means an interest in an oil and gas lease that gives the owner of
the  interest the right to receive a portion of the  production  from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating  the wells on
the lease  acreage.  Royalties may be either  landowner's  royalties,  which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding  royalties,  which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.

     "SEC 10 Value" means the present  value of estimated  future net  revenues,
before taxes, of the specified reserves or property,  determined in all material
respects in  accordance  with the rules and  regulations  of the SEC  (generally
using prices and costs in effect at a fixed date and a 10% discount rate).

     "Shut-in"  means to close down a producing  well or field  temporarily  for
repair,  cleaning  out,  building  up  reservoir  pressure,  lack of a market or
similar conditions.

     "Undeveloped acreage" means the oil and gas acreage on which wells have not
been  drilled  or to which no Proved  Reserves  other  than  Proved  Undeveloped
Reserves have been attributed by independent petroleum engineers.

     "Unproved  properties"  means  the oil and gas  acreage  to which no Proved
Reserves have been attributed by independent petroleum engineers.

     "Unproved   reserves"   means  those  reserves  based  on  geologic  and/or
engineering  data  similar to that used in  estimates  of proved  reserves;  but
technical,  contractual,  economic,  or regulatory  uncertainties  preclude such
reserves  being  classified  as proved.  They may be estimated  assuming  future
economic conditions different from those prevailing at the time of the estimate.
Unproved  reserves may be divided into two  subclassifications:  "probable"  and
"possible."

     "Working interest" means an interest in an oil and gas lease that gives the
owner of the  interest  the  right to drill for and  produce  oil and gas on the
leased  acreage and  requires  the owner to pay a share of the costs of drilling
and production  operations.  The share of production to which a working interest
owner is  entitled  will  always be  smaller  than the  share of costs  that the
working  interest owner is required to bear,  with the balance of the production
accruing to the owners of  royalties.  For example,  the owner of a 100% working
interest in a lease  burdened  only by a  landowner's  royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.



         .




                                                       

<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
                          INDEX TO FINANCIAL STATEMENTS
                                                                                   Page
                    PRO FORMA COMBINED FINANCIAL INFORMATION


<S>                         <C> <C>                                                 <C>
   Balance Sheet, September 30, 1996                                                13
   Statements of Income (Operations) for the nine months
         ended September 30, 1996                                                   14
   Statements of Income (Operations) for the years ended
         December 31, 1995, 1994 and 1993                                           15
   Notes to Pro Forma Financial Statements                                          18

PANACO, INC. -  AUDITED FINANCIAL STATEMENTS

   Independent Auditors' Report                                                     F-2
   Balance Sheets, December 31, 1995 and 1994                                       F-3
   Statements of Income (Operations)  for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-5
   Statements of Changes in Stockholders' Equity and Retained Earnings (Deficit)
         for the Years Ended December 31, 1995, 1994 and 1993                       F-6
   Statements of Cash Flows for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-7
   Notes to Financial Statements for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-8

ZAPATA PROPERTIES AND BAYOU SORREL FIELD

   Independent Auditors' Report                                                    F-21
   Schedules of Revenues, Selected Direct Operating Expenses and Production Taxes
         for the Years Ended December 31, 1994 and 1993                            F-22
   Notes to the Schedules of Revenues, Selected Directed Expenses and Production
         Taxes for the Years Ended December 31, 1994 and 1993                      F-23

PANACO, INC. -  UNAUDITED FINANCIAL STATEMENTS

   Balance  sheets,  September 30, 1996 and December 31, 1995 F-28 Statements of   F-27
   Income operating for the nine months and three months ended
         September 30, 1996                                                        F-29
   Statement of Changes in Stockholders' Equity for the nine months ended
         September 30, 1996                                                        F-30
   Statements of Cash Flows for the nine months ended September 30, 1996           F-31
   Notes to Financial Statements for the nine months ended September 30, 1996      F-32

AMOCO PROPERTIES

   Independent Auditors' Report                                                    F-34
   Statement of Revenues and Direct Operating Expenses                             F-35
   Notes to the Statement                                                          F-37

</TABLE>



                                      F-1



                                                    

<PAGE>





Independent Auditors' Report


To the Board of Directors
PANACO, Inc.

We have  audited the  accompanying  balance  sheets of PANACO,  Inc. (a Delaware
corporation)  as of December 31, 1995 and 1994,  and the related  statements  of
income (operations),  changes in Stockholders' equity and cash flows for each of
the  three  years  in the  period  ended  December  31,  1995.  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  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 audits provide a reasonable basis for our opinion.

As  discussed  in Note 1 to the  Financial  Statements,  the  Company  has given
retroactive effect to the change in accounting for its oil and gas operations.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of PANACO, Inc. as of December 31,
1995 and 1994,  and the  results of its  operations,  changes  in  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1995 in conformity with generally accepted accounting principles.



BARRETT & ASSOCIATES
Overland Park, Kansas

February 26, 1996, except for Note 1, which the date is June 7, 1996.
















                                      F-2




                                                       

<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
                                 BALANCE SHEETS



                                     ASSETS

                                                                           December 31,
                                                                 1995               1994
CURRENT ASSETS:

Cash and cash equivalents                                     $   1,198,000      $   1,583,000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Accounts receivable
    Trade                                                         3,294,000          2,230,000
    Other                                                         1,092,000              1,000
    Prepaid expenses                                                465,000            272,000
                                                            ---------------     --------------
       Total current assets                                       6,049,000          4,086,000
                                                             --------------     --------------

OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
    Oil and gas properties                                      103,105,000         89,010,000
    Less accumulated depreciation, depletion, amortization,
       and valuation allowances                                (73,620,000)       (65,065,000)
                                                               -----------        -----------
       Net oil and gas properties                                29,485,000         23,945,000
                                                               ------------       ------------

PROPERTY, PLANT, AND EQUIPMENT
    Equipment                                                       196,000            158,000
    Less accumulated depreciation                                  (92,000)           (68,000)
                                                            --------------      -------------
       Net property, plant, and equipment                           104,000            90,000
                                                             --------------     -------------

OTHER ASSETS:
    Loan costs, net                                                 471,000            714,000
    Certificates of deposit - escrow                                 26,000             47,000
    Other                                                             5,000              6,000
    Accounts receivable - other                                       8,000            186,000
    Note receivable                                                  21,000             21,000
                                                            ---------------     --------------
       Total other assets                                           531,000            974,000
                                                            ---------------     --------------

TOTAL ASSETS                                                   $ 36,169,000        $29,095,000
                                                               ============        ===========

</TABLE>












              The  accompanying  notes to financial  statements  are an integral
part of this statement.


                                       F-3

<PAGE>



<TABLE>
<CAPTION>


                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                December 31,
                                                      1995                      1994

CURRENT LIABILITIES
<S>                                              <C>                      <C>          
    Accounts payable                             $  4,444,000             $   1,528,000
    Interest payable                                  161,000                   185,000
    Current portion of long-term debt                     -0-                       -0-
                                                -------------              ------------
       Total current liabilities                    4,605,000                 1,713,000
                                                -------------             -------------


LONG-TERM DEBT                                     22,390,000                12,500,000
                                                 ------------              ------------


STOCKHOLDERS' EQUITY

    Preferred Share, $.01 par value,
       1,000,000 shares authorized; no
       shares issued and outstanding                      -0-                       -0-
    Common Share, $.01 par value,
       20,000,000 shares authorized;
       11,504,615 and 10,220,138 shares
       issued and outstanding, respectively           115,000                   102,000
    Additional paid in capital                     21,155,000                17,586,000
    Retained earnings (deficit)                  (12,096,000)               (2,806,000)
                                                ------------               ------------
       Total Stockholders' Equity                   9,174,000                14,882,000
                                                -------------              ------------



TOTAL LIABILITIES AND STOCKHOLDERS'   EQUITY     $ 36,169,000              $ 29,095,000
                                                 ============              ============


</TABLE>

















              The  accompanying  notes to financial  statements  are an integral
part of this statement.


                                       F-4

<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
                        STATEMENTS OF INCOME (OPERATIONS)


                                                                           Year Ended December 31,
                                                                1995                 1994                1993
REVENUES
<S>                                                         <C>                  <C>                <C>         
    Oil and gas sales                                       $18,447,000          $17,338,000        $ 12,605,000

COSTS AND EXPENSES
    Lease operating                                           8,055,000            5,231,000           5,297,000
    Depreciation, depletion and amortization                  8,064,000            6,038,000           4,288,000
    General and administrative                                  690,000              587,000             542,000
    Production and ad valorem taxes                           1,078,000            1,006,000             754,000
    Exploration expenses                                      8,112,000                  -0-                 -0-
    Provision for losses and (gains) on disposition
       and write-down of assets                                 751,000            1,202,000           3,824,000
                                                         --------------        -------------       -------------
       Total                                                 26,750,000           14,064,000          14,705,000
                                                           ------------         ------------        ------------

NET OPERATING INCOME (LOSS)                                 (8,303,000)            3,274,000         (2,100,000)
                                                          ------------         -------------       -------------

OTHER INCOME (EXPENSE)
    Interest income                                               5,000               46,000              27,000
    Interest expense                                          (992,000)          (1,669,000)         (1,913,000)
                                                         -------------         ------------        ------------
    Total                                                     (987,000)          (1,623,000)         (1,886,000)
                                                         --------------        ------------        ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM                                (9,290,000)            1,651,000         (3,986,000)
INCOME TAXES (BENEFIT)                                              -0-                  -0-                 -0-
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM                                          (9,290,000)            1,651,000         (3,986,000)
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT                                                  -0-            (536,000)                 -0-
                                                          -------------        -------------       -------------

NET INCOME (LOSS)                                         $ (9,290,000)        $   1,115,000       $ (3,986,000)
                                                          ============         =============       =============

EARNINGS (LOSS) PER COMMON SHARE
    Primary:
       Earnings (loss) before extraordinary item     $            (.81)   $              .16  $            (.53)
       Extraordinary loss                                           -0-                (.05)                 -0-
                                                    -------------------   ----------------- --------------------
       Net earnings (loss)                           $            (.81)   $              .11  $            (.53)
                                                     =================    ==================  =================
    Assuming full dilution:
       Earnings (loss) before extraordinary item     $            (.81)   $              .16  $            (.53)
       Extraordinary loss                                           -0-                (.05)                 -0-
                                                    -------------------    ----------------  -------------------
       Net earnings (loss)                           $            (.81)   $              .11  $            (.53)
                                                     =================    ==================  =================
    Weighted average shares outstanding:
       Primary                                             $ 11,504,615         $  9,952,870       $   7,583,761
                                                           ============         ============       =============
    Assuming full dilution                                 $ 11,504,615          $10,039,042       $   7,583,761
                                                           ============          ===========       =============

</TABLE>




              The  accompanying  notes to financial  statements  are an integral
part of this statement.



                                       F-5

<PAGE>

<TABLE>
<CAPTION>


                                  PANACO, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         AND RETAINED EARNINGS (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995


                                                                      Common         Additional         Retained
                                                                       Share           Paid-In          Earnings
                                                       Shares        Par Value         Capital          (Deficit)
<S>                <C> <C>                       <C>              <C>               <C>                   <C>   
Balances, December 31, 1992                      $   7,534,496    $    75,000       $ 11,298,000    $     65,000
Net loss                                                   -0-            -0-                -0-     (3,986,000)
Exercises of stock options and warrants                620,759          7,000          1,285,000             -0-
                                                   -----------   ------------      ------------------------------
Balances, December 31, 1993                          8,155,255      $  82,000        $12,583,000    $(3,921,000)

Net income                                                 -0-            -0-                -0-       1,115,000
Exercises of stock options and warrants and
 shares  issued under Employee Stock
   Ownership Plan                                    2,064,883         20,000          5,003,000             -0-
                                                    ----------    -----------       ------------------------------
Balances, December 31, 1994                       $ 10,220,138       $102,000        $17,586,000    $(2,806,000)

Net Loss                                                   -0-            -0-                -0-     (9,290,000)
Exercise of stock options and warrants               1,181,602         12,000          3,137,000             -0-
Issuance of new shares                                 102,875          1,000            432,000             -0-
                                                   -----------   ------------       -----------------------------
Balances, December 31, 1995                       $ 11,504,615      $ 115,000        $21,155,000   $(12,096,000)
                                                  ============      =========        ===========    ============


</TABLE>


























              The  accompanying  notes to financial  statements  are an integral
part of this statement.



                                       F-6

<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
                            STATEMENTS OF CASH FLOWS


                                                                               Year Ended December 31,
                                                                     1995              1994                1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                             <C>                  <C>             <C>          
   Net income (loss) before extraordinary item                  $(9,290,000)         $1,651,000      $ (3,986,000)
   Adjustments to reconcile net income (loss) to
       net cash provided by operating activities:
     Depreciation, depletion, and amortization                     8,065,000          6,038,000          4,288,000
     Amortization of loan discount                                       -0-            340,000            512,000
     Exploration expenses                                          8,112,000                -0-                -0-
     Provision for losses and (gains) on disposition
       and write-down of assets                                      751,000          1,202,000          3,824,000
   Changes in operating assets and liabilities:
     Accounts receivable                                         (2,155,000)        (1,202,000)          1,261,000
     Prepaid expenses                                              (193,000)          (113,000)           (20,000)
   Other assets                                                      200,000          (388,000)           (11,000)
     Accounts payable                                              2,916,000           (79,000)          (896,000)
     Interest payable                                               (24,000)             26,000           (40,000)
   Extraordinary loss                                                    -0-          (536,000)                -0-
                                                              --------------      ------------  ------------------
     Net cash provided by operating activities                     8,382,000          6,939,000          4,932,000
                                                              --------------      -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Sale of oil and gas properties                                     11,000            300,000             41,000
   Capital expenditures and acquisitions                        (21,803,000)       (12,101,000)          (790,000)
   Purchase of other property and equipment                         (38,000)           (37,000)           (52,000)
   Sale of other property and equipment                                  -0-             10,000                -0-
   Purchase of certificate of deposit                                    -0-                 -0-          (26,000)
                                                              --------------      --------------  ---------------
     Net cash used by investing activities                      (21,830,000)       (11,828,000)          (827,000)
                                                              --------------      ------------     --------------

CASH FLOW FROM FINANCING ACTIVITIES:
   Long-term debt proceeds                                        16,890,000          5,564,000                -0-
   Repayment of long-term debt                                   (7,000,000)        (7,326,000)        (3,535,000)
   Issuance of common shares - exercise of
     warrants and options                                          3,173,000          5,023,000          1,163,000
                                                               -------------      -------------      -------------
   Net cash provided (used) by financing activities               13,063,000          3,261,000        (2,372,000)
                                                                ------------      -------------      ------------

NET INCREASE (DECREASE) IN CASH                                    (385,000)        (1,628,000)          1,733,000

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF YEAR                                               1,583,000          3,211,000          1,478,000
                                                               -------------       ------------      -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                        $  1,198,000       $  1,583,000       $  3,211,000
                                                                ============       ============       ============

</TABLE>



              The  accompanying  notes to financial  statements  are an integral
part of this statement.






                                       F-7

<PAGE>




                                  PANACO, INC.

                          NOTES TO FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993



Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of PANACO, Inc. (the Company) is
presented to assist in understanding  the Company's  financial  statements.  The
financial statements and notes are representations of the Company's  management,
who  are  responsible  for  the  integrity  and  objectivity  of  the  financial
statements.  These accounting  policies conform to generally accepted accounting
principles  and  have  been  consistently  applied  in  the  preparation  of the
financial statements.

Revenue Recognition
The Company  recognizes its ownership  interest in oil and gas sales as revenue.
It records revenues on an accrual basis,  estimating  volumes and prices for any
months for which actual information is not available.  If actual production sold
differs  from  its  allocable  share  of  production  in a  given  period,  such
differences would be recognized as deferred or accounts receivable.

Hedging Transactions
The Company engages in natural gas futures contracts within the normal course of
its business. The Company uses futures and floor contracts to reduce the effects
of  fluctuations  in natural  gas prices.  Changes in the market  value of these
contracts are deferred and subsequent gains and losses are recognized monthly in
the same  period as the hedged  item based on the  difference  between the First
Nearby  Contract  for Natural Gas - NYMEX and the  contract  price.  The Company
entered into a hedge agreement  beginning in January,  1996, for the delivery of
15,000  MMBTU of gas for each day in 1996  with  contract  prices  ranging  from
$1.7511/MMBTU to $2.253/MMBTU.  Prior to this agreement, the Company had entered
into a floor  contract that expired  December,  1994, and a hedge contract which
expired September, 1993.

Income Taxes
In 1993, the Company adopted Statement of Financial  Accounting  Standards (FAS)
No. 109 - "Accounting for Income Taxes",  which requires recognition of deferred
tax assets and liabilities  for the expected  future tax  consequences of events
that have been included in the financial  statements or tax returns.  Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities  using  enacted  tax  rates in  effect  for the  year in  which  the
differences are expected to reverse.  Generally, FAS 109 allows for at least the
partial  recognition of deferred tax assets in the current period for the future
benefit of net operating loss carry forwards.

Income (Loss) per share
The  computation  of  earnings  or loss per  share in each  year is based on the
weighted  average  number of common shares  outstanding.  When  dilutive,  stock
options and warrants are included as share  equivalents using the treasury share
method. Stock options and warrants were not included in the calculation for 1993
and 1995, as the effects were not dilutive. Shares to be contributed to the ESOP
plan are treated as common share equivalents.

Property, Plant & Equipment
Other property and equipment is recorded at cost. Depreciation is provided using
the straight-line method based on estimated useful lives which range from 5 to 7
years.

Oil and Gas Producing Activities and Depreciation, Depletion and Amortization
     Effective  December 31, 1995,  PANACO  changed its method of accounting for
oil and gas operations from the
                                       F-8

<PAGE>



full cost method to the successful efforts method. Management concluded that the
successful efforts method will more  appropriately  reflect PANACO's oil and gas
operations  and will enable  investors  and others to better  compare  PANACO to
similar  oil and gas  companies,  the  majority of which  follow the  successful
efforts  method.  All prior period  financial  statements  have been restated to
reflect the change.

Under the successful  efforts method,  lease  acquisition costs are capitalized.
Exploratory drilling costs are also capitalized pending  determination of proved
reserves.  If proved  reserves are not  discovered,  the  exploratory  costs are
expensed. All development costs are capitalized.  Provision for depreciation and
depletion is determined on a field-by-field  basis using the  unit-of-production
method.  The  carrying  amounts of proven and unproven  properties  are reviewed
periodically  on a  property-by-property  basis,  based on future net cash flows
determined by an  independent  engineering  firm,  and an impairment  reserve is
provided  as  conditions  warrant.  The  provision  for write down of assets was
$751,000 for 1995, $1,202,000 for 1994, and $3,824,000 for 1993.

The  change in the  Company's  accounting  method  increased  1995 net income by
$2,054,000 or $0.18 per share from  previously  reported  results under the full
cost method.  The change  decreased 1994 and 1993 net income by  $1,298,000,  or
$0.13  per  share  and  $3,800,000,  or  $0.51  per  share,  respectively,  from
previously reported results under the full cost method. As of December 31, 1995,
retained  earnings was  decreased by  $2,797,000  as a result of the  accounting
change and additional paid in capital was reduced by $1,264,000.

Amortization of Note Discount
The note  discount was being  amortized  utilizing  the interest  method,  which
applies a constant  rate of interest  to the book value of the note.  Additional
interest expense of $0, $234,000,  and $512,000,  was recorded in 1995, 1994 and
1993,  respectively,  from the  amortization of the discount.  Effective July 1,
1994 the debt related to the note discount was extinguished,  and the balance of
the note discount totaling $106,000 was recorded as an extraordinary item.

Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all cash investments
with maturities of three months or less to be cash equivalents.

Use of Estimates
Management  relies on the use of estimates  for oil and gas reserve  information
and the  valuation  allowance for deferred  income taxes in preparing  financial
statements  in  accordance  with  generally  accepted   accounting   principles.
Estimates  related  to oil  and gas  reserve  information  and the  standardized
measure  are based on  estimates  provided by third  parties.  Changes in prices
could significantly affect these estimates from year to year.

Reclassification
Certain  financial  statement  items  have been  reclassified  to conform to the
current year's presentation.

Note 2 - LOAN COSTS

Loan costs in the amount of $602,000 and $255,000 are being  amortized  over the
lives of the loans,  three years and six years,  respectively.  Additional  loan
costs of $402,000 were incurred during 1994.

Note 3 - MAJOR CUSTOMERS

One  purchaser  accounted  for  69%  and  83% of  revenues  in  1995  and  1994,
respectively, and two purchasers accounted for 65% and 17% of revenues in 1993.

Note 4 - CERTIFICATE OF DEPOSITS - ESCROW

The Company has CD's to satisfy  plugging  obligations  with certain  government
entities.


                                       F-9

<PAGE>



Note 5- LONG-TERM DEBT
                                   1995                       1994
                            -------------                 -----------
Note payable (a)            $   5,000,000               $   5,000,000
Note payable (b)               17,390,000                   7,500,000
                            -------------                -------------
                               22,390,000                  12,500,000

Less current portion                   -                          -
                            -------------                ------------
    Long-term debt          $  22,390,000                $ 12,500,000
                            ============                 ============

     (a) Note payable  dated  December 31, 1993 due to a group of six lenders in
the  amount  of  $5,000,000  bearing  interest  at 12%.  The  lenders  at  their
discretion  can loan an  additional  $5,000,000  to the  Company.  Payments  for
interest only are required  quarterly.  The Company may deliver up to $1,000,000
in PIK (payment in kind) notes,  bearing interest at 12%, in satisfaction of all
or part of any interest payment. The loan agreement limited the use of the first
$5,000,000 to capital expenditures and the next $5,000,000 (assuming the lenders
approve  additional  borrowings) to  acquisitions.  The loan agreement  contains
certain  financial  covenants  including  future  indebtedness  and  payment  of
dividends.  The note  matures on December  31, 1999 and is  collateralized  by a
second  mortgage on a  substantial  portion of offshore oil and gas  properties,
production  proceeds and receivables.  The lenders were issued 816,526 warrants,
at an exercise price of $2.25, expiring December 31, 1998 in connection with the
financing (see Note 8).
     (b)  Reducing  Revolving  Line of Credit  dated July 1, 1994 with a maximum
debt  incurred  equal to the lesser of thirty  million  dollars or the Borrowing
Base ($21,000,000 at December 31, 1995). The Borrowing Base reduces on a monthly
basis at a rate of $500,000 and is reviewed on a semi-annual basis as of June 30
and December 31. The note is due July 1, 1998 and bears interest at either prime
or Libor plus 1.0% to 1.75%  depending on the  percentage of the borrowing  base
used (8% and 7.625% at December 31, 1995,  respectively).  At December 31, 1995,
the Company had $3,025,000 borrowed at 7.625%,  $10,500,000 borrowed at 7.5625%,
and $3,865,000 borrowed at 7.6875%. Interest is due on the last day of the month
for prime notes and is due on the last day of the interest period or every three
months on Libor notes.  A commitment  fee of .375% to .5% of the average  unused
portion of the Borrowing Base is due on a quarterly basis. The revolving line of
credit is collateralized by a substantial portion of the oil and gas properties,
receivables,  inventory and general  intangibles.  The loan  agreement  contains
certain  covenants  including  maintaining a positive  indebtedness to cash flow
ratio,  a  positive  working  capital  ratio,  a  certain  tangible  net  worth,
limitations on future debt,  guarantees,  liens,  dividends,  mergers,  material
change in ownership by management,  and sale of assets. In addition,  the Lender
has issued the  Company a letter of credit for  $3,000,000  to  collateralize  a
plugging bond which reduces the available Borrowing Base.

Maturities of long-term debt are as follows:

                 December 31, 1997                        $17,390,000


                 December 31, 1999                        $  5,000,000
                                                          ------------
                                                           $22,390,000

Note 6 - STOCKHOLDERS' EQUITY

During 1995,  1,181,602  shares were issued  related to the exercise of warrants
and options, 97,680 shares were issued related to property acquisition costs and
5,195 shares were issued for board of directors fees.

During 1994,  2,034,033  shares were issued  related to the exercise of warrants
and options, and 30,850 shares were issued related to the Company's ESOP.

During 1993,  12,294  shares were awarded to three new  directors,  1,200 shares
were issued in exchange for oil and gas  properties,  36,363  shares were issued
for payment of a finders fee on new  financing  (see Note 5) and 575,000  shares
were issued related to the exercise of warrants and options.

                                      F-10

<PAGE>



During 1993,  4,098 shares were  relinquished  to the Company under the terms of
the Long-Term  Incentive Plan by a director upon his  resignation.  These shares
were reissued in the above transactions during 1993.

Shares outstanding are as follows:
     Year Ending December 31,
                                                      Common           Preferred
                                                      Shares            Shares
                         1993                       8,155,255              -
                         1994                      10,220,138              -
                         1995                      11,504,615              -

Note 7- WARRANTS

Warrants  outstanding  at December 31,  1995   to acquire  common  shares are as
follows:

                    Number of     Price per
                      Shares        Share         Expiration Date
                    --------     ----------     ------------------
                    160,000        $2.375           June 1, 1996
                     90,000        $2.000           June 1, 1996
                     39,365        $2.000           December 31, 1997
                   ---------
                    289,365

During 1995, warrants with exercise prices ranging from $2.00 to $4.00 per share
were exercised for a total of 495,735 shares.

Note 8 -  LENDER WARRANTS

In  connection  with the note  payable  dated  December  31,  1993  (See Note 4)
warrants were issued to a group of six lenders. These warrants differ from those
described  in Note 5;  they have  stronger  antidilution  provisions,  effective
January 1, 1996 the holders can demand  registering  the warrant  shares  either
issuable  upon  exercise or held by the holder,  and the holder may also, if the
Company  files a  Registration  Statement,  have an  opportunity  to include the
warrant shares in such Registration Statement. Warrants to acquire Common Shares
were as follows:

                      Number of         Price per
                      Shares            Share            Expiration Date
                      816,526           $2.25            December 31, 1998


Early in 1996, the warrants were exercised.

Note 9 - STOCK OPTIONS AND LONG-TERM INCENTIVE PLAN

On August 26,  1992,  the  shareholders  approved  a  long-term  incentive  plan
allowing  the  Company  to  grant  incentive  and  nonstatutory  stock  options,
performance units,  restricted stock awards and stock appreciation rights to key
employees,  directors, and certain consultants and advisors of the Company up to
a maximum of 20% of the total number of shares outstanding.

At December 31, 1995, there were no stock options outstanding.

During 1995, options with exercise prices ranging from $2.00 to $3.975 per share
were exercised for a total of 759,712 shares.

Under the terms of the Long-Term  Incentive Plan,  three  directors  surrendered
73,845 shares to exercise 124,400 options.  New options were issued equal to the
number of shares surrendered at a price of $2.0313

                                      F-11

<PAGE>



per share.

Note 10 - RELATED PARTY TRANSACTIONS

During  1995,  25,000  warrants at a price of $2.50 per share were issued to and
exercised by a director.

During 1994,  650,000  warrants at a price of $2.75 per share were issued to the
Board of Directors. All warrants were exercised during 1994.

The Company entered into a triple net lease  agreement with a partnership  owned
by two directors for the lease of an office building.  The lease,  which expires
November,  2003,  has monthly rental  payments of $4,000.  During 1995 and 1994,
$48,000 per year in rent was paid under the lease  agreement.  During  1993,  no
rent was due under the lease agreement. A deposit of $4,000 was due and included
in accounts payable at December 31, 1993.

Stock  options  (see Note 7)  originally  issued to three  directors  to acquire
250,000 shares each,  were  exercisable  through  December 31, 1995 at $2.00 per
share.  During 1995,  1994 and 1993,  150,000,  275,000 and 300,000 options were
exercised  at $2.00 per  share.  In 1994 and 1993,  an  additional  275,000  and
300,000 options  respectively were issued at prices ranging from $2.32 per share
to $3.9375 per share, and all options were exercised in 1995.

Under the terms of the Long-Term  Incentive  Plan,  three  directors were issued
73,845  options at $2.0313 per share and 68,567  options at $2.1875 per share in
1995 and 1994, respectively. These options were exercised in 1995.

Warrants were issued to a director in 1991 to acquire 250,000 shares.  Of these,
160,000 shares were exercised in 1993 at $2.00 per share and 90,000 warrants are
exercisable  through  June 1,  1996 at $2.00 per  share.  In  addition,  160,000
warrants at $2.375 issued  December 10, 1993,  are  exercisable  through June 1,
1996.

Consulting fees of $80,000 were paid in 1993 to an entity of which a director is
a 100% owner. At December 31, 1993, no such fees were payable to this entity.

In 1993,  three new directors  were awarded 4,098 shares each (valued at a total
of $30,000)  pursuant to the Company's  Long-term  Incentive Plan.  These shares
become vested over a thirty month period.

During 1993, a director relinquished 4,098 shares upon his resignation.

Note 11 - LEASES

The following is a schedule of future rental  payments  required under an office
building lease described in Note 10 as of December 31, 1995.


     Year ending December 31,

                           1996                  $   48,000
                           1997                      48,000
                           1998                      48,000
                           1999                      48,000
                           2000                      48,000
                         2001-2003                  140,000
                                                 $  380,000

Rental expense incurred on a former office lease for the year ended December 31,
1993, was $26,180.


                                      F-12

<PAGE>



Note 12 - INCOME TAXES

At December  31, 1995,  the Company had net  operating  loss carry  forwards for
federal income tax purposes of $15,765,000  which are available to offset future
federal taxable income through 2010.

Significant  components of the Company's  deferred tax liabilities and assets as
of December 31 are as follows:

                                                 1995                  1994
                                           ------------          ----------
Deferred tax assets
     Fixed asset basis differences         $1,408,000           $    557,000
     Net operating loss carry forwards      6,306,000              3,504,000
                                            ---------           ------------
        Total deferred tax assets           7,714,000              4,061,000
                                            ---------           ------------

  Valuation allowance for deferred
     tax assets                            (7,714,000)           (4,061,000)
                                           ----------            ----------
        Total deferred tax assets          $        -           $         -
                                           ===========          ===========


A valuation  allowance  is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized.

The  valuation  allowance  for  deferred  tax assets as of December 31, 1993 was
$3,704,000.  The net change in the total valuation allowance for the years ended
December  31,  1995  and  1994  was an  increase  of  $3,653,000  and  $357,000,
respectively.

Note 13 - COMMITMENT AND CONTINGENCIES

A  $3,000,000  letter of credit,  collateralizing  a plugging  bond,  expires on
December 14, 1996. The contract amount of the letter of credit  approximates its
fair value.

The Company has had a suit filed against it related to a gas gathering system in
Oklahoma  seeking  $700,000.  The Company has filed a counter  claim against the
plaintiff alleging fraud, asking that the contract,  which is the subject of the
suit, be declared void.  Management  feels the suit is without merit and will be
disposed of for less than the amount  claimed,  although  this amount  cannot be
reasonably estimated.

Concentrations of Credit Risk
Financial  instruments which potentially subject the Company to concentration of
credit risk consist  principally of bank account balances in excess of federally
insured limits and trade receivables.  The Company's  receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively,  in that these  entities  may be  similarly  affected  by changes in
economic or other  conditions.  Receivables  are generally  not  collateralized.
Historical  credit losses  incurred by the Company on receivables  have not been
significant.

Note 14 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

In August, 1994, the Company established an Employee Stock Ownership Plan (ESOP)
and Trust that covers  substantially  all  employees. The Board of Directors can
approve  contributions,  up to a maximum  of 15% of  eligible  employees'  gross
wages. The Company  incurred  $132,000 and $123,000 in costs for the years ended
December 31, 1995 and 1994, respectively.


                                      F-13
<PAGE>

Note 15-IMPAIRMENT OF LONG-LIVED ASSETS

In 1995 the Company adopted the Statement of Financial  Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be  Disposed  Of",  which  requires  that  long-lived  assets  and  identifiable
intangibles be reviewed for impairment  when the assets  carrying amount may not
be  recoverable  based on the fair market value of the asset.  SFAS 121 requires
assets to be reviewed  for  impairment  at the lowest  level for which there are
independent, indentifiable cash flows. The adoption of SFAS 121 had no effect on
1995  financial  statements  and the Company  expects no future  impact,  as the
Company  periodically  evaluates its oil and gas properties for impairment under
the  successful  efforts  method  of  accounting  on a field by  field  basis as
prescribed by FAS No. 121.

Note 16-FINANCIAL INSTRUMENTS

Effective  December 31, 1995, the Company adopted the  requirements of Statement
of  Financial  Accounting  Standards  No. 107,  "Disclosure  about Fair Value of
Fianacial  Instruments"  requires desclosure of an estimate of the fair value of
certain  financial  instruments.  The  carrying  amount  and fair  values of the
Company's financial insturments at December 31, 1995, are as follows:

                                                     Assets (Liabilities)
                                               Carrying Amount     Fair Value  
Cash and cash equivalents                       $    1,198,000    $ 1,198,000
Receivables                                          4,415,000      4,415,000
Payables                                            (4,605,000)    (4,605,000)
Long-term variable rate debt                       (17,390,000)   (17,390,000)
Long-term fixed rate debt                           (5,000,000)    (3,675,150)
Off balance sheet financial instruments
     Letter of credit                                        0              0
     Hedge contracts                                         0     (2,000,000)

Cash and cash equivalents,  receivables,  payables,  and long-term variable rate
debt
The carrying amount reported on the consolidated  balance sheet approximates its
fair value because of the short maturities of these instruments.

Long-term, fixed rate debt
The Company estimates the fair value of its long-term, fixed rate debt generally
using descounted cash flow analysis based on the Corporation's current borrowing
rates for debt with similar maturities.

Letter of credit
A  $3,000,000  letter of credit  collateralizes  a  plugging  bond.  Fair  value
estimated on the basis of fees paid to obtain the  obligation is not material at
December 31, 1995.

Hedge contract
The fair value of the Company's futures contracts are estimated based on current
settlement values.

Concentrations of Credit Risk
Financial  instruments which potentially subject the Company to concentration of
credit risk consist  principally of bank account balances in excess of federally
insured limits and trade receivables.  The Company's  receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively,  in that these  entities  may be  similarly  affected  by changes in
economic or other  conditions.  Receivables  are generally  not  collateralized.
Historical  credit losses  incurred by the Company on receivables  have not been
significant.

Note 17 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)

The  following  table  reflects  the  costs  incurred  in oil and  gas  property
activities for each of the three years ended December 31:

                                      F-14

<PAGE>

<TABLE>
<CAPTION>

                                                   1995             1994              1993
                                               -------------    -------------    --------------
<S>                                            <C>              <C>              <C>      
Property acquisition costs, proved             $12,603,000      $     352,000    $       -

Property acquisition costs, unproved           $        -       $         -      $       -

Exploration costs                              $  8,112,000     $         -      $       -
Development costs                              $  1,497,000     $ 11,749,000     $     801,000
</TABLE>
                             

Quantities of Oil and Gas Reserves

The estimates of proved developed and proved  undeveloped  reserve quantities at
December  31,  1995 are based upon  reports of  petroleum  engineers  and do not
purport to reflect realizable values or fair market values of PANACO's reserves.
It should be  emphasized  that reserve  estimates are  inherently  imprecise and
accordingly,  these  estimates  are  expected  to change  as future  information
becomes available. These are estimates only and should not be construed as exact
amounts. All reserves are located in the United States.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude  oil and
condensate  that  geological and engineering  data  demonstrate  with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.  Proved developed reserves are those expected
to be recovered through existing wells, equipment, and operating methods.

Proved developed and undeveloped reserves          Oil                 Gas

Estimated reserves as of December 31, 1992      1,121,000           46,595,000

     Production                                 (180,000)          (5,586,000)
     Sale of minerals in-place                   (12,000)            (155,000)
     Revisions of previous estimates            (184,000)            2,842,000
                                              ----------            ----------
Estimated reserves as of December 31, 1993        745,000           43,696,000

     Production                                 (137,000)          (8,139,000)
     Extensions and discoveries                   183,000           16,930,000
     Sale of minerals in-place                   (24,000)             (45,000)
     Revisions of previous estimates              176,000         (10,860,000)
                                              -----------         -----------
Estimated reserves as of December 31, 1994        943,000           41,582,000


     Production                                 (170,000)          (9,850,000)
     Sale of minerals in-place                    (1,000)             (22,000)
     Purchase of minerals in-place              1,140,000           20,094,000

     Revisions of previous estimates             (12,000)          (5,093,000)
                                              ----------         ------------
Estimated reserves as of December 31, 1995    1  ,900,000           46,711,000
                                              ===========          ===========


Proved developed reserves:

                                 Oil                  Gas
                               (BBLS)                (MCF)
                            --------------        -----------

    December 31, 1992            1,053,000         36,208,000
                            ==============         ==========

    December 31, 1993              745,000         24,665,000
                            ==============         ==========

    December 31, 1994              907,000         36,282,000
                            ==============         ==========

    December 31, 1995            1,794,000         40,323,000
                            ==============         ==========



                                      F-15


<PAGE>

Standardized Measure of Discounted Future Net Cash Flows
     Future cash inflows are computed by applying year-end prices of oil and gas
(with  consideration of price changes only to the extent provided by contractual
arrangements) to the year-end  estimated future production of proved oil and gas
reserves.  Estimates of future  development  and  production  costs are based on
year-end costs and assume  continuation  of existing  economic  conditions.  The
estimated  future net cash flows are then discounted using a rate of 10 per cent
per  year to  reflect  the  estimated  timing  of the  future  cash  flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the computed discount.

     The  accompanying  table  reflects the  standardized  measure of discounted
future cash flows  relating to proved oil and gas reserves as of the three years
ended December 31:
<TABLE>
<CAPTION>

                                                     1995             1994              1993
                                               --------------     -------------      --------------
<S>                                            <C>                <C>                <C>         
Future cash inflows                            $140,247,000       $88,893,000        $113,419,000
Future development and production costs          50,723,000        32,197,000          38,375,000
                                               --------------     ------------       --------------
Future net cash flows                            89,524,000        56,696,000          75,044,000
Future income taxes                              11,755,000         6,304,000          13,937,000
                                               --------------     -------------      --------------
Future net cash flows after income taxes         77,769,000        50,392,000          61,107,000
10% annual discount                            (14,848,000)       (8,477,000)        (13,728,000)
                                               --------------     ------------       --------------
Standardized measure after income taxes        $ 62,921,000       $41,915,000       $  47,379,000
                                               =============      ===========        =============
</TABLE>

Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the  principal  changes in the  standardized
measure of discounted  future net cash flows  attributable to proved oil and gas
reserves for each of the three years ended December 31:

<TABLE>
<CAPTION>
                                                             1995            1994                1993
                                                      ----------------   --------------     --------------
<S>                                                   <C>                  <C>                <C>         
Beginning balance                                     $     41,915,000     $47,379,000        $ 48,163,000
Sales of oil and gas, net of production costs              (9,314,000)    (11,047,000)         (9,426,000)
Net change in income taxes                                 (4,267,000)       5,562,000         (2,130,000)
Changes in price and production costs                       11,498,000    (10,781,000)           2,199,000
Purchase of minerals in-place                               34,415,000              -                    -
Revision of previous estimates, extensions,
   discoveries, & sales of minerals in place-net          (11,326,000)      10,802,000           8,573,000
                                                        --------------     -----------       -------------
Ending balance                                           $  62,921,000     $41,915,000        $ 47,379,000
                                                      ================  ===============    ================

Price per MCF                                         $          2.24   $         1.75     $          2.40
                                                      ================  ===============    ================
Price per BBL                                         $         17.75   $        16.00     $         12.75
                                                      ================  ===============    ================

</TABLE>

Note 18 - ACQUISITIONS

On July 12, 1995,  the Company  entered into a Purchase and Sale  Agreement with
Zapata  Exploration  Company  ("Zapata") to acquire all of Zapata's offshore oil
and gas properties in the Gulf of Mexico.  The properties consist of East Breaks
Blocks 109 and 110,  East Cameron  Block 359,  Eugene  Island  Block 372,  South
Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross acres. The
transaction closed July 26, 1995.

The purchase price for the assets acquired in this transaction was $2,748,000 in
cash and the obligation to pay a production  payment to Zapata based upon future
production. The production payment is based upon production from the East Breaks
109 Field after  production of 12 Bcfe gross (10 Bcfe net) measured from October
1,  1994.  The  Company  will pay to Zapata  $.4167 per Mcfe on the next 27 Bcfe
produced.  Payments to Zapata on this  production  payment are to be made by the
Company when it is paid for the oil or gas. Oil and gas reserves attributable to
this production  payment are not included in the reserves for the properties set
forth herein.


                                      F-16

<PAGE>

As of November 30, 1995, the Company  entered into a Purchase and Sale Agreement
with Shell Western E&P Inc.  ("Shell") to acquire all of Shell's interest in the
Bayou  Sorrel Field in  Iberville  Parish,  Louisiana.  The  transaction  closed
December 27, 1995, and PANACO took over as operator from Shell.  Proved reserves
attributable to the field at December 31, 1995, were 898,000 barrels and 3.1 Bcf
of natural gas. In addition to the proved  reserves  management  has  identified
significant  probable  and possible  reserves  attributable  to this field.  The
purchase price of the field was $10,455,000  which included a $204,000  brokers'
fee and a related receivable of $600,000.

Both of the  acquisitions  made in 1995 were  accounted  for using the  purchase
method.  The results of the Zapata  properties  acquisition  are included in the
Company's  statement of income  (operations)  from July 27 to December 31, 1995.
The  results of the Bayou  Sorrel  acquisition  are  included  in the  Company's
statement of income (operations) from December 28 to December 31, 1995.

The unaudited pro forma  statements  of income  (operations)  for the year ended
December  31, 1995  assumes the Zapata and Bayou  Sorrel  acquisitions  had been
consummated  January  1,  1995.  The  unaudited  pro forma  statement  of income
(operations)  includes certain adjustments to give effect to the acquisitions of
the oil and gas properties.

The pro forma  statements  do not purport to be indicative of the results of the
Company  had these  acquisitions  occurred on the date  assumed,  nor is the pro
forma statement necessarily indicative of the future results of the Company. The
pro forma statement should be read together with the Financial Statements of the
Company, including the notes thereto and included elsewhere in this Statement.






































                                      F-17

<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
          Unaudited Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1995

                                                       Zapata          Bayou                           PANACO, Inc.
                                   PANACO, Inc.      Properties    Sorrel Field      Pro Forma          Pro Forma
                                   (As Restated)     1/1-7/26/95   1/1-12/26/95     Adjustments          Combined
REVENUES
<S>                                 <C>             <C>              <C>                              <C>         
Oil and gas sales                   $ 18,447,000    $ 3,623,000      $ 3,326,000$            --       $ 25,396,000

COSTS AND EXPENSES
   Lease operating                     8,055,000      1,460,000          867,000        280,000  (a)    10,662,000
   Depreciation, depletion and
      amortization                     8,064,000             --               --      1,812,000  (b)     9,876,000
   Exploration expenses                8,112,000             --               --             --          8,112,000
   Provision for losses and
      (gains) on disposition
      & write-down of assets             751,000             --               --             --            751,000
   General and administrative            690,000             --               --             --            987,000
   Production and ad valorem
      taxes                            1,078,000             --          297,000             --          1,078,000
                                    ------------------------------------------------------------------------------
   Total                              26,750,000      1,460,000        1,164,000      2,092,000         31,466,000

NET OPERATING INCOME
   (LOSS)                            (8,303,000)      2,163,000        2,162,000    (2,092,000)        (6,070,000)
                                    ------------   ------------     ------------   ------------     --------------

OTHER INCOME (EXPENSE)
   Interest income                         5,000             --               --             --              5,000
   Interest expense                    (992,000)             --               --      (651,000)  (c)   (1,643,000)
                                   ------------------------------------------------------------     --------------
      Total                            (987,000)             --               --      (651,000)        (1,638,000)
                                   ---------------------------------------------------------------- --------------

NET INCOME (LOSS) BEFORE
   INCOME TAXES                      (9,290,000)      2,163,000        2,162,000    (2,743,000)        (7,708,000)
INCOME TAXES (BENEFIT)                        --             --               --             --                 --
                                   -------------------------------------------------------------------------------

NET INCOME (LOSS)                   $(9,290,000)     $2,163,000       $2,162,000   $(2,743,000)       $(7,708,000)
                                    ============     ==========       ==========   ============       ============

EARNINGS (LOSS) PER COMMON SHARE
   Primary
      Net earnings (loss)       $         (0.81)                                                 $          (0.67)
                                ================                                                 =================

   Assuming full dilution
       Net earnings (loss)      $         (0.81)                                                 $          (0.67)
                                ================                                                 =================

   Weighted average shares outstanding:
      Primary                         11,504,615                                                        11,504,615
                                ================                                                  ================

    Assuming full dilution            11,504,615                                                        11,504,615
                                ================                                                  ================

</TABLE>




         The  accompanying  notes  to  pro  forma  financial  statements  are an
integral part of this statement.


                                      F-18

<PAGE>

<TABLE>
<CAPTION>



                                  PANACO, INC.
          Unaudited Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1994

                                                         Zapata          Bayou                       PANACO, Inc.
                                      PANACO, Inc.     Properties    Sorrel Field       Pro Forma      Pro Forma
                                      (As Restated)   1/1-12/31/94   1/1-12/31/94      Adjustments     Combined
REVENUES
<S>                                   <C>           <C>              <C>                            <C>           
   Oil and gas sales                  $ 17,338,000  $   7,540,000    $  2,888,000           --      $   27,766,000

COSTS AND EXPENSES
   Lease operating                       5,231,000      3,317,000       1,942,000         480,000  (a)  10,970,000
   Depreciation, depletion and 
   amortization                          6,038,000         --              --           1,447,000  (b)   7,485,000
   Exploration expenses                     --             --              --              --             --
   Provision for losses and (gains)
     on disposition and write-down
     of assets                           1,202,000         --              --              --          1,202,000
   General and administrative              587,000         --            310,000           --            897,000
    Production and ad valorem taxes      1,006,000         --              --              --          1,006,000
                                      --------------------------------------------------------------------------
     Total                              14,064,000      3,317,000       2,252,000       1,927,000     21,560,000
                                      ------------- --------------   -------------   -------------   ------------

NET OPERATING INCOME (LOSS)              3,274,000      4,223,000         636,000     (1,927,000)      6,206,000
                                      --------------  -------------  --------------  --------------  -----------

OTHER INCOME (EXPENSE)
   Interest income                          46,000         --              --             --              46,000
   Interest expense                    (1,669,000)         --              --           (788,000)(c) (2,457,000)
                                      --------------------------------------------------------------- -----------
     Total                             (1,623,000)         --              --           (788,000)    (2,411,000)
                                      --------------------------------------------------------------------------

NET INCOME (LOSS) BEFORE
   INCOME TAXES AND
   EXTRAORDINARY ITEM                    1,651,000      4,223,000         636,000     (2,715,000)      3,795,000

INCOME TAXES (BENEFIT)                      --             --              --             --              --
                                      --------------------------------------------------------------------------

EXTRAORDINARY ITEM-LOSS
   ON EARLY RETIREMENT OF
   DEBT                              $   (536,000)    $    --        $     --       $     --        $  (536,000)
                                      --------------------------------------------------------------------------

NET INCOME (LOSS)                     $  1,115,000    $ 4,223,000    $    636,000    $(2,715,000)   $  3,259,000
                                      ------------    -----------    ------------    ------------   ------------

EARNINGS (LOSS) PER COMMON SHARE
   Primary
     Net (loss) before extraordinary item$   0.16                                                  $           0.37
     Extraordinary loss                     (0.05)                                                            (0.05)
                                ------------------                                                 -----------------
       Net earnings (loss)       $            0.11                                                 $           0.33
                                 =================                                                 ================

   Assuming full dilution
      Earnings loss before
       extraordinary item        $           0.16                                                  $           0.38
     Extraordinary loss                     (0.05)                                                            (0.05)
                                 -----------------                                                 -----------------
       Net earnings (loss)       $            0.11                                                 $          0.33
                                 =================                                                 =================

   Weighted average shares outstanding:
     Primary                             9,952,870                                                        9,952,870
                                  ================                                                 =================
     Assuming full dilution             10,039,042                                                       10,039,042
                                  ================                                                 =================

</TABLE>


         The  accompanying  notes  to  pro  forma  financial  statements  are an
integral part of this statement.



                                      F-19

<PAGE>



     NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)


1.  Basis of Presentation

The  Unaudited  Pro Forma  Statement  of Income  (Operations)  of  PANACO,  Inc.
presents the combined  effects of the  acquisition of the Zapata  properties and
Bayou Sorrel Field as if the acquisitions  had been  consummated  January 1st of
each year.

2.  Pro Forma Entries

    (a)   To record the estimated additional insurance expense.
    (b)   To record the additional  depletion and  depreciation  expense for the
          increased property costs and production volumes (see Note 4 below).
    (c) To  record  the  additional  interest  expense  for  increased  term  of
borrowing (see Note 5 below).

3.  Taxes

No  additional  operating  taxes are included for the Zapata  properties  as the
production  from these  properties  is from federal  offshore  waters and is not
subject to severance taxes.

4.  Depletion, depreciation & amortization

Additional  depletion  and  depreciation  expense is  included  to  reflect  the
additional  property costs and production  volumes  assuming the transaction was
consummated January 1. The original purchase prices are used for the cost of the
properties. The actual purchase prices of the properties were reduced by the net
income of the  properties  from the effective  dates of the purchases  until the
closing dates.

5.  Interest

Additional  interest  expense is included as if the transactions had taken place
January 1. It is assumed that the Zapata  acquisition price was paid in cash and
the Bayou  Sorrel  acquisition  price was paid for using the  Company's  Primary
Credit  Facility.  Interest  is  computed on the  additional  borrowings  at the
estimated rates in effect at January 1.









                                      F-20

<PAGE>




                          Independent Auditors' Report




To the Board of Directors
PANACO, Inc.


We have  audited  the  accompanying  schedules  of  Revenues,  Direct  Operating
Expenses and Production Taxes of the Zapata  properties  (which were acquired by
PANACO,  Inc.,  on July 26, 1995) and the Bayou Sorrel Field (which was acquired
by PANACO on December  27,  1995) for each of the two years in the period  ended
December 31, 1994.  These  schedules are the  responsibility  of PANACO,  Inc.'s
management.  Our  responsibility is to express an opinion on the schedules based
on our audits.

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

The accompanying  Schedules of Revenues,  Selected Direct Operating Expenses and
Production  Taxes were prepared for the purpose of complying  with the rules and
regulations  of the  Securities  and Exchange  Commission  (for inclusion in the
current  report on Form 10-K) and is not intended to be a complete  presentation
of the Zapata properties and Bayou Sorrel Field's revenues and expenses.

In our  opinion,  the  Schedules  of  Revenues,  Direct  Operating  Expenses and
Production Taxes referred to above present fairly, in all material respects, the
revenues,  selected direct operating expenses and production taxes of the Zapata
properties  and the Bayou  Sorrel  Field for each of the two years in the period
ended  December 31, 1994,  in  conformity  with  generally  accepted  accounting
principles.



BARRETT & ASSOCIATES
Overland Park, Kansas

December 15, 1995














                                      F-21

<PAGE>

<TABLE>
<CAPTION>



                    ZAPATA PROPERTIES AND BAYOU SORREL FIELD

            SCHEDULES OF REVENUES, SELECTED DIRECT OPERATING EXPENSES
                              AND PRODUCTION TAXES



                                          Zapata             Bayou Sorrel
                                        Properties              Field                    Total

                                                     Year Ended December 31, 1994

<S>                                    <C>                   <C>                    <C>          
Oil and gas revenues                   $  7,540,000          $  2,888,000           $  10,428,000
                                       ============          ============           =============

Selected direct operating expenses     $  3,317,000          $  1,942,000          $    5,259,000
                                       ============          ============          ==============

Production taxes                                  0         $     310,000         $       310,000
                                       ============         =============         ===============



                                                    Year Ended December 31, 1993


Oil and gas revenues                   $ 11,823,000          $  2,908,000            $ 14,731,000
                                       ============          ============            ============

Selected direct operating expenses    $   3,696,000          $  1,806,000           $   5,502,000
                                      =============          ============           =============

Production taxes                      $           0         $     352,000          $      352,000
                                      =============         =============          ==============


</TABLE>





















                    See accompanying notes to this schedule.



                                      F-22

<PAGE>



                    ZAPATA PROPERTIES AND BAYOU SORREL FIELD

                       NOTES TO THE SCHEDULES OF REVENUES,
             SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES

                 FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993

Note 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of  significant  accounting  policies  related to the  Schedules of
Revenues,  Selected Direct Operating Expenses and Production Taxes of the Zapata
properties  and the Bayou Sorrel  Field is presented to assist in  understanding
the  schedules.  The  schedules and notes are  representations  of the Company's
management,  which is  responsible  for the  integrity  and  objectivity  of the
schedules.  These accounting  policies conform to generally accepted  accounting
principles  and  have  been  consistently  applied  in  the  preparation  of the
statement.

Acquisitions
The Zapata  properties were acquired on July 26, 1995,  from Zapata  Exploration
Co. The Bayou Sorrel Field was acquired on December 27, 1995, from Shell-Western
E&P, Inc.

Revenue Recognition
Revenues  are  recorded  on the accrual  basis,  with  volumes and prices  being
estimated for properties  during periods when actual  production  information is
not available.

Selected Direct Operating Expenses
     Selected direct operating  expenses include necessary and ordinary expenses
to maintain  production.  Insurance  expense is not  included  since  sufficient
information is not available  from the Seller.  Management  estimates  insurance
costs to be $280,000 per annum.

Depreciation, depletion and amortization
Depreciation,   depletion  and  amortization  is  not  presented  as  sufficient
information is not available from the Seller.

Operating Taxes
No  additional  tax  expense  is  included  for the  Zapata  properties,  as the
production from federal offshore waters is not subject to state severance taxes.

General, Administrative, and Overhead  Expenses
General,  administrative,  and overhead expenses are not presented as sufficient
information is not available from the Seller.


Note 2 - 1995 REVENUES, SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES
          ----------------------------------------------------------------------
          (UNAUDITED)

The following is a schedule of revenues,  selected direct operating expenses and
production taxes for the periods in 1995 that the Company did not own the Zapata
properties  and the Bayou  Sorrel  Field.  The  schedule is not intended to be a
complete presentation of the Zapata properties and Bayou Sorrel Field's revenues
and expenses.







                                      F-23

<PAGE>

<TABLE>
<CAPTION>


                                            Oil and Gas         Selected Direct          Production
                                            Revenues          Operating Expenses            Taxes
Zapata Properties
<S>          <C>             <C> <C>       <C>                   <C>                   <C>             
     January 1, 1995 to July 25, 1995      $ 3,623,000           $ 1,460,000           $        0

Bayou Sorrel
     January 1, 1995 to December 26, 1995    3,326,000               867,000              297,000
                                           ------------          -------------         ------------

TOTAL                                      $ 6,949,000           $ 2,327,000           $  297,000
                                           ===========           ===========           ===========
</TABLE>


Note 3 -  SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
          --------------------------------------------------------------------
          (UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved  undeveloped  reserve quantities of
the Zapata  properties and the Bayou Sorrel Field at December 31, 1994 are based
upon management's  computation from the report of PANACO's independent petroleum
engineers  as of December  31,  1995,  and do not purport to reflect  realizable
values  or  fair  market  values  of the  properties'  reserves.  It  should  be
emphasized  that reserve  estimates are  inherently  imprecise and  accordingly,
these estimates are expected to change as future information  becomes available.
These are  estimates  only and should not be  construed  as exact  amounts.  All
reserves are located in the United  States.  Reserve  quantities  for the Zapata
properties  and the Bayou Sorrel Field were not  available at December 31, 1992,
1993,  and 1994,  and the balances at those dates were  derived from  production
activity during 1993 and 1994.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude oil that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating  conditions.  Proved  developed  reserves  are  those  expected  to be
recovered through existing wells, equipment, and operating methods.
<TABLE>
<CAPTION>


Proved developed and                       OIL (BBLS)                                  GAS (MCF)
undeveloped reserves                         Bayou                                       Bayou
                                Zapata       Sorrel         Total          Zapata        Sorrel         Total
Estimated reserves as of
<S>         <C> <C>            <C>         <C>            <C>            <C>           <C>           <C>       
   December 31, 1992           391,000     1,323,000      1,714,000      27,647,000    4,039,000     31,686,000

Production                     (54,000)     (143,000)      (197,000)     (4,924,000)    (228,000)     (5,152,000)
                               --------     ---------     ----------     -----------   ----------     -----------

Estimated reserves as of
   December 31, 1993           337,000     1,180,000      1,517,000      22,723,000    3,811,000     26,534,000

Production                     (67,000)     (127,000)      (194,000)     (3,419,000)    (368,000)    (3,787,000)
                               --------     ---------      ---------     -----------   ----------    -----------

Estimated reserves as of
   December 31, 1994           270,000     1,053,000      1,323,000       19,304,000   3,443,000     22,747,000
                               =======     =========      =========      ===========   =========     ==========


Proved, developed reserves:

   December 31, 1993           337,000     1,180,000      1,517,000      22,723,000    3,811,000     26,534,000
                               =======     =========      =========      ==========    =========     ==========
   December 31, 1994           270,000     1,053,000      1,323,000      19,304,000    3,443,000     22,747,000
                               =======     =========      =========      ==========    =========     ==========

</TABLE>



                                      F-24

<PAGE>



Standardized Measure of Discounted Future Net Cash Flows
Future cash  inflows are  computed  by applying  year-end  prices of oil and gas
(with  consideration of price changes only to the extent provided by contractual
arrangements) to the year-end  estimated future production of proved oil and gas
reserves.  Estimates of future  development  and  production  costs are based on
year-end costs and assume  continuation  of existing  economic  conditions.  The
estimated  future net cash flows are then discounted  using a rate of 10 percent
per  year to  reflect  the  estimated  timing  of the  future  cash  flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the computed discount.

The accompanying  table reflects the standardized  measure of discounted  future
cash flows relating to the proved oil and gas reserves of the Zapata  properties
as of the two years ended December 31:
<TABLE>
<CAPTION>

                                              1994                                          1993
                              --------------------------------------------------------------------------------------
                                             Bayou                                          Bayou
                              Zapata         Sorrel          Total         Zapata           Sorrel         Total

<S>                       <C>            <C>            <C>             <C>            <C>             <C>         
Future cash inflows       $ 45,181,000    $27,233,000   $72,414,000      $52,721,000   $30,121,000     $ 82,842,000
Future development
  and production costs      15,341,000      9,021,000    24,362,000       18,658,000    11,273,000       29,931,000
                          -------------  -------------  ------------    -------------  ------------    -------------
Future net cash flows       29,840,000     18,212,000    48,052,000       34,063,000    18,848,000       52,911,000
10% annual discount
  to reflect timing of
  cash flows                 1,821,000      5,532,000     7,353,000        1,821,000     5,532,000        7,353,000
                          -------------- -------------  -------------   -------------- -------------   --------------
Standardized measure
  before income taxes     $ 28,019,000    $12,680,000   $40,699,000     $ 32,242,000   $13,316,000     $ 45,558,000
                          ============   ============   ===========     ============   ===========     ============

</TABLE>



Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the  principal  changes in the  standardized
measure of discounted  future net cash flows  attributable to proved oil and gas
reserves of the Zapata properties for each of the two years ended December 31:
<TABLE>
<CAPTION>

                                              1994                                          1993
                              ---------------------------------------------------------------------------------------
                                             Bayou                                          Bayou
                              Zapata         Sorrel          Total         Zapata           Sorrel         Total

<S>                       <C>            <C>            <C>             <C>            <C>             <C>          
Beginning balance         $ 32,242,000   $13,316,000    $45,558,000     $40,369,000    $14,066,000     $  54,435,000
  Sales of oil and gas,
  net of production
  costs                      4,223,000       636,000      4,859,000       8,127,000        750,000         8,877,000
                          -------------- -------------- -------------   -------------- --------------  ---------------

Ending balance            $ 28,019,000   $12,680,000     $40,699,000    $32,242,000   $ 13,316,000     $  45,558,000
                          ============   ===========     ===========    ============   ===========     =============


</TABLE>










                                      F-25

<PAGE>









                                  PANACO, Inc.










                               September 30, 1996



                              Financial Statements

                                   (Unaudited)


























                                      F-26

<PAGE>

<TABLE>
<CAPTION>
                                  PANACO, INC.
              Condensed Balance Sheets (Successful Efforts Method)
                                  (Unaudited)




ASSETS                                                      As of                      As of
                                                     September 30, 1996        December 31, 1995
CURRENT ASSETS:
<S>                                                         <C>                      <C>       
     Cash and cash equivalents                              $766,000                 $1,198,000
     Accounts receivable                                   4,435,000                  4,386,000
     Accounts receivable - sale of Bayou Sorrel           11,152,000                          0
     Prepaid expenses                                        359,000                    465,000
                                                       -------------               -------------
        Total Current Assets                              16,712,000                  6,049,000
                                                       -------------               -------------

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
     SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
     Oil and gas properties                              103,015,000                103,105,000
     Less: accumulated depreciation,
        depletion and amortization                      (77,526,000)               (73,620,000)
                                                       -------------               ------------
        Net Oil and Gas Properties                        25,489,000                 29,485,000
                                                       -------------               ------------

PROPERTY, PLANT AND EQUIPMENT:
     Equipment                                               248,000                    196,000
     Less: accumulated depreciation                        (122,000)                   (92,000)
                                                       -------------               ------------
        Net Property, Plant and Equipment                    126,000                    104,000
                                                       -------------               ------------

OTHER ASSETS:
     Restricted deposits                                   1,733,000                       0.00
     Loan costs, net                                         323,000                    471,000
     Certificate of deposit                                   27,000                     26,000
     Note receivable                                          21,000                     21,000
     Other                                                    13,000                     13,000
                                                       -------------               ------------
        Total Other Assets                                 2,117,000                    531,000
                                                       -------------               ------------

TOTAL ASSETS                                             $44,444,000                $36,169,000
                                                       =============               ============
</TABLE>





     The accompanying notes to financial statements are an integral part of this
statement

                                      F-27
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
              Condensed Balance Sheets (Successful Efforts Method)
                                   (Unaudited)




LIABILITIES AND STOCKHOLDERS' EQUITY                     As of                   As of
                                                 September 30, 1996          December 31, 1995
CURRENT LIABILITIES:
<S>                                                    <C>                     <C>       
     Accounts payable                                  $8,569,000              $4,444,000
     Interest payable                                     240,000                 161,000
     Current portion of long-term debt                          0                       0
                                                     ------------             -----------  
        Total Current Liabilities                       8,809,000               4,605,000
                                                     ------------             -----------

LONG-TERM DEBT                                         25,137,000              22,390,000
                                                     ------------             -----------

STOCKHOLDERS' EQUITY:
     Preferred stock, ($.01 par value,
        5,000,000 shares authorized; no
        shares issued and outstanding)                          0                       0
     Common stock, ($.01 par value,
        40,000,000 shares authorized and
        12,350,255 and 11,504,615 shares
        issued and outstanding, respectively)             123,000                 115,000
     Additional paid-in capital                        23,090,000              21,155,000
     Retained earnings (deficit)                     (12,715,000)            (12,096,000)
                                                     ------------             -----------
        Total Stockholders' Equity                     10,498,000               9,174,000
                                                     ------------             -----------








TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $44,444,000             $36,169,000
                                                     ============             ===========
</TABLE>




     The accompanying notes to financial statements are an integral part of this
statement

                                      F-28

<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
                Statements of Income (Successful Efforts Method)
              For the Nine Months Ended September 30, 1996 and 1995
                                   (Unaudited)




                                                          1996                    1995
REVENUES
<S>                                                    <C>                     <C>        
     Oil and natural gas sales                         $13,257,000             $13,660,000

COSTS AND EXPENSES
     General & administrative                              573,000                 442,000
     Depletion, depreciation & amortization              4,981,000               6,277,000
     Exploration expenses                                        -               2,174,000
     Provision for losses and (gains) on
        disposition and write-downs of assets              (4,000)                       -
     Lease operating                                     6,049,000               5,729,000
     Production and ad valoreum taxes                      429,000                 810,000
     West Delta fire loss                                  500,000                       -
                                                       -----------            ------------
        Total                                           12,528,000              15,432,000
                                                       -----------            ------------
NET OPERATING INCOME (LOSS)                                729,000             (1,772,000)
                                                       -----------            ------------
OTHER INCOME (EXPENSE)
     Interest expense (net)                            (1,347,000)               (720,000)
                                                       -----------            ------------

NET INCOME (LOSS) BEFORE INCOME TAXES                    (618,000)             (2,492,000)

INCOME TAXES                                                     -                       -
                                                       -----------            ------------

NET INCOME (LOSS)                                       ($618,000)            ($2,492,000)
                                                       ===========            ============

Net income (loss) per share                                ($0.05)                 ($0.21)
                                                       ===========            ============
</TABLE>





     The accompanying notes to financial statements are an integral part of this
statement

                                      F-29
<PAGE>

<TABLE>
<CAPTION>

                                  PANACO, INC.
  Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
                  For the nine months ended September 30, 1996
                                   (Unaudited)



                                                                                  Amount ($)
                                      Number of                                   Additional            Retained
                                       Common                  Common              Paid-in              Earnings
                                       Shares                   Stock               Capital             (Deficit)

<S>               <C> <C>             <C>                      <C>               <C>                 <C>          
Balance, December 31, 1995            11,504,615               $115,000          $21,155,000         ($12,096,000)

Net income                                     0                      0                    0             (618,000)

Common shares issued - warrants
exercised and ESOP contribution          840,746                  8,000            1,935,000                     0
                                     -----------              ---------         ------------        --------------

Balance, September 30, 1996           12,345,361               $123,000          $23,090,000         ($12,714,000)
                                     ===========              =========         ============        ==============

</TABLE>

















     The accompanying notes to financial statements are an integral part of this
statement

                                      F-30
<PAGE>


<TABLE>
<CAPTION>

                                  PANACO, INC.
                             Statement of Cash Flows
                         Nine Months Ended September 30,
                                   (Unaudited)

                                                                                1996                    1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>                   <C>         
     Net income (loss)                                                       ($618,000)            ($2,492,000)
     Adjustments to reconcile net income (loss) 
     to net cash provided by operating activities:
        Depletion, depreciation and amortization                              4,824,000               6,052,000
        Exploration expenses                                                          0               2,174,000
        Amortization of loan costs                                              157,000                 225,000
        Changes in operating assets and liabilities:
            Certificates of Deposits - escrow                                   (1,000)                  21,000
            Accounts receivable                                                (49,000)               (110,000)
            Prepaid expenses                                                    106,000               (405,000)
            Other assets                                                              0                  44,000
            Accounts payable                                                  4,231,000                 916,000
            Interest payable                                                     79,000                (34,000)
                                                                           ------------             -----------
                       Net cash provided by operating activities              8,729,000               6,391,000
                                                                           ------------             -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Accounts receivable - sale of Bayou Sorrel                         (11,152,000)                       0
        Sale of oil and gas properties                                       11,158,000                   9,000
        Capital expenditures and acquisitions                              (11,804,000)             (5,396,000)
        Purchase of other property and equipment                               (52,000)                (33,000)
        Increase in restricted deposits                                     (1,886,000)                       0
                                                                           ------------             -----------
                       Net cash used by investing activities               (13,736,000)             (5,420,000)
                                                                           ============             ===========

CASH FLOWS FROM FINANCING ACTIVITIES:
        Long-term debt proceeds                                               7,500,000               3,365,000
        Repayment of long-term debt                                         (4,753,000)             (7,000,000)
        Issuance of common stock-exercise of warrants                         1,837,000               2,554,000
        Additional loan costs                                                   (9,000)                       0
                                                                           ------------             -----------
            Net cash provided (used) by financing activities                  4,575,000             (1,081,000)
                                                                           ------------             -----------

NET INCREASE (DECREASE) IN CASH                                               (432,000)               (110,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                1,198,000               1,583,000
                                                                           ------------             -----------
                         
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30,                                     $766,000              $1,473,000
                                                                           ============             ===========
     Supplemental disclosures of cash flow information:
        Cash paid for nine months ended September 30:
                       Interest                                              $1,180,000                $757,000

     Disclosure of accounting policies:
        1.  For purposes of the statement of cash flows, the Company considers all highly liquid debt
            instruments purchased with a maturity of six months or less to be cash equivalents.
        2.  24,220 Common Shares were issued related to the Company's ESOP in a non-cash
            transaction.


</TABLE>



                                                



     The accompanying notes to financial statements are an integral part of this
statement



                                      F-31



<PAGE>







                                  PANACO, INC.
                          NOTES TO FINANCIAL STATEMENTS

              For the nine months ended September 30, 1996 and 1995

Note 1. In the  opinion of  management,  the  accompanying  unaudited  financial
statements  contain all  adjustments  necessary to present  fairly the financial
position  as of  September  30,  1996 and  December  31, 1995 and the results of
operations  and changes in  Stockholders'  Equity and cash flows for the periods
ended  September  30,  1996 and 1995.  Most  adjustments  made to the  financial
statements are of a normal,  recurring nature.  Other  adjustments,  if any, are
discussed in later notes.

Note 2.  Effective  December  31,  1995,  the  Company  changed  its  method  of
accounting  for oil and gas  operations  from  the full  cost to the  successful
efforts  method.  Management  concluded that the successful  efforts method will
better enable investors and others to compare the Company to similar oil and gas
companies, the majority of which follow the successful efforts method.

           Under the successful  efforts  method,  lease  acquisition  costs are
capitalized.   Exploratory   drilling   costs  are  also   capitalized   pending
determination  of proved  reserves.  If proved reserves are not discovered,  the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production   method.   The  carrying  amounts  of  proved  and  unproved
properties are reviewed periodically on a  property-by-property  basis, based on
future net cash flows  determined by an independent  engineering  firm,  with an
impairment reserve provided if conditions warrant.

           The Company recognizes its ownership interest in oil and gas sales as
revenue and records revenues on an accrual basis.

           Capital costs of oil and gas properties  include the estimated  costs
to develop proved reserves and the costs of plugging offshore wells and removing
structures.  The capital costs are amortized on the units of production  method,
using the ratio of current  production to the calculated  future production from
the remaining proved oil and gas reserves.

           Reserve  determinations  are  subject  to  revision  due to  inherent
imprecisions  in estimating  reserves and are revised as additional  information
becomes available.

Note 3. The results of operations  for the nine months ended  September 30, 1996
are not indicative of the results to be expected for the full year. On April 24,
1996 the Company  experienced  an explosion  and fire at Tank Battery #3 in West
Delta.  The fields were  shut-in  through  October 7th while  repairs were being
made. No revenues for the 67 remaining  days in the second  quarter and the full
third  quarter of 1996 were  recorded,  while at the same time,  a large part of
lease operating  expenses  associated with West Delta are fixed costs,  and have
stayed at  relatively  the same  level as  before  the  fire.  Production  taxes
decreased as a result of the lost  production  from West Delta , a large part of
which is in Louisiana State waters and is subject to severance  taxes.  Interest
expense is also up as a result of the fire due to reduced  cash  flows,  coupled
with increased  spending to repair Tank Battery #3. The Company did not begin to
receive insurance advances for repairing the platform until the third quarter of
1996. The Company began producing oil and natural gas from the West Delta fields
on October 7th, 1996.

Note 4. The net income per share for the nine months  ended  September  30, 1996
and 1995 has been calculated based on 12,253,382 and 11,649,091 weighted average
shares outstanding,  respectively and 12,345,361 and 11,661,540 weighted average
shares for the three months ended September 30, 1996 and 1995, respectively.

                                      F-32

<PAGE>



Note 5. The reserves  presented in the following  table were prepared  solely by
the Company and are  estimates  only and should not be  construed as being exact
amounts.  All  reserves  presented  are  proved  reserves  that are  defined  as
estimated  quantities  which  geological and engineering  data  demonstrate with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing  economic and operating  conditions.  Sale  of  minerals-in-place
reflects  the sale of the Bayou  Sorrel  Field,  effective  September  1,  1996.
Reserves  attributable to the Amoco  Acquisition, closed on October 8th, are not
included.


Proved developed and undeveloped reserves           Oil               Gas
                                                  (Bbls)              (Mcf)

December 31, 1995 reported reserves            1,900,000           46,711,000
Purchase of minerals-in-place                        -0-                  -0-
Extensions & Discoveries                             -0-                  -0-
Production                                     (203,000)          (4,590,000)
Sale of minerals-in-place                      (805,000)          (3,102,000)
Revisions of previous estimates                      -0-                  -0-
                                            ------------          -----------
Estimated reserves at September 30, 1996         892,000          39,019,000
                                            ============          ===========

No major  discovery or other favorable or adverse event has caused a significant
change in the estimated  proved  reserves since  September 30, 1996. The Company
does not have proved  reserves  applicable to long-term  supply  agreements with
governments  or  authorities.  All  proved  reserves  are  located in the United
States.

Note 6. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.

Note 7. The  Company is party to various  escrow  agreements  which  provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations.  The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging  and  abandonment  operations,  funds are  partially  or  completely
released  upon the  presentation  by the Company to the escrow agent of evidence
that the operation was or is being  conducted in compliance with applicable laws
and regulations.  These escrow amounts are included on the financial  statements
as Restricted Deposits. See "The Company-Plugging and Abandonment Escrows"

Note 8. On April 24, 1996, the Company experienced an explosion and fire on Tank
Battery #3 in West Delta.  The fire was caused by a service  company  performing
work on the facility.  The extraordinary loss, recorded in the second quarter of
1996, is management's  estimate of the Company's shortfall on insurance advances
of repairing the facilities,  which includes a $225,000 deductible.  The Company
will seek to recover  these  costs,  along with lost  profits,  from the company
whose workers caused the fire.

Note 9. On November 22, 1996,  effective September 1, 1996, the Company sold its
Bayou Sorrel Field to National Energy Group, Inc. for $11,000,000, $9,000,000 in
cash and  $2,000,000 in National  Energy Group,  Inc.  common  shares.  National
Energy Group, Inc. will also reimburse the Company for deposits it has made into
an  escrow  agreement  for the  plugging  and  abandonment  obligation.  Through
September  30,  this  amount was  $152,000.  The  Company  will also retain a 3%
overriding royalty interest in the deep rights of the field.

Note 10. At December 31, 1995, the Company had net operating loss carry forwards
for federal  income tax purposes of  $15,765,000  which are  available to offset
future federal taxable income through the year 2010.









                                      F-33

<PAGE>






Report of Independent Public Accountants



To the Board of Directors
PANACO, Inc.


We have audited the  accompanying  Statement  of Revenues  and Direct  Operating
Expenses of the Amoco  Properties  (to be acquired by PANACO,  Inc.) for each of
the three years in the period ended  December 31, 1995.  This  statement and the
notes  thereto  are  the  responsibility  of  PANACO,  Inc.'s  management.   Our
responsibility is to express an opinion on the statement 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 Statement of Revenues and Direct Operating  Expenses
is free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement.  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 Statement of Revenues and Direct Operating Expenses referred
to above  presents  fairly,  in all material  respects,  the revenues and direct
operating  expenses of the Amoco  Properties  for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.


Arthur Andersen LLP


Kansas City, Missouri
September 6, 1996



                                      F-34

<PAGE>




                                AMOCO PROPERTIES

               STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES


<TABLE>
<CAPTION>

                                            Year Ended December 31                  Six Months Ended June 30
                                            ----------------------                  ------------------------
                                                                                           (Unaudited)

                                  1995            1994            1993                1996           1995
                                  ----            ----            ----                ----           ----


Revenues:

<S>                            <C>             <C>            <C>                 <C>            <C>        
         Gas                   $ 8,769,000     $ 7,346,000    $ 8,459,000         $ 5,684,000    $ 4,379,000

         Oil & Condensate        3,759,000       3,789,000      3,620,000           2,221,000      1,979,000
                               ------------    ------------   ------------         -----------    -----------

Total Revenues                 $12,528,000     $11,135,000    $12,079,000         $ 7,905,000    $ 6,358,000
                               ===========     ===========    ===========         ===========    ===========

Direct Operating Expenses      $ 2,991,000     $ 3,158,000    $ 2,798,000         $ 1,756,000    $ 1,275,000
                               ===========     ===========    ===========         ===========    ===========



</TABLE>




























                                     See accompanying notes to this statement.


                                      F-35

<PAGE>



                                AMOCO PROPERTIES
                     NOTES TO THE STATEMENT OF REVENUES AND
                            DIRECT OPERATING EXPENSES

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Note 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  financial  statements  require the use of estimates,  and when  applicable,
specific information  regarding  significant estimates embodied in the financial
statements have been disclosed.  The Statement of Revenues and Direct  Operating
Expenses was prepared for purposes of complying  with the rules and  regulations
of the Securities  and Exchange  Commission and is not intended to be a complete
presentation  of the  financial  position or results of  operations of the Amoco
Properties.

Acquisition
The Amoco  Properties  are to be acquired by the Company on October 8, 1996 from
Amoco Production  Company  (seller)  pursuant to the purchase and sale agreement
dated  August 26,  1996.  The  properties  to be acquired  are Amoco  Production
Company's existing interests in the following offshore blocks:  East Breaks 160,
East Breaks  161,  High Island (HI) 302, HI 309, HI 310, HI 330, HI 349, HI 474,
HI 489, HI 499, a portion of the HI 475 Block,  West  Cameron  (WC) 613,  and WC
144.

Revenue Recognition
Revenues  are  recorded  on an accrual  basis,  with  volumes  and prices  being
estimated for properties  during periods when actual  production  information is
not available.  Revenues are recognized based on volumes of production taken and
sold by Amoco which is not materially  different from the entitlement method for
the  three  year  period  ending  December  31,  1995.  For each of the  periods
presented,  Amoco sold  substantially all of their production to a related party
at market based prices.

Direct Operating Expenses
Direct operating  expenses include  necessary and ordinary  expenses to maintain
production.  Insurance  expense is not included since sufficient  information is
not available from the Seller.  Depreciation,  depletion and amortization is not
included.  No severance tax expense is included for the Amoco Properties,  since
the production  from federal  offshore waters are not subject to state severance
taxes.

General, Administrative, and Overhead  Expenses
General,  administrative,  and overhead expenses are not presented as sufficient
information is not available from the Seller.

Note 2 -  SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
          --------------------------------------------------------------------
          (UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved  undeveloped  reserve quantities of
the Amoco Properties at December 31, 1995 are based upon PANACO's computation at
September 1, 1996 from a report of independent petroleum engineers,  retained by
Amoco, and do not purport to reflect  realizable values or fair market values of
the properties'  reserves.  It should be emphasized  that reserve  estimates are
inherently imprecise and accordingly,  these estimates are expected to change as
future information becomes available. These are estimates only and should not be
construed  as exact  amounts.  All  reserves  are located in the United  States.
Reserve  quantities for the Amoco  Properties were not available at December 31,
1992,  1993,  1994,  and 1995, and the balances at those dates were derived from
production activity during 1993, 1994, 1995 and 1996.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude oil that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating  conditions.  Proved  developed  reserves  are  those  expected  to be
recovered through existing wells, equipment, and operating methods.

                                      F-36

<PAGE>



<TABLE>
<CAPTION>

Proved developed and               OIL (BBLS)                     GAS (MCF)
undeveloped reserves

Estimated reserves as of
<S>         <C> <C>                 <C>                           <C>       
   December 31, 1992                2,772,000                     45,227,000

Production                           (216,000)                    (3,874,000)
                                     ---------                    -----------

Estimated reserves as of
   December 31, 1993                2,556,000                     41,353,000

Production                           (236,000)                    (4,057,000)
                                     ---------                    -----------

Estimated reserves as of
   December 31, 1994                2,320,000                     37,296,000

Production                           (216,000)                    (5,704,000)
                                  ------------                   ------------

Estimated reserves as of
    December 31,1995                2,104,000                      31,592,000
                                   ===========                    ===========

Proved developed reserves:
                                   OIL (BBLS)                    GAS (MCF)

   December 31, 1993                2,185,000                     35,202,000
                                   ==========                     ==========

   December 31, 1994                1,949,000                     31,145,000
                                   ==========                     ===========

   December 31, 1995                1,733,000                     25,441,000
                                   ==========                     ==========
</TABLE>

Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying  September,  1996 prices of oil and
gas  (with  consideration  of  price  changes  only to the  extent  provided  by
contractual  arrangements) to the estimated future  production of proved oil and
gas reserves.  Estimates of future development and production costs are based on
September,  1996 costs and assume continuation of existing economic  conditions.
The  estimated  future  net cash  flows are then  discounted  using a rate of 10
percent per year to reflect the estimated  timing of the future cash flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the discount at September 1, 1996.















                                      F-37

<PAGE>



The accompanying  table reflects the standardized  measure of discounted  future
cash flows  relating to the proved oil and gas reserves of the Amoco  properties
as of the three years ended December 31:

                                1995             1994               1993
                                ----             ----               ----



Future cash inflows         $ 108,399,000     $120,927,000       $132,062,000
Future development
  and production costs         31,112,000       34,103,000         37,261,000
                             ------------     ------------     --------------
Future net cash flows          77,287,000       86,824,000         94,801,000
10% annual discount
  to reflect timing of
  cash flows                   23,045,000       23,045,000         23,045,000
                            -------------   --------------     --------------
Standardized measure
  before income taxes       $  54,242,000     $ 63,779,000      $  71,756,000
                            =============    =============      =============


Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the changes in the  standardized  measure of
discounted  future  net  cash  flows  from  the  sales  of oil and  gas,  net of
production  costs  attributable  to  proved  oil and gas  reserves  of the Amoco
properties for each of the three years ended December 31:

                                 1995             1994              1993
                                 ----             ----              ----


Beginning balance           $   63,779,000     $ 71,756,000      $ 81,037,000
  Sales of oil and gas,
  net of production
  costs                          9,537,000        7,977,000         9,281,000
                           ---------------   --------------    --------------

Ending balance             $    54,242,000     $ 63,779,000      $ 71,756,000
                           ===============     ============      ============




                                      F-38

<PAGE>




   No  dealer,  salesperson  or other  person  has been  authorized  to give any
information or to make any representations not contained in this Prospectus, and
if given or made, such information or representation  must not be relied upon as
having been authorized by the Company or the  Underwriter.  Neither the delivery
of this Prospectus nor any sale hereunder shall, under any circumstances, create
any  implication  that there has been no change in the  affairs  of the  Company
since the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities to any person in any jurisdiction
in which such offer or solicitation  is not  authorized,  or in which the person
making  such offer or  solicitation  is not  authorized,  or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such an offer or solicitation.
<TABLE>
<CAPTION>


                                                 TABLE OF CONTENTS

                         <S>                                                 <C>
Prospectus Summary.............................     3                             8,403,305
Risk Factors...................................     6                           Common Shares
Use of Proceeds................................    10
Capitalization.................................    10
Price Range of Common Shares...................    11
Dividend Policy................................    11
Pro Forma Financial Information................    12
Selected Financial Data........................    20
Management's Discussion and Analysis...........    20
The Company....................................    25
Properties.....................................    35
Management.....................................    43                               [LOGO]
Principal Shareholders.........................    51
Certain Relationships and Related Transactions     52
Selling Shareholders...........................    53
Description of Capital Shares and Other
     Securities................................    53
Underwriting...................................    58
Shares Eligible for Future Sale................    60
Other Matters..................................    61
Legal Matters..................................    62
Experts........................................    62                             PROSPECTUS
Glossary of Selected Oil and Gas Terms.........    63                                , 1996
Index to Financial Statements..................    F-1

                                                       `                        Nolan Securities
                                                                                 Corporation


</TABLE>

   Until ,all dealers  effecting  transactions in the Common Shares,  whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the  obligation  of dealers to deliver a Prospectus  when
acting  as  Underwriter   and  with  respect  to  their  unsold   allotments  or
subscriptions.



<PAGE>



                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.  Other Expenses of Issuance and Distribution.

         The estimated expenses in connection with the Offering are as set forth
in the following table. All amounts except the SEC registration fee and the NASD
filing fee are estimates.

 SEC Registration Fee                                             $    16,106.00
 NASD Filing Fee and legal clearance fee                                5,815.00
 Blue Sky Legal Fees and Filing and Qualification Fees                 11,000.00
 Printing and Engraving Expenses                                       30,000.00
 Legal Fees and Expenses
 Accounting Fees and Expenses                                          25,000.00
 Transfer Agent's Fees                                                  2,000.00
 Miscellaneous Expenses (including travel and promotion expenses)      10,000.00
                                                                     -----------

             TOTAL                                                $

Item 14.  Indemnification of Directors and Officers.

         Article Twelve of the Certificate of Incorporation of PANACO, INC. (the
"Company")  provides that the Company must  indemnify its officers and directors
to the extent  allowed by the  Delaware  General  Corporation  Law.  Pursuant to
Section 145 of the Delaware General  Corporation Law, the Company  generally has
the power to indemnify  its present and former  directors  and officers  against
expenses and  liabilities  incurred by them in connection with any suit to which
they are, or are  threatened  to be made, a party by reason of their  serving in
those  positions  so long as they  acted  in good  faith  and in a  manner  they
reasonably  believed  to be in, or not  opposed  to, the best  interests  of the
Company,  and with respect to any criminal action,  they had no reasonable cause
to believe their conduct was unlawful.  With respect to suits by or in the right
of the Company, however, indemnification is generally limited to attorney's fees
and other  expenses and is not  available if the person is adjudged to be liable
to the Company unless the court determines that  indemnification is appropriate.
The statute expressly provides that the power to indemnify authorized thereby is
not  exclusive  of any  rights  granted  under any  by-law,  agreement,  vote of
shareholders or disinterest  directors,  or otherwise.  The Company also has the
power to  purchase  and  maintain  insurance  for its  directors  and  officers.
Additionally,  Article Twelve of the Certificate of Incorporation provides that,
in the event that an officer or director files suit against the Company  seeking
indemnification of liabilities or expenses  incurred,  the burden will be on the
Company  to prove  that the  indemnification  would not be  permitted  under the
Delaware General Corporation Law.

         The preceding discussion of the Company's  Certificate of Incorporation
and Section 145 of the Delaware  General  Corporation  Law is not intended to be
exhaustive and is qualified in its entirety by the Certificate of  Incorporation
and Section 145 of the Delaware General Corporation Law.

Item 15.  Recent Sales of Unregistered Securities.

         During  the three  years  preceding  the  filing  of this  Registration
Statement,  the Company sold the following  securities in transactions that were
not registered  under the  Securities Act of 1933, as amended,  in reliance upon
the  exemption  provided by Section 4(2)  thereof and the rules and  regulations
promulgated thereunder.

                                      II-1

<PAGE>




         1.  Effective  December  31,  1993,  the  Company  concluded  a private
         placement in which it issued promissory notes in an aggregate amount of
         $5,000,000,  the 1993  Subordinated  Notes, and warrants to purchase an
         aggregate of 816,526  Common  Shares to six  investors for an aggregate
         consideration  of $5,000,000.  Each investor  executed a loan agreement
         confirming  that it was an accredited  investor (as defined in Rule 501
         under the Securities  Act) and  containing  other  representations  and
         agreements customary for private placement transactions.

         2. Effective October 8, 1996, the Company concluded a private placement
         in  which  it  issued  promissory  notes  in  an  aggregate  amount  of
         $17,000,00,  the 1996 Tranche A Convertible  Subordinated Notes and the
         1996 Tranche B Bridge Loan Subordinated Notes, and warrants to purchase
         an aggregate  of  2,060,606  Common  Shares to seven  investors  for an
         aggregate  consideration of $17,000,000.  Each investor executed a loan
         agreement  confirming that it was an accredited investor (as defined in
         Rule 501 under the Securities Act) and containing other representations
         and agreements customary for private placement transactions.

         3. On October 8, 1996,  the Company issued  2,000,000  Common Shares to
         Amoco Production  Company as part of the purchase price for certain oil
         and gas  properties,  in a private  placement.  The  purchase  and sale
         agreement  confirmed that Amoco is an accredited investor and contained
         the  representations  and  agreements  customary  in private  placement
         transactions.

         4. In the past three years  various  persons and entities have acquired
         Common Shares upon the exercise of options and warrants.  In 1993 seven
         investors  acquired 575,000 Common Shares.  In 1994 eighteen  investors
         acquired  1,719,900 Common Shares.  In 1995 twelve  investors  acquired
         1,255,447  Common Shares.  In each instance the person or entity was an
         officer or former  officer,  director  or former  director,  lenders or
         investment  bankers.  In  each  instance  the  documentation  contained
         appropriate   representations   and   agreements   to   establish   the
         availability of the exemption.

         5. In the first quarter 1996 the six investors,  described in paragraph
         (1) above,  exercised  their  warrants to acquire  the  816,526  Common
         Shares,  which were issued in reliance upon the exemption and the facts
         relied upon above.

Item 16. Exhibits and Financial Statement Schedules.

         (a) Exhibits

     Exhibit
     Number      Description
     1.0*** Underwriting Agreement

     1.1*** Selling Stockholders' Custody Agreement

     1.2*** Selling Stockholders' Power of Attorney

     3.1* Certificate of Incorporation of the Company.

     3.2*  Amendment  to  Certificate  of  Incorporation  of the  Company  dated
November 19, 1991.

     3.3* By-laws of the Company.

     3.4  Amendment  to  Certificate  of  Incorporation  of  the  Company  dated
September  24,  1996 filed as an exhibit to the Amended  Current  Report on Form
8-K/A,  filed with the Commission on November 18, 1996, and incorporated  herein
by this reference.

                                      II-2

<PAGE>



     4.1* Article Fifth of the  Certificate of  Incorporation  of the Company in
Exhibit 3.1.

     4.2* Form of Certificate of Common Shares par value $.01 per share,  of the
Company.

     4.3 Rights Agreement, dated as of August 3, 1995, between PANACO, Inc., and
American Stock Transfer and Trust Company,  which includes as Exhibit A the Form
of Certificate of Designation of Series A Preferred Stock, Exhibit B the Form of
Rights  Certificate  and Exhibit C the  Summary of Rights to Purchase  Preferred
Stock was filed as Exhibit 1 to the  Registration  Statement on Form 8-A,  filed
with the  Commission  on  August  21,  1995,  and  incorporated  herein  by this
reference.

     5 Form of Opinion of Shughart Thomson & Kilroy, P.C. regarding the legality
of the securities being registered.

     10.1* PANACO, Inc. Long-term Incentive Plan.

     10.7* Senior Second  Mortgage Term Loan  Agreement as of December 31, 1993,
between PANACO, Inc., and seven lenders represented by Kayne Anderson Investment
Management, Inc.

     10.9  Purchase  and Sale  Agreement,  dated July 12, 1995,  between  Zapata
Exploration  Company,  Zapata  Offshore  Gathering Co., Inc., and PANACO,  Inc.,
filed as an exhibit to the Current  Report on Form 8-K filed with the Commission
on August 1, 1995, and incorporated herein by this reference.

     10.11  Assignment/East  Breaks 110,  effective October 1, 1994, from Zapata
Exploration Company to PANACO,  Inc. The Assignment/East  Breaks 109 document is
identical,  filed as an exhibit to the Current Report on Form 8-K filed with the
Commission on August 1, 1995, and incorporated herein by this reference.

     10.12  Purchase and Sale Agreement  dated November 30, 1995,  between Shell
Western E&P, Inc. and PANACO, Inc., filed as an exhibit to the Current Report on
Form 8-K filed, with the Commission on January 31, 1996, and incorporated herein
by this reference.

     10.13** PANACO, Inc. Employee Stock Ownership Plan & Trust.

     10.14  Purchase and Sale  Agreement,  dated August 26, 1996,  between Amoco
Production  Company and PANACO,  Inc., filed as an exhibit to the Current Report
on Form 8-K,  filed with the  Commission on October 28, 1996,  and  incorporated
herein by this reference.

     10.15 Amended and Restated Credit  Agreement,  dated October 7, 1996, among
First Union National Bank of North Carolina, as agent, and the lenders signatory
thereto,  and PANACO, Inc., filed as an exhibit to the Amended Current Report on
Form 8-K/A,  filed with the  Commission on November 18, 1996,  and  incorporated
herein by this reference.

     10.16 Senior  Subordinated  Mortgage Master Loan Agreement dated October 8,
1996 between PANACO,  Inc. and Offense Group Associates,  L.P., Kayne,  Anderson
Non-Traditional   Investments,   L.P.,  ARBCO  Associates,   L.P.,   Opportunity
Associates,  L.P., Kayne, Anderson Offshore Limited, Foremost Insurance Company,
TOPA  Insurance  Company and EOS  Partners,  L.P. and Offense,  as agent for the
Lenders,  filed as an exhibit to the Amended Current Report on Form 8-K/A, filed
with the  Commission  on November  18,  1996,  and  incorporated  herein by this
reference.

     23.1 Consent of Barrett and Associates.

     23.2 Consent of Ryder Scott Company.

                                      II-3

<PAGE>




     23.3 Consent of McCune Engineering, P.E.

     23.4 Consent of Shughart Thomson & Kilroy,  P.C.  (included in Exhibit 5 to
this Registration Statement.)

     23.5 Consent of Arthur Andersen LLP.

     24   Power of Attorney (included on signature page).
     27   Financial Data Schedule.

     *Filed with the  Registration  Statement on Form S-4,  Commission  File No.
     33-44486,  initially  filed December 13, 1991, and  incorporated  herein by
     this reference.

     ** Filed with the Registration  Statement on Form S-1,  Commission file No.
     33-81058,  initially  filed July 1, 1994, and  incorporated  herein by this
     reference.

     All others  filed  herewith or  incorporated  herein by  reference to prior
     filings with the Commission.

     ***To be filed by amendment.

     (b)      Financial Statement Schedules

              None.

         All other  statements and schedules for which  provision is made in the
applicable  regulation  of the  Securities  and  Exchange  Commission  have been
omitted  because  they  are  not  required  under  related  instruction  or  are
inapplicable,  or the  information  is shown  in the  financial  statements  and
related notes.

Item 17. Undertakings.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors,  officers and controlling  persons of
the  registrant  pursuant  to  the  foregoing  provisions,   or  otherwise,  the
registrant  has been advised that in the opinion of the  Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against such  liabilities  (other than the payment by the registrant of expenses
incurred or paid by a director,  officer or controlling person of the registrant
in the  successful  defense of any action,  suit or  proceeding)  is asserted by
securities being  registered,  the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,  submit to a court
of appropriate  jurisdiction the question whether such  indemnification by it is
against  public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

         The undersigned registrant hereby undertakes that:

(1) For purposes of determining  any liability under the Securities Act of 1933,
the  information  omitted  from  the  form of  prospectus  filed as part of this
Registration  Statement  in reliance  upon Rule 430A and  contained in a form of
prospectus  filed by the registrant  pursuant to Rule 424(b)(1) or (4) or 497(h)
under  the  Securities  Act  shall  be  deemed  to be part of this  Registration
Statement as of the time it was declared effective.

(2) For purposes of determining  any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration  Statement  relating to the securities offered therein,
and the  offering  of such  securities  at that  time  shall be deemed to be the
initial bona fide offering thereof.




                                      II-4

<PAGE>






                                                    SIGNATURES

         Pursuant to the  requirements of the Securities Act, the registrant has
duly caused this  amendment  to the  Registration  Statement to be signed on its
behalf by the  undersigned,  thereunto  duly  authorized,  in the City of Kansas
City, State of Missouri on December 18, 1996.

                                                   PANACO, INC.


                                           By: /s/ H. James Maxwell
                                               H. James Maxwell, President & CEO

         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and on the dates indicated.

         We, the undersigned  directors and officers of PANACO, Inc., a Delaware
corporation,  hereby  constitute  and appoint H. James Maxwell and Todd R. Bart,
and  each of them,  the true and  lawful  agents  and  attorneys-in-fact  of the
undersigned   with  full   power  and   authority   in  said   agents   and  the
attorneys-in-fact,  and in any one or more of them, to sign for the  undersigned
and in their  respective  names as directors and officers of the Corporation the
Registration  Statement  of the  Corporation  on forms S-1 to be filed  with the
Securities and Exchange Commission,  Washington,  D.C., under the Securities Act
of 1933, as amended,  and sign any amendment or amendments to such  Registration
Statement,  in the matter of the proposed public offering by the Corporation and
certain  shareholders of the  Corporation,  hereby  ratifying and confirming all
acts taken by such agents and  attorneys-in-fact  or any one of them,  as herein
authorized.
<TABLE>
<CAPTION>


      Signature                      Title                                                  Date


<S>                                                                                           <C>   
/s/ H. James Maxwell          Chairman of the Board, Chief Executive Officer,            Dec. 18,1996
H. James Maxwell,             President, and Director (principal executive officer)


/s/ Bob F. Mallory            Chief Operating Officer, Executive Vice President,         Dec. 18, 1996
Bob F. Mallory                and Director


/s/ Todd R. Bart              Chief Financial Officer, Secretary, and                    Dec. 18, 1996
Todd R. Bart                  Treasurer


/s/ Larry M. Wright           Executive Vice President and Director                      Dec. 18, 1996
Larry M. Wright

/s/ N. Lynn Sieverling        Director                                                   Dec. 18, 1996
N. Lynn Sieverling

/s/ A. Theodore Stautberg, Jr.Director                                                   Dec. 18, 1996
A. Theodore Stautberg, Jr.


</TABLE>


                                      II-5

<PAGE>





                                 __________ 1996


                                  PANACO, INC.
                               8,403,305 SHARES OF
                     COMMON STOCK, PAR VALUE $.01 PER SHARE,
                       REGISTRATION STATEMENT ON FORM S-1





Dear Ladies and Gentlemen:

     We have  acted as  counsel to PANACO,  Inc.,  a Delaware  corporation  (the
"Company"), in connection with the Company's Registration Statement on Form S-1,
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933 (the "Act"),  for the registration  under the Act of the offering by the
Company and certain  persons  (the  "Selling  Shareholders")  of up to 9,663,801
common shares (including the Over-Allotment  Option),  $.01 par value per share,
of the Company (the "Common Shares").

     In that  connection,  we have examined  originals,  or copies  certified or
otherwise identified to our satisfaction, of such documents,  corporate records,
and other  instruments  as we have  deemed  necessary  for the  purposes of this
opinion,  including the following:  (a) the Certificate of  Incorporation of the
Company,  as amended and applicable  certificates of public  officials,  (b) the
By-laws of the Company, as amended,  and (c) resolutions adopted by the Board of
Directors of the Company.

     Based on the foregoing,  we are of the opinion that the authorized  capital
stock of the Company  conforms as to legal  matters to the  description  thereof
contained in the Prospectus; the outstanding Common Shares including those owned
by the selling Shareholders have been duly and validly authorized and issued and
are fully  paid and  nonassessable;  the  shares  to be  issued  and sold by the
Company  pursuant to this offering have been duly and validly  authorized,  and,
when issued,  delivered and paid for, will be fully paid and  nonassessable  and
the  issuance of such shares  will not be subject to any  preemptive  or similar
right.

         We know that we are  referred to under the heading  "Legal  Matters" in
the  Prospectus  forming  a part of the  Registration  Statement  and we  hereby
consent  to  such  use of our  name in  such  Prospectus  and to the use of this
opinion for filing as Exhibit 5 to the Registration Statement.

                                                 Very truly yours,



                                                 SHUGHART THOMSON & KILROY, P.C.





                                    Exhibit 5

<PAGE>









                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


      As independent public  accountants,  Barrett & Associates  consents to the
use of our reports and to all  references to our firm included in or made a part
of this  Registration  Statement  on Form  S-1  filed  with the  Securities  and
Exchange  Commission  by  PANACO,  Inc.  under the  Securities  Act of 1933,  as
amended, including any references to our firm as experts.





                                                            BARRETT & ASSOCIATES



Overland Park, Kansas
December 18, 1996


                                  Exhibit 23.1

<PAGE>













                         CONSENT OF RYDER SCOTT COMPANY




         As independent  petroleum  consultants,  Ryder Scott Company  Petroleum
Engineers  consents to the  references to our firm included in or made a part of
this  Registration  Statement on Form S-1 filed with the Securities and Exchange
Commission  by  PANACO,  Inc.  under the  Securities  Act of 1993,  as  amended,
including any references to our firm as experts.





                                                             RYDER SCOTT COMPANY
                                                             PETROLEUM ENGINEERS



Houston, Texas
December 18, 1996
























                                  Exhibit 23.2

<PAGE>












                          CONSENT OF MCCUNE ENGINEERING


         As independent  petroleum  consultants,  McCune Engineering,  Petroleum
Engineers  consents to the  references to our firm included in or made a part of
this  Registration  Statement on Form S-1 filed with the Securities and Exchange
Commission  by  PANACO,  Inc.  under the  Securities  Act of 1933,  as  amended,
including any references to our firm as experts.




                                                             MCCUNE ENGINEERING
                                                             PETROLEUM ENGINEERS



Kansas City, Missouri
December 18, 1996




























                                  Exhibit 23.3

<PAGE>












                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



         As independent public accountants,  we hereby consent to the use of our
report  (and all  references  to our  Firm)  included  in or made a part of this
Registration Statement on Form S-1.



                                                             ARTHUR ANDERSEN LLP



Kansas City, Missouri
December 18, 1996




                                  Exhibit 23.5
[{"type": "S-1", "sequence": "1", "description": "REGISTRATION STATEMENT", "secsgml_size_bytes": 430764}]
{"company-data": {"conformed-name": "PANACO INC", "cik": "0000882074", "assigned-sic": "1311", "irs-number": "431593374", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-18233", "film-number": "96683171"}, "business-address": {"street1": "1050 WEST BLUE RIDGE BOULEVARD", "street2": "PANACO BUILDING", "city": "KANSAS CITY", "state": "MO", "zip": "64114", "phone": "8169426300"}, "mail-address": {"street1": "1050 W BLUE RIDGE BLVD", "city": "KANSAS CITY", "state": "MO", "zip": "64114"}}
As filed with the Securities and Exchange Commission on December 19, 1996

                                                     Registration No.-----------
--------------------------------------------------------------------------------
                                UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                              --------------------
                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                  PANACO, Inc.
             (Exact name of registrant as specified in its charter)

       Delaware                        1311                     43-1593374
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
 incorporation or organization)  Classification Code Number) Identification No.)

                         1050 West Blue Ridge Boulevard
                                 PANACO Building
                        Kansas City, Missouri 64145-1216
                                 (816) 942-6300
               (Address, including ZIP code, and telephone number,
        including area code, of registrant's principal executive offices)
             ------------------------------------------------------

                                   Copies to:

    Steven H. Goodman, Esq.          Louis J. Bevilacqua, Esq.
    Shughart Thomson & Kilroy, P.C.  Cadwalader, Wickersham & Taft
    Twelve Wyandotte Plaza           100 Maiden Lane
    120 West 12th Street             New York, New York  10038
    Kansas City, Missouri 64105

    As soon as practicable after Effectiveness of this Registration Statement
       (Approximate date of commencement of proposed sale to the public)

If any of the  securities  being  registered on this Form are to be offered on a
delayed or continuous  basis  pursuant to Rule 415 under the  Securities  Act of
1933  check  the  following:  [ ] If this form is filed to  register  additional
securities  for an offering  pursuant to Rule 462(b) under the  Securities  Act,
please  check  the  following  box and  list  the  Securities  Act  registration
statement number of the earlier  effective  registration  statement for the same
offering: [ ] If this form is a post-effective  amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration  statement number of the earlier registration statement for the
same  offering:  [ ] If  delivery  of this  prospectus  is  expected  to be made
pursuant to Rule 434, please check the following: [ ]

                                          Calculation of Registration Fee
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
    Title of Each Class                            Proposed Maximum          Proposed Maximum
    of Securities to be        Amount to be            Offering                 Aggregate                 Amount of
        Registered            Registered (1)     Price per Share (2)          Offering Price          Registration Fees
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
Common Stock, par          9,663,801
  value, $.01 per share.          Shares                $5.50                 $53,150,905.00              $16,106.33
---------------------------- ----------------- ------------------------- ------------------------- -------------------------
(1)  Based  upon  the  maximum  number  of  shares  that may be sold in the
transactions described herein.
     (2) Estimated in accordance with Rule 457(g) & (c).
                        --------------------------------

         The Registrant hereby amends this  Registration  Statement on such date
or dates as may be necessary to delay its  effective  date until the  Registrant
shall file a further amendment which specifically  states that this Registration
Statement shall  thereafter  become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the  Registration  Statement shall be become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.
CROSS-REFERENCE SHEET
                    Pursuant to Item 501(b) of Regulation S-K

                        Showing Location in Prospectus of
                    Information Required by Items of Form S-1
Number and Caption                                                   Location in Prospectus

                                        
1.   Forepart of the Registration Statement
and Outside Front Cover Page of
         Prospectus...........................................       Front Cover Page
2.   Inside Front and Outside Back Cover
         Pages of Prospectus..................................       Inside Front Cover Page; Other Matters
3.   Summary Information, Risk Factors and
         Ratio of Earnings to Fixed Charges...................       Prospectus Summary; Risk Factors
4.   Use of Proceeds..........................................       Use of Proceeds
5.   Determination of Offering Price..........................       Use of Proceeds
6.   Dilution.................................................       *
7.   Selling Security Holders.................................       Principal Shareholders; Selling Shareholders
8.   Plan of Distribution.....................................       Underwriting
9.   Description of Securities to be Registered...............       Front Cover Page; Description of
                       Capital Shares and Other Securities
10.  Interests of Named Experts and Counsel                          Legal Matters; Experts
11.  Information With Respect to the Registrant...............       Front Cover Page; Prospectus Summary;
                                                                     The Company; Selected Financial Data;
                                                                     Management's Discussion and Analysis of
                                                                     Financial Condition and Results of
                                                                     Operations; Management; Description of
                                                                     Capital Shares and Other Securities;  Index
                                                                     to Financial Statements
12.  Disclosure of Commission Position on
       Indemnification for Securities Act Liabilities.........       Other Matters
*Omitted because answer is not applicable or negative.
Information  contained  herein is subject to  completion  or  amendment.  A
registration  statement  relating  to these  securities  has been filed with the
Securities  and Exchange  Commission.  These  securities may not be sold nor may
offers to buy be accepted prior to the time the registration  statement  becomes
effective.  This  prospectus  shall  not  constitute  an  offer  to  sell or the
solicitation of an offer to buy nor shall there be any sale of these  securities
in any State in which such offer,  solicitation  or sale would be unlawful prior
to registration or qualification under the securities laws of any State.

     Subject to Completion, Dated December 19, 1996.
PROSPECTUS
(Subject  to Completion)

                                                 [LOGO]

                                              8,403,305 Common Shares

                                                -------------------

     Of the up to 8,403,305 Common Shares, par value $.01 per share (the "Common
Shares"),  offered hereby (this  "Offering"),  6,000,000 Common Shares are being
offered  and sold by the Company and  2,403,305  are being sold  directly by the
Selling Shareholders.  See "Selling  Shareholders." The Company will not receive
any proceeds from the sale of Common Shares by the Selling Shareholders.
     The Common Shares are traded on the NASDAQ National Market under the symbol
"PANA".  On December 18, 1996, the last reported sale price of the Common Shares
was $5.125 per share. See "Description of Capital Stock Market Prices".
     The Common  shares are being  offered  through the  Underwriters  on a best
efforts basis.  The Offering will terminate on , unless  extended by the Company
and the Underwriters.

        An investment in the Common Shares offered hereby involves a high
            degree of risk. See "Risk Factors" beginning on page 5 for
         certain considerations relevant to an investment in the Common
                                     Shares.

  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
      SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
            PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
            ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
                                                                                                 Proceeds to the
                                       Price to            Underwriting        Proceeds to           Selling
                                        Public             Discount (1)        Company(2)        Shareholders (3)
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
Per Share .........              $                      $                   $                  $
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
Total (4) ...........            $                      $                   $                  $
-------------------------------- ---------------------- ------------------- ------------------ ---------------------
(1) The Company has agreed to indemnify the  Underwriters  against  certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting".
     (2) Before deducting expenses payable by the Company, estimated to be $ .
     (3)  Before  deducting  expenses  payable  by  the  Selling   Shareholders,
estimated to be $ .
     (4) The Company has granted the Underwriters a 30-day option to purchase up
to  an  aggregate  of  1,260,496   additional  Common  Shares  solely  to  cover
over-allotments, if any. If such option is exercised in full, the total Price to
Public,  Underwriting  Discount  and  Proceeds to Company  will be $ , $ and $ ,
respectively. See "Underwriting".
                              --------------------

         The shares of Common Shares are offered by the Underwriters, subject to
prior sale,  when, as and if issued to and accepted by them,  subject to certain
other  conditions.  The  Underwriters  reserve the right to withdraw,  cancel or
modify such offer and reject  orders in whole or in part.  It is  expected  that
delivery of the shares of Common Shares offered hereby will be made in New York,
New York on or about , 1996.

                          Nolan Securities Corporation

                      The date of this Prospectus is , 1996

IN  CONNECTION  WITH THE OFFERING,  THE  UNDERWRITERS  MAY  OVER-ALLOT OR EFFECT
TRANSACTIONS  WHICH  STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT  OTHERWISE  PREVAIL IN THE OPEN  MARKET.  SUCH
TRANSACTIONS  MAY BE EFFECTED ON THE NASDAQ  NATIONAL  MARKET,  IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
PROSPECTUS SUMMARY

     The  following  summary is qualified  in its entirety by the more  detailed
information and consolidated  financial  statements and notes thereto  appearing
elsewhere in this Prospectus.  Unless the context otherwise requires, references
in  this  Prospectus  to  the  "Company"   shall  mean  PANACO,   Inc.  and  its
predecessors.  Unless otherwise noted herein, the information  contained in this
Prospectus  assumes  the  Underwriters'   over-allotment   option  will  not  be
exercised.  An investment in the Common Shares  offered  hereby  involves a high
degree of risk.  Investors should  carefully  consider the information set forth
under the heading "Risk  Factors".  See "Glossary of Selected Oil and Gas Terms"
for the definitions of certain terms used in this Prospectus.

                                   The Company

     PANACO,  INC.  (the  "Company")  is a  Delaware  corporation,  incorporated
October 4, 1991.  When used herein the word "Company"  includes its  predecessor
Pan  Petroleum  MLP,  which merged into the Company on  September  1, 1992.  The
Company is in the oil and gas  business,  acquiring,  developing  and  operating
offshore oil and gas  properties  in the Gulf of Mexico.  Including the recently
acquired  Amoco  Properties  (as defined  herein) and excluding the Bayou Sorrel
Field (as defined herein) which was recently sold, the Company owned oil and gas
properties  containing,  as of November 1, 1996,  Proved  Reserves of 2,920,000
Bbls of oil and 64,925,000 Mcf of gas. The SEC 10 Value of such Proved  Reserves
as of  September  1, 1996 was  $128,092,000.  See "Risk  Factors - Estimates  of
Reserves and Future Net  Revenue."  The Company  operates 52 offshore  wells and
owns interests in 71 offshore wells operated by others.  It operates nine of the
twenty-five  offshore  blocks  in which it owns an  interest.  In  addition  the
Company owns and operates some onshore properties which generate less than 3% of
its  revenues.  For a description  of the  properties  owned and the  activities
conducted by the Company, see "The Company" and "Property."

     Common  Shares are quoted on the  NASDAQ-National  Market  under the symbol
"PANA".

     The Company's Board of Directors  consists of nine persons,  three of which
are employees of the Company. See "Management - Officers and Directors."

     The Company's  headquarters  are located at 1050 West Blue Ridge Boulevard,
PANACO Building,  Kansas City, Missouri 64145-1216,  and its telephone number at
such offices is (816)942-6300, FAX (816) 942-6305. The Houston office is located
at 1100 Louisiana,  Suite 5110,  Houston,  Texas  77002-5220,  and the telephone
number is (713) 652-5110, FAX (713) 651-0928.

                                Business Strategy

     The Company's  objective is to enhance  shareholder value through sustained
growth in its reserve  base,  production  levels and  resulting  cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies  properties that may be acquired preferably
through negotiated transactions or, if necessary,  sealed bid transactions.  The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs,  have an established  production history and are candidates
for  exploitation.  Geologically  complex  fields with multiple  reservoirs  are
fields in which there are  multiple  reservoirs  at  different  depths and wells
which   penetrate  more  than  one  reservoir,   that  have  the  potential  for
recompletion  in more than one  reservoir.  Once  properties  are acquired,  the
Company  focuses  on  reducing  operating  costs  and  implementing   production
enhancements through the application of technologically  advanced production and
recompletion  techniques.  Over the past  five  years,  the  Company  has  taken
advantage  of  opportunities  to  acquire  interests  in a number  of  producing
properties which fit these criteria.
Recent Developments

Amoco Acquisition

     On October 8, 1996, the Company  closed on its  acquisition of interests in
six offshore fields from Amoco Production  Company for $40.4 million (the "Amoco
Acquisition").  In  consideration  for such interests,  the Company issued Amoco
2,000,000  Common Shares and paid the sum of $32 million in cash.  The interests
acquired  include (1) a 33.3%  working  interest in the East Breaks 160 Field (2
Blocks)  and a 33.3%  interest in the High  Island 302 Field,  both  operated by
Unocal Corporation;  (2) an average 50% interest in the High Island 309 Field (2
Blocks),  a 12%  interest  in the High  Island  330 Field (3  Blocks)  and a 12%
interest  in the High  Island 474 Field (4  Blocks),  all  operated  by Phillips
Petroleum  Company;  and (3) a 12.5%  interest in the West  Cameron 180 Field (1
Block)  operated  by  Texaco  (collectively  the  "Amoco  Properties").  Current
production,  for the  interests  acquired,  is 680 barrels of oil per day and 12
MMcf of natural gas per day. See "Amoco Acquisition."

Explosion and Fire

     The Company experienced an explosion and fire on April 24, 1996 at its Tank
Battery  #3 located in the  Company's  West Delta oil and gas fields  (the "West
Delta Fields"), resulting in production from the West Delta Fields being shut-in
through  October 7, 1996,  when  production was resumed.  The loss of 67 days of
production  in the second  quarter and the entire third  quarter was a principal
contributor  to the loss of $.19 per share for the second and third  quarters of
1996. Until final resolution of the total repair costs the insurance  company is
advancing  funds to assist  the  Company  in  paying  for  repairs.  There is no
assurance  that  the  Company's  repair  costs  will be  fully  covered  by such
insurance or that the Company's  insurance  carriers may not seek reimbursement
of some of their advances.  The Company is considering  filing suits against the
employers of the persons who caused the  incidents.  No  assurance  can be given
that the company will successfully recover any amounts sought in any such suits.
The  repair  expenditures  on Tank  Battery  #3,  with the  delay  in  insurance
advances, also decreased working capital and increased long-term debt.

Sale of Bayou Sorrel

     Effective  September  1, 1996 the  Company  sold its  interest in the Bayou
Sorrel oil and gas field ( the "Bayou Sorrel  Field") to National  Energy Group,
Inc. for $11 million.  The Company received $9 million in cash and $2 million in
shares of National Energy Group,  Inc. common stock. The Company also retained a
3%  overriding  royalty  interest in the deep  rights of the field below  11,000
feet.

                                  The Offering
Common Shares offered by the Company................................. 6,000,000 shares (a)

Common Shares offered by the Selling Shareholders.................... 2,403,305 shares

Common Shares offered hereby......................................... 8,403,305 shares (a)

Common Shares to be outstanding after this Offering..................20,350,255 shares (a)(b)

Use of Proceeds......................................................For repayment of existing long term debt,
                                                                     development of existing oil and gas
                                                                     properties and acquisition of additional oil
                                                                     and gas properties.
NASDAQ National Market Symbol........................................PANA

     (a)  Exclusive  of the  Underwriters'  Over-Allotment  Option of  1,260,496
shares.
     (b)  Excludes   289,365  Common  Shares   issuable  upon  the  exercise  of
outstanding  warrants,  2,060,606  issuable upon the conversion of the Tranche A
Convertible  Subordinated  Notes, and up to 840,330 Common Shares which would be
issuable upon the exercise of warrants to be issued to the  Underwriters  should
all of the Common  Shares  offered  hereby be sold,  assuming no exercise of the
Underwriters' Over- Allotment Option.
Summary Financial Data

     The following  table sets forth  summaries of certain  selected  historical
financial  and reserve  information  for the Company as of the dates and for the
periods  indicated.  Effective December 31, 1995, the Company changed its method
of  accounting  for oil and gas  operations  from the full  cost  method  to the
successful  efforts  method.  Prior periods have been restated to give effect to
this change. Future results may vary significantly from the amounts reflected in
the  information  set forth  hereafter  because of, among other reasons,  normal
production declines,  acquisitions, and changes in the price of oil and gas. See
"Risk Factors - Estimates of Reserves and Future Net Revenues" and "Risk Factors
- Recent Changes in Oil and Gas Prices."
As of and For the Nine Months               As of and For the Year
                                        Ended September 30,                      Ended December 31,
                                            (unaudited)

                                      1996(a)          1995             1995            1994              1993
                                 ---------------  --------------  ---------------- ------------------  -----------
Operations Data
Oil & Gas Sales...............   $    13,257,000    13,660,000      18,447,000       17,338,000        12,605,000
Funds Provided By
      Operations(b)...........         6,782,000     7,121,000       9,314,000       11,101,000         6,554,000
Exploration Expenses..........          0            2,174,000       8,112,000         0                 0
Provision for losses and
(gains) on disposition of
and write-down of asset.......          0             0                751,000        1,202,000         3,824,000
Depletion, depreciation &
        amortization..........         4,981,000     6,277,000       8,064,000        6,038,000         4,288,000
Net income (loss).............         (618,000)   (2,492,000)     (9,290,000)        1,115,000       (3,986,000)
Net Income (loss) per share               (0.05)         (.21)           (.81)              .11             (.53)

Balance Sheet Data
Oil and gas properties, net...   $    25,489,000     21,515,000     29,485,000       23,945,000        19,183,000
Total assets..................        44,444,000     26,795,000     36,169,000       29,095,000        24,432,000
Long-term debt................        25,137,000      8,865,000     22,390,000       12,500,000        12,465,000
Stockholders' equity..........        10,498,000     15,335,000      9,174,000       14,882,000         8,744,000
Book value per share..........   $           .85           1.38            .80             1.46              1.07

Oil and Gas Data
Production:
Oil and condensates (Bbls).......        203,000        122,000        170,000          137,000           180,000
Gas (Mcf).....................         4,590,000      7,578,000      9,850,000        8,139,000         5,586,000
Estimated Proved
      Reserves:
Oil and condensates (Bbls)(c)....      2,920,000       ---             900,000          943,000           745,000
Gas (Mcf)(c)..................        64,925,000       ---          46,711,000       41,582,000        43,696,000
SEC 10 Value(c)................  $   128,092,000       ---          72,432,000       47,159,000        58,185,000
(a) Results for the period ended  September  30, 1996,  were  substantially
affected by the  explosion  and fire.  See  "Recent  Explosion  and Fire".  Such
results include the results of operations through August 31 for the Bayou Sorrel
Field, which the Company sold effective September 1.
     (b) Funds provided by operations is revenues less lease operating  expenses
and production and ad valorem taxes.
     (c) Reserve information was not prepared as of September 30, 1996 and 1995.
Information  shown  is from a  reserve  report  prepared  by the  Company  as of
November 1, 1996, which includes the recent effect of
the Amoco  Acquisition  and excludes the Bayou Sorrel Field,  which was recently
sold.  No reserve  reports were  prepared as of November 1, 1996 by  independent
petroleum  engineers.  The reserve  information for the years ended December 31,
1995,  1994 and 1993 was derived by the  Company  from  reports  prepared by the
Company's  independent  petroleum  engineers.  See "Risk  Factors - Estimates of
Reserves and Future Net Reserves."

                                  RISK FACTORS

      Prospective  investors  should  carefully  read this entire  document  and
should give particular attention to the following risk factors.

Large Shareholders

      Richard A. Kayne  controls  four of the six lenders who  invested  through
Kayne,   Anderson  Investment   Management,   Inc.  with  respect  to  the  1993
Subordinated  Notes (the "1993  Subordinated  Notes").  These four  lenders  own
694,047 of the 816,526 shares acquired upon exercise of warrants held by the six
lenders. Mr. Kayne also controls five of the eight lenders on the 1996 Tranche A
Convertible  Subordinated  Notes (the "1996 Tranche A  Convertible  Subordinated
Notes"),  which could acquire  1,466,667 of the 2,060,606  shares  issuable upon
conversion  of such Notes.  See "The Company - Funding of Business  Activities -
Borrowings and Obligations," for information with respect to these transactions.
Carl C. Icahn  controls  High River  Limited  Partnership  which owns  1,095,000
shares.  Because of the substantial holdings of these shareholders,  they may be
able to  influence  the  outcome  of votes on  various  matters,  including  the
election  of  directors,   extraordinary  corporate  transactions,  and  certain
business combinations. See "Principal Shareholders".

Anti-takeover Provisions

      Documents  governing the Company's  affairs provide for or contain several
procedures,  provisions, and plans designed to reduce the likelihood of a change
in the  management or voting  control of the Company  without the consent of the
then incumbent  Board of Directors,  including a classified  Board of Directors,
"fair price" provisions,  the ability of the Board of Directors to issue classes
or series of preferred  shares,  restrictions  on the ability of shareholders to
call  meetings  and propose  business  at  meetings of the common  shareholders,
restrictions  on the ability of  shareholders to approve actions or proposals by
written consent rather than at meetings and  acceleration of vesting  provisions
in stock award and option plans upon a change in control.  These  provisions may
have the effect of reducing  interest in the Company as a potential  acquisition
target or  encouraging  persons  considering  an  acquisition or takeover of the
Company to negotiate  with the Company's  Board of Directors  rather than pursue
non-negotiated  acquisition or takeover  attempts,  although no assurance can be
given that they will have that effect.

      In 1995, the Company  adopted a Shareholder  Right Plan which may have the
effect of discouraging non-negotiated takeover attempts.

      In  addition,  the  Company  chose to be  governed  by Section  203 of the
Delaware General  Corporation Law, which prohibits business  combination between
the Company and any interested  shareholder of the Company for a period of three
years  following  the date on which that  shareholder  became an owner of 15% or
more of the  outstanding  voting shares of the Company unless certain  statutory
exceptions are satisfied.  Section 203 may also have the effect of  discouraging
non-negotiated takeover attempts.

      For a discussion of documents and provisions with potential  anti-takeover
effects,  see "The  Company  Funding of Business  Activities  -  Borrowings  and
Obligation," "Management - Other Compensation Arrangements - Long-term Incentive
Plan," "Description of Capital Shares - Certain  Anti-takeover  Provisions," and
"Description of Capital Shares - Shareholder Rights Plan."
Future Issuances of Shares

     Of the 40,000,000 Common Shares,  14,350,255 are presently issued,  leaving
25,649,745  shares  which  may be  issued  without  further  approval  from  the
shareholders.  If the  Company  issues  additional  Common  Shares or  preferred
shares,  the  interest in the assets,  liabilities,  cash flows,  and results of
operations  of the  Company  represented  by the Common  Shares may be  diluted.
Additional  issuances  may occur for many  reasons,  including  pursuant  to the
Company's Long-term Incentive Plan described in "Management - Other Compensation
Arrangements  -  Long-term  Incentive  Plan."  As of the date  hereof  there are
outstanding warrants to acquire 289,365 Common Shares, exercisable at prices per
share  ranging  from $2.00 to  $2.375.  In  connection  with this  Offering  the
Underwriters will receive warrants to acquire up to 840,330 Common Shares at the
price at which Common Shares are sold hereunder,  which warrants are exercisable
any time within two years of the date of this  Prospectus.  The exercise of such
warrants  would likely occur  primarily  when the exercise  prices are below the
then current  market  prices.  After the  expiration  of 180 days  following the
conclusion of this offering,  the Tranche A Convertible  Subordinated  Notes are
convertible into 2,060,606 Common Shares, at $4.125 per share.

General Market Conditions

       Revenues  generated  from the oil and gas  operations  of the Company are
highly  dependent  on the future  prices of and demand for oil and gas.  Various
factors beyond the control of the Company affect prices of oil, gas, and natural
gas liquids,  including the worldwide  supply of oil and gas, the ability of the
members  of  OPEC  to  agree  to and  maintain  production  controls,  political
instability or armed  conflict in  oil-producing  regions,  the price of foreign
imports,   the  levels  of  consumer  demand,  the  price  and  availability  of
alternative fuels and changes in existing  regulation.  Prices for oil, gas, and
natural gas  liquids  have  fluctuated  greatly  during the past few years,  and
markets for oil,  natural gas, and natural gas liquids  continue to be volatile.
The  currently  unsettled  energy  markets  make it  particularly  difficult  to
estimate  future  prices of oil,  natural gas, and natural gas liquids,  and any
assumptions  about future prices may prove  incorrect.  In addition,  demand for
natural gas and fuel oil can  fluctuate  significantly  with seasonal and annual
variations in weather  patterns because those products are used in large part as
heating  fuels.  See "Risk  Factors -  Estimates  of  Reserves  and  Future  Net
Revenues" and "The Company - Competition, Markets and Regulation".

Hedging of Production

      The Company's lenders have generally required it to reduce its exposure to
the  volatility  of crude oil and natural gas prices by hedging a portion of its
production.  In a typical hedge transaction,  the Company will have the right to
receive  from the  counter  party to the hedge,  the  excess of the fixed  price
specified in the hedge over a floating  price. If the floating price exceeds the
fixed price,  the Company is required to pay the counter  party this  difference
multiplied  by the  quantity  hedged,  regardless  of whether  the  Company  has
sufficient   production  to  cover  the  quantities   specified  in  the  hedge.
Significant  reductions in  production at times when the floating  price exceeds
the fixed price  could  require  the  Company to make  payments  under the hedge
agreements  even though  such  payments  are not offset by sales of  production.
However,  the Company  hedges up to, but not more than,  50% of its  anticipated
production.  Hedging  will also  prevent the  Company  from  receiving  the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.

Historical Operating Losses

      The Company has sustained losses in two of the past three years,  1993 and
1995.  No  assurance  may be given that the Company  will be  profitable  in the
future.  The Company  sustained losses in 1993 and 1995 primarily as a result of
an accounting  change in 1995 that required  property  write-downs in both years
and  expensing of three  unsuccessful  exploratory  wells in 1995.  On April 24,
1996,  the  Company  experienced  an  explosion  and fire at its West Delta Tank
Battery #3 which has been the primary  factor in a loss  through  September  30,
1996 of $.05 per share. As such, the Company can not assure a profit will result
for the year ended  December 31, 1996.  Due to the change in accounting  method,
any future  unsuccessful  exploratory  wells,  as well as adverse  events beyond
management's control, such as the fire, could also result in losses.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and the  consolidated  financial  statements  and the related notes
thereto included elsewhere herein.

Risks of Development, Exploration, and Other Activities

       The Company  engages in exploration  activities on  Undeveloped  Acreage,
drills development wells, and reworks and recompletes wells on the properties it
owns as well as on  properties  it may  acquire,  and  anticipates  that it will
expend a significant portion of its net cash flow for those activities. See "The
Company -  Acquisition,  Development  and Other  Activities."  Those  activities
involve a significant  degree of risk. For example,  the drilling of exploratory
and development wells involves risks such as encountering  unusual or unexpected
formations,  pressures,  and other  conditions  that could result in the Company
incurring  substantial losses. In addition,  all drilling is subject to the risk
of dry holes or a failure to produce oil or gas in  commercial  quantities.  The
degree of risk will vary depending on the geological features of the area.

Other Operating Risks

       The  Company  is also  subject  to all the  operating  hazards  and risks
normally incident to drilling for or producing,  processing and transporting oil
and gas, including blowouts, pollution, and fires, each of which could result in
damage to or destruction of oil and gas wells, producing formations, production,
pipeline,  or  processing  plants,  or persons or other  property.  Although the
Company  maintains  insurance  coverage  that is similar to that  maintained  by
comparable companies in the oil and gas industry, there can be no assurance that
the coverage will be adequate to insure fully against all risks.

Replacement of Reserves

       In general,  the volume of production from natural gas and oil properties
declines as reserves  are  depleted.  Except to the extent the Company  acquires
properties  containing  proved reserves or conducts  successful  development and
exploration activities, or both, the proved reserves of the Company will decline
as reserves are produced.  The Company's  future  natural gas and oil production
is,  therefore,  highly  dependent  upon its  level of  success  in  finding  or
acquiring  additional  reserves.  The business of exploring  for,  developing or
acquiring reserves is capital intensive. To the extent cash flow from operations
is reduced and external  sources of capital become limited or  unavailable,  the
Company's  ability to make the  necessary  capital  investments  to  maintain or
expand its asset base of natural  gas and oil  reserves  could be  impaired.  In
addition,  there can be no  assurance  that the  Company's  future  development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.

Estimates of Reserves and Future Net Revenues

      Numerous  uncertainties exist in estimating  quantities of Proved Reserves
and future net  revenues.  Oil and gas  engineering  is a subjective  process of
estimating  underground  accumulations  of oil and gas that  cannot be  measured
exactly.  The  accuracy  of any  reserve  estimate is a result of the quality of
available  geologic  and  engineering  data,  geological   interpretation,   and
judgment. Actual results of drilling,  testing, and production after the date of
an estimate  may  indicate the need to revise the  estimate.  In  addition,  the
prices used affect the  calculation  of  quantities  of reserves  and future net
revenues.  A higher price can generally  result in a longer  estimated  economic
life for reserves and can increase  estimated  future net revenues  because both
the estimated reserves are larger and the price per reserve unit (Bbl or Mcf) is
higher.  Reserve  reports as of November 1, 1996 were  prepared by the  Company.
Reserve  information  for the years ended  December 31, 1995,  1994 and 1993 was
derived by the  Company  from  reports  prepared  by the  Company's  independent
petroleum engineers.

      SEC 10 Values presented in certain disclosures of reserves and the present
value of estimated future net revenues represent a reporting  convention adopted
by the SEC that uses  prices at the date of the reserve  presentation  and a 10%
discount rate. While SEC 10 Values provide a common basis for comparing oil and
gas companies subject to the rules and regulations of the SEC, the use of prices
on the  presentation  date may not represent the prices  ordinarily  received or
that will be received for oil and gas because of seasonal price  fluctuations or
other varying market conditions. SEC 10 Values are not necessarily indicative of
future results of operations.  Accordingly,  reserve  estimates set forth herein
may be  materially  different  from  the  quantities  of oil  and gas  that  are
ultimately  recovered,  and  estimates  of  future  net  revenues  may  also  be
materially different from the net revenues that are ultimately received.

Acquisitions

        Although  acquisitions  of oil and gas properties  with Proved  Reserves
involve less risk than are inherent in  exploratory or  developmental  drilling,
the criteria on which decisions to acquire properties are usually based (such as
the  estimates  of reserve  quantities  and the  projections  of future rates of
production,  future  development and production costs, and prices to be received
on sale)  may prove to be  incorrect,  and  consequently  adversely  affect  the
profitability of an acquisition.  The Company intends to continue  acquiring oil
and gas properties.  Although the Company performs a review of the properties to
be acquired that it believes is consistent with industry practices, such reviews
are  inherently  incomplete.  Generally,  it is not feasible to review  in-depth
every individual property involved in each acquisition.  Ordinarily, the Company
will focus its review  efforts on the  higher-valued  properties and will sample
the remainder.  However,  even an in-depth  review of all properties and records
may not necessarily  reveal existing or potential  problems nor will it permit a
buyer to become sufficiently  familiar with the properties to assess fully their
deficiencies and capabilities.  Inspections may not always be performed on every
facility, and environmental problems are not necessarily observable even when an
inspection is  undertaken.  Furthermore,  the Company must rely on  information,
including  financial,  operating  and  geological  information,  provided by the
seller of the properties without being able to verify fully all such information
and  without  the  benefit of knowing  the  history  of  operations  of all such
properties.

Environmental Risks

       The discharge of oil,  gas, or other  pollutants  into the air,  soil, or
water may give rise to  liability  to the  government  or third  parties and may
require the Company to incur  costs to remedy the  discharge.  Oil or gas may be
discharged in many ways,  including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and  transportation  facilities,
leakage from storage tanks,  and sudden  discharges  from damage or explosion at
processing  plants or oil or gas wells.  Hydrocarbons  tend to degrade slowly in
soil and water, which makes remediation costly, and discharged  hydrocarbons may
migrate  through soil to water  supplies or adjoining  property,  giving rise to
additional  liabilities.  A variety  of federal  and state laws and  regulations
govern the environmental aspects of oil and gas production,  transportation, and
processing and may, in addition to other law,  impose  liability in the event of
discharges  (whether  or  not  accidental),  a  failure  to  notify  the  proper
authorities of a discharge, and other noncompliance with those laws. The Company
has both an offshore  Regional  Spill  Response  Plan  (RSRP) and onshore  Spill
Prevention  Control  Countermeasure  Plans (SPCC).  Environmental  laws may also
affect the costs of the Company's acquisitions of oil and gas properties.

      The Company does not believe that its  environmental  risks are materially
different  from  those  of  comparable  companies  in the oil and gas  industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future,  result in a  curtailment  of  production  or  processing  or a material
increase in the costs of  production,  development,  or exploration or otherwise
adversely affect the Company's operations and financial condition. Pollution and
similar environmental risks generally are not fully insurable.

Governmental Regulation

        The Company's  business is subject to certain  federal,  state and local
laws  and  regulations  relating  to the  exploration  for and  development  and
production of oil and gas, as well as  environmental  and safety  matters.  Such
laws and regulations have generally become more stringent in recent years, often
imposing  greater  liability  on a  larger  number  of  potentially  responsible
parties. Because the requirements imposed by such laws
and  regulations  are frequently  changed,  the Company is unable to predict the
ultimate  cost of  compliance  with such  requirements  and their  effect on the
Company. See "The Company - Competition, Markets, Seasonality and Regulation".

Dependence On Key Personnel

        The success of the Company will depend almost  entirely upon the ability
of a small group of key executives to manage the business of the Company. Should
one or more of these  executives  leave the Company or become  unable to perform
his duties,  no assurance  can be given that the Company will be able to attract
competent new management.  The key executives do not have  employment  contracts
and the Company does not have "key man" life insurance.

                                 USE OF PROCEEDS

      The net  proceeds  to be  received  by the  Company  from  the sale of the
6,000,000  Common  Shares sold hereby  (assuming an offering price of $5.125 per
share)  are  estimated  to be  approximately  $28,598,000  ($37,137,437  if  the
Over-Allotment  Option is exercised  in full) after  deducting  the  anticipated
underwriting  discount and estimated offering  expenses.  The Company intends to
use $5 million to repay the 1993  Subordinated  Notes,  which  carry an interest
rate of 12% (due  December  31,  1999),  and are  repayable  at any time.  These
borrowings were made to finance development  activities.  The Company intends to
also prepay $8.5  million of the  Tranche B Bridge  Loan  Subordinated  Notes of
October 8, 1996,  which carry an interest  rate of 12% until August 8, 1997 (14%
thereafter),  are due October 8, 2003,  and are  prepayable  at any time.  These
funds were borrowed in connection with the Amoco Acquisition.  The remaining net
proceeds of this offering will be used to develop the properties acquired in the
Amoco Acquisition, particularly High Island 474 Field, 309 Field, and 330 Field.
Any further remaining net proceeds will be used for general corporate  purposes,
including further  development of properties owned by the Company in the Gulf of
Mexico, and for further  acquisitions of properties in the Gulf of Mexico deemed
appropriate by  management.  Although the Company  actively  reviews oil and gas
acquisition candidates,  it has not identified any specific acquisitions at this
time,  and no  assurances  can be made that the Company will be able to identify
and consummate  acquisitions  that it deems suitable.  Pending such use, the net
proceeds will be used to pay down the Company's Bank Facility. See "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations-
Liquidity  and  Capital  Resources".  See "The  Company  - Funding  of  Business
Activities - Borrowings and Obligations."

                                 CAPITALIZATION

      The  following  table sets forth the  consolidated  capitalization  of the
Company at November  30,  1996,  and as adjusted to reflect the  issuance of the
Common  Shares  offered by the Company  hereby at an assumed price of $5.125 per
share and the application of the net proceeds  therefrom as described in "Use of
Proceeds".  This  table  should  be read in  conjunction  with the  consolidated
financial  statements  of the Company,  including the notes  thereto,  contained
elsewhere in this Prospectus.
November 30, 1996
                                                               Actual       As Adjusted
Long-term debt (less current maturities)                $    49,000         $      35,500
Stockholders' Equity:
      Preferred shares, $.01 par value, 5,000,000
        shares authorized; none issued or outstanding           ---                   ---
      Common Shares, $.01 par value, 40,000,000
        shares authorized; 14,350,255 shares issued
        and outstanding (20,350,255 as adjusted)(1)(2)          143                   203
      Additional paid-in capital                             31,470                60,008
      Retained Earnings (deficit)                          (10,214)             ( 10,214)
                                                          ---------          ------------
              Total Stockholders' Equity                     21,399                49,997
                                                         ----------          ------------
      Total capitalization                              $    70,399       $        85,497
                                                        ===========        ==============
(1)   Excludes  289,365 Common Shares  issuable upon the exercise of outstanding
      warrants,  2,060,606  issuable  upon  the  conversion  of  the  Tranche  A
      Convertible  Subordinated  Notes,  and up to 840,330  Common  Shares which
      would be  issuable  upon the  exercise  of  warrants  to be  issued to the
      Underwriters  should  all of the  Common  Shares  offered  hereby  be sold
      (assuming no exercise of the Underwriters' Over-Allotment Option).
(2)   Exclusive of the Underwriters' Over-Allotment Option of 1,260,496 Shares.
PRICE RANGE OF COMMON SHARES

      The Common  Shares are quoted on the National  Association  of  Securities
Dealers, Inc. Automated Quotation System  ("NASDAQ")-National  Market, under the
symbol "PANA".  They commenced  trading  September 21, 1989. The following table
sets  forth,  for the  periods  indicated,  the high and low closing bid for the
Common Shares. Information for fourth quarter 1996 is through December 18th.

                                   1994

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High  3 5/8               4 3/8                  4 5/8               4 1/4
Low   2 9/16              2 15/16                3 1/2               3 5/8

                                   1995

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High 4 5/16               4 7/8                  5 5/16              5
Low  3 5/8                4                      4 1/8               4
                                   1996

 1st Quarter          2nd Quarter             3rd Quarter         4th Quarter
 -----------          -----------             -----------         -----------
High 5                    4 1/2                  6                   6 3/8
Low  3 7/16               3 11/16                3 3/8               4 9/16

     On December 18, 1996,  the last sale price of the Common Shares as reported
on  the  NASDAQ-  NM  was  $5.125  per  share.  There  are  approximately  6,000
shareholders of the Common Shares.

                                 DIVIDEND POLICY

         The Company has not paid any cash dividends on the Common  Shares.  The
Delaware General  Corporation Law, to which the Company is subject,  permits the
Company to pay  dividends  only out of its  capital  surplus  (the excess of net
assets over the aggregate par value of all outstanding capital shares) or out of
net  profits  for the  fiscal  year in which the  dividend  is  declared  or the
preceding fiscal year. The Bank Facility and the Subordinated  Notes require the
consent of the lenders to any dividends or  distributions  by the Company and to
any purchases by the Company of Common Shares.  The Company retains its earnings
and cash flow to finance the  expansion  and  development  of its  business  and
currently  does not intend to pay  dividends  on the Common  Shares.  Any future
payments of dividends  will depend on, among other factors,  the earnings,  cash
flow, financial condition, and capital requirements of the Company.

                         PRO FORMA FINANCIAL INFORMATION

         On October 8,1996,  the Company  completed the acquisition of interests
in thirteen  offshore  blocks  comprising  six fields in the Gulf of Mexico from
Amoco Production  Company.  Proved reserves at September 1, 1996 attributable to
the Amoco Properties were, net to the Company's interests,  1,953,000 barrels of
oil and  condensate  and 28.6 Bcf of natural gas,  based upon  internal  reserve
reports prepared by the Company.
The  purchase  price  for the  assets  acquired  in this  transaction  was $40.4
million, paid by the issuance of 2,000,000 Common Shares and by payment to Amoco
of $32 million in cash.  Concurrently  with this transaction the Company entered
into a new Bank  Facility with First Union  National Bank of North  Carolina and
Banque  Paribas under which its reducing  revolver was increased to $40 million,
with an initial borrowing base of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to Tranche A Convertible and the Tranche B
Bridge Loan  Subordinated  Notes,  provided by lenders  investing through Kayne,
Anderson Investment Management, Inc.

         On July 26, 1995, the Company  completed the  acquisition of all of the
offshore  oil  and  gas  properties  in the  Gulf  of  Mexico  owned  by  Zapata
Exploration  Company,  the "Zapata  Properties." Proved reserves at December 31,
1994  attributable to the oil and gas interests  acquired,  net to the Company's
interest, were 308,000  barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's  independent  petroleum engineers
as of October 1,  1994.  The  purchase  price for the  Zapata  properties  and a
related  receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an  obligation  to pay a  production  payment to Zapata based on future
production. See "Properties - Zapata Properties."

     On November 22, 1996,  the Company  completed  its sale of the Bayou Sorrel
Field  to  National  Energy  Group,  Inc.  for a  sales  price  of $11  million,
consisting of $9,000,000 in cash and $2 million in National  Energy Group,  Inc.
common stock.

         Effective  December  31,  1995,  the  Company  changed  its  method  of
accounting  for oil  and  gas  operations  from  the  full  cost  method  to the
successful efforts method.  The information  provided in the Pro Forma Financial
Statements reflects this change.
PANACO, Inc.
                        Pro Forma Combined Balance Sheet
                            As of September 30, 1996
                 (Amounts in thousands except number of shares )
                                   (Unaudited)

                                                                       Amoco                         Bayou
                                                     PANACO, Inc.    Properties                      Sorrel
                                                        As of        Pro Forma     PANACO, Inc.    Pro Forma     PANACO, Inc.
ASSETS                                                 9/30/96      Adjustments     Pro Forma     Adjustments     Pro Forma
                                                       (Note 1)       (Note 2)       Combined       (Note 3)       Combined
                                                    ---------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents                               $766                          $766                          $766
      Accounts receivable                                    4,435                         4,435                         4,435
      Accounts receivable - sale of                                                            0                             0
            Bayou Sorrel Field                              11,152                        11,152       (11,152)              0
      Prepaid expenses                                         359                           359                           359
      National Energy Group Common Stock                         0                             0          2,000          2,000
                                                    ---------------               ---------------               ---------------
            Total Current Assets                            16,712                        16,712                         7,560

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
      Oil and gas properties                                98,015         40,400        138,415                       138,415
      Less: accumulated depreciation, depletion
      and amortization                                    (77,526)                      (77,526)                      (77,526)
                                                    ---------------               ---------------               ---------------
            Net Oil and Gas Properties                      20,489                        60,889                        60,889

PROPERTY, PLANT AND EQUIPMENT (net)                            126                           126                           126

OTHER ASSETS
      Restricted deposits                                    1,733                         1,733                         1,733
      Other                                                    384                           384                           384
                                                    ---------------               ---------------               ---------------
            Total Other Assets                               2,117                         2,117                         2,117

TOTAL ASSETS                                               $39,444                       $79,844                       $70,692 

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable                                      $8,809                        $8,809                        $8,809
      Current portion of long-term debt                          0                             0                             0
                                                    ---------------               ---------------               ---------------
            Total Current Liabilities                        8,809                         8,809                         8,809

LONG-TERM DEBT                                              20,137         32,000         52,137        (9,152)         42,985

STOCKHOLDERS' EQUITY
      Preferred stock, ($.01 par value,
            5,000,000 shares authorized;
            no shares issued and outstanding)                    0                             0                             0
      Common stock, ($.01 par value,
            40,000,000 shares authorized and
            14,350,255 issued and outstanding)                 123             20            143                           143
      Additional paid-in capital                            23,090          8,380         31,470                        31,470
      Retained earnings (deficit)                         (12,715)              0       (12,715)                      (12,715)
                                                    ---------------               ---------------               ---------------
            Total Stockholders' equity                      10,498                        18,898                        18,898

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $39,444                       $79,844                       $70,692
PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                  For the Nine Months Ended September 30, 1996
                  (Amounts in thousands except per share data)
                                   (Unaudited)

                                                                                 Amoco                      Bayou
                                                                               Properties                   Sorrel
                                                                               Pro Forma    PANACO, Inc.  Pro Forma   PANACO, Inc.
                                                                    Amoco       Adjustments  Pro Forma    Adjustments   Pro Forma
                                                   PANACO, Inc.  Properties     (Note 2)     Combined      (Note 3)     Combined
                                                  --------------------------- ------------- ------------ ---------------------------

REVENUES
Oil and gas sales                               $13,257        $11,135            $0      $24,392      ($2,010)       $22,382

COSTS AND EXPENSES
      Lease operating                                   6,049          3,158           108        9,315         (733)         8,582
      Depreciation, depletion and amortization          4,981              0         5,629       10,610         (888)         9,722
      Exploration expenses                                  0              0             0            0             0             0
      Provision for losses and (gains) on
            disposition and write-down of assets          (4)              0             0          (4)             0           (4)
      General and administrative                          573              0             0          573             0           573
      Production and ad valorem taxes                     429              0             0          429         (239)           190
      West Delta fire loss                                500              0             0          500             0           500
                                                  ------------   ------------ ------------- ------------ ---------------------------
            Total                                      12,528          3,158         5,737       21,423       (1,860)        19,563
                                                  ------------   ------------ ------------- ------------ ---------------------------

NET OPERATING INCOME (LOSS)                               729          7,977       (5,737)        2,969         (150)         2,819
                                                  ------------   ------------ ------------- ------------ ---------------------------

OTHER INCOME (EXPENSE)
      Interest expense (net)                          (1,347)              0       (1,389)      (2,736)           588       (2,148)
                                                  ------------   ------------ ------------- ------------ ---------------------------

NET INCOME (LOSS) BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                            (618)          7,977       (7,126)          233           438           671

INCOME TAXES (BENEFIT)                                      0              0             0            0             0             0
 
NET INCOME (LOSS)                                      ($618)         $7,977      $(7,126)         $233          $438          $671 

EARNINGS (LOSS) PER COMMON SHARE                      ($0.05)                                     $0.01                       $0.04 
 
      Weighted average shares outstanding              12,253                        4,061       16,314                      16,314 

Cash flows from operations                                                                      $14,648                     $13,610 
      Cash flows from operations per share                                                        $0.90                       $0.83 

Cash flows                                                                                      $11,339                     $10,889 
      Cash flows per share                                                                        $0.70                       $0.67 

Note:       "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
            "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
            disposition and write-down of assets" and any extraordinary items.
PANACO, Inc.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1995
                  (Amounts in thousands except per share data)
                                   (Unaudited)

                                                                                                     Pro Forma      PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments     Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
Oil and gas sales                                       $18,447        $3,623       $12,528             $0         $34,598

COSTS AND EXPENSES
      Lease operating                                           8,055         1,460         2,991            314          12,820
      Depreciation, depletion and amortization                  8,064             0             0         10,064          18,128
      Exploration expenses                                      8,112             0             0              0           8,112
      Provision for losses and (gains) on
           disposition and write-down of assets                   751             0             0              0             751
      General and administrative                                  690             0             0              0             690
      Production and ad valorem taxes                           1,078             0             0              0           1,078
           Total                                               26,750         1,460         2,991         10,378          41,579

NET OPERATING INCOME (LOSS)                                   (8,303)         2,163         9,537       (10,378)         (6,981)

OTHER INCOME (EXPENSE)
      Interest expense (net)                                    (987)             0             0        (1,921)         (2,908)

NET INCOME (LOSS) BEFORE INCOME TAXES                         (9,290)         2,163         9,537       (12,299)         (9,889)

INCOME TAXES (BENEFIT)                                              0             0             0              0               0

NET INCOME (LOSS)                                            ($9,290)        $2,163        $9,537      ($12,299)        ($9,889)    

EARNINGS (LOSS) PER COMMON SHARE                              ($0.81)                                                    ($0.64)

      Weighted average shares outstanding                      11,505                                      4,061          15,566

Cash flows from operations                                                                                               $20,700
      Cash flows from operations per share                                                                                 $1.33

Cash flows                                                                                                                $8,990
      Cash flows per share                                                                                                 $0.58

Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.
PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1994
                  (Amounts in thousands except per share data)
                                   (Unaudited)

                                                                                                     Pro Forma     PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments    Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
Oil and gas sales                                       $17,338        $7,540       $11,135             $0        $36,013

COSTS AND EXPENSES
      Lease operating                                           5,231         3,317         3,158            444         12,150
      Depreciation, depletion and amortization                  6,038             0             0          8,710         14,748
      Exploration expenses                                          0             0             0              0              0
      Provision for losses and (gains) on
           disposition and write-down of assets                 1,202             0             0              0          1,202
      General and administrative                                  587             0             0              0            587
      Production and ad valorem taxes                           1,006             0             0              0          1,006
           Total                                               14,064         3,317         3,158          9,154         29,693

NET OPERATING INCOME (LOSS)                                     3,274         4,223         7,977        (9,154)          6,320

OTHER INCOME (EXPENSE)
      Interest expense (net)                                  (1,623)             0             0        (1,757)        (3,380)

NET INCOME (LOSS) BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                                    1,651         4,223         7,977       (10,911)          2,940

INCOME TAXES (BENEFIT)                                              0             0             0              0              0

EXTRAORDINARY ITEM-LOSS ON EARLY
      RETIREMENT OF DEBT                                        (536)             0             0              0          (536)

NET INCOME (LOSS)                                              $1,115        $4,223        $7,977      ($10,911)         $2,404

EARNINGS (LOSS) PER COMMON SHARE                                $0.11                                                     $0.17

      Weighted average shares outstanding                      10,039                                      4,061         14,100

Cash flows from operations                                                                                              $22,857
      Cash flows from operations per share                                                                                $1.62

Cash flows                                                                                                              $18,890
      Cash flows per share                                                                                                $1.34

Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.
PANACO, INC.
               Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1993
                  (Amounts in thousands except per share data)
                                   (Unaudited)

                                                                                                     Pro Forma     PANACO, Inc.
                                                                          Zapata         Amoco       Adjustments    Pro Forma
                                                          PANACO, Inc.   Properties    Properties     (Note 2)       Combined

REVENUES
Oil and gas sales                                       $12,605       $11,823       $12,079             $0        $36,507

COSTS AND EXPENSES
      Lease operating                                           5,297         3,696         2,798            294         12,085
      Depreciation, depletion and amortization                  4,288             0             0          8,781         13,069
      Exploration expenses                                          0             0             0              0              0
      Provision for losses and (gains) on
           disposition and write-down of assets                 3,824             0             0              0          3,824
      General and administrative                                  542             0             0              0            542
      Production and ad valorem taxes                             754             0             0              0            754
           Total                                               14,705         3,696         2,798          9,075         30,274

NET OPERATING INCOME (LOSS)                                   (2,100)         8,127         9,281        (9,075)          6,233

OTHER INCOME (EXPENSE)
      Interest expense (net)                                  (1,886)             0             0        (1,641)        (3,527)

NET INCOME (LOSS) BEFORE INCOME TAXES                         (3,986)         8,127         9,281       (10,716)          2,706

INCOME TAXES (BENEFIT)                                              0             0             0              0              0

NET INCOME (LOSS)                                            ($3,986)        $8,127        $9,281      ($10,716)         $2,706    

EARNINGS (LOSS) PER COMMON SHARE                              ($0.53)                                                     $0.23

      Weighted average shares outstanding:                      7,584                                      4,061         11,645

Cash flows from operations                                                                                              $23,668
      Cash flows from operations per share                                                                                $2.03

Cash flows                                                                                                              $19,599
      Cash flows per share                                                                                                $1.68

Note:      "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
           "Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
           disposition and write-down of assets" and any extraordinary items.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                              At September 30, 1996

1.       Basis of Presentation

         The Unaudited Pro Forma Balance Sheet presents the combined  effects of
the  acquisition of the Amoco  Properties,  which closed on October 8, 1996, and
the  sale of  Bayou  Sorrel  Field,  closed  on  November  22,  1996,  as if the
transactions had occurred on September 30, 1996. The Company's  balance sheet at
September  30,  1996 is adjusted  to reverse an earnest  deposit  made in August
1996, on the Amoco Acquisition of $5 million.

2.       Amoco Properties Pro Forma Adjustments

         The purchase price for the Amoco Properties was $32 million in cash and
2,000,000  Common  Shares,  valued  at  $4.20  per  share,  for a total of $40.4
million.  The increases in Long-Term Debt and Stockholders' Equity represent the
additional borrowing for the cash portion of the purchase price and the issuance
of 2,000,000 Common Shares to Amoco.

3.       Bayou Sorrel Pro Forma Adjustments

         The Company  sold the Bayou  Sorrel  Field on November 22, 1996 for $11
million,  consisting  of $9 million in cash and $2  million in  National  Energy
Group,  Inc.  common stock.  National  Energy Group,  Inc. also  reimbursed  the
Company  $152,000 for the amounts it had deposited in an escrow  account for the
plugging and abandonment obligations of the Field.

         The total cash proceeds from the sale of $9,152,000 are assumed to have
been all applied to the Company's Long-Term Debt balance at September 30, 1996.

     NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)
                  For the nine months ended September 30, 1996
              and the years ended December 31, 1995, 1994 and 1993.

1.       Basis of Presentation

         The Unaudited Pro Forma Statement of Income  (Operations)  for the nine
months ended September 30, 1996 presents the combined effects of the acquisition
of the Amoco Properties, which closed on October 8, 1996, the Zapata Properties,
closed  on July 26,  1995 and the sale of the  Bayou  Sorrel  Field,  closed  on
November 22,  1996,  as if all of these  transactions  had been  consummated  on
January 1, 1996.

         The Unaudited Pro Forma Statements of Income (Operations) for the years
ended  December  31, 1995,  1994 and 1993  present the  combined  effects of the
acquisition  of the Amoco  Properties,  which closed on October 8, 1996, and the
Zapata  Properties,  closed on July 26, 1995,  as if the  acquisitions  had been
consummated on January 1 of each of these years.

     Each period  presented  includes the issuance of 2,000,000 Common Shares to
Amoco Production Company in connection with the Amoco  Acquisition.  Each income
statement  presented also includes the 2,060,606 shares issuable upon conversion
of the 1996  Tranche A  Convertible  Subordinated  Notes,  as if the  conversion
occurred on January 1 of each period  presented  and the  resulting  decrease in
interest expense. 

2. Amoco and Zapata Properties Pro Forma Adjustments

         Additional  lease operating  expenses of $108,000 in 1996,  $314,000 in
1995  and  $444,000  in 1994  and  $294,000  in  1993  represent  the  estimated
additional  insurance  costs of  owning  the  Amoco  Properties  and the  Zapata
Properties.  These amounts are estimated using the Company's  current  insurance
rates for owning the
properties acquired or similar properties.

         Additional  depletion and depreciation  expense of $ 5,629,000 in 1996,
$10,064,000 in 1995,  $8,710,000 in 1994 and  $8,781,000 in 1993  represents the
estimated  depletion  and  depreciation  for assets  acquired in the  respective
acquisitions  assuming the price and proved  reserve  amounts were  identical to
those that existed at the time of the actual acquisitions.

         Additional interest expense of $1,389,000 in 1996,  $1,921,000 in 1995,
$1,757,000 in 1994 and $1,641,000 in 1993 represents the increased borrowings at
January 1 of each year. The purchase  price assumed for each  acquisition is the
same as at the actual date of  acquisition.  It is assumed  that cash on hand at
the  beginning of each year was used for the  acquisitions,  with the balance of
any cash  required  being funded with the  Company's  Bank Facility and the 1996
Subordinated Notes, using the rates in effect at the beginning of each such year
for the  Bank  Facility  and  12% for the  1996  Subordinated  Notes.  The  1996
Subordinated  Note  interest  is net of the  $8,500,000  assumed  to  have  been
converted at January 1 of each period.

3.       Bayou Sorrel Pro Forma Adjustments

         The  adjustments  with  respect to the sale of the Bayou  Sorrel  Field
represent  the  revenues  and expenses of the Field from January 1 to August 31.
Interest  expense is reduced to reflect the elimination of the financing for the
acquisition,  closed on December 28, 1995.  The purchase price for the Field was
$10,455,000 which included a related receivable of $600,000 and a brokers fee of
$205,000.
SELECTED FINANCIAL DATA

         Selected  financial  data  for the  five  years  1991  through  1995 is
presented below.  Effective December 31, 1995, the Company changed its method of
accounting  for oil  and  gas  operations  from  the  full  cost  method  to the
successful efforts method.  The information  provided below reflects this change
for all  periods.  This data also  reflects a  retroactive  restatement  for all
periods  presented  to reflect the  merging of the  Company's  predecessor,  Pan
Petroleum  MLP,  into the Company  effective  September 1, 1992 and reflects the
acquisition of the West Delta offshore properties as of May 28, 1991,  accounted
for utilizing the"purchase" method.

Summary of Operations: ( Amounts in thousands except per share data)
For the nine months ended                        For the year ended
                                     September 30,                                        December 31,
                                      (unaudited)                                         (unaudited)
                                        1996(a)       1995        1995     1994       1993        1992       1991
                                         ----         ----        ----     ----       ----        ----       ----
Oil and Gas revenue                  $  13,257        13,660     18,447   17,338     12,605      13,335      8,149
Depreciation, depletion
 & amortization                         4,981          6,277      8,064    6,038      4,288      4,245       3,305
Lease operating expense                 6,049          5,729      8,055    5,231      5,297      5,762       3,728
Production and ad valorem taxes           429            810      1,078    1,006        754        867         635   
Exploration expenses                        -          2,174      8,112        -          -          -           -
Provision for losses and (gains)
 on disposition and write-downs
 of assets                                (4)             -         751     1,202      3,824         -        (91)
West Delta fire loss                      500             -          -         -          -          -          -
Net operating income (loss)               729        (1,772)    (8,303)     3,274    (2,100)      1,922        128
Interest (net)                          1,347            720        987     1,623      1,886      2,323      1,597
Net income (loss)                       (618)        (2,492)    (9,290)     1,115    (3,986)      (401)    (1,469)
Net income (loss) per
 Common Share                        $  (0.05)        (0.21)     (0.81)      0.11     (0.53)     (0.05)     (0.23)

Summary Balance Sheet Data:

Oil and Gas Properties (net)         $ 25,489         21,515     29,485   23,945      19,183     26,448     29,018
Total assets                           44,444         26,795     36,169   29,095      24,432     31,085     33,827
Long-term debt                         25,137          8,865     22,390   12,500      12,465     15,380     18,945
Stockholders' equity                   10,498         15,335      9,174   14,882       8,744     11,700     10,889
Dividends per Common Share           $   0.00           0.00       0.00     0.00        0.00       0.00       0.03
(a) Results for the period ended September 30, 1996, were substantially affected
by the explosion and fire. See "Recent Explosion and Fire". Such results include
the results of operations  through  August 31 for the Bayou Sorrel Field,  which
was sold by the Company effective September 1.

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

For the nine months ended September 30, 1996 and 1995:

      The oil and gas industry has experienced  significant volatility in recent
years because of the  oversupply of most fossil fuels relative to the demand for
such  products  and other  uncertainties  in the  world  energy  markets.  These
industry  conditions  should be  considered  when this analysis of the Company's
operations is read.
Results of Operations

      Effective  December 31, 1995 the Company  changed its method of accounting
for its oil and gas  operations  from the full  cost to the  successful  efforts
method. Prior periods have been restated.

     The Company  experienced  an  explosion  and fire on April 24, 1996 at Tank
Battery #3 in West Delta  resulting in the fields being shut-in from April 24th,
until being  returned to production  on October 7, 1996.  The loss of 67 days of
production  in the  second  quarter  and the  entire  third  quarter  and a loss
incurred in repairing the facility have been the principal  contributors  to the
loss of $.19 per share for the second and third quarters of 1996.

      The  decrease in  production  also  brought  about a decrease in operating
taxes  of  $178,000,  as a  portion  of the  production  from  West  Delta is in
Louisiana  State  waters  and is  subject  to State  severance  taxes.  Although
production  was shut-in for 67 days in the second  quarter and the entire  third
quarter,  resulting  in a decrease  in West Delta  lease  operating  expenses of
$805,000 from expected levels,  a large part of the lease operating  expenses in
West Delta are fixed expenses and continued throughout both quarters.

     The Company has repaired Tank Battery #3 and has received advances from its
insurance company on the  reimbursement of repair costs.  Until final resolution
of the total repair costs the insurance company is advancing funds to assist the
Company in paying for repairs.  There is no assurance that the Company's  repair
costs will be fully covered by such  insurance or that the  Company's  insurance
carriers may  not seek  reimbursement of some of their advances.  The Company is
considering  filing  suits  against the  employers of the persons who caused the
incidents.  No assurance can be given that the company will successfully recover
any amounts sought in any such suits.  in such suits.  The Company did not begin
receiving these  insurance  advances until the third quarter of 1996. The repair
expenditures,  coupled with the decrease in net operating  cash flows  discussed
above resulted in higher borrowing levels and interest expense.

      The resulting  decrease in revenues,  net of the corresponding  production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased  current assets by approximately  $1.9 million at the end of the third
quarter of 1996. The repair  expenditures  on Tank Battery #3, with the delay in
receiving insurance advances, also decreased cash and increased accounts payable
and long-term debt. These expenditures  impacted working capital and limited the
Company's ability to pay down its long-term debt.

      "Oil and natural gas sales" decreased only 3% for the first nine months of
1996 when compared to the same period in 1995 in spite of the explosion and fire
at West Delta.

      Natural gas  production  decreased 39% to 4,590,000 Mcf for the first nine
months of 1996 from 7,578,000 Mcf for the same period in 1995.  This decrease is
primarily due to two factors:  no production  from West Delta  Properties for 67
days in the second  quarter and the entire third  quarter,  due to the April 24,
1996 explosion and fire;  and higher  production in 1995 in West Delta from four
horizontal  wells drilled in 1994 that had declined  significantly by the end of
1995. These two factors were offset by the production from the Zapata Properties
and Bayou Sorrel  Field not owned during the first and second  quarters of 1995.
The Zapata  Properties were acquired on July 26, 1995 and the Bayou Sorrel Field
was acquired on December 27, 1995.

      Oil  production  was also  reduced by the West Delta  explosion  and fire,
however,  production  for the first nine months of 1996 increased 66% to 203,000
barrels from 122,000 barrels in the same period in 1995,  because oil production
from the Zapata  Properties and Bayou Sorrel Field more than offset the decrease
from the West Delta explosion and fire.

      On an Mcf equivalent basis, total oil and natural gas production decreased
30% for the first nine months in 1996 compared to the same period in 1995.

      These  reductions  in  production  were more than offset by higher oil and
natural gas prices in 1996 when  compared to 1995.  Natural gas prices  averaged
$2.65 per Mcf for the first nine  months in 1996  compared to $1.54 for the same
period in 1995.  Oil prices  also  increased  to $18.33 per barrel for the first
nine months in 1996 from $16.30 in 1995. The Company  entered into a natural gas
swap  agreement  beginning  January 1, 1996 for the sale of 15,000  MMBTU of gas
each day in 1996 with contract  prices ranging from $1.75 per MMBTU to $2.25 per
MMBTU. The hedge contract loss of $2.7 million  averaged $.57 per Mcf,  bringing
the net price received to $2.08 per Mcf for the first nine months of 1996.
"Depletion,  depreciation  and  amortization"  decreased 21% for the first
nine months of 1996  primarily  due to the  decreased  production  from the West
Delta Properties as a result of the explosion and fire.

      "Exploration  expenses"  in  1995  consist  of two dry  exploratory  wells
drilled on South  Timbalier  Block 33 and Eugene  Island  Block 50 in the second
quarter. The Company has not drilled any exploratory wells in 1996.

     "Lease  operating  expenses"  increased  due to the  addition  of the  five
offshore  Zapata  Properties  on July  26,  1995  and the  Bayou  Sorrel  Field,
purchased from Shell Western E & P, Inc. on December 26, 1995. The increase as a
percentage  of oil and  natural  gas sales from 42% for the first nine months of
1995 to 46% for the  same  period  in  1996 is  primarily  due to the  operating
expenses of the West Delta  Properties  which are fixed in nature and continued,
even with  production  from the fields being  shut-in due to the  explosion  and
fire.

     "Production and ad valorem taxes"  decreased to 3.2% of oil and natural gas
sales in the first nine  months of 1996 from 5.9% of oil and  natural  gas sales
for  the  same  period  in  1995.  A part  of the  decrease  is due to the  lost
production from the West Delta  Properties for 67 days in the second quarter and
the entire third quarter due to the  explosion  and fire. A large  percentage of
this  production  is in  Louisiana  State  waters which are subject to severance
taxes. The decrease is also due to the shift in the Company's production volumes
from  properties  subject to severance  taxes to properties in federal  offshore
waters (primarily the Zapata Properties) that are not subject to such taxes. 

     The "West  Delta fire loss" is the  Company's  expense  of  repairing  Tank
Battery #3, the central processing facility in the West Delta fields.

     "Interest  expense  (net)"  increased 87% for the first nine months of 1996
compared  to the same  period  in 1995 due to  higher  borrowing  levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field  acquisition.  The Company began an aggressive  debt
reduction program and through April 1996 it had reduced debt by $4 million.  The
April 24th West Delta  explosion and fire  resulting in decreased  discretionary
cash flows which  restricted  the Company's  ability to lower its long-term debt
levels  as  quickly  as  anticipated,  and  correspondingly  contributed  to the
increase in interest expense.

        The  Company  borrowed  $5 million on the Bank  Facility  in late August
1996,  for an earnest money deposit in connection  with the  acquisition  of the
Amoco Properties, which closed on October 8, 1996.

Liquidity and Capital Resources

        At  September  30,  1996,  57%  of  the  Company's   total  assets  were
represented  by  oil  and  gas  properties,  net  of  accumulated  depreciation,
depletion and amortization.

        In 1991, in connection with a debt financing which has subsequently been
repaid,  certain lenders received a net profits interest (NPI) in the West Delta
Properties,  which is a continuing  obligation with respect to these properties.
During the three months ended March 31, 1996,  payments with respect to this NPI
averaged $53,000 per month. Due to the explosion and fire at Tank Battery #3, no
NPI payments were made in the three months ended June 30 or September 30, 1996.

     Pursuant to existing agreements the Company is required to deposit funds in
escrow  accounts  to  provide a reserve  against  satisfaction  of its  eventual
responsibility  to plug and abandon  wells and remove  structures  when  certain
fields no longer produce oil and gas.Each month, until November 1997, $25,000 is
deposited in a bank escrow account,  to satisfy such obligations with respect to
a portion of its West Delta  Properties.  The Company has entered into an escrow
agreement  with Amoco  Production  Company under which the Company will deposit,
for the life of the fields,  in a bank escrow  account ten percent  (10%) of the
net cash flow, as defined in the  agreement,  from the Amoco  properties.  These
funds and interest earned thereon will be available for the expenses of plugging
wells and removing  structures when that time comes. The Company has established
the "PANACO East Breaks 110 Platform  Trust" at Bank One,  Texas, NA in favor of
the Minerals  Management  Service of the U.S.  Department of the Interior.  This
Trust  requires an initial  funding of $846,720 in December  1996, and remaining
deposits of $244,320  due at the end of each quarter in 1999 and $144,000 due at
the end of each  quarter in 2000 for a total of  $2,400,000.  In  addition,  the
Company has  $10,150,000 in surety bonds to secure its plugging and  abandonment
obligations;  including a  $4,100,000  bond which was  provided to the  original
sellers of the West Delta Properties; a $2,400,000 bond provided to the Minerals
Management  Service of the U.S Department of the Interior in connection with the
plugging and structure  removal  obligations for the Company's East Breaks Block
110 Platform;  and a $3,000,000 Area Wide Bond, a $300,000 Pipeline Right-of-Way
Bond, a $300,000  Supplemental  Bond and a $50,000  Operator's Bond provided the
Minerals Management Service.

     Under a swap  agreement  the Company has hedged the price of natural gas by
selling the  equivalent  of 15,000  MMBtu per day for 1996 at fixed prices which
range from $2.25 for January to $1.75 for July. If the closing price (settlement
price) on NYMEX for  natural  gas  futures is greater  than the swap price for a
given month the Company must pay that  difference to the bank which affected the
swap. If the settlement price is less than the swap price the bank must pay that
difference  to the  Company.  By  entering  into the swap in  December  1995 the
Company  locked in the fixed  prices on 15,000  MMBtu per day for each  month in
1996.  Because settlement prices have been above the fixed prices each month the
Company has been required to pay the  difference to the bank which  effected the
swap.  Since the  Company  sells its  natural gas on the spot market it realizes
prices which  approximate the settlement  prices on NYMEX,  less differences for
transportation  due to pipeline  locations that are varying distances from Henry
Hub,  Louisiana  which is the  delivery  point used for  natural  gas futures on
NYMEX.  Generally  these  differences  are  anticipatable  and not  significant.
However, to the extent that these differences become significant the Company may
realize  more or less on its spot sales of gas than was  anticipated  and may be
impacted  beneficially or detrimentally  by erratic  fluctuations in the natural
gas spot market or the futures  market on NYMEX.  Both such  eventualities  have
occurred so far this year. These erratic  fluctuations  which have characterized
the natural gas market in recent  months have  exposed the Company to market and
credit  risks.  In those months in which the spot price is below the  settlement
price,  the net amount  realized  by the Company on its total gas sales would be
proportionately  reduced by the swap agreements.  At present natural gas futures
on NYMEX for the  remaining  months of 1996 are all above the fixed prices under
the swap  agreement  and the  Company  anticipates  that this will result in its
realizing  less for its natural gas due to amounts  required for payments to the
bank under the swap  agreement.  Management  entered into the swap  agreement to
assure the Company of not receiving less than the fixed prices established under
the agreement for at least 15,000  MMBtu's of natural gas per day in 1996.  This
gave the Company assurance that it would be in a position to timely amortize its
long-term  debt.  Long-term debt had increased with  acquisitions  of the Zapata
Properties  and  Bayou  Sorrel  Field.   Management  has  generally  used  hedge
transactions  to protect its cash flows when  long-term debt has been higher and
refrained  from hedge  transactions  when  long-term  debt has been  lower.  For
accounting purposes,  gains or losses on swap transactions are recognized in the
production  month to which a swap  contract  relates.  The fair market  value of
these swap  transactions  at September 30, 1996 was  ($600,000)  due to the high
natural gas futures market prices on that date.

Capital Spending

        Through the nine months ended  September 30, 1996, the Company had spent
$11.8 million in capital expenditures,  including (1) a $5 million earnest money
deposit of the Amoco Properties,  which were subsequently acquired on October 8,
1996,  (2) the repair and  rebuilding  of the West Delta Tank  Battery #3 net of
insurance  advances  and (3)  development  of its oil  and gas  properties.  The
majority  of the  development  costs  were  incurred  to drill two  unsuccessful
development  wells in the  Bayou  Sorrel  Field and for the  Company's  share of
successfully  recompleting  two  wells on  Eugene  Island  Block  372,  which is
operated by Unocal Corporation.
During 1995, Shareholders' Equity increased $3,173,000, by virtue of the
exercise of options and warrants. During first quarter 1996 Shareholders' Equity
increased $1,837,000, as a result of the exercise of warrants.

For the years ended December 31, 1991 - December 31, 1995

Results of Operations

        During the years ended  December  31, 1991  through  1995,  "Oil and Gas
Revenue"  has  varied  due to  several  factors.  The prices of oil and gas have
fluctuated  widely  during the years shown.  Oil prices are  influenced by world
political  events as well as decisions  made by OPEC  regarding  the  production
quotas  of  its  members.  Prices  are  further  influenced  by  world  economic
conditions which affect industrial output and the need for oil.

         In 1995,  the  Company  sold  170,000  barrels of oil for an average of
$16.78 per barrel accounting for 15% of oil and gas revenue. In 1994 oil was 12%
of such revenue with 137,000 barrels at an average price of $15.35.  In 1993 oil
was 19% of such revenue with 180,000  barrel at an average  price of $16.69.  In
1992 oil was 25% of such  revenue with  174,000  barrels at an average  price of
$19.41.  In 1991 the Company sold 129,000 barrels of oil for an average price of
$19.68 per barrel; accounting for 29% of its oil and gas revenue.

           A large part of the changes affecting most operating accounts in 1992
was due to West Delta being operated for twelve months  compared with only seven
months in 1991.

         The average  natural gas price  received by the Company has  fluctuated
but generally  followed the trend of national gas prices.  By 1995,  gas revenue
contributed  85%  of  revenue  compared  with  46% in  1990.  While  1995  saw a
production  increase of 21%, the drop in natural gas prices to $1.58 offset most
of the benefit.  Part of the increase was due to the  acquisition  of the Zapata
Properties  in July 1995.  By drilling four  horizontal  wells and  recompleting
eight existing wells, the Company increased  production by 34% in 1994. With the
acquisition of the West Delta  Properties in 1991,  gas production  increased in
1992, 1993 and 1994 to 5,811,000, 5,586,000 and 8,139,000 Mcf, which sold for an
average price of $1.81,  $2.24 and $1.88 per Mcf,  before the effects of various
natural gas hedge  agreements.  In 1991,  the Company sold  3,714,000 Mcf for an
average price of $1.49.

         From time to time,  upon the  insistence of its lenders the Company has
entered into natural gas hedging  agreements which have the effect of raising or
lowering the price it receives for natural gas. In 1992 a contract  loss of $1.1
million  lowered the average price received per Mcf by $.19 to $1.73.  In 1993 a
contract loss of $3 million  lowered the average price  received per Mcf by $.54
to $1.72.

           The "depreciation,  depletion and amortization"  increase in 1995 was
primarily the result of the acquisition of the Zapata Properties for $2,748,000,
$1.5 million in  capitalized  costs on existing  properties  and the increase in
production bringing about an increase in the rate of depletion.  The increase in
1994 is due to the 1994 drilling and rework program increasing  capitalized cost
and the 34% increase in  production.  The expense for 1993  remained  relatively
constant over 1992 with only a slight decrease due to lower production.

         "Lease operating  expense" increased  significantly  during 1995 by (1)
$1,008,000  related to the  acquisition  of the Zapata  Properties in July which
added  interests on six  offshore  platforms  and 44 wells,  (2)  $1,105,000  of
additional   operating  expenses  on  the  West  Delta  Properties  to  maintain
production from some of the more rapidly  declining  wells,  and (3) $711,000 of
expensed items which might otherwise have been  capitalized.  Such expenses rose
from $.58 per Mcfe in 1994 (a year of very high  production) to $.74 per Mcfe in
1995,  after having been $.84,  $.84, and $.79 per Mcfe in 1991, 1992, and 1993,
respectively.

     "Production  and ad valorem  taxes"  increased 33% in 1994 due to increased
production from four horizontal  wells drilled in state waters on the West Delta
Properties in 1994.

     The "West  Delta fire loss" is the  Company's  expense  of  repairing  Tank
Battery #3, the central processing facility in the West Dela fields.

     The 1995 "exploration  expense"  consisted of dry hole exploratory costs of
$796,000 on Eugene Island Block 50,  $1,378,000 on South  Timbalier Block 33 and
$5,938,000  on West  Delta  Block 54.  The  Company  currently  plans no further
exploratory activity in these blocks.
The "provision for  write-downs of assets" in 1993,  1994 and 1995 were
for the  Company's  group of onshore  properties,  acquired in the early  1980's
which were becoming a less significant part of its operations.

         "Net operating income (loss)" for 1995 would have been $560,000 were it
not for the $8,112,000  exploratory  expenses and $751,000 property  write-down.
The  increased   production  in  1994,  along  with  $2.6  million  lower  asset
write-downs  brought about the large increase in 1994. The operating  income for
1993 decreased due to lower production, and an asset write-down of $3.8 million.
Net  operating  income  increased  from  1991  to  1992  primarily  due  to  the
realization  of the benefit of a large  number of expenses  incurred in 1991 and
again the ownership of the West Delta Properties for a full twelve months.

         The lower levels of long-term  debt that prevailed  throughout  most of
1995 resulted in a decrease in "Interest (net)." Long-term debt increased during
1995 to fund  the  acquisitions  of the  Zapata  Properties  in  July  and  more
importantly  the  acquisition  of the Bayou Sorrel Field in late  December.  The
decreases of 19% in 1993 and 13% in 1994 were due to the significant decrease in
long  term  debt  and the  refinancing  of such  debt on July 1,  1994 at  lower
interest rates. Interest expense increased  significantly in 1992 because of the
debt incurred to acquire the West Delta  Properties being in place a full twelve
months.

         "Net income (loss) per common share" is based upon the weighted average
number of shares  outstanding  of  11,504,615  for  1995,  10,039,042  for 1994,
7,583,761 for 1993, 7,314,041 for 1992, and 6,399,338 for 1991.

Liquidity and Capital Resources

         Cash flow from  operations  was used to reduce  long term  debt,  drill
wells, recomplete wells and acquire properties.

         On July 1, 1994 the Company  entered into a Credit  Agreement  with the
First Union National Bank of North  Carolina.  The loan was a reducing  revolver
designed to provide the Company up to $30 million  depending  upon the Company's
borrowing base. The principal amount of the loan was due July 1, 1998.

Capital Spending

         In 1995 the Company spent $8,112,000 on exploratory  drilling which did
not result in a discovery and  $1,497,000 on  developmental  costs.  During 1994
over $11,749,000 was spent on eight offshore  recompletions  and the drilling of
four horizontal wells. All four horizontal wells and all eight  recompletions in
1994  were   successful   and   offshore   natural  gas   production   increased
significantly.

         During the last part of 1993 the Company increased Stockholders' Equity
$1,163,000,  primarily by virtue of options and warrants being exercised. During
1994, the Company increased  Stockholders'  Equity $5,023,000,  primarily as the
result  of  such  exercises  of  options  and  warrants.  Likewise  most  of the
$3,173,000  increase in 1995 was from the exercise of options and  warrants.  As
explained  under "The  Company - Funding of  Business  Activities,"  the Company
issued   subordinated   notes  at  year-end  1993.  The  Company  utilized  this
$5,000,000,  along with equity proceeds and cash flow from operations  described
above, to drill the wells and perform the recompletions in 1994 and 1995.

                                   THE COMPANY
General

         PANACO,  Inc.  (the  "Company")  is a  Delaware  corporation  that  was
organized in October 1991.  Effective  September 1, 1992, Pan Petroleum MLP, the
Company's  predecessor,  was merged into the Company.  The Company is in the oil
and  gas  business,  acquiring,  drilling  and  operating  offshore  oil and gas
properties in the Gulf of Mexico.
Between  1984  and  1988 a  total  of  114  limited  partnerships  were
consolidated  into the Company's  predecessor.  With the acquisition of the West
Delta Properties in 1991, the Company shifted its emphasis offshore.  Additional
offshore  properties  were acquired in 1994,  1995 and 1996. In recent years the
Company  has  been  disposing  of  numerous  onshore  properties.   The  onshore
properties  presently  generate  less than 3% of the Company's  revenues.  These
onshore  property  sales  are  part  of  management's  plan  to  concentrate  on
properties  in the  Gulf of  Mexico,  which  the  Company  considers  to be more
profitable.

Business Strategy

     The Company's  objective is to enhance  shareholder value through sustained
growth in its reserve  base,  production  levels and  resulting  cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies  properties that may be acquired preferably
through negotiated transactions or, if necessary,  sealed bid transactions.  The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs,  have an established  production history and are candidates
for  exploitation.  Geologically  complex  fields with multiple  reservoirs  are
fields in which there are  multiple  reservoirs  at  different  depths and wells
which   penetrate  more  than  one  reservoir,   that  have  the  potential  for
recompletion  in more than one  reservoir.  Once  properties  are acquired,  the
Company  focuses  on  reducing  operating  costs  and  implementing   production
enhancements through the application of technologically  advanced production and
recompletion  techniques.  Over the past  five  years,  the  Company  has  taken
advantage  of  opportunities  to  acquire  interests  in a number  of  producing
properties which fit these criteria.

Business Activities

         The Company  owns  interests in 123 offshore  wells,  located  offshore
Louisiana  and Texas.  It also owns  interests  in 314 onshore  wells in Kansas,
Louisiana,  Oklahoma and Texas, but these interests generate less than 3% of its
revenues.  As of november  1, 1996,  these  properties,  including  the recently
acquired  Amoco  Properties  and  excluding  the Bayou  Sorrel  Field  which was
recently sold,  contained  estimated Proved Reserves of approximately  2,920,000
Bbls of oil and condensate and  approximately  64,925,000 Mcf of gas and the SEC
10 Value of such Proved Reserves was approximately  $128,092,000.  Approximately
21% of such Proved  Reserves  are  attributable  to oil and 79% to natural  gas,
based on six Mcf of gas being equivalent to one Bbl of oil. Information included
herein with  respect to Proved  Reserves  and the SEC 10 Value  thereof has been
prepared by the Company. See "Properties - Significant Proved Properties."

      The  Company   expects  to  hold  its  producing   properties   until  the
economically  recoverable reserves  attributable thereto are depleted,  although
the Company may sell any of its properties if management believes that such sale
would be in the Company's best interest.

Recent Explosion and Fire

        The Company  experienced  an explosion and fire on April 24, 1996 at its
Tank Battery #3 in West Delta, resulting in the production from the fields being
shut-in through October 7, 1996, when production resumed. The loss of 67 days of
production  in the second  quarter and the entire third  quarter was a principal
contributor  in the loss of $.19 per share for the second and third  quarters of
1996. Although the production was shut-in, and consequently there was a decrease
in West Delta lease operating expenses of $805,000 from expected levels, a large
part of the lease  operating  expenses  in West  Delta are  fixed  expenses  and
continued throughout both quarters.

     The Company has repaired Tank Battery #3 and is receiving advances from its
insurance  company.  Until  final  resolution  of the  total  repair  costs  the
insurance  company  is  advancing  funds to assist  the  Company  in paying  for
repairs.  The Company  began  receiving  these  insurance  advances in the third
quarter of 1996.  There is no assurance that the Company's  repair costs will be
fully covered by such  insurance or that the Company's  insurance  carriers  may
not seek  reimbursement  of some of their  advances.  The Company  plans to file
suits  against  the  employers  of the  persons  who  caused the  incidents.  No
assurance can be given that the Company will recover anything in such suits. The
repair expenditures, net of insurance advances, coupled with the decrease in net
operating cash flows  discussed  above resulted in higher  borrowing  levels and
interest  expense for the second and third quarters.  The resulting  decrease in
revenues and higher interest expense  decreased  current assets by approximately
$1.9 million at the end of the third quarter of 1996.
Well Operations

     The  Company  operates  52  offshore  wells  and  owns  all of the  working
interests  in  substantially  all of those  wells.  The  Company's  71 remaining
offshore  wells  are  operated  by  third  party  operators,   including  Unocal
Corporation,  Phillips Petroleum Company, Texaco, Anadarko Petroleum Corporation
and Louisiana Land and Exploration Company. Operations are conducted pursuant to
joint operating  agreements that were in effect at the time the Company acquired
its interest in these  properties.  However,  the Company  considers these joint
operating agreements to be on terms customary within the industry.  The operator
of an oil and gas property supervises production,  maintains production records,
employs field personnel, and performs other functions required in the production
and  administration of such property.  The compensation paid to the operator for
such services  customarily  varies from  property to property,  depending on the
nature, depth, and location of the property being operated. Where properties are
operated by the  Company,  it generally  owns all of the working  interests or a
majority of the working  interest in the  property.  Therefore,  its revenue and
expense  associated  with  portions of  properties it operates for other working
interest holders is not material.

Acquisition, Development, and Other Activities

        The Company  utilizes  its  capital  budget for (a) the  acquisition  of
interests  in other  producing  properties,  (b)  recompletions  of its existing
wells, and (c) the drilling of development and exploratory wells.

      In recent years,  major oil companies have been selling  certain  offshore
properties to independent  oil companies  because they feel these  properties do
not have the remaining reserve potential needed by a major oil company.  Several
independent  oil companies have acquired these offshore  properties and achieved
significant success in further  exploitation of these properties.  Even though a
property  does not meet the  criteria  for  further  development  by a major oil
company,  that does not mean it is lacking further exploitation  potential.  The
majors  are  simply  moving  further  offshore  into  deeper  water and to other
countries  where  they can find and  produce  the  super-fields  that fit  their
criteria.  Present day technology permits drilling and completing wells in water
as deep as 10,000 feet.

      On October 8, 1996, the Company closed on its  acquisition of interests in
six  offshore  fields  from  Amoco  Production  Company  for $40.4  million.  In
consideration  for such  interests,  the Company issued Amoco  2,000,000  Common
Shares and paid the sum of $32 million in cash. The interests  acquired  include
(1) a 33.3% working interest in the East Breaks 160 Field (2 Blocks) and a 33.3%
interest in the High Island 302 Field, both operated by Unocal Corporation;  (2)
an average 50% interest in the High Island 309 Field (2 Blocks),  a 12% interest
in the High  Island 330 Field (3 Blocks)  and a 12%  interest in the High Island
474 Field (4 Blocks),  all  operated by Phillips  Petroleum  Company;  and (3) a
12.5%  interest  in the West  Cameron  180 Field (1 Block)  operated  by Texaco.
Current  production for the interests acquired is 680 barrels of oil per day and
12 MMcf per day of natural gas. See "Properties - Amoco Acquisition."

      Depending  on the sales  prices of oil and gas and its  ability to finance
such activities,  the Company may also drill  exploratory wells on properties it
acquires.  The Company does not currently have plans to drill  exploratory wells
during 1997 but will  evaluate  potential  prospects to  determine  the economic
benefit to the  Company  and may drill  exploratory  wells if the benefit to the
Company is reasonable when measured against the risks involved.

      The number and type of wells  drilled by the Company will vary from period
to period  depending on the amount of the capital budget available for drilling,
the cost of each well,  the  Company's  commitment to  participate  in the wells
drilled on  properties  operated by third  parties,  the size of the  fractional
working  interest  acquired  by the  Company  in each  well  and  the  estimated
recoverable reserves attributable to each well.

      Acquisitions of properties may include  acquisitions of working interests,
royalty interests,  net profits interests,  production payments, and other forms
of direct or indirect ownership interest or interests in oil and gas production.
The Company may also acquire general or limited partner  interests in general or
limited  partnerships  and interests in joint ventures,  corporations,  or other
entities that own, manage, or are formed to acquire, explore for, or develop oil
and gas properties or conduct other activities  associated with the ownership of
oil and gas  production.  The Company  may also  acquire or  participate  in the
expansion of natural gas  processing  plants and natural gas  transportation  or
gathering systems.
The success of the Company's acquisitions will depend on (a) the Company's
ability to  establish  accurately  the volumes of  reserves  and rates of future
production from producing  properties  being  considered for acquisition and the
future net revenues  attributable to reserves from such properties,  taking into
account  future  operating  costs,  market  prices  for oil and  gas,  rates  of
inflation,  risks  attendant to production of oil and gas, and a suitable return
on investment,  and (b) the Company's ability to purchase properties and produce
and  market  oil and gas  therefrom  at  prices  and  rates  that over time will
generate cash flows resulting in an attractive return on the initial investment.
The Company's  cash flow and return on  investment  will vary to the extent that
the Company's  production from an acquired property is greater or less than that
estimated at the time of  acquisition  because of, for  example,  the results of
drilling or improved recovery  programs,  the demand for oil and gas, or changes
in the  prices of oil and gas from the prices  used to  calculate  the  purchase
price for  producing  properties.  The Company will  evaluate  any  economically
feasible project that would enhance the value of its properties.  Such a project
may involve both the acquisition of developed and undeveloped properties and the
drilling of infield wells.

      The  Company  expects  that its  primary  activities  will  continue to be
concentrated  offshore in the Gulf of Mexico. The Company can, if it so chooses,
invest  in any  geographic  area.  Drilling  on  and  production  from  offshore
properties often involves higher costs than does drilling on and production from
onshore properties, but the production achieved on successful wells is generally
much greater.

      The Company may also seek to acquire oil and gas  companies  through stock
purchases,  asset  purchases,  and purchases of interests in  partnerships.  The
Company intends to pay for such possible  acquisitions  with its own securities,
cash or any other property, or any combination of the foregoing.  The consent of
the  Company's  lenders is  required  for any such  purchases.  See  "Funding of
Business Activities - Borrowings and Obligations".

Capital Spending

        Through the nine months  ended  September  30, 1996 the Company had made
$11.8  million in capital  expenditures  for (1) the earnest money deposit of $5
million for the Amoco Properties, which were subsequently acquired on October 8,
1996,  (2) the repair and  rebuilding  of the West Delta Tank Battery #3 (net of
insurance  advances) and (3) the development of its oil and gas properties.  The
majority  of the  development  costs  were  incurred  to drill two  unsuccessful
development  wells in the Bayou Sorrel Field and for the Company's  share of two
successful recompletions on Eugene Island Block 372, which is operated by Unocal
Corporation.  The sources of funds for capital  expenditures were cash flow from
operations,  borrowings  on the  Company's  Bank  Facility  and  proceeds of the
issuances of Common Shares.

Use of 3-D Seismic Technology

        The  use  of  3-D  seismic  and  computer-aided   exploration   ("CAEX")
technology is an integral component of the Company's acquisition,  exploitation,
drilling  and  business  strategy.  In  general,  3-D  seismic is the process of
obtaining  seismic data along multiple lines and grids within a large geographic
area. 3-D seismic differs from 2-D seismic in that it provides  information with
respect to multiple horizontal and vertical points within a geological formation
instead of  information  on a single  vertical line or multiple  vertical  lines
within the formation. By expanding the amount of data obtained with respect to a
geological formation, the user is better able to correlate the data and obtain a
greater  understanding  and image of the  formation.  While it is  impossible to
predict  with  certainty  the  specific  configuration  or  composition  of  any
underground  geological  formation,  3-D seismic  provides a mechanism  by which
clearer and more accurate projected images of complex geological  formations can
be obtained  prior to drilling for  hydrocarbons  therein.  In  particular,  3-D
seismic  delineates  smaller  reservoirs  with  greater  precision  than  can be
obtained with 2-D seismic.

      CAEX technology is the process of  accumulating  and analyzing the various
seismic, production and other data obtained relating to a potential prospect. In
general,  the process of prospect  evaluation  through CAEX technology  requires
inputting  various 2-D and 3-D seismic data obtained with respect to a prospect,
correlating  that data with  historical  well control and  production  data from
similar  properties and analyzing the available data through  computer  programs
and modeling techniques in order to project the likely geological composition of
a prospect and potential  locations of  hydrocarbons.  This process  relies on a
comparison of actual data with respect to the prospect and historical  data with
respect to the  density and sonic  characteristics  of  different  types of rock
formations, hydrocarbons and other subsurface minerals, resulting in a projected
three  dimensional  image of the subsurface.  This modeling is performed through
the use of advanced interactive  computer  workstations and various combinations
of  available  computer  programs  that  have  been  developed  solely  for this
application.

     3-D  seismic  and CAEX  technology  have  been in  existence  since the mid
1970's;  however,  it was not until the late  1980's,  with the  development  of
improved  data  acquisition   equipment  and  techniques  capable  of  gathering
significant  amounts  of  data  through  a  large  number  of  channels  and the
availability  of improved  computer  technology  at reasonable  costs,  that the
method  became  economically  available to firms such as the  Company.  Prior to
that, it was the exclusive province of large multinational oil companies.

     The  Company  believes  that  its  application  of  3-D  seismic  and  CAEX
technology in the  exploration  of oil and natural gas provides it with a number
of benefits in the exploration, delineation and development process that are not
generally  available  to those who only use 2-D  seismic  data and  conventional
processing  methods.  In  particular,  the Company  believes  that, by obtaining
clearer and more accurate  projected  images of underground  formations  through
computer  modeling,  the  Company  is able to  specifically  identify  potential
locations  of  hydrocarbon  accumulations  based on the  characteristics  of the
formations  and  analogies   made  with  nearby  fields  and  formations   where
hydrocarbons  have been  found.  This  enhanced  data can be used to assist  the
Company in eliminating  prospects and prospect  locations  that might  otherwise
have been drilled had the Company  relied solely on 2-D seismic data.  This data
can be used to assist the Company in  identifying  the perceived  most desirable
location for the well to maximize the likelihood of a successful  exploratory or
development well and production from the reservoir.

      The Company  believes that the  collective  application of 3-D seismic and
CAEX technology enables a much more accurate definition of the risk profile of a
prospect than was previously available using traditional exploration techniques.
To the extent the Company is  successful  in  increasing  its  success  rate and
reducing its dry hole costs through the use of advanced  technology  the Company
believes it has a  competitive  advantage  over  companies  that do not use such
technology.

     The  Company  generated a prospect  in the  northern  portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding  royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently  completed on the western  portion of the  Company's  properties in
West Delta.

Marketing of Production

       Production  from the Company's  properties is marketed in accordance with
industry  practices,  which  include  the sale of oil at the  wellhead  to third
parties and the sale of gas to third parties at prices based on factors normally
considered in the  industry,  such as the spot price for gas or the posted price
for oil, and the quality of the oil and gas.

     The Company  markets all of its offshore oil  production  to Amoco,  Citgo,
Conoco,  Texaco, Unocal and Vastar. Citgo, Conoco,  Texaco, and Vastar each have
25%  calls(exclusive  rights to  purchase) on the oil  production  from the West
Delta Fields at their average  posted price for each month.  Amoco has a call on
all of the oil production from the Amoco  Properties at their posted prices.  If
the Company has a bona fide offer from a crude oil  purchaser  at a higher price
than Amoco's posted price, then Amoco must match that price or release the call.
Oil from the Zapata  Properties is currently being sold to Unocal and Amoco, but
can be sold to any crude oil purchaser of the Company's  choice.  Natural gas is
sold on the spot market.  There are numerous  potential  purchasers for offshore
gas.  Notwithstanding  this,  natural gas  purchased  by Tennoco  Gas  Marketing
Company  accounted  for 69% of the  revenues  in 1995.  There are  numerous  gas
purchasers  doing  business in the areas involved as well as natural gas brokers
and clearing houses. Furthermore, the Company can contract to sell
the gas directly to end users. The Company does not believe that it is dependent
upon any one customer or group of customers for the purchase of natural gas.

      The Company's lenders have generally required it to reduce its exposure to
the  volatility  of crude oil and natural gas prices by hedging a portion of its
production.  In a typical hedge transaction,  the Company will have the right to
receive  from the  counter  party to the hedge,  the  excess of the fixed  price
specified in the hedge over a floating  price. If the floating price exceeds the
fixed price,  the Company is required to pay the counter  party this  difference
multiplied  by the  quantity  hedged,  regardless  of whether  the  Company  has
sufficient   production  to  cover  the  quantities   specified  in  the  hedge.
Significant  reductions in  production at times when the floating  price exceeds
the fixed price  could  require  the  Company to make  payments  under the hedge
agreements  even though  such  payments  are not offset by sales of  production.
However,  the Company  hedges up to, but not more than,  50% of its  anticipated
production.  Hedging  will also  prevent the  Company  from  receiving  the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.

Plugging and Abandonment Escrows

     Pursuant to existing agreements the Company is required to deposit funds in
escrow  accounts  to  provide a reserve  against  satisfaction  of its  eventual
responsibility  to plug and abandon  wells and remove  structures  when  certain
fields no longer produce oil and gas. Each month,  until November 1997,  $25,000
is deposited in a bank escrow account,  to satisfy such obligations with respect
to a portion of its West Delta  Properties.  The  Company  has  entered  into an
escrow  agreement  with Amoco  Production  Company  under which the Company will
deposit,  for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the  agreement,  from the Amoco  properties.
These funds and interest  earned  thereon will be available  for the expenses of
plugging  wells and removing  structures  when that time comes.  The Company has
established  the "PANACO East Breaks 110 Platform  Trust" at Bank One, Texas, NA
in favor of the  Minerals  Management  Service  of the  U.S.  Department  of the
Interior.  This Trust  requires an initial  funding of $846,720 in December 1996
and  remaining  deposits of $244,320  due at the end of each quarter in 1999 and
$144,000 due at the end of each quarter in 2000, for a total of  $2,400,000.  In
addition, the Company has $10,150,000 in surety bonds to secure its plugging and
abandonment  obligations;  including a $4,100,000 bond which was provided to the
original sellers of the West Delta Properties; a $2,400,000 bond provided to the
Minerals Management Service of the U.S. Department of the Interior in connection
with the plugging and  structure  removal  obligations  for the  Company's  East
Breaks Block 110 Platform;  and a $3,000,000 Area Wide Bond, a $300,000 Pipeline
Right-of- Way Bond, a $300,000  Supplemental Bond and a $50,000  Operator's Bond
provided the Minerals Management Service.

Insurance

     The Company maintains insurance coverage as is customary for companies of a
similar size  engaged in  operations  similar to the  Company's.  The  Company's
insurance  coverage includes  comprehensive  general liability  insurance in the
amount of $50 million per occurrence for personal injury and property damage and
cost of control and operators  extra expense  insurance of $3 million on onshore
wells,  $20  million on wells in  Louisiana  State  waters  and $50  million per
occurrence in Federal  offshore  waters.  The Company  maintains  $65 million in
property insurance on its offshore  properties.  There is no assurance that such
insurance  will be adequate to cover all such costs or that such  insurance will
continue to be available in the future or that such  insurance will be available
at premium  levels that justify its  purchase.  The  occurrence of a significant
event not fully insured or  indemnified  against  could have a material  adverse
effect on the Company's financial condition and operations.

Funding of Business Activities

      Cash  Flow  from  Operations.  Funding  for the  Company's  activities  is
provided  primarily by cash flow from operations,  however,  the Company may use
its Bank Facility and other sources described below.  Generally,  cash flow from
properties declines over time as production declines. The cash flow generated by
the Company's  activities,  would decline in the absence of (a) the  acquisition
and development of other oil and gas properties,  (b) increases in the Company's
production of oil and gas resulting from the development of its  properties,  or
(c)  increases  in the  prices  that  the  Company  receives  for  oil  and  gas
production.

      Issuance of Additional Common Shares and Other Securities. The Company may
issue additional  Common Shares or other securities for cash, to the extent that
market and other conditions permit, and use the proceeds to fund its activities.
Additional securities issued by the Company may be of a class preferred as
to the Common Shares with respect to such matters as dividends  and  liquidation
rights and may also have other rights and preferences as determined by the Board
of  Directors.  The  Certificate  of  Incorporation  and  By-laws of the Company
generally  do not require the Company to obtain the consent of its  shareholders
for the issuance and sale of Common Shares or other securities.

      During 1995 Shareholders' Equity increased by $3,173,000, by virtue of the
exercise of options  and  warrants.  Through  September  30, 1996  Shareholders'
Equity increased by $1,837,000, as a result of the exercise of warrants.

      Borrowings and Obligations. The Company is permitted to incur indebtedness
for any Company purpose. It is currently expected that Company indebtedness will
consist  primarily of borrowings from commercial banks and credit  corporations,
the  sale of  debt  instruments,  and  possibly  by  advances  from  oil and gas
purchasers.

     On October 8, 1996, the Company  amended its bank facility with First Union
National Bank of North  Carolina (60%  participation),  and Banque  Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million  depending on the  Company's  borrowing
base, as determined by the lenders.  The Company's borrowing base at December 1,
1996 was $31 million,  with an availability  under the revolver of $3.5 million.
The principal  amount of the loan is due July 1, 1999.  However,  at no time may
the Company have outstanding borrowings under the Bank Facility in excess of its
borrowing base. Should the borrowing base ever be determined to be less than the
outstanding  principal owed, the Company must immediately pay that difference to
the  lenders.  Interest on the loan is computed at the bank's prime rate or at 1
to 1 3/4%  (depending  upon the  percentage of the facility being used) over the
applicable   London  Interbank  Offered  Rate  ("LIBOR")  on  Eurodollar  loans.
Eurodollar  loans can be for terms of one, two, three or six months and interest
on such loans is due at the  expiration of the terms of such loans,  but no less
frequently  than every three months.  Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over  LIBOR as long as the  Company  has in excess of  $13,500,000  in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. See "Use of Proceeds." Management
feels that this Bank  Facility  greatly  enhances its ability to make  necessary
capital  expenditures to maintain and improve production from its properties and
makes available to the Company  additional  funds for future  acquisitions.  The
bank facility is  collateralized  by a first mortgage on the Company's  offshore
properties.   The  loan  agreement   contains  certain  covenants   including  a
requirement to maintain a positive  indebtedness  to cash flow ratio, a positive
working  capital ratio, a certain  tangible net worth, as well as limitations on
future debt, guarantees, liens, dividends, mergers, material change in ownership
by management, and sale of assets.

      In 1991,  the Company  borrowed  $21,600,000  from New England Mutual Life
Insurance  Company,  NMB Post Bank,  Groep,  N.V.  (now ING Bank),  the  Lincoln
National  Life  Insurance  Company and En Cap 1989-1  Limited  Partnership.  The
balance  owed on this  facility was prepaid in 1994 with part of the proceeds of
the  Company's  Bank  Facility.  As part of the 1991  transaction  these  former
lenders received a net profits interest in part of the West Delta Properties.

     From time to time the Company has borrowed funds from institutional lenders
who are represented by Kayne, Anderson Investment Management,  Inc. In each case
these loans are due at a stated  maturity,  require payments of interest only at
12% per annum 45 days after the end of each calendar  quarter and are secured by
a  second  mortgage  on the  Company's  offshore  oil  and gas  properties.  The
respective loan documents contain certain  covenants  including a requirement to
maintain a net worth ratio,  as well as limitations on future debt,  guarantees,
liens, dividends,  mergers, material change in ownership by management, and sale
of assets. The loans are as follows:

      (a)  1993  Subordinated  Notes.  In 1993,  $5,000,000  was  borrowed,  due
December 31, 1999,  but  prepayable  at any time.  The Company may deliver up to
$1,000,000 in PIK (payment in kind) notes in  satisfaction  of interest  payment
obligations.  The lenders were issued,  and during 1996  exercised,  warrants to
acquire 816,526 Common Shares at $2.25 per share.

      (b) 1996 Tranche A  Convertible  Subordinated  Notes.  On October 8, 1996,
$8,500,000 was borrowed,  due October 8, 2003, but prepayable any time after May
8, 1998. The Notes are convertible  into 2,060,606 Common Shares on the basis of
$4.125 per share.  The  Company  may  deliver up to  $2,000,000  in PIK notes in
satisfaction of interest payment obligations.
(c) 1996  Tranche B Bridge Loan  Subordinated  Notes.  On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable at any time. Should
this loan not be prepaid by August 8, 1997 the interest  rate will increase from
12% to 14% per annum.  The Company may deliver PIK notes in satisfaction of this
additional interest.

     Management  intends to  pre-pay  the 1993  Subordinated  Notes and the 1996
Tranche B Bridge Loan Subordinated  Notes with a portion of the proceeds of this
Offering.

Competition, Markets, Seasonality and Regulation

      Competition. There are a large number of companies and individuals engaged
in the exploration for and development of oil and gas properties. Competition is
particularly  intense with respect to the  acquisition  of oil and gas producing
properties.  The Company  encounters  competition  from various  independent oil
companies in raising capital and in acquiring producing properties.  Many of the
Company's  competitors have financial  resources and staffs  considerably larger
than the Company.

      Markets.  The  ability of the  Company  to produce  and market oil and gas
profitably  depends on numerous  factors beyond the control of the Company.  The
effect of these factors  cannot be accurately  predicted or  anticipated.  These
factors include the availability of other domestic and foreign  production,  the
marketing  of  competitive  fuels,  the  proximity  and  capacity of  pipelines,
fluctuations  in supply and demand,  the  availability  of a ready  market,  the
effect of federal and state regulation of production, refining,  transportation,
and  sales  of  oil  and  gas,  political   instability  or  armed  conflict  in
oil-producing  regions,  and general national and worldwide economic conditions.
In recent years,  worldwide oil production  capacity and gas production capacity
in the United States  exceeded  demand and resulted in a substantial  decline in
the price of oil and natural gas in the United States.

      Since  early  1986,  certain  members  of the  Organization  of  Petroleum
Exporting  Countries  ("OPEC")  have, at various times,  dramatically  increased
their  production of oil,  causing a significant  decline in the price of oil in
the world market.  The Company cannot predict future levels of production by the
OPEC  nations,  the prospects for war or peace in the Middle East, or the degree
to which oil and gas prices will be affected, and it is possible that prices for
any oil, natural gas liquids,  or gas produced by the Company will be lower than
those currently available.

      The demand for gas in the United States has fluctuated in recent years due
to economic factors, a deliverability  surplus,  conservation and other factors.
This lack of demand has resulted in increased competitive pressure on producers.
However,  environmental  legislation  is  requiring  certain  markets  to  shift
consumption  from fuel oils to natural gas, thereby  increasing  demand for this
cleaner burning fuel.

      In view of the many uncertainties affecting the supply and demand for oil,
gas, and refined petroleum products, the Company is unable to predict future oil
and gas prices. In order to minimize these uncertainties the Company,  from time
to time, hedges prices on a portion of its production with futures contracts.

      Seasonality.  Historically the nature of the demand for natural gas caused
prices and demand to vary on a seasonal  basis.  Prices and  production  volumes
were  generally  higher  during the first and fourth  quarters of each  calendar
year.  For example,  during 1991 the price the Company  receives for its natural
gas fell from a high of $1.78 per Mcf in  January  to a low of $1.09 in July and
then climbed to a new high of $1.95 in December,  averaging  $1.49 for the year.
However, the substantial amount of gas storage becoming available in the U.S. is
altering this  seasonality.  During 1993, 1994 and 1995 the Company's gas prices
ranged from $2.78 to $1.64, $2.43 to $1.39 and $2.37 to $1.37,  averaging $2.13,
$1.88 and $1.58, respectively,  in each case, per Mcf. Gas prices averaged $2.08
per Mcf during the first nine months of 1996.  The Company sells its natural gas
on the spot  market  based  upon  published  index  prices  for  each  pipeline.
Historically  the net price  received by the  Company  for its gas has  averaged
about  $.10  per  MMbtu  below  the  NYMEX  Henry  Hub  index   price,   due  to
transportation differentials.  Fields that are located further offshore, such as
the Amoco  Properties,  will  generally sell their gas for as much as $.20 below
that index price.  Recent  pipeline index prices have been at historical  highs.
During December 1996 the Company sold its gas for an average of $2.86.

     Regulation.  The Company's  business is affected by  governmental  laws and
regulations, including price
control, energy, environmental, conservation, tax and other laws and regulations
relating to the petroleum industry. For example, state and federal agencies have
issued rules and  regulations  that  require  permits for the drilling of wells,
regulate  the  spacing of wells,  prevent the waste of natural gas and crude oil
reserves,  and regulate  environmental and safety matters including restrictions
on the types,  quantities and  concentration  of various  substances that can be
released  into the  environment  in  connection  with  drilling  and  production
activities, limits or prohibitions on drilling activities on certain lands lying
within  wetlands and other  protected  areas,  and remedial  measures to prevent
pollution  from  current  and former  operations.  Changes in any of these laws,
rules and  regulations  could have a material  adverse  effect on the  Company's
business.  In view of the many  uncertainties  with  respect to current  law and
regulations,  including their  applicability to the Company,  the Company cannot
predict the overall effect of such laws and regulations on future operations.

      The Company believes that its operations  comply in all material  respects
with all applicable laws and regulations and that the existence of such laws and
regulations  have  no  more  restrictive  effect  on  the  Company's  method  of
operations  than on other  similar  companies  in the  industry.  The  following
discussion  contains  summaries of certain laws and regulations and is qualified
in its entirety by reference thereto.

      Various  aspects of the  Company's  oil and  natural  gas  operations  are
regulated by  administrative  agencies under statutory  provisions of the states
where such  operations  are  conducted  and by certain  agencies  of the federal
government  for  operations of federal  leases.  The Federal  Energy  Regulatory
Commission  (the  FERC)  regulates  the  transportation  and sale for  resale of
natural gas in interstate  commerce pursuant to the Natural Gas Act of 1938 (the
"NGA") and the Natural  Gas Policy Act of 1978 (the  "NGPA").  In the past,  the
federal  government has regulated the prices at which oil and gas could be sold.
Currently,  sales by  producers  of  natural  gas,  and all sales of crude  oil,
condensate  and natural gas liquids can be made at  uncontrolled  market prices,
but Congress could reenact price controls at any time.  Deregulation of wellhead
sales in the natural gas industry  began with the enactment of the NGPA in 1978.
In 1989,  Congress enacted the Natural Gas Wellhead  Decontrol Act which removed
all NGA and NGPA price and nonprice controls affecting wellhead sales of natural
gas effective January 1, 1993.

     Commencing in April 1992, the FERC issued Order NOS. 636, 636-A,  and 636-B
("Order No. 636"),  which require  interstate  pipelines to provide  open-access
transportation on a basis that is equal for all gas shippers. Although Order No.
636 does not directly  regulate the  Company's  activities,  the FERC has stated
that it intends  for Order No. 636 to foster  increased  competition  within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order No. 636 will have on the
Company's  activities.  Although  Order No.  636,  assuming  it is upheld in its
entirety,  could  provide the Company  with  additional  market  access and more
fairly applied  transportation  service rates,  Order No. 636 could also subject
the Company to more restrictive pipeline imbalance  tolerances,  delivering more
or less than  anticipated  deliveries,  and greater  penalties  for violation of
those  tolerances.  The FERC has issued final orders in virtually  all Order No.
636  pipeline  restructuring  proceedings.  Appeals  of Order No. 636 as well as
orders in the  individual  pipeline  restructuring  proceedings,  are  currently
pending and Company  cannot predict the ultimate  outcome of court review.  This
review may result in the repeal, in whole or in part, of Order No. 636.

      The  FERC  has  announced  its  intention  to  reexamine  certain  of  its
transportation-related  policies,  including  the  manner  in  which  interstate
pipeline shippers may release  interstate  pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
the Company only indirectly,  the FERC's current rules and policies may have the
effect of enhancing  competition  in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions.  The Company cannot predict what action the FERC will take on
these  matters,  nor can it accurately  predict  whether the FERC's actions will
achieve the goal of  increasing  competition  in markets in which the  Company's
natural  gas is sold.  However,  the Company  does not  believe  that it will be
affected by any action taken in a manner that is materially  different  than the
effect upon other natural gas producers with which it competes.

      The FERC has  issued a policy  statement  on how  interstate  natural  gas
pipelines  can recover the costs of new pipeline  facilities.  While this policy
statement  affects the Company only  indirectly,  in its present  form,  the new
policy  should  enhance  competition  in  natural  gas  markets  and  facilitate
construction of gas supply
laterals. However, requests for rehearing of this policy statement are currently
pending.  The  Company  cannot  predict  what action the FERC will take on these
requests.

      Sales of crude oil,  condensate  and gas  liquids by the  Company  are not
regulated and are made at market prices. The price the Company receives from the
sale of these products is affected by the cost of  transporting  the products to
market.  Effective  as of  January  1, 1995,  the FERC  implemented  regulations
establishing  an indexing  system for  transportation  rates for oil  pipelines,
which  would  generally  index  such  rates to  inflation,  subject  to  certain
conditions  and  limitations.  These  regulations  could  increase  the  cost of
transporting  crude oil, liquids and condensates by pipeline.  These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect,  if any, these  regulations will have on it,
but  other  factors  being  equal,   the   regulations   may  tend  to  increase
transportation costs or reduce wellhead prices for such conditions.

      Additional  proposals  and  proceedings  that might affect the oil and gas
industry  are pending  before  Congress,  the FERC and the  courts.  The Company
cannot predict when or whether any such proposals may become  effective.  In the
past,  the natural gas industry  historically  has been very heavily  regulated.
There is no assurance that the current  regulatory  approach pursued by the FERC
will continue indefinitely into the future. Notwithstanding the foregoing, it is
not anticipated  that compliance  with existing  federal,  state and local laws,
rules and regulations will have a material or significantly  adverse effect upon
the capital expenditures, earnings or competitive position of the Company.

      Extensive  federal,  state and local laws and  regulations  govern oil and
natural  gas   operations   regulating  the  discharge  of  materials  into  the
environment or otherwise relating to the protection of the environment. Numerous
governmental  departments  issue rules and  regulations to implement and enforce
such laws which are often  difficult  and costly to comply  with and which carry
substantial  penalties for failure to comply.  Some laws,  rules and regulations
relating to protection of the environment may, in certain circumstances,  impose
"strict  liability" for environmental  contamination,  rendering a person liable
for  environmental  damages and response  costs without  regard to negligence or
fault  on the  part of such  person.  For  example,  the  federal  Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, also
known as the "Superfund"  law, imposes strict liability on an owner and operator
of a  facility  or  site  where a  release  of  hazardous  substances  into  the
environment  has  occurred and on  companies  that  disposed or arranged for the
disposal  of the  hazardous  substances  released at the  facility or site.  The
regulatory  burden on the oil and natural  gas  industry  increases  its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations  affect the  operations and costs of the Company.  While  compliance
with environmental  requirements  generally could have a material adverse effect
upon the capital expenditures,  earnings or competitive position of the Company,
the Company believes that other independent  energy companies in the oil and gas
industry likely would be similarly affected.  The Company believes that it is in
substantial   compliance  with  current   applicable   environmental   laws  and
regulations and that continued  compliance with existing  requirements  will not
have a material adverse impact on the Company.

       Offshore  operations  of the Company are  conducted  on both  federal and
state  lease  blocks  of the Gulf of  Mexico.  In all  offshore  areas  the more
stringent  regulation  of the  federal  system,  as  implemented  by the Mineral
Management  Service of the  Department of the Interior,  are to be applicable to
state leases as well as federal  leases.  The Oil Pollution Act of 1990 requires
operators  of oil and gas leases on or near  navigable  waterways to provide $35
million in  "financial  responsibility",  as defined in the Act.  At present the
Company is satisfying the financial  responsibility  requirement  with insurance
coverage.

Employees

      The Company has thirteen full time  employees,  some of whom are officers.
The  Company  utilizes  an  additional  thirty-two  contract  personnel  in  the
operation of the offshore  properties,  and uses  numerous  outside  geologists,
production engineers, reservoir engineers, geophysicists and other professionals
on a consulting basis.
Office Facilities

      The Company's  headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building,  Kansas City, Missouri 64145-1216,  and its telephone number is
(816) 942-6300, FAX (816) 942-6305. The Houston, Texas office is located at 1100
Louisiana, Suite 5110, Houston, Texas 77002-5220,  telephone (713) 652-5110, FAX
(713) 651-0928.

Legal Proceedings

      The Company is presently a party to several  legal  proceedings,  which it
considers to be routine and in the ordinary  course of its business.  Management
has no knowledge of any pending or threatened claims that could give rise to any
litigation which management believes would be material to the Company.

                                   PROPERTIES

      The  Company's  offshore  properties  are located  offshore  Louisiana and
Texas.  The following table sets forth certain  information  with respect to the
Company's significant properties as of November 1, 1996. Such properties account
for 97% of the aggregate SEC 10 Value of its properties.

                          Significant Proved Properties
Proved Reserves
                                                         Oil               Gas                SEC 10
Property                         Area                   (Bbls)            (Bcf)                Value
AMOCO PROPERTIES             Offshore TX              1,820,000           28.1         $     56,929,000
WEST DELTA PROPERTIES        Offshore LA                566,000           25.2         $     46,403,000
ZAPATA PROPERTIES            Offshore TX & LA           208,000            9.6         $     20,076,000
Amoco Acquisition

        On  August  26,  1996  the  Company  entered  into a  Purchase  and Sale
Agreement  with  Amoco  Production  Company to acquire  Amoco's  interest  in 13
offshore   blocks   comprising   six  fields  in  the  Gulf  of  Mexico  ("Amoco
Properties"). The acquisition closed October 8, 1996. Current production, net to
the working interests acquired, is 680 barrels of oil per day and 12 MMcf of gas
per day of natural  gas.  The  purchase  price for the assets  acquired  in this
transaction was $40.4 million,  paid by the issuance of 2,000,000 Common Shares,
at $4.20 per share, and by payment to Amoco of $32,000,000 in cash.

      In  addition to the  interests  acquired,  the  Company  purchased a 33.3%
interest in a 12.67 mile 12" pipeline  connecting East Breaks Block 160 platform
to the High Island  Offshore System  ("HIOS"),  a natural gas pipeline system in
the Gulf of Mexico and a 33.3% interest in a 17.47 mile 10" pipeline  connecting
the East Breaks Block 160 platform to the High Island Pipeline System  ("HIPS"),
a crude oil pipeline system in the Gulf of Mexico. HIOS and HIPS are the primary
natural gas and crude oil pipeline systems in that part of the Gulf of Mexico.

      The East  Breaks  Block 160  platform  also  serves a subsea well owned by
Mobil Oil Corporation in East Breaks Block 117. Under  agreements with Mobil the
owners of the East  Breaks  Block 160  platform  share in  certain  fees paid by
Mobil.
The  following  table  lists  the  field  names,  block  numbers,  working
interests, net revenue interests and number of wells of the properties.

                                      Working        Net Revenue     Number of
        Field/Block                   Interest          Interest    Active Wells

     East Breaks 160 Field
     EB 160 (OCS 2647)                0.3333            0.2778           13
     EB 161 (OCS 2648)                0.3333            0.2778           10

     High Island A-302 Field
     HI A-302 (OCS 2732)              0.3333            0.2778            5

     High Island A-309 Field
     HI A-309 (OCS 2735)              0.4500            0.3750            9
     HI A-310 (OCS 3378)              0.5500            0.4583            8

     High Island A-330 Field
     HI A-330 (OCS 2421)              0.1200            0.1000           25
     HI A-349 (OCS 2743)              0.1200            0.1000            6
     WC 613 (OCS 3286)                0.1200            0.1000            3

     High Island A-474 Field
     HI A-474 (OCS 2366)              0.1200            0.1000           18
     HI A-489 (OCS 2372)              0.1200            0.1000           22
     HI A-499 (OCS 3118)              0.1310            0.1092            6
     HI A-475 (OCS 2367)              0.1200            0.1000            0

     West Cameron 180 Field
     WC 144 (OCS 1953)                0.1250            0.1042            7

      Average net production  from these fields during 1995 was 15.6 MMcf of gas
per day and 592  barrels of oil per day and cash flow net to the  interests  was
$9.5 million. These fields have potential for substantial reserve and production
increases.  Net  Probable  Reserves  of 10.8  Bcf  and 213 MBO and net  possible
reserves  of 21.0 Bcf and 323 MBO have been  identified  by the Company in third
party engineering. Many of the fields have additional reserve potential that has
not yet been quantified.

East Breaks 160 Field

      This field  consists  of two blocks,  East  Breaks 160 and 161.  The water
depth ranges from 900' to 1,100'. The Company owns a 33.3% working interest with
a 27.8% net revenue interest.  Unocal Corporation is the operator.  The 1995 net
cash flow was $2.8  million.  East Breaks 160 field  produces from an anticlinal
ridge  with 12  productive  horizons.  A  proprietary  3-D  survey  was shot and
processed in 1990.  Net proved  reserves are  estimated to be 15.2 Bcf and 1,641
MBO. The GA-2 and HB-2 reservoirs account for most of the reserves.
 An additional 1.8 Bcf and 77 MBO of net Probable Reserves have been identified.
Additional income is derived from processing fees from the Mobil Oil Corporation
recent  discovery  in adjacent  Block 117.  This subsea well is tied back to the
East Breaks 160 platform.  Management  believes there are numerous reservoirs in
the field which have not been adequately evaluated with wells.  Additional wells
on Blocks  160 and 161 as well as  adjacent  blocks are under  consideration  by
Unocal Corporation.

High Island A-302 Field

      High Island  Block A-302 is in  approximately  200' of water.  The Company
owns a  33.3%  working  interest  with a  27.8%  net  revenue  interest.  Unocal
Corporation is the operator. Production is from four producing
horizons on a faulted anticlinal structure. A speculative 3-D survey was shot in
1991 and processed in 1992. Net Proved  Reserves are estimated to be .3 Bcf. One
well is producing,  with one well scheduled to be recompleted in 1997 to exploit
net Probable  Reserves of 5.1 Bcf.  Management  believes these probable reserves
should  be  recoverable  from two  sands in an area  which  seismic  shows to be
undrained by the existing wells.

High Island A-309 Field

      High Island  A-309 field  consists  of two blocks,  High Island  A-309 and
A-310, in  approximately  200' of water. The Company owns a 45% working interest
in Block A-309 and a 55% working  interest in Block  A-310.  Phillips  Petroleum
Company  is the  current  operator.  The 1995 net  cash  flow was $5.9  million.
Production  is from three faulted  anticlines  with 18  productive  horizons.  A
proprietary  3-D  seismic  was shot in 1988 and  processed  in 1989.  Net Proved
Reserves are  estimated to be 7.3 Bcf.  One  additional  well will be drilled to
recover  the  estimated  4.8 Bcf in four  zones.  An  extensive  field study was
completed  in 1993.  Numerous  additional  wells  and  recompletions  are  under
consideration for 1997.

High Island A-330 Field

     The field  consists of three blocks,  High Island A-330,  High Island A-349
and West Cameron 613. The field is located in 280' of water.  The Company owns a
12%  working  interest  with a 10% net  revenue  interest.  Coastal  Oil and Gas
Corporation is the current operator.  Three wells have been recompleted in 1996.
This field produces from a faulted  anticline with 24 productive  horizons.  The
Company has 2-D seismic over this field,  but a 3-D seismic  survey was recently
shot. Significant upside potential was delineated by the 3-D seismic. A well has
been  proposed by the  operator for 1997 and other wells and  recompletions  are
under consideration.

High Island A-474 Field

      This field  consists of three full blocks in the High Island Area,  A-474,
A-489,  A-499,  and  part of Block A- 475.  The  water  depth is 250' to 285 and
Phillips  Petroleum  Company is the  operator.  The  Company  owns a 12% working
interest  with a 10% net  revenue  interest in Blocks  A-474 and A-489,  a 13.1%
working  interest  with a 10.9% net revenue  interest in Block A-499,  and a 12%
working  interest  with a 9% net revenue  interest in Block A-475.  There are 23
productive  horizons in this faulted  anticline.  A proprietary  3-D seismic was
shot in 1991 and processed in 1993. Net Proved Reserves are 3.6 Bcf and 174 MBO.
An additional 2.8 Bcf and 130 MBO of net probable reserves have been identified.
The most significant reserve base is the competitive G-15 Sand which has over 75
Bcf gross  reserves  remaining.  Phillips  is  currently  drilling a well and is
planning several recompletions and additional wells in 1997.

West Cameron 180 Field

      This field consists of a single block,  West Cameron 144, in 40' of water.
Texaco is the operator.  The Company owns a 12.5% working  interest with a 10.4%
net  revenue  interest.  The  producing  feature  is a north-  plunging  faulted
anticline  that  underlies  West  Cameron  Blocks  173 and 180.  There are three
productive  horizons.  Net Proved  Reserves are estimated to be 353 MMCF, all of
which are producing in one well.  Net probable  incremental  producing  reserves
from this well add another  375 MMCF.  Net  Probable  and  Possible  Undeveloped
Reserves of 16.4 Bcf are targeted by three proposed wells.

West Delta Properties

     These properties  consist of 13,565 acres in Blocks 52 through 56 and Block
58 in the West Delta Area,  offshore  Louisiana.  The properties  have 36 wells,
five of which were recently  drilled.  In 1994 the Company spent $6.9 million on
drilling four wells and the recompletion of eight wells on these properties. The
Company is the operator and generally owns 100% of the working interest, with an
87.5% net revenue  interest  with respect to these  properties.  Presently,  the
wells produce from depths ranging from 1,200 feet to 12,500 feet. Because of the
existing surface  structures and production  equipment,  additional wells can be
added on the properties with lower completion costs.
The West  Delta  Properties  were  acquired  from  Conoco,  Inc.,  Atlantic
Richfield  Company  (now  Vastar  Resources,  Inc.),  OXY USA,  Inc.  and Texaco
Exploration and Production, Inc. in May 1991. During 1995 the properties had net
production  averaging  approximately  20,643 Mcf of natural  gas per day and 264
barrels of oil and condensate per day.

     During 1994 the Company  farmed out the deep rights  (below 11,300 feet) to
an 1,875 acre parcel in Block 58 to Energy Development Corporation which drilled
a successful  well to 16,500 feet.  Production  commenced  in April,  1995.  The
Company  retained a 12 1/2%  overriding  royalty  interest in that  acreage that
converts to 15% overriding  royalty interest at Payout. The well has produced as
much as 21,000  Mcf per day and 1,500  barrels  of  condensate  per day.  Energy
Development Corporation was subsequently acquired by Samedan Oil Corporation.

     The  Company  generated a prospect  in the  northern  portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding  royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently  completed on the western  portion of the  Company's  properties in
West Delta.

         The main  production  facility on the West Delta  Properties  is a four
platform  complex  designated  as Tank  Battery  #3.  There  are four  ancillary
platforms in the eastern portion of the properties connected to Tank Battery #3.
Three wells are on one of these  platforms.  In the western portion there is one
production  platform  designated  as Platform "D" in Block 58, with three wells.
The  remaining  30 wells are located on satellite  structures  connected to Tank
Battery  #3 or one of its  ancillary  platforms.  Eight  wells  produce  oil and
natural gas. The remaining wells produce only natural gas.

     The Company is replacing the pipeline  connecting  "D" Platform in Block 58
with Tank  Battery  #3 in Block 54 with two new 6"  pipelines.  For this  reason
production from Block 58 is currently shut-in.

         In  connection   with  the  acquisition  of  the  West  Delta  offshore
properties  the Company  provides  the sellers  with a  $4,100,000  plugging and
abandonment bond collateralized in part with a bank escrow account.
See "The Company - Plugging and Abandonment Escrows".

Zapata Properties

           On July 12th,  1995,  the Company  entered  into a Purchase  and Sale
Agreement with Zapata Exploration  Company ("Zapata") to acquire all of Zapata's
offshore oil and gas properties in the Gulf of Mexico. The properties consist of
East Breaks Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372,
South  Timbalier  Block 185 and West Cameron  Block 538,  totaling  31,134 gross
acres.  The  transaction  was closed July 26,  1995.  The  Company  took over as
operator of the East Breaks and West  Cameron  properties  effective at closing.
The East Cameron  property is operated by Anadarko  Petroleum  Corporation.  The
Eugene Island property is operated by Unocal Corporation and the South Timbalier
property is operated by Louisiana Land & Exploration Company. Proved reserves at
December 31, 1995  attributable  to the  Company's net working  interests,  were
222,000 Bbls and 15.3 Bcf of natural gas. Management has identified probable and
possible reserves  attributable to these properties.  During 1995, subsequent to
July 26th, the properties  produced 20,000 barrels of oil and 1.8 Bcf of natural
gas, net to the Company's interest.

         In addition to the mineral interests acquired,  the Company purchased a
100% interest in a 31 mile natural gas pipeline  connecting  the Company's  East
Breaks  110  platform  to the  High  Island  Offshore  System  and a 22 mile oil
pipeline  which  connects  the East  Breaks 110  platform  with the High  Island
Pipeline System. HIOS and HIPS are the primary natural gas and crude oil systems
in that part of the Gulf of Mexico.

         The Company's East Breaks 110 platform has significant  excess capacity
for both crude oil and natural gas. Prior to the  acquisition of the properties,
Zapata had entered  into a  Facilities  Sharing  Agreement  with AGIP  Petroleum
Company,  Inc. ("AGIP") to operate and process for AGIP's subsea wells in Blocks
112 and 157.  Under the Agreement  AGIP will pay certain fees to the Company and
split the cost of operating the East Breaks 110 platform with the Company, based
upon each  company's  proportion  of  production.  A  portion,  not to exceed $6
million,  of the monies  earned  pursuant  to this  Agreement  are being paid to
Zapata as part of the acquisition of the properties.

         The  purchase  price for the assets  acquired  in the  transaction  was
$2,748,000  in cash and the  obligation  to pay a  production  payment to Zapata
based upon future  production.  The production  payment is based upon production
from the East Breaks 109 Field after  production  of 12 Bcfe gross (10 Bcfe net)
measured from October 1, 1994. The Company will pay to Zapata $.4167 per Mcfe on
the next 27 Bcfe produced, if that much
is produced. Payments to Zapata on this production payment are to be made by the
Company when it is paid for the oil or gas. The  Company's  oil and gas reserves
are calculated net of this production payment.

Bayou Sorrel Field

           As of December 27, 1995 the Company  acquired  from Shell Western E &
P, Inc.  all of its  interest in the Bayou  Sorrel  Field in  Iberville  Parish,
Louisiana.  The purchase price of the field and a related receivable of $600,000
was $10,455,000 in cash, including a $205,000 brokers' fee.

          Effective September 1, 1996 the Company sold the Bayou Sorrel Field to
National Energy Group, Inc. for $11 million.  The Company received $9 million in
cash and $2 million in shares of National Energy Group,  Inc. common stock.  The
Company  retained a 3%  overriding  royalty  interest  in the deep rights of the
field below 11,000 feet. The transaction closed November 22nd.

Oil and Gas Information

         The following tables set forth selected oil and gas information for the
Company. Future results may vary significantly from the amounts reflected in the
information  set forth herein because of normal  production  declines and future
acquisitions. The transaction closed November 22nd.

                             Proved Reserves (a) (b)

     The following table sets forth information as of November 1, 1996 as to the
estimated Proved Reserves attributable to the Company's properties.

Oil and liquids (Bbls):
       Proved Developed Reserves ............................    2,438,000
       Proved Undeveloped Reserves ..........................      482,000
                                                               -----------
           Total Proved Reserves ............................    2,920,000
Natural gas (Mcf):
       Proved Developed Reserves ............................   52,192,000
       Proved Undeveloped Reserves ..........................   12,733,000
                                                               -----------
           Total Proved Reserves ............................   64,925,000

     (a) Calculated by the Company in accordance  with the rules and regulations
of the SEC,  based upon  November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of gas, adjusted for basis differentials, BTU content of gas and
specific gravity of oil. The Company's independent reservoir engineers prepare a
reserve report as of the end of each calendar year.

     (b)  Includes  the  recently  acquired  Amoco  Properties  and excludes the
recently sold Bayou Sorrel Field.

                          Estimated Future Net Revenues
                          from Proved Reserves (a) (b)

         The following  table sets forth  information as of November 1, 1996  as
to the estimated future net revenues (before deduction of income taxes) from the
production  and  sale  of the  Proved  Reserves  attributable  to the  Company's
properties.
                                                    Proved            Total
                                                  Developed          Proved
                                                   Reserves         Reserves
Estimated Future net revenues (c):
         1996(2 mos.)......................    $  6,290,000         6,290,000
1997 .............................     35,573,000         36,847,000
         1998 .............................     25,008,000         31,607,000
         1999 .............................     16,910,000         22,331,000
         Thereafter .......................     53,627,000         79,623,000
                                              ------------       ------------
         Total ............................  $ 137,408,000   $    176,698,000
Present value (10%) of estimated future net
         revenues (SEC 10 Value)...........  $ 104,868,000   $    128,092,000

     (a) Calculated by the Company in accordance  with the rules and regulations
of the SEC,  based upon  November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of offshore gas, adjusted for basis  differentials,  BTU content
of gas  and  specific  gravity  of  oil.  The  Company's  independent  reservoir
engineers prepare a reserve report as of the end of each calendar year.

     (b)  Includes  the  recently  acquired  Amoco  Properties  and excludes the
recently sold Bayou Sorrel Field.

     (c) Estimated future net revenues represent estimated future gross revenues
from the  production  and sale of Proved  Reserves,  net of estimated  operating
costs,  future  development  costs estimated to be required to achieve estimated
future  production  and estimated  future costs of plugging  offshore  wells and
removing offshore structures.

                        Production, Price, and Cost Data

          The following  table sets forth certain  production,  price,  and cost
data  with  respect  to the  Company's  properties,  for the three  years  ended
December 31, 1995,  1994 and 1993 and the nine months ended  September  30, 1996
and 1995.
For the nine months                         For the years
                                                ended September 30,                       ended December 31,

                                               1996(a)           1995            1995           1994           1993
                                              -----              ----          ------           ----           ----
Oil:
Net Production (Bbls)(b)             203,000         122,000        170,000        137,000         180,000
         Revenue........................$.  3,724,000  $    1,989,000  $   2,853,000  $   2,103,000  $    3,003,000
         Average net Bbls per day                 741             447            466            375             493
         Average price per Bbl          $       18.34  $        16.30  $       16.78  $       15.35  $        16.69

Gas:
         Net Production(Mcf)(b)             4,590,000       7,578,000      9,850,000      8,139,000       5,586,000
         Revenue........................$   9,533,000  $   11,671,000  $  15,594,000  $  15,235,000  $    9,602,000
         Average net Mcf per day               16,800          27,800         27,000         22,300          15,300
         Average price per Mcf          $        2.08  $         1.54  $        1.58           1.87  $         1.72

Total Revenues..........................$  13,257,000  $   13,660,000  $  18,447,000  $  17,338,000  $   12,605,000

Production Costs:
         Production cost                    6,049,000     5,729,000       8,055,000      5,231,000       5,297,000
         Mcfe(c)                            5,808,000     8,310,000      10,870,000      8,961,500       6,666,000
         Production costs per Mcfe(c)            1.04           .69             .74            .58             .79
------
(a)      The  information  shown for 1996 was impacted by the explosion and fire
         on April 24th at West Delta Tank  Battery #3,  which  resulted in those
         fields being off  production  until  October 7, 1996,  when  production
         resumed. For that reason management would not consider these production
         costs to be indicative of the future.  Also this  information  includes
         Bayou Sorrel Field  through  August 31, the date of its sale,  and does
         not include any information with respect to the recently acquired Amoco
         Properties.
(b)      Production  information  is net of all  royalty  interests,  overriding
         royalty  interest  and the  net  profits  interest  in the  West  Delta
         Properties owned by the Company's former lenders.
(c)      Oil production is converted to Mcfe  (Equivalent  Mcf) at the rate of 6
         Mcf per Bbl,  representing  the estimated  relative  energy  content of
         natural gas to oil.
Productive Wells(a)

         The  following  table sets forth the number of  productive  oil and gas
wells, as of the date hereof, attributable to the Company's properties.

Gross productive offshore wells (b):                            Company Operated

         Oil     . . . . . . . . . . . . . . . 33. . . . .  . . . . . .  10
         Gas   . . . . . . . . . . . . . . . . 90. . . . . .  . . . . .  42
                                               --                        --
           Total  . . . . . . . . . . . .  . .123 . . . . . .  . . . . . 52

Net productive offshore wells (c):
         Oil   . . . . . . . . . . . . . .. . . 1. . . . . .  . . . . .. 10
         Gas . . . . . . . . . . . . . . .. . .49 . . . . . .  . . . . ..38
                                               --                        --
           Total  . . . . . . . . . . . .  . . 64 . . . . . .  . . . . ..48

-----
(a)      Productive  wells  consist  of  producing  wells and wells  capable  of
         production,  including  shut-in wells and water  disposal and injection
         wells.  One or more completions in the same borehole are counted as one
         well.
(b)      A "gross  well" is a well in which a working  interest  is  owned.  The
         number  of  gross  wells  represents  the sum of the  wells  in which a
         working interest is owned.
(c)      A "net well" is deemed to exist when the sum of the fractional  working
         interests in gross wells equals one. The number of net wells is the sum
         of the fractional working interests in gross wells.

                                Leasehold Acreage

         The  following  table sets forth the  developed  acreage as of the date
hereof attributable to the Company's properties, excluding onshore acreage which
is no longer significant.

Developed offshore acreage (a):
         Gross acres (b)..........................  103,771
         Net acres (c)............................   43,645

(a)      Developed acreage is acreage assignable to productive wells.
(b)      A "gross  acre" is an acre in which a working  interest  is owned.  The
         number  of  gross  acres  represents  the sum of the  acres  in which a
         working interest is owned.
(c)      A "net acre" is deemed to exist when the sum of the fractional  working
         interests in gross acres equals one. The number of net acres is the sum
         of the fractional working interests in gross acres.
Drilling Activities

         The following  table sets forth the number of gross  productive and dry
wells in which the  Company had an  interest,  that were  drilled and  completed
during  the three  years  ended  December  31,  1995 and the nine  months  ended
September 30, 1996.  Such  information  should not be  considered  indicative of
future  performance,  nor should it be assumed  that  there is  necessarily  any
correlation  between the number of productive  wells drilled and the oil and gas
reserves  generated  thereby  or the costs to the  Company of  productive  wells
compared to the costs to the Company of dry wells.

                         Developmental Wells           Exploratory Wells
                       Completed        Dry         Completed         Dry
                      Oil     Gas    Oil    Gas    Oil     Gas     Oil    Gas
                      ---     ---    ---    ---    ---     ---     ---    ---
1993                   3       0      0      0      0       0       0      0
1994                   5       4      0      0      0       1       0      0    
1995                   0       0      0      0      0       0       0      3
1996 (9 mos)           0       0      2      0      0       0       0      0
                     ----    ----   ----   ----   -----   ----    ----   ----
Total                  8       4      2      0      0       1       0      3

Title to Oil and Gas Properties

         In the case of acquired  properties title opinions are obtained.  Prior
to  the  commencement  of  drilling   operations  a  thorough   drillsite  title
examination is conducted and curative work performed with respect to significant
defects.

Undeveloped Acreage and Unproved Properties

          The  Company  does  not  hold  interest  in a  significant  amount  of
Undeveloped Acreage to which no Proved Reserves have been assigned. However, the
Company  retained a 3% overriding  royalty  interest in depths below 11,000 feet
when it sold the Bayou Sorrel  Field,  and no reserves  have been  attributed to
these depths.
MANAGEMENT
                             Officers and Directors

         The Company has a classified Board of Directors.  Directors are elected
to serve for  three-year  terms and  until  their  successors  are  elected  and
qualified.  One-third of the  directors  stand for  election  each year as their
terms expire.  The Board of Directors consists of three employees of the Company
and six independent directors.

         Officers  are  elected by and serve at the  discretion  of the Board of
Directors.

         Set forth below are the names,  ages,  and positions of the persons who
are executive officers and directors of the Company.

                                Director
          Name             Age    Since              Position

H. James Maxwell ..........52      1992 Chairman of the Board, President,
                                        Chief Executive Officer, and Director(a)
Bob F. Mallory ............64      1992 Chief Operating Officer,  Executive Vice
                                        President and Director(a)
Larry M. Wright ...........52      1992 Executive Vice President and
                                        Director(b)
Robert G. Wonish ..........43      ---  Vice President

Edward A. Bush.............53      ---  Vice President

William J. Doyle ..........45      ---  Vice President

Todd R. Bart ..............32      ---  Chief Financial Officer, Secretary and
                                        Treasurer
A. Theodore Stautberg, Jr..50      1993 Director(c)-Compensation Committee

Donald W. Chesser .........57      1992 Director(a)

James B. Kreamer ..........56      1993 Director(c)

N. Lynne Sieverling .......59      1992 Director(b)-Audit and Compensation
                                        Committees
Mark C. Barrett............46      1996 Director(b)-Audit and Compensation
                                        Committees
Michael Springs............47      1996 Director(c)-Audit Committee

(a)      These persons are designated as Class II directors,  with their term of
         office expiring at the annual meeting of shareholders in 1998.
(b)      These persons are  designated as Class I directors,  with their term of
         office expiring at the annual meeting of shareholders in 1997.
(c)      These persons are designated as Class III directors, with their term of
         office expiring at the annual meeting of shareholders in 1999.

         Set forth below are descriptions of the principal  occupations,  during
at least the past five years,  of the directors  and  executive  officers of the
Company.

     H. James Maxwell received a B.A. degree in Economics from the University of
Missouri-Kansas City
and  received  his Law Degree from that same  university  in 1972.  Mr.  Maxwell
practiced  securities  law from  1972 to 1984,  and was a  frequent  author  and
speaker on oil and gas tax and securities law. He served as a General Partner of
Castle Royalty Limited  Partnership from 1984 to 1988,  Managing General Partner
of PAN Petroleum MLP from 1987 to 1992,  both of which were  predecessors of the
Company, and President, CEO and Chairman of the Company from 1992 to date. He is
a member of the Executive Committee and Personnel Committee.

         Bob F. Mallory  received his Ph.D.  in Geology from the  University  of
Missouri in 1968 and a B.A. in Geology from the  University  of Wichita in 1961.
He began  consulting in the oil industry in 1980. He served as a General Partner
of Castle Royalty Limited Partnership from 1984 to 1988, as a General Partner of
PAN  Petroleum  MLP from 1987 to 1992,  both of which were  predecessors  of the
Company, and Executive Vice President and Chief Operating Officer of the Company
from  1992 to date.  He is a member of the  Executive  Committee  and  Personnel
Committee.

         Larry M.  Wright  received  his B.S.  Degree  in  Engineering  from the
University of Oklahoma in 1966.  From 1966 to 1976 he was with Union Oil Company
of  California  (UNOCAL).  From 1976 to 1980,  he was with  Texas  International
Petroleum  Corporation,  ultimately as division operations manager. From 1980 to
1981,  he was  with  what  is now  Transamerica  Natural  Gas  Company  as  Vice
President-Exploration  and  Production.  From  1981-1982,  he  was  Senior  Vice
President of Operations for Texas International Petroleum Corporation, and, from
1983 to 1985, he was Executive  Vice President of Funk Fuels Corp., a subsidiary
of  Funk  Exploration.  From  1985  to  1993,  Mr.  Wright  was  an  independent
consultant.  From 1993 to date, he has served as Executive Vice President of the
Company. He is a member of the Executive Committee and Personnel Committee.

         Robert G. Wonish  received his B.S. in Mechanical  Engineering  in 1975
from the University of Missouri-Rolla.  He was a production  engineer with Amoco
from 1975 to 1977, Napeco,  Inc. from 1977 to 1979;  Division Operation Engineer
with Texas  International  from 1979 to 1980;  Production  Manager  with  Cliffs
Drilling  Company  from  1980 to 1984  and  District  Superintendent  with  Ladd
Petroleum  Corporation  from  1985 to  1991.  He then  worked  as a  consultant,
starting with the Company in 1992, and became an employee in 1993.

     Edward A. Bush  received his B.S.  Degree in Geology  from Baldwin  Wallace
College in 1964 and his M.A. in Geology from Bowling  Green State  University in
1966. He served in various  geological  and  exploration  capacities  with Exxon
(1968-75),  Union Texas Petroleum  (1975-79),  Home Petroleum  Corp.  (1979-81),
Traverse Oil Co. (1981-83) and Sohio Petroleum Co. (1983-85).  From 1985 to 1995
he served first as Exploration  Manager,  then Vice President of Exploration and
later Vice  President of Operations  for Columbia Gas Devp.  Corp.  From 1995 to
1996 he served as Vice  President-Exploration  and then the  President of Howell
Petroleum Corp.

         William J. Doyle received his Masters in Geology in 1975 from Texas A&M
University  and his B.S. in Earth Sciences from the University of New Orleans in
1973.  From 1975 to 1978 he was a geologist  with Mobil Oil focusing on offshore
Gulf of Mexico  projects.  From 1978 to the present he has worked as an employee
and consultant for various oil and gas  exploration  companies  operating in the
Gulf Coast. He joined the Company as a consulting geologist in 1992 and became a
Vice President in 1995.

     Todd R. Bart  received his B.B.A.  in  Accounting  from  Abilene  Christian
University in 1987. He worked in the energy industry with Pennzoil  Company from
1987 to 1990 and the public  accounting firm of Arthur Andersen and Company from
1990 until 1992. From 1992 to 1995 he worked for Yellow Freight System,  Inc., a
trucking company, in financial  accounting and reporting.  He joined the Company
as  Controller in 1995 and was elected Chief  Financial  Officer,  Treasurer and
Secretary in 1996.  He received his C.P.A.  designation  in Texas in 1990 and in
Kansas in 1993, and is a member of the A.I.C.P.A.

     A. Theodore Stautberg, Jr. has since 1981 been the President and a director
of Triumph  Resources  Corporation and its parent  company,  Triumph Oil and Gas
Corporation of New York.  Triumph  engages in the oil and gas business,  assists
others in  financing  energy  transactions,  and  serves as  general  partner of
Triumph
Production L.P. Mr.  Stautberg is also the president of Triumph  Securities
Corporation  and BT Energy  Corporation.  Prior to forming  Triumph in 1981, Mr.
Stautberg was a Vice President of Butcher & Singer,  Inc., an investment banking
firm, from 1977 to 1981.  From 1972 to 1977, Mr.  Stautberg was an attorney with
the  Securities  and  Exchange  Commission.  Mr.  Stautberg is a graduate of the
University of Texas and the University of Texas School of Law.

     Donald W.  Chesser  received  his  B.B.A.  in  Accounting  from  Texas Tech
University  in 1963 and has  served  with  several  CPA firms  since  that time,
including eight years with Elmer Fox and Company. From 1977 to 1981, he was with
IMCO  Enterprises,  Inc. Since 1982 he has been a  shareholder  and President of
Chesser & Company, P.A., a CPA firm. He is also President of Financial Advisors,
Inc., a registered investment advisor.
 
     James B. Kreamer  received his B.S.  Degree in Business from the University
of Kansas in 1963 and has been  active in  investment  banking  since that time.
Since 1982 he has managed his personal investments.

         N. Lynne  Sieverling  received his B.S.  Degree in Accounting  from the
University  of  Kansas  in 1959 and has  practiced  as a CPA  since  graduation,
serving 17 years as a partner with the accounting firm of Coopers & Lybrand. Mr.
Sieverling  has also been  actively  involved in the oil and gas industry  since
1984 both as an  investor  and as an  operator  of oil and gas leases in Kansas,
Oklahoma  and  North  Dakota.  

         Mark   C.   Barrett    received    his   B.S.    Degree   in   Business
Administration/Accounting  in 1972 and is  licensed  to  practice as a Certified
Public  Accountant  in both  Kansas and  Missouri.  He was a partner in the firm
Drees  Dunn  Lubow and  Company  from 1974  until  1981.  He  founded  Barrett &
Associates, a CPA firm, in 1981 and is the president and majority shareholder in
that firm. His CPA firm served as the Company's  independent  public accountants
from 1985 to 1995.

     Michael  Springs  graduated from the Medical Field Service  School,  Brooke
Hospital,  San Antonio,  Texas in 1971 and the  University  of Missouri,  Kansas
City,  in 1969 with a degree in  Business.  He is the  President  and founder of
Ortho-Care, Inc. of Kansas City, Missouri and Ortho-Care Southeast of Charlotte,
North  Carolina.  Ortho-Care,  Inc. is a  manufacturer  of  orthopedic  fracture
management and sports  medicine  products,  and holds a number of patents in the
field. Mr. Springs is also controlling partner in Ortho-Implants,  a distributor
of total joint replacement prosthesis.

         None  of  the  officers  or  directors  serve  pursuant  to  employment
agreements.

Board of Directors

         The Board of Directors has the  responsibility  for establishing  broad
corporate policies and for the overall  performance of the Company,  although it
is not involved in day-to-day operating details.  Directors are kept informed of
the Company's business by various reports and documents, as well as by operating
and financial reports presented at Board and committee  meetings by the Chairman
and other officers.

         Meetings of the Board of Directors are held  regularly each quarter and
there is also a  meeting  following  the  annual  meeting  of the  shareholders.
Additional  meetings,  including  meetings by telephone  conference call, of the
Board may be called whenever needed.  The Board of Directors of the Company held
six (6) meetings in 1995,  two of which were  meetings by  telephone  conference
call.  Each  director  attended  all  meetings of the Board,  except for the two
telephone  conference  calls, of which James B. Kreamer was not connected either
time and  Allen H.  Sweeney  and  Thomas  E.  Clark ( then  directors)  were not
connected on one conference call.

Committees of the Board

         The  committees  established  by the Board of Directors to assist it in
the discharge of its  responsibilities  are described  below.  The  biographical
information  on each director  identifies  the committee  memberships  currently
held.
The  Executive  Committee  has  three  members,  all of whom  are  also
officers of the Company.  The Committee  meets on call  whenever  needed and has
authority to act on most matters  during the intervals  between Board  meetings.
The Executive Committee also serves as the Personnel Committee.

         The Audit  Committee has three members,  none of whom is an employee of
the Company. The Committee meets with management to consider the adequacy of the
internal controls of the Company and the objectivity of its financial reporting;
the  Committee  also meets with the  independent  accountants  concerning  these
matters.   The  Committee  recommends  to  the  Board  the  appointment  of  the
independent  accountants,  subject to  ratification  by the  shareholders at the
annual meeting.  The independent  accountants  periodically  meet alone with the
Committee and have unrestricted access to the Committee.  The Committee met once
in 1995.

         The  Compensation  Committee  has  three  members,  none  of whom is an
employee of the Company.  It makes  recommendations to the Board with respect to
the  compensation  of  management  of the  Company and the  Company's  Long-Term
Incentive Plan. The Committee met twice in 1995.

Compensation of Directors

          Directors  receive  travel  expenses  incurred in  attending  Board of
Directors or committee meetings.  Officers of the Company who serve as directors
do not receive special  compensation  for serving on the Board of Directors or a
committee thereof.  However, during 1995 Messrs.  Stautberg,  Chesser,  Sweeney,
Kreamer and Sieverling,  the then non-employee directors, were each issued 1,039
Common  Shares as a $5,000  bonus.  In 1995 Mr.  Chesser was issued  warrants to
acquire  25,000  Common Shares at $2.50 per share,  which  expired  December 31,
1995, for services  performed for the Company in 1991.  During 1995 he exercised
those warrants. See "Certain Relationships and Related Transactions," herein.

     Newly  elected  non-employee  directors  are granted a one-time  restricted
stock award in Common  Shares equal in value to $10,000 upon their being elected
to the Board. See "Long-Term Incentive Plan," herein.

                            Long-Term Incentive Plan

         The  Company's  Long-Term  Incentive  Plan  (the  "Long-Term  Incentive
Plan"),  adopted in 1992,  provides for the granting to certain officers and key
employees of the Company and its participating  subsidiaries incentive awards in
the form of stock options,  stock appreciation  rights ("SARs"),  Common Shares,
and cash awards. The Long-Term  Incentive Plan is administered by a committee of
non-employee members of the Board of Directors with respect to awards to certain
executive  officers  of the  Company  but may be  administered  by the  Board of
Directors  with  respect to any other  awards  (either,  the "Plan  Committee").
Except for certain automatic awards, the Plan Committee has discretion to select
the employees to be granted  awards,  to determine the type,  size, and terms of
the awards, to determine when awards will be granted,  and to prescribe the form
of the instruments evidencing awards.

         Options,  which include  nonqualified stock options and incentive stock
options,  are rights to purchase a specified  number of Common Shares at a price
fixed at the time the option is granted.  Payment may be made with cash or other
Common  Shares  owned by the  optionee  or a  combination  of both.  Options are
exercisable at the time and on the terms that the Plan Committee determines. The
payment  of the  option  price  can be made  either  in  cash  or by the  person
exercising the option turning in to the Company  shares  presently  owned by the
person,  which would be valued at the then current market price. SARs are rights
to receive a payment,  in cash or Common Shares or both, based on the value of a
Common  Share.  A stock  award is an award of Common  Shares or  denominated  in
Common Shares that may be subject to a restriction against transfer as well as a
repurchase  option  exercisable  by  the  Company.  During  the  period  of  the
restriction,  the employee may be given the right to vote and receive  dividends
on the shares  covered by  restricted  stock  awards.  Cash awards are generally
based on the extent to which pre-established performance goals are achieved over
a  pre-established  period  but may also  include  individual  bonuses  paid for
previous,  exemplary  performance.  It  is  currently  expected  that  the  Plan
Committee  will  determine  performance  objectives  and award levels before the
beginning of each plan year.
The  Long-term  Incentive  Plan  provides for the issuance of a maximum
number  of Common  Shares  equal to 20% of the  total  number  of Common  Shares
outstanding from time to time. Unexercised SARs, unexercised options, restricted
stock, and performance  units under the Long-term  Incentive Plan are subject to
adjustment in the event of a stock dividend,  stock split,  recapitalization  or
combination  of  the  Company,  merger,  or  similar  transaction  and  are  not
transferable except by will and by the laws of descent and distribution.  Except
when a participant's employment terminates as a result of death, disability,  or
retirement under an approved retirement plan or following a change in control in
certain  circumstances,  an award generally may be exercised (or the restriction
thereon may lapse) only if the participant is an officer,  employee, or director
of the Company or a  subsidiary  at the time of exercise or lapse or, in certain
circumstance,  if the exercise or lapse occurs within 180 days after  employment
is terminated.

         The  Long-term   Incentive  Plan  allows  for  the  satisfaction  of  a
participant's  tax  withholding  with respect to an award by the  withholding of
Common Shares issuable  pursuant to the award or the delivery by the participant
of  previously  owned  Common  Shares,  in either case valued at the fair market
value, subject to limitations the Plan Committee may adopt.

         Awards  granted  pursuant to the Long-term  Incentive  Plan may provide
that, upon a change of control of the Company, (a) each holder of an option will
be granted a  corresponding  SAR,  (b) all  outstanding  SARs and stock  options
become  immediately  and  fully  vested  and  exercisable  in full,  and (c) the
restriction  period on any restricted  stock award shall be accelerated  and the
restriction  shall expire.  Options and SARs will remain  exercisable  for their
original  terms whether or not  employment  is terminated  following a change in
control.

         The Long-term  Incentive Plan may be amended by the Board of Directors,
except that under current law no amendment that materially  increases the number
of Common Shares  subject to the Long-term  Incentive Plan or that makes certain
other material changes may be made without  shareholder  approval.  No grants or
awards  may  be  made  under  the  Long-term  Incentive  Plan  after  the  tenth
anniversary  of the Closing  Date.  No  shareholder  approval will be sought for
amendments to the Long-term  Incentive Plan except as required by law (including
Rule  16b-3  under the  Exchange  Act) or the rules of any  national  securities
exchange on which the Common Shares are then listed.

         There are no incentive  awards  pertaining  to stock  options,  SARs or
Common Shares issued or outstanding under the Long-term Incentive Plan.

         Under the Company's  Long-Term  Incentive  Plan  beginning in 1996, all
employees on December 31 of each year share a bonus equal to 5% of the Company's
pre-tax net income, computed in accordance with GAAP, exclusive of extraordinary
and  non-recurring  items.  The  bonuses  will be paid to all full time (1,000 +
hours)  employees  at December  31. The bonus will be paid upon  delivery of the
independent audit. The bonus shall be allocated to the full time employees based
upon their salary at December 31 of that year.

         Each non-employee  director of the Company who becomes a director will,
on the day after the first  meeting  of the  Board of  Directors  at which  that
director is in attendance,  automatically be granted a restricted stock award of
the  number  of  Common  Shares  that  have a value of  $10,000,  which  will be
calculated based on the average trading price of the Common Shares during the 60
days immediately preceding the date of grant. These restricted stock awards will
vest over two years,  with  one-third  vesting six months  following the date of
grant,  another one-third vesting on the first anniversary of the date of grant,
and the last one-third vesting on the second anniversary of the date of grant so
long as the  non-employee  director  remains a director of the  Company  through
those vesting dates.

         Each non-employee  director will be entitled to vote each share subject
to these  restricted  stock  awards  from the date of grant until the shares are
forfeited,  if ever.  The Long-term  Incentive  Plan requires each  non-employee
director  to make an  election  under  Section  83(b) of the Code to include the
value of the  restricted  stock in his income in the year of grant and  provides
for cash awards to the non-employee  directors in amounts  sufficient to pay the
federal income taxes due with respect to the award.
The following table shows  information with respect to restricted stock
awards owned by non-employee directors.

         Name                Date of Grant          Shares               Price
      ----------             -------------          ------               -----
Michael Springs              September 4, 1996       2,447               $4.09
Mark C. Barrett              September 4, 1996       2,447                4.09
                                                     -----
Total                                                4,894

                          Employee Stock Ownership Plan

         In 1994,  the  shareholders  approved the adoption of the PANACO,  Inc.
Employee Stock Ownership Plan ("ESOP").  The primary purposes of the ESOP are to
enable  participants to acquire ownership in the Company and to provide a source
of equity capital to the Company.  The ESOP provides for the  establishment of a
trust to hold ESOP assets which will  primarily  consist of Common Shares of the
Company. The ESOP will be administered by a committee of the Board of Directors.
Subject to the discretion of the Board of Directors,  the Company may contribute
up to fifteen percent (15%) of the participant's  (including employees and other
consultants to the Company)  annual  compensation to the ESOP. The ESOP does not
allow contributions by participants in the Plan.

         Company  contributions  to the ESOP may be in the form of Common Shares
or cash.  Cash  contributions  may be used,  at the  discretion  of the Board of
Directors,  to purchase  Common Shares in the open market or from the Company at
prevailing prices.

         The  allocation  of ESOP  assets is  determined  by a formula  based on
participant compensation.  Participation in the ESOP requires completion of more
than one thousand  (1,000)  hours of service to the Company  within  twelve (12)
consecutive months.

         The ESOP is  intended  to satisfy any  applicable  requirements  of the
Internal  Revenue Code of 1986 and the Employee  Retirement and Income  Security
Act of 1974.  The Company has been  advised that its  contributions  to the ESOP
will be deductible for Federal Income Tax purposes,  and the  participants  will
not recognize  income on their  allocated share of ESOP assets until such assets
are distributed.

         As of  September  30,  1996,  the ESOP  owned of record  59,865  Common
Shares,  allocable  to the  years  prior to 1996,  and  will,  subject  to Board
approval,  be issued 20,460 Common Shares for the first three  quarters of 1996.
Such Common Shares are owned beneficially by the employees of the Company.

                                            Summary Compensation Table

         The  following  table sets forth the  annual  compensation  paid to the
Company's Chief Executive Officer and each executive officer whose  compensation
exceeds $100,000 during 1995.
Long-Term Incentive Plan
                                     Annual Compensation                        Awards           Payouts
                                                                                 Securities
                                                      Other       Restricted     Underlying    LTIP       All
Name and Principal                Salary   Bonus      Annual         Stock        Options    Payouts     Other
      Position           Year     ($)(1)    ($)      Comp. ($)    Award(s) ($)      (#)        ($)    Comp.($)(2)
-----------------------------   ------------------------------    ------------    --------------------------------
H. James Maxwell         1995   153,500        0          0             0          24,615       0        22,500
  President and Chief    1994   120,000        0          0             0          22,857       0        18,000
  Executive Officer      1993    80,000        0          0             0         115,000       0           0

Larry M. Wright          1995   147,300        0          0             0             0         0        22,100
  Executive Vice         1994   134,000        0          0             0             0         0        20,000
  President              1993   120,000        0          0             0             0         0           0
Robert G. Wonish         1995     92,100       0          0             0             0         0        13,800
  Vice President         1994     78,800       0          0             0             0         0        11,800
                         1993     77,000       0          0             0             0         0           0
(1)      The 1993 salary figures for Messrs.  Wright and Wonish include payments
         made to them as independent  consultants  before becoming  employees of
         the Company in that year.
(2)      The   other   compensation   figures   for  1995  and  1994   represent
         contributions  to the  accounts of the  employees  under the  Company's
         Employee Stock Ownership Plan. The Plan was adopted in 1994.

           Aggregated Option( Warrants) Exercises in Last Fiscal Year
                        and Fiscal Year End Option Values

         The following  table  provides  information  relating to the number and
value of Common Shares subject to options  exercised  during 1995 or held by the
named executive officers as of December 31, 1995.
Number of
                                                             securities underlying      Value of unexercised
                        Securities                           unexercised options             in-the-money
                         acquired           Value            at fiscal year-end ($)     options at year-end($)(2)
          Name          on Exercise (#)   Realized ($)(1)   Exercisable/unexercisable   Exercisable/Unexercisable
---------------------------------------   ---------------   -------------------------   -------------------------
H. James Maxwell         250,972             410,129                -0- / -0-                  -0-  / -0-
Larry M. Wright              0                  0               250,000 / -0-               549,375 / -0-
Robert G. Wonish             0                  0                   -0 -/ -0-                  -0-  / -0-
(1)      Value  realized is  calculated  based upon the  difference  between the
         options exercise price and the market price of the Common Shares on the
         date of  exercise  multiplied  by the  number  of  shares  to which the
         exercise price relates.
(2)      Value of unexercised  in-the-money  options is calculated  based on the
         difference  between the option  exercise price and the closing price of
         the  Common  Shares at  year-end,  multiplied  by the  number of shares
         underlying  the options.  The closing price on December 29, 1995 of the
         Common Shares was $4.4375.

                        Option Grants in Last Fiscal Year
Number of       Percent of
                      Securities    total options
                     Underlying      granted to    Exercise or    Market price
                        Options      employees     Base price        at date       Expiration    Grant Date
          Name         Granted      in fiscal year  ($/Share)      of grant($)         Date        Value($)
H. James Maxwell      24,615 (1)        33%          2.03125         4.0625         12/31/95        50,000
Larry M. Wright           -0-           -0-            N/A             N/A             N/A             N/A
Robert G. Wonish          -0-           -0-            N/A             N/A             N/A             N/A
(1)      Mr. Maxwell's options were exercised in 1995.
TOTAL RETURN GRAPH

                                                PERFORMANCE GRAPHS

         The  following  Performance  Graph  compares  the annual  change of the
cumulative total shareholder return , assuming reinvestment of dividends,  of an
assumed $100 investment on January 1, 1991 in (1) Common Shares,  (2) the NASDAQ
Market  Index  and (3) a peer  group of all  crude  petroleum  and  natural  gas
exploration  and  production  companies  (SIC Code 1311)  listed on NASDAQ.  The
Company began trading on NASDAQ September 21, 1989.

                              FISCAL YEAR ENDING
COMPANY       12/31/90  12/31/91 12/31/92  12/31/93  12/31/94 12/29/95 11/29/96*

PANACO, Inc.   100.00    214.37   130.49    195.73    298.26   330.88   391.46
PEER GROUP     100.00    109.81   116.29    139.38    125.19   144.76   213.62  
BROAD MARKET   100.00    128.38   129.64    155.5     163.26   211.77   257.90 

* 1996 IS BASED ON 11 MONTHS, ENDING 11/29/96.
PRINCIPAL SHAREHOLDERS

         The following table sets forth  information  with respect to record and
beneficial ownership of Common Shares by (a) each executive officer and director
of the Company,  (b) all  executive  officers and  directors of the Company as a
group,  and (c) for each person who  beneficially  owns 5% or more of the Common
Shares as of November 15, 1996.
Shares Owned
Name and Positions of Owners                                        Of Record               Beneficially

                                                                Number   Percent        Number       Percent
H. James Maxwell; Chief Executive Officer,
President, Chairman of the Board & Director ..............     313,386    2.18         322,971  (1)      2.01
Larry M. Wright; Executive Vice President &
Director .................................................     395,000    2.75         654,999 (1)(2)    4.08
Bob F. Mallory; Chief Operating Officer,
Executive Vice President & Director ......................     228,030    1.59         233,030  (1)      1.45
Robert G. Wonish; Vice President .........................      12,000     .08          18,328  (1)       .11
William J. Doyle; Vice President .........................           -     .00           4,405  (1)       .03
A. Theodore Stautberg, Jr.; Director .....................       6,137     .04           6,137            .04
Donald W. Chesser; Director ..............................       1,039     .01           1,039            .00
Michael Springs; Director ................................       3,096     .02           3,096  (3)       .02
James B. Kreamer; Director ...............................      51,055     .36          51,055            .32
N. Lynne Sieverling; Director ............................       8,137     .06           8,137            .05
Mark C. Barrett; Director.................................       2,447     .02           2,447  (3)       .02

All directors and officers as a group (13 persons) .......   1,020,327    7.11       1,305,644  (1)      8.13

Carl C. Icahn  ...........................................   1,095,000    7.63       1,095,000  (4)      6.82
c/o Icahn Associates Corp.
114 West 47th Street, 19th Fl
New York, NY  10036
Richard A. Kayne .........................................     694,047    4.84       2,160,714 (5)(6)   13.45
Kayne, Anderson Investment Management, Inc.
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Amoco Production Company..................................   2,000,000   13.94       2,000,000          12.45
550 WestLake Park Blvd.
Houston, TX 77079
Attn.: John M. Kaffenes
(1) Includes shares held in the Company's Employee Stock Ownership Plan for
each officer as follows:  Mr. Maxwell - 9,585 shares, Mr. Wright - 9,999 shares,
Mr.  Mallory - 5,000  shares,  Mr.  Wonish - 6,328  shares and Mr. Doyle - 4,405
shares, and for all directors and officers as a group - 35,307 shares.
     (2) Includes  250,000  shares  issuable  pursuant to currently  exercisable
warrants.
     (3) These persons were each issued 2,447 shares upon election as a director
in 1996.
     (4) Mr. Icahn is the sole  shareholder of Riverdale  Investors Corp,  Inc.,
the general  partner of High River  Limited  Partnership,  the record  holder of
these shares.
     (5) Mr. Kayne has sole voting power with respect to  investments  of Kayne,
Anderson  Investment  Management,  Inc.,  which is the  general  partner of KAIN
Non-Traditional, L.P., which is the general partner of: Offense Group Associates
Limited;  Opportunity  Associates,  L.P.;  ARBCO  Associates,  L.P.;  and Kayne,
Anderson  Non-Traditional  Investments,  L.P.;  the record holders of 694,047 of
these  shares were some of the  lenders  with  respect to the 1993  Subordinated
Notes.
     (6) Mr. Kayne has sole voting power with respect to  investments  of Kayne,
Anderson Investment & Management,  Inc., which is the general partner of Offense
Group Associates,  L.P.; Kayne,  Anderson  Non-Traditional  Investments,  L. P.;
ARBCO  Associates,  L. P.;  Kayne,  Anderson  Offshore  Limited and  Opportunity
Associates,  L. P.; the  beneficial  holders of 1,466,667  shares  issuable upon
conversion of some of the 1996 Tranche A Convertible Subordinated Notes.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         A. Theodore Stautberg, Jr., a director of the Company since 1993, is an
officer,  director and beneficial shareholder of Triumph Securities Corporation,
which  is  participating  in  this  Offering  as  a  finder,  and  will  receive
one-seventh of the 7% Underwriters discount.

         During 1996 two new non-employee  directors were each issued restricted
stock awards of 2,447 Common Shares upon election to the Board.

         Mark C. Barrett  became a director of the Company on September 4, 1996.
For the years 1985 through 1995 his CPA firm, Barrett and Associates,  served as
the Company's independent accountants. During 1995 his CPA firm was paid $53,400
for accounting services, including the audit.

         Those  entities  which  invest  through  Kayne,   Anderson   Investment
Management, Inc., that were the lenders in connection with the 1993 Subordinated
Notes,  own 816,526 Common Shares by virtue of their exercise of warrants issued
to them in 1993 and exercised in first quarter 1996. They are paid interest with
respect to the 1993  Subordinated  Notes,  which  totaled  $600,000 in 1995.  In
addition, the Company is required to pay certain expenses, including legal fees,
of those lenders, of which there were none during 1995.

         During 1995 Donald W. Chesser, a director who is not an employee of the
Company was issued  warrants to acquire  25,000 Common Shares at $2.50 per share
for past  services  to the  Company.  The  warrants,  which  would have  expired
December 31, 1995, were all exercised during 1995.

         During 1995 each of the five  directors  who are not  employees  of the
Company  were  issued a stock  bonus of $5,000,  paid by the  issuance  of 1,039
Common Shares.

          Employees of the Company are eligible to receive stock  awards,  stock
options,  stock  appreciation  rights,  and  performance  units  pursuant to the
Company's Long-Term Incentive Plan.

         The Company has several procedures,  provisions,  and plans designed to
reduce the  likelihood of a change in the  management  or voting  control of the
Company  without  the  consent  of  the  incumbent  Board  of  Directors.  These
provisions  may have the effect of  strengthening  the ability of  officers  and
directors  of the Company to continue as officers  and  directors of the Company
despite changes in share ownership of the Company.

         Under the terms of the Company's Long-Term Incentive Plan, three of the
officers and directors  surrendered Common Shares in January 1995 in exercise of
outstanding  options during 1995.  The following  table sets forth the number of
shares  surrendered and market value thereof and the number of options exercised
and the aggregate exercise price thereof.

                       Shares          Market        Options     Aggregate
                   Surrendered (a)     Value ($)    Exercised    Price ($) (b)
                   ---------------     ---------    ---------    -------------
H. James Maxwell       24,615           99,998        43,100        100,245
Bob F. Mallory         24,615           99,998        42,400        100,018
Thomas E. Clark(c)     24,615           99,820        38,900        100,137

(a)      Persons  surrendering  shares in  payment of the  exercise  price of an
         option were granted new options for a like number of shares at $2.03125
         expiring December 31, 1995.
(b)      Differences between the value of the share surrendered and the exercise
         prices were paid in cash by the person exercising the option.
(c)      Mr. Clark is a former officer and director.

         Messrs.  Maxwell  and  Mallory  are the  partners  of 1050  Blue  Ridge
Building  Partnership,  which owns a 5,200  square foot office  building at 1050
West Blue  Ridge  Boulevard,  Kansas  City,  Missouri,  which  they lease to the
Company  on a triple  net basis for  $4,000  per month for a term of ten  years,
expiring  in 2003.  The lease was  approved  by the  Board of  Directors,  which
determined that the rate was as good or better than that which could be obtained
from a non-affiliated party.

                              SELLING SHAREHOLDERS
The following  table sets forth  information as of November 15, 1996 as
adjusted to reflect the sale of the Common Shares offered  hereby,  with respect
to the Common Shares offered by the Selling Shareholders.

                                                 Shares Owned                       Shares     Shares Beneficially
         Name and Positions of                  Before Offering                    Offered        Owned After
              Beneficial Owners              Directly        Beneficially           Hereby          Offering
H. James Maxwell; Director, President       313,386         322,971(2)  2.01%       30,000      292,971   1.82%
and CEO of the Company................
Offense Group Associates Limited       (1)  163,305         599,669(2)  3.73        70,000      529,669   3.30
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Opportunity Associates, L.P...........  (1)  40,826         137,796(2)  0.86        40,826       96,970   0.60
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
ARBCO Associates, L.P.................  (1) 285,785         722,149(2)  4.49        70,000      652,149   4.06
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Kayne, Anderson Non-Traditional
   Investments, L.P...................  (1) 204,131         604,495(2)  3.77        70,000      570,495   3.55
   1800 Avenue of the Stars, #200
   Los Angeles, CA 90067
Evanston Insurance Company............  (1)  81,653          81,653     0.51        81,653                0.00
   P.O. Box 2009
   Glen Allen, VA 23058-2009
Nobel Insurance Company...............  (1)  40,826          40,826     0.25        40,826                0.00
   3010 LBJ Freeway, Suite 320
   Dallas, TX 75234
Amoco Production Company..............    2,000,000       2,000,000    12.45     2,000,000                0.00
   550 WestLake Park Blvd.
   Houston, TX 77079

                Total.................    3,129,912       4,509,559    28.07%    2,403,305    2,142,254  13.33%
(1)      These firms are the Company's lenders under the 1993 Subordinated Notes
         described  under  "Funding  of  Business  Activities  -  Borrowing  and
         Obligations."  In 1993 these lenders were issued  warrants to acquire a
         total of 816,526  Common  Shares at an exercise  price of $2.25 anytime
         prior to December 31, 1998,  all of which were  exercised  during first
         quarter 1996.
(2)      Includes  436,364,   96,970,   436,364,   and  436,364  Common  Shares,
         respectively,   issuable   upon   conversion  of  the  1996  Tranche  A
         Convertible Subordinated Notes.
DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES

         The  authorized  capital  shares of the Company  consists of 40,000,000
Common Shares,  par value $.01 per share, and 5,000,000  preferred  shares,  par
value $.01 per share.  The  following  description  of the capital  share of the
Company does not purport to be complete or to give full effect to the provisions
of  statutory  or common law and is subject in all  respects  to the  applicable
provisions of the Company's  Certificate of  Incorporation  and the  information
herein is qualified in its entirety by this reference.

Common Shares

         The Company is  authorized  by its  Certificate  of  Incorporation,  as
amended,  to issue 40,000,000  Common Shares,  of which  14,350,255  shares were
issued  and  outstanding  as of the  date  hereof  and are  held  by over  6,000
shareholders.

         The  holders of Common  Shares are  entitled to one vote for each share
held on all matters  submitted to a vote of common  holders.  The Common  Shares
have no cumulative voting rights,  which means that the holders of a majority of
the Common Shares  outstanding  can elect all the directors if they choose to do
so. In that event, the holders of the remaining shares will not be able to elect
any directors.

         Each Common Share is entitled to participate  equally in dividends,  as
and when declared by the Board of Directors,  and in the  distribution of assets
in the  event of  liquidation,  subject  in all  cases to any  prior  rights  of
outstanding preferred shares. The Common Shares have no preemptive or conversion
rights,  redemption  rights, or sinking fund provisions.  The outstanding Common
Shares are duly authorized, validly issued, fully paid, and nonassessable.

Warrants

         The Company has  outstanding  warrants to acquire 289,365 Common Shares
at  prices  ranging  from  $2.00  to  $2.375.  These  warrants  contain  limited
provisions for adjustment of the number of shares in the event of a subdivision,
combination or reclassification of Common Shares. They do not have any rights to
demand  registration  or "piggy back" rights in the event of a  registration  of
Common Shares.

         A group of the  Company's  lenders,  pursuant to the 1993  Subordinated
Notes,  acquired 816,526 Common Shares upon the exercise of warrants,  which are
restricted  securities  within the meaning of the Securities Act of 1933 and can
only be sold pursuant to an exemption from  registration or an offering which is
the subject of an effective registration statement.  The holders of these shares
have demand registration rights and "piggy back" rights in the event the Company
registers an offering of its Common  Shares.  Six of those  lenders are offering
Common Shares pursuant to this Prospectus. See "Selling Shareholders".  See also
"The Company - Funding of Business Activities - Borrowing and Obligations."

         The  Company  has  agreed  to  grant  to  the   Representative  of  the
Underwriters,  or its designees, warrants to purchase Common Shares equal to 10%
of the aggregate number of Common Shares sold pursuant to this  Prospectus.  The
warrants  will expire two years from the date of this  Prospectus.  The exercise
price per warrant will equal the Public Offering Price. See  "Underwriting." The
warrants will be  exercisable  at any time and from time to time, in whole or in
part,   during  said  two  year  term.   The   Company  has  also   granted  the
Representative,  or his designee,  "piggy back" registration rights with respect
to the Common Shares underlying the warrants.

Convertible Securities

         A group  of the  Company's  lenders,  pursuant  to the 1996  Tranche  A
Convertible Subordinated Notes issued October 8, 1996, have the right to convert
$8,500,000  in notes into  2,060,606  Common  Shares at $4.125 per share,  which
Common  Shares  would  be  restricted  securities  within  the  meaning  of  the
Securities  Act of 1933  and can  only be sold  pursuant  to an  exemption  from
registration  or an offering  which is the subject of an effective  registration
statement. The holders of these shares, after conversion, will have the right to
demand  registration  of the  shares  or "piggy  back" in the event the  Company
registers an offering of its Common Shares.

Preferred Shares

         Pursuant to the Company's Certificate of Incorporation,  the Company is
authorized to issue  5,000,000  preferred  shares,  and the  Company's  Board of
Directors,  by  resolution,  may  establish  one or more  classes  or  series of
preferred  shares  having the number of shares,  designations,  relative  voting
rights,   dividend  rates,   liquidation  and  other  rights  preferences,   and
limitations that the Board of Directors fixes without any shareholder approval.

         A number of preferred shares equal to one share for every one hundredth
of one Common Share  outstanding has been reserved for issuance  pursuant to the
Company's  Shareholder Rights Plan, and designated as Series A Preferred Shares.
No shares of this Series A Preferred Shares have been issued or are outstanding.
Other than the  designation as Series A, the Series A Preferred  Shares have not
had designations,  preferences and rights established by the Board of Directors.
See "Shareholder  Rights Plan," below. The designations,  preferences and rights
will be established  if and when any of the Series A Preferred  Shares are to be
issued.

Transfer Agent

         The transfer  agent,  registrar and dividend  disbursing  agent for the
Common Shares is American Stock  Transfer and Trust  Company,  6201 15th Avenue,
Brooklyn, New York 11204.

Shareholder Rights Plan

         On  August  2,  1995,  the  Board  of  Directors  declared  a  dividend
distribution  of one Right for each  outstanding  Common Share of the Company to
the  shareholders of record on August 3, 1995,  (the "Record Date").  Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
one share of the Series A Preferred Shares (the "Preferred Shares"),  or in some
circumstances,  Common  Shares,  other  securities,  cash  or  other  assets  as
summarized below, at a price of $30.00 per share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement  (the  "Rights  Agreement")  between the Company  and  American  Stock
Transfer and Trust Company, as Rights Agent.

     The  Shareholder  Rights  Plan was  designed  to reduce the  likelihood  of
inadequate bids, partial bids, market  accumulations and front-end loaded offers
to acquire the Company's  Common  Shares,  which are not in the best interest of
all the  Company's  shareholders.  The  adoption  of the Plan  communicates  the
Company's  intention to resist such  actions as are not in the best  interest of
all  shareholders  and provides  time for the Board of Directors to consider any
offer and seek alternative  transactions to maximize shareholder value. The Plan
was adopted upon the advice of the Company's investment bankers in 1995.

         Until  the  earlier  to occur of (i) the date of a public  announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 20%
or more  of the  outstanding  Common  Shares  or (ii)  ten  days  following  the
commencement  or announcement of an intention to make a tender offer or exchange
offer that would result in a Person or group beneficially  owning 20% or more of
such  outstanding  Common  Shares (the  earlier of such dates  being  called the
"Distribution  Date," the Rights will be  evidenced,  with respect to any of the
Company's Common Share  certificates  outstanding as of the Record Date, by such
Common  Share  certificate.  The  Rights  Agreement  provides  that,  until  the
Distribution  Date, the Rights will be transferred with and only with the Common
Shares.  Until the Distribution Date (or earlier redemption or expiration of the
Rights),  new  Common  Share  certificates  issued  after the  Record  Date upon
transfer  or  new  issuance  of  the  Common  Shares  will  contain  a  notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier  redemption or expiration of the Rights),  the surrender for transfer of
any of the Company's  Common Share  certificates  outstanding  as of the Record,
will also constitute the transfer of the Rights associated with the Common
Shares  represented by such  certificate.  As soon as practicable  following the
Distribution  Date,  separate   certificates   evidencing  the  Rights  ("Rights
Certificates")  will be mailed to holders  of record of the Common  Shares as of
the  close  of  business  on the  Distribution  Date and  such  separate  Rights
Certificates alone will evidence the Rights.

         The Rights are not exercisable until the Distribution  Date. The Rights
will  expire on August 4,  2005,  unless  earlier  redeemed  by the  Company  as
described below.

         The Purchase  Price  payable,  and the number of  Preferred  Shares (or
Common  Shares,  other  securities,  cash or other assets,  as may be necessary)
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent  dilution (i) in the event of a stock  dividend on, or a subdivision,
combination or  reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred  Shares of certain  rights or warrants to subscribe for
Preferred Shares or convertible securities at less than the current market price
of the  Preferred  Shares  or (iii)  upon the  distribution  to  holders  of the
Preferred  Shares of  evidences of  indebtedness  or assets  (excluding  regular
periodic  cash  dividends  out of  earnings or  retained  earnings or  dividends
payable in the Preferred  Shares) or of  subscription  rights or warrants (other
than those referred to above).

         In the  event  that the  Company  were  acquired  in a merger  or other
business  combination  transaction of 50% or more of its assets or earning power
were sold, proper provision shall be made so that each holder of a Right,  other
than of Rights that are or were beneficially owned by an Acquiring Person (which
will thereafter be void) shall  thereafter  have the right to receive,  upon the
exercise thereof at the then current exercise price of the Right, that number of
common  shares of the acquiring  company  which at the time of such  transaction
would have a market value of two times the exercise  price of the Right.  In the
event that an Acquiring  Person becomes the  beneficial  owner of 20% or more of
the  outstanding  Common  Shares,  proper  provision  shall be made so that each
holder of a Right,  other than of Rights that are or were beneficially  owned by
the Acquiring  Person (which will thereafter be void),  will thereafter have the
right to receive upon  exercise  that number of the Common Shares (or in certain
other  circumstances,  assets or other securities)  having a market value of two
times the exercise price of the Right.

         With certain  exceptions,  no adjustment in the Purchase  Price will be
required until  cumulative  adjustments  require an adjustment of at least 1% in
such Purchase Price. No fractional  shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth of one Preferred Share)
and, in lieu  thereof,  an  adjustment  in cash will be made based on the market
price of the  Preferred  Shares on the last  Trading  Date  prior to the date of
exercise.

         At any time prior to 5:00 P.M. Kansas City,  Missouri time on the tenth
calendar day after the first date after the public announcement that a person or
group of affiliated or associated persons has acquired  beneficial  ownership of
20% or  more  of the  outstanding  Common  Shares  of the  Company  (the  "Share
Acquisition Date"), the Company may redeem the Rights in whole, but not in part,
at a price of $0.005 per Right (the  "Redemption  Price").  Following  the Share
Acquisition  Date,  but prior to an event listed in Section  13(a) of the Rights
Agreement,  the  Company  may  redeem the  Rights in  connection  with any event
specified in Section 13(a) in which all shareholders are treated alike and which
does  not  include  the  Acquiring  Person  or  his  Affiliates  or  Associates.
Thereafter,  the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding Common
Shares in a  transaction  or series of  transactions  not involving the Company.
Immediately upon the action of the Board of Directors of the Company electing to
redeem the Rights,  the Company shall make announcement  thereof,  and upon such
election,  the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.

         Until a Right is exercised,  the holder thereof,  as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.

         The  provisions of the Rights  Agreement may be amended by the Board of
Directors in order to cure any ambiguity or correct any defect or inconsistency,
extend the Redemption Period and, prior to the
Distribution  Date,  to make changes  deemed to be in the best  interests of the
holders  of the  Rights  or,  after the  Distribution  Date,  to make such other
changes which do not adversely affect the interests of the holders of the Rights
(excluding  the  interests  of any  Acquiring  Person  and  its  affiliates  and
associates).

Certain Anti-takeover Provisions

         The  provisions  of the  Company's  Certificate  of  Incorporation  and
By-laws  summarized  in the  following  paragraphs  may be  deemed  to  have  an
anti-takeover effect and may delay, defer, or prevent a tender offer or takeover
attempt  that a  shareholder  might  consider to be in that  shareholder's  best
interests,  including  attempts  that might  result in a premium over the market
price for the shares held by shareholders.  In addition,  certain  provisions of
Delaware law and the Company's  Long-term Incentive Plan may be deemed to have a
similar effect.

         Certificate of Incorporation and By-laws. The Board of Directors of the
Company  is  divided  into  three  classes.  The term of  office of one class of
directors expires at each annual meeting of shareholders,  when their successors
are  elected  and  qualified.   Directors  are  elected  for  three-year  terms.
Shareholders  may remove a director  only for cause.  In  general,  the Board of
Directors,  not the Company's shareholders,  has the right to appoint persons to
fill vacancies on the Board of Directors.

         Pursuant to the Company's  Certificate of Incorporation,  the Company's
Board of Directors,  by resolution,  may establish one or more classes or series
of preferred  shares having the number of shares,  designation,  relative voting
rights,  dividend  rates,  liquidation  and  other  rights,   preferences,   and
limitations that the Board of Directors fixes without any shareholder  approval.
Any rights, preferences,  privileges, and limitations that are established could
have the effect of impeding or  discouraging  the  acquisition of control of the
Company.

         The  Company's  Certificate  of  Incorporation  contains a "fair price"
provision that requires the  affirmative  vote of the holders of at least 80% of
the voting shares of the Company and the affirmative vote of at least two-thirds
of the voting shares of the Company not owned,  directly or  indirectly,  by the
Related Person (hereafter defined) to approve any merger, consolidation, sale or
lease of all or substantially all of the assets of the Company, or certain other
transactions  involving  any  Related  Person.  For  purposes  of the fair price
provision,  a "Related Person" is any person  beneficially owning 10% or more of
the voting shares of the Company who is a party to the  Transaction  at issue, a
director who is also an officer of the Company and is a party to the Transaction
at issue, an affiliate of either such person,  and certain  transferees of those
persons.  The voting  requirement  is not  applicable  to certain  transactions,
including  those that are approved by the  Company's  Continuing  Directors  (as
defined in the Certificate of  Incorporation)  or that meet certain "fair price"
criteria contained in the Certificate of Incorporation.

         The  Company's  Certificate  of  Incorporation  further  provides  that
shareholders  may act only at annual or special meeting of shareholders  and not
by written consent,  that special meetings of shareholders may be called only by
the  Board of  Directors,  and  that  only  business  proposed  by the  Board of
Directors may be considered at special meetings of shareholders.

         The Company's  Certificate of Incorporation also provides that the only
business  (including  election of directors) that may be considered at an annual
meeting of shareholders,  in addition to business proposed (or persons nominated
to be  directors)  by the  directors  of the Company,  is business  proposed (or
persons  nominated to be directors) by  shareholders  who comply with the notice
and disclosure requirements of the Certificate of Incorporation. In general, the
Certificate of Incorporation requires that a shareholder give the Company notice
of  proposed  business  or  nominations  no later than 60 days before the annual
meeting  of  shareholders  (meaning  the  date on  which  the  meeting  is first
scheduled and not  postponements or adjournments  thereof) or (if later) 10 days
after  the  first  public  notice  of the  annual  meeting  is  sent  to  common
shareholders.  In general,  the notice must also  contains  certain  information
about the shareholder proposing the business or nomination,  his interest in the
business,  and (with respect to nominations for director)  information about the
nominee  of the nature  ordinarily  required  to be  disclosed  in public  proxy
solicitations.  The shareholder must also submit a notarized letter from each of
his nominees stating the nominee's
acceptance of the nomination and indicating the nominee's  intention to serve as
director if elected.

         The  Certificate  of  Incorporation   also  restricts  the  ability  of
shareholders  to interfere  with the powers of the Board of Directors in certain
specified ways, including the constitution and composition of committees and the
election and removal of officers.

         The Certificate of Incorporation  provides that approval by the holders
of at least two-thirds of the outstanding voting shares is required to amend the
provisions  of the  Certificate  of  Incorporation  discussed  in the  preceding
paragraphs and certain other provisions,  except that approval by the holders of
at least 80% of the  outstanding  voting  shares of the Company,  together  with
approval by the holders of at least two-thirds of the outstanding  voting shares
not owned,  directly or indirectly,  by the Related Person, is required to amend
the fair price  provisions  and except that  approval of the holders of at least
80% of the  outstanding  voting  shares  is  required  to amend  the  provisions
prohibiting shareholders from acting by written consent.

         Delaware  Anti-takeover  Statute. The Company is a Delaware corporation
and is  subject to Section  203 of the  Delaware  General  Corporation  Law.  In
general,  Section 203 prevents an "interested shareholder" (defined generally as
a person owning 15% or more of the  Company's  outstanding  voting  shares) from
engaging  in a  "business  combination"  (as  defined in  Section  203) with the
Company for three years  following  the date that  person  became an  interested
shareholder unless (a) before that person became an interested shareholder,  the
Board of  Directors  of the  Company  approved  the  transaction  in  which  the
interested shareholder became an interested shareholder or approved the business
combination,  (b) upon  consummation  of the  transaction  that  resulted in the
interested  shareholder's  becoming an interested  shareholder,  the  interested
shareholder owns at least 85% of the voting shares of the Company outstanding at
the time the transaction  commenced  (excluding shares held by directors who are
also  officers of the  Company  and by employee  stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange  offer),  or (c)  following
the  transaction  in which that person  became an  interested  shareholder,  the
business  combination  is approved by the Board of  Directors of the Company and
authorized at a meeting of shareholders  by the affirmative  vote of the holders
of at least two-thirds of the outstanding voting shares of the Company not owned
by the interested shareholder.

         Under  Section  203,  these  restrictions  also do not apply to certain
business  combinations  proposed  by an  interested  shareholder  following  the
announcement  or  notification  of one  of  certain  extraordinary  transactions
involving the Company and a person who was not an interested  shareholder during
the  previous  three  years or who  became an  interested  shareholder  with the
approval  of a  majority  of the  Company's  directors,  if  that  extraordinary
transaction  is approved or not opposed by a majority of the  directors who were
directors  before any person  became an interested  shareholder  in the previous
three years or who were  recommended  for  election  or elected to succeed  such
directors by a majority of such directors then in office.

         Long-term  Incentive  Plan.  Awards  granted  pursuant to the Company's
Long-term  Incentive  Plan may  provide  that,  upon a change in  control of the
Company,  (a) each  holder of an option  will be granted a  corresponding  stock
appreciation  right,  (b) all outstanding  stock  appreciation  rights and stock
options become immediately and fully vested and exercisable in full, and (c) the
restriction  period on any restricted  stock award shall be accelerated  and the
restrictions shall expire.

         Debt.  Certain  provisions in the Bank Facility and Subordinated  Notes
may also impede a change in control,  in that they provide that the loans become
due if there is a change  in the  management  of the  Company  or a merger  with
another company.

                                  UNDERWRITING

         The  Company  and  the  Selling   Shareholders  have  entered  into  an
underwriting  agreement  dated the date of this  Prospectus  (the  "Underwriting
Agreement").  Subject to the terms and conditions of the Underwriting Agreement,
the Company and the Selling  Shareholders have appointed the Underwriters  named
below, for whom Nolan Securities  Corporation is acting as  Representative  (the
"Representative"), exclusive
agents to offer and sell  8,403,305  Common  Shares on behalf of the Company and
the  Selling  Shareholders,   on  a  "best  efforts,  all-or-none"  basis.  Such
appointment  will be exclusive and not subject to  termination by the Company or
the Selling Shareholders for a period of three months following the date of this
Prospectus.  The  Underwriters  have not made a firm  commitment to purchase any
Common Shares.  The number of Common Shares that each  Underwriter has agreed to
use its "best efforts" to sell, is set forth below  opposite each  Underwriter's
name:

         Underwriter                       Number of Shares

Nolan Securities Corporation                    8,403,305

             Total                              8,403,305

         The  Underwriting   Agreement  provides  that  the  obligation  of  the
Underwriters  are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions. The Underwriters are obligated to use
their "best efforts" to sell all of the Common Shares offered hereby (other than
those covered by the over-allotment option described below).

         The  Company  has  been   advised  by  the   Representative   that  the
Underwriters  propose to offer the Common  Shares  directly to the public at the
initial  public  offering  price per  share set forth on the cover  page of this
Prospectus (the "Public Offering Price"). Upon the closing of the sale of any of
the Common  Shares,  the Company will receive the net proceeds  therefrom  after
deducting a discount  equal to seven percent (7%) of the Public  Offering  Price
for each Common Share sold,  including  any  Over-Allotment  Option shares.  The
Underwriters have agreed to pay Triumph Securities Corporation  ("Triumph") as a
finder, an amount equal to one-seventh of such 7%. A. Theodore  Stautberg Jr., a
director of the Company, is also an officer, director and beneficial shareholder
of Triumph.

         The Company has granted to the  Underwriters an option,  exercisable by
the Representative within 45 days after the date of this Prospectus,  to require
the Company to offer and sell to an  additional  1,260,496  Common Shares at the
Public Offering Price per share, herein  "Over-Allotment  Option." To the extent
that such option is exercised,  each of the  Underwriters  has agreed to use its
best efforts to sell on behalf of the Company  approximately the same percentage
of  such  additional  shares  as  the  number  set  forth  above  next  to  such
Underwriter's  name in the  preceding  table bears to the total number of Common
Shares  offered by this  Prospectus.  This Option may only be exercised  for the
purpose  of  covering  any  over-allotments  in the sale of the  shares  offered
hereby.

         The  Company  has  agreed  to  grant  to  the  Representative,  or  its
designees,  warrants (the  "Warrants") to purchase Common Shares equal to 10% of
the  aggregate  number of Common Shares sold  pursuant to this  Prospectus.  The
Warrants  will expire two years from the date of this  Prospectus.  The exercise
price per Warrant will equal the Public  Offering  Price.  The Warrants  will be
exercisable at any time and from time to time, in whole or in part,  during said
two year term. The Company has also granted the  Representative  or his designee
"piggy back"  registration  rights with respect to the Common Shares  underlying
the Warrants.

         The Company has agreed to pay all expenses of the  Offering,  including
the fees and  expenses  of  counsel  to the  Underwriters  and the  expenses  of
qualifying  the  Common  Shares  for sale  under the laws of such  states as the
Representative  may designate,  including  expenses of counsel retained for such
purpose.

         In the Underwriting  Agreement,  the Company,  the Selling Shareholders
and the  Underwriters  have agreed to indemnify  each other against  liabilities
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact or omission or alleged omission of a material fact required to
be stated or necessary to make the  statements  made not misleading (in the case
of the  Underwriters  only to the extent such  statement or omission was made in
reliance  upon  or in  conformity  with  written  information  furnished  by the
Underwriters  for use  herein).  If such  indemnifications  are  unavailable  or
insufficient,  the Company,  the Selling  Shareholders and the Underwriters have
agreed to damage contribution arrangements between them
based upon relative  benefits  received  from this  Offering and relative  fault
resulting in such damage.

         The  Underwriters  do not intend to confirm  sales of the Common Shares
offered hereby to discretionary accounts.

         The Company,  its directors  and officers and the Selling  Shareholders
have agreed not to offer,  sell,  contract to sell or  otherwise  dispose of any
Common  Shares,  for a period  of 180  days  after  the date of this  Prospectus
without the prior written consent of the  Representative,  other than the Common
Shares offered hereby.

         The Public Offering Price has been determined by negotiations among the
Underwriters,  the  Company  and the  Selling  Shareholders.  Among the  factors
considered in such negotiations were certain financial and operating information
for recent  periods,  the future  prospects of the Company,  and its industry in
general,  the general  condition  of the  securities  markets at the time of the
Offering,  and the  market  prices  of  securities  and  certain  financial  and
operating information of companies engaged in activities similar to those of the
Company. There can, however, be no assurance that the prices at which the Common
Shares will sell in the public  market after the Offering will not be lower than
the price at which they are sold hereunder.

         Pursuant to the Underwriting  Agreement,  the Public Offering will take
place only if certain  material  conditions  are satisfied by the Company.  Such
material   conditions  include  that,  except  for  matters  disclosed  in  this
Prospectus  (i)  between  the  date of the  last  audited  financial  statements
included in the  Prospectus  and the Closing  Date,  the Company  shall not have
sustained any loss on account of fire, explosion,  flood, accident,  calamity or
any other cause, which materially  adversely affects its business or properties,
whether or not such loss is covered by insurance; (ii) there shall be no pending
or  threatened  action,  suit or  proceeding  before  any court or  governmental
agency,  authority or body or any  arbitrator  involving the Company that is not
adequately disclosed and there is no required contract or other document that is
not  adequately  disclosed;  (iii) the Company (1) shall be in  compliance  with
applicable  environmental laws, (2) has received all permits,  licenses or other
approvals required of the Company under applicable  environmental  laws, and (3)
shall be in compliance  with all such permits,  licenses or approvals;  (iv) the
material  agreements,  relating to the  Company  rights of  ownership,  lease or
operation of oil and gas properties, the acquisition of interests in oil and gas
properties,  or  exploration  for,  development  of or production of oil and gas
reserves  thereon  are  valid,  binding  and  enforceable  agreements;  (v)  the
statements  in  the  Prospectus  regarding  the  legal  matters,   documents  or
proceedings,  shall fairly  represent and summarize the  information  called for
with respect to such legal matters,  documents and  proceedings;  (vi) since the
date of the most recent financial  statements included in the Prospectus,  there
shall  have been no  material  adverse  change in the  condition  (financial  or
other),  earnings,  business or  properties  of the  Company;  (vii) the lock up
agreement  between the  Representative  and certain  shareholders,  officers and
directors  of the Company for sales and certain  dispositions  of Common  Shares
shall have been  delivered on a timely  basis;  and (viii) since the date of the
Registration  Statement,  no material  adverse  change in the  general  affairs,
business prospects,  properties,  management, condition (financial or otherwise)
or results of operations of the Company shall have occurred.

         The foregoing does not purport to be a complete  statement of the terms
and conditions of the Underwriting Agreement, copies of which are on file at the
offices of the  Company,  the  Representative  and the  Securities  and Exchange
Commission.

                         SHARES ELIGIBLE FOR FUTURE SALE

         As of the date  hereof the Company had  outstanding  14,350,255  Common
Shares,  warrants  exercisable for 289,365 Common Shares, and the 1996 Tranche A
Convertible  Subordinated  Notes which are  convertible  into  2,060,606  Common
Shares.  An additional  1,260,496  Common Shares may be sold if the Underwriters
exercise the  Over-Allotment  Option.  The  Underwriters  have also been granted
warrants to acquire 840,330 Common Shares if all shares offered hereby are sold,
assuming  they  do  not  exercise  the  Over-Allotment  Option.   Following  the
consummation of the Offering,  and assuming the Underwriters receive warrants to
acquire  840,330  Common Shares , the Company will then have  16,459,444  Common
Shares  available  for  issuance  at such  times and upon  such  terms as may be
approved by the Company's Board of
Directors. No prediction can be made as to the effect, if any, that future sales
or the  availability  of shares  for sale will have on the  market  price of the
Common Shares prevailing from time to time.  Nevertheless,  sales of substantial
amounts of Common  Shares of the Company in the public  market  could  adversely
affect the  prevailing  market  price of the Common  Shares and could impair the
Company's ability to raise capital through sales of its equity securities.

         After giving effect to the Offering, 3,436,358 Common Shares (including
shares  issuable  upon exercise of  outstanding  warrants and the 1996 Tranche A
Convertible  Subordinated Notes) will be held by executive  officers,  directors
and  affiliates  of  the  Company  and  may be  sold  pursuant  to an  effective
registration  statement  covering  such  shares or  pursuant  to Rule 144 of the
Securities Act, subject to the contractual restrictions described below.

         In  general,  under Rule 144,  as  currently  in  effect,  a person (or
persons  whose  shares  are  aggregated),   including  an  affiliate,   who  has
beneficially  owned  restricted  shares for at least two years,  is  entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding  Common Shares or (ii) an amount equal
to the average weekly  reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities  and  Exchange  Commission.  Sales under Rule 144 are also subject to
certain manner of sale limitations,  notice requirements and the availability of
current public information about the Company. Restricted shares properly sold in
reliance on Rule 144, are thereafter  freely tradeable  without  restrictions or
registration under the Securities Act, unless thereafter held by an affiliate of
the  Company.  In  addition,  affiliates  of the  Company  must  comply with the
restrictions  and  requirements  of Rule 144,  other than the  two-year  holding
period  requirement,  in order to sell Common  Shares  which are not  restricted
shares  (such as Common  Shares  acquired by  affiliates  of the Company in this
Offering).  As defined in Rule 144, an "affiliate" of an issuer is a person that
directly,  or  indirectly  through  one or more  intermediaries,  controls or is
controlled by, or is under common control with, such issuer. If three years have
elapsed since the later of the date of any acquisition of restricted shares from
the Company or from any affiliate of the Company, and the acquiror or subsequent
holder  thereof is deemed not to have been an  affiliate  of the  Company at any
time during the 90 days preceding a sale,  such person would be entitled to sell
such  shares in the public  market  pursuant to Rule  144(k)  without  regard to
volume limitations, manner of sale restrictions, or public information or notice
requirements.

         The lenders under the 1993 Subordinated Notes have the right to request
registration of 816,526  restricted shares which they received upon the exercise
of  warrants  issued  to  them at the  time  of the  borrowing  under  the  1993
Subordinated  Notes;  373,305 of which are being sold pursuant to this Offering.
The lenders  under the 1996 Tranche A  Convertible  Subordinated  Notes have the
right to receive  2,060,606 shares upon conversion of the Notes,  which may take
place  anytime  after 180 days from the date of this  Prospectus.  They have the
right to request  registration  with  respect to those  shares.  There can be no
assurance that the holders of such rights will not exercise  these  registration
rights in a manner and at a time which may adversely  impact the market price of
the Common Shares or business  plans of the Company or may adversely  affect the
Company's efforts to seek additional capital.

                                  OTHER MATTERS

Available Information

         The  Company  is  subject  to  the  informational  requirements  of the
Exchange Act, as amended, and, in accordance therewith,  files reports and other
information with the SEC.  Reports,  proxy and information  statements and other
information  filed by the Company  with the SEC  pursuant  to the  informational
requirements  of the  Exchange  Act may be  inspected  at the  public  reference
facilities  maintained  by the SEC at 450 Fifth  Street,  NW,  Judiciary  Plaza,
Washington,  D.C. 20549-1004,  and at the following Regional Offices of the SEC:
Chicago Regional Office, 500 West Madison Street, Suite 1400 , Chicago, Illinois
60661-2511,  and New York Regional Office,  7 World Trade Center,  New York, New
York  10048.  Copies  of such  material  may also be  obtained  from the  Public
Reference Section of the SEC, 450 Fifth Street, NW Washington,  D.C.  20549-1004
at prescribed rates. The Common Shares are traded on the NASDAQ National Market.
The
Company's registration  statements,  reports, proxy and information  statements,
and other  information  may also be  inspected at the  National  Association  of
Securities Dealers,  Inc., 1735 K Street, NW, Washington,  D.C. 20006. Copies of
such material may also be obtained  from the SEC EDGAR  archives on the Internet
at the following SEC address: HTTP://WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.

         The  Company  will  furnish to the  holders  of the  Common  Shares the
Company's annual reports  containing  audited  financial  statements and interim
reports containing unaudited financial statements.

         This Prospectus  constitutes a part of a Registration Statement on Form
S-1 filed by the Company with the SEC under the Securities  Act. This Prospectus
omits certain of the information  contained in the Registration  Statement,  and
reference is hereby made to the Registration  Statement for further  information
with respect to the Company and the securities  offered  hereby.  Any statements
contained  herein  concerning the provisions of any document filed as an exhibit
to  the  Registration  Statement  or  otherwise  filed  with  the  SEC  are  not
necessarily  complete and in each instance reference is made to the copy of such
document so filed.
Each such statement is qualified in its entirety by such reference.

SEC Position on Indemnification

         Insofar as indemnification for liabilities arising under the Securities
Act  may be  permitted  to  directors,  officers,  or  persons  controlling  the
registrant  pursuant  to  any  provisions  described  in  this  Prospectus,  the
registrant has been informed that in the opinion of the SEC such indemnification
is against  public  policy as expressed in the  Securities  Act and is therefore
unenforceable.

                                  LEGAL MATTERS

     The validity of the Common Shares offered  hereby,  including  those shares
offered by the Selling  Shareholders,  and certain  other legal  matters will be
passed upon for the Company by Shughart Thomson & Kilroy, Kansas City, Missouri,
counsel to the Company.  Certain legal  matters in connection  with the Offering
are being passed upon for the Underwriters by Cadwalader, Wickersham & Taft, New
York, New York.
                                     EXPERTS

         The  financial  statements  of the Company as of December  31, 1995 and
1994 and for each of the years in the three year period ended  December 31, 1995
and the audit of Schedules of Revenues, Direct Operating Expenses and Production
Taxes of the Zapata  Properties  and the Bayou  Sorrel Field for each of the two
years in the period ended  December 31, 1994 included  herein have been examined
by Barrett and Associates,  independent  certified  public  accountants,  to the
extent and for the periods indicated in their reports with respect thereto,  and
are included  herein in reliance  upon those  reports and upon the  authority of
that firm as experts in accounting  and  auditing.  On September 4, 1996 Mark C.
Barrett became a director of the Company.

         The  Schedule of Revenues  and Direct  Operating  Expenses of the Amoco
Properties  for each of the three years in the period  ended  December  31, 1995
included  herein have been examined by Arthur Andersen LLP,  independent  public
accountants, as indicated in their report with respect thereto, and are included
herein in  reliance  upon the  authority  of such firm as experts in giving such
reports.

         The firm of  Arthur  Andersen  LLP has been  engaged  to do the  annual
audits of the Company  commencing  with the year ending  December 31, 1996. They
have not audited any period of the Company during 1996.

         The information  with respect to the independent  reserve reports as of
December 31, 1995, 1994 and 1993 was prepared by the petroleum engineering firms
of Ryder Scott Company (offshore and Bayou Sorrel Field) and McCune Engineering,
P.E.  (onshore  other than Bayou Sorrel  Field),  and are  referenced  herein in
reliance  upon such firms as experts  with respect to such  information.  Dwayne
McCune, the sole proprietor
of McCune Engineering,  P.E., was an employee of the Company from September 1992
to July 1995. Other reserve information referenced herein was based upon reports
prepared by the Company, which is solely responsible for its content.

                     GLOSSARY OF SELECTED OIL AND GAS TERMS

     The following are  abbreviations  and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.

     "3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

     "Bank Facility" means the Company's  reducing  revolving bank facility with
First Union National Bank of North Carolina and Banque Paribas.

     "Bbl" means a barrel of oil and condensate or natural gas liquids, being 42
U.S. gallons.

     "Bcf" means billion cubic feet of natural gas.

     "Bcfe" means billion cubic feet of natural gas equivalents.

     "Block" means one offshore unit of lease acreage, generally 5,000 acres.

     "Btu" or  "British  Thermal  Unit" means the  quantity of heat  required to
raise the temperature of one pound of water by one degree Fahrenheit.

     "Condensate" means a hydrocarbon  mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.

     "Developed  acreage"  means oil and gas acreage spaced for or assignable to
productive wells.

     "Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

     "Dry hole" means a well found to be incapable  of  producing  either oil or
gas in sufficient quantities to justify completion as an oil or gas well.

     "Equivalent Bbls" means a measure of gas volumes representing the estimated
relative  energy  content of natural gas to oil,  being 6 Mcf of natural gas per
Bbl of oil.

     "Estimated  future net revenues"  means revenues from production of oil and
gas, net of all production  -related taxes, lease operating expenses and capital
costs.
        
     "Exploratory  well" means a well  drilled to find and produce oil or gas in
an unproved  area,  to find a new  reservoir in a field  previously  found to be
productive of oil and gas in another reservoir, or to extend a known reservoir.

     "Gross,"  when used  with  respect  to acres or wells,  refers to the total
acres or wells in which the Company has a working interest.

     "Group 3-D seismic" means seismic procured by a group of parties or shot on
a speculative basis by a seismic company.
"MBbls" means thousands of barrels of oil.

     "MBOE" means one thousand barrels of oil equivalent.

     "Mbtu" means one thousand Btus.

     "Mcf" means thousand cubic feet of natural gas.

     "Mcfe" means thousand cubic feet of natural gas equivalents.

     "MMBbls" means millions of barrels of oil.

     "MMBOE" means one million barrels of oil equivalent

     "MMBtu" means one million British Thermal Units.

     "MMcf" means million cubic feet of natural gas.

     "MMcfe" means million cubic feet of natural gas equivalents.

     "Natural  gas  equivalents"  means a volume,  expressed in Mcf's of natural
gas,  that  includes  not only  natural  gas but also  liquids  converted  to an
equivalent quantity of natural gas on an energy equivalent basis. Equivalent gas
reserves are based on a conversion factor of 6 Mcf of gas per barrel of liquids.

     "Net," when used with  respect to acres or wells,  refers to gross acres or
wells multiplied,  in each case, by the percentage working interest owned by the
Company.

     "Net  pay"  means  the  thickness  of a  productive  reservoir  capable  of
containing hydrocarbons.

     "Net  production"  means  production  that is  owned  by the  Company  less
royalties and production due others.

     "NGLs" means the natural gas liquids such as ethane,  propane,  iso-butane,
normal butane and natural gasoline that have been extracted from natural gas.

     "Oil" means crude oil or condensate.

     "Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.

     "Overriding royalty interest" or "ORRI" means an interest in an oil and gas
property  entitling the owner to a share of oil and gas production free of costs
of exploration and production.

     "Payout" means that point in time when a party has recovered  monies out of
the production from a well equal to the cost of drilling and completing the well
and the cost of operating the well through that date.

     "Possible  reserves"  means  reserves  that are less certain than  probable
reserves and can be estimated  with a low degree of certainty,  insufficient  to
indicate whether they are more likely to be recovered than not.

     "Present  value of  future  net  revenues"  or  "Present  value  of  proved
reserves"  means the present value of estimated  future revenues to be generated
from the production of proved reserves  calculated in accordance with Securities
and  Exchange  Commission  guidelines,  net of estimated  production  and future
development  costs,  using prices and costs as of the date of estimation without
future  escalation,  except as otherwise  provided by contract,  without  giving
effect to non-property related expenses such as general and administrative
expenses,  debt service,  future income tax expense and depreciation,  depletion
and amortization, and discounted using an annual discount rate of 10%.

     "Probable  reserves"  means  reserves  that are less  certain  than  proved
reserves and can be estimated with a degree of certainty  sufficient to indicate
they are more likely to be recovered than not.

     "Production  costs" means costs  necessary for the  production of a well or
field and sale of oil and gas, including production and ad valorem taxes.

     "Productive  well"  means a well  that is  producing  oil or gas or that is
capable of production.

     "Proprietary 3-D seismic" means seismic privately procured and owned by the
procurer.

     "Proved  developed  nonproducing  reserves" means those reserves that exist
behind the casing if existing  wells or at minor depths below the present bottom
of such wells and that are  expected to be produced  through  these wells in the
predictable  future,  when the cost of  making  such oil and gas  available  for
production should be relatively small compared to the cost of a new well.

     "Proved  developed  producing  reserves"  means  those  reserves  that  are
expected  to be  produced  from  existing  completion  intervals  now  open  for
production in existing wells.

     "Proved  developed  reserves"  means  reserves  that can be  expected to be
recovered through existing wells with existing  equipment and operating methods.
Additional oil and gas expected to be obtained  through the application of fluid
injection or other improved  recovery  techniques for  supplementing the natural
forces and mechanisms of primary recovery will be included as "proved  developed
reserves"  only after  testing by a pilot  project or after the  operation of an
installed  program has confirmed  through  production  response  that  increased
recovery will be achieved.

     "Proved reserves" means the estimated  quantities of crude oil, natural gas
and natural gas liquids that geological and engineering  data  demonstrate  with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing economic and operating  conditions (i.e.,  prices and costs as of
the date the  estimate  is made).  Prices  include  consideration  of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.

          i.  Reservoirs  are  considered  proved if economic  producibility  is
     supported by either actual  production or conclusive  formation  test.  The
     area of a reservoir  considered proved includes (A) that portion delineated
     by drilling and defined by gas-oil and/or oil-water  contacts,  if any; and
     (B) the immediately  adjoining  portions not yet drilled,  but which can be
     reasonably  judged as  economically  productive  on the basis of  available
     geological  and  engineering  data. In the absence of  information on fluid
     contacts,  the lowest known structural  occurrence of hydrocarbons controls
     the lower proved limit of the reservoir.

          ii. Reserves that can be produced  economically through application of
     improved recovery  techniques (such as fluid injection) are included in the
     "proved"  classification when successful testing by a pilot project, or the
     operation of an installed  program in the reservoir,  provides  support for
     the engineering analysis on which the project or program was based.

          iii.  Estimates of proved  reserves do not include the following:  (A)
     oil that may become  available  from  known  reservoirs  but is  classified
     separately as "indicated  additional  reserve";  (B) crude oil, natural gas
     and natural gas  liquids,  the  recovery of which is subject to  reasonable
     doubt because of uncertainty as to geology,  reservoir  characteristics  or
     economic  factors;  (C) crude oil, natural gas and natural gas liquids that
     may occur in  undrilled  prospects;  and (D)  crude  oil,  natural  gas and
     natural gas liquids that may be recovered from oil shales,  coal, gilsonite
     and other such sources.

     "Proved  undeveloped  reserves"  means  reserves  that are  expected  to be
recovered from new wells
on  undrilled  acreage,   or  from  existing  wells  where  a  relatively  major
expenditure  is required  for  recompletion.  Reserves on  undrilled  acreage is
limited to those drilling units offsetting  productive units that are reasonably
certain of production  when drilled.  Proved  reserves for other undrilled units
can be claimed only where it can be  demonstrated  with  certainty that there is
continuity  of  production  from the  existing  productive  formation.  Under no
circumstances are estimates of proved undeveloped  reserves  attributable to any
acreage for which an application of fluid  injection or other improved  recovery
technique is contemplated,  unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.

     "Recompletion"  means the completion for production of an existing wellbore
in another formation from that in which the well has previously been completed.

     "Reserves" means proved reserves.

     "Royalty" means an interest in an oil and gas lease that gives the owner of
the  interest the right to receive a portion of the  production  from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating  the wells on
the lease  acreage.  Royalties may be either  landowner's  royalties,  which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding  royalties,  which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.

     "SEC 10 Value" means the present  value of estimated  future net  revenues,
before taxes, of the specified reserves or property,  determined in all material
respects in  accordance  with the rules and  regulations  of the SEC  (generally
using prices and costs in effect at a fixed date and a 10% discount rate).

     "Shut-in"  means to close down a producing  well or field  temporarily  for
repair,  cleaning  out,  building  up  reservoir  pressure,  lack of a market or
similar conditions.

     "Undeveloped acreage" means the oil and gas acreage on which wells have not
been  drilled  or to which no Proved  Reserves  other  than  Proved  Undeveloped
Reserves have been attributed by independent petroleum engineers.

     "Unproved  properties"  means  the oil and gas  acreage  to which no Proved
Reserves have been attributed by independent petroleum engineers.

     "Unproved   reserves"   means  those  reserves  based  on  geologic  and/or
engineering  data  similar to that used in  estimates  of proved  reserves;  but
technical,  contractual,  economic,  or regulatory  uncertainties  preclude such
reserves  being  classified  as proved.  They may be estimated  assuming  future
economic conditions different from those prevailing at the time of the estimate.
Unproved  reserves may be divided into two  subclassifications:  "probable"  and
"possible."

     "Working interest" means an interest in an oil and gas lease that gives the
owner of the  interest  the  right to drill for and  produce  oil and gas on the
leased  acreage and  requires  the owner to pay a share of the costs of drilling
and production  operations.  The share of production to which a working interest
owner is  entitled  will  always be  smaller  than the  share of costs  that the
working  interest owner is required to bear,  with the balance of the production
accruing to the owners of  royalties.  For example,  the owner of a 100% working
interest in a lease  burdened  only by a  landowner's  royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.

         .
PANACO, INC.
                          INDEX TO FINANCIAL STATEMENTS
                                                                                   Page
                    PRO FORMA COMBINED FINANCIAL INFORMATION
Balance Sheet, September 30, 1996                                                13
   Statements of Income (Operations) for the nine months
         ended September 30, 1996                                                   14
   Statements of Income (Operations) for the years ended
         December 31, 1995, 1994 and 1993                                           15
   Notes to Pro Forma Financial Statements                                          18

PANACO, INC. -  AUDITED FINANCIAL STATEMENTS

   Independent Auditors' Report                                                     F-2
   Balance Sheets, December 31, 1995 and 1994                                       F-3
   Statements of Income (Operations)  for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-5
   Statements of Changes in Stockholders' Equity and Retained Earnings (Deficit)
         for the Years Ended December 31, 1995, 1994 and 1993                       F-6
   Statements of Cash Flows for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-7
   Notes to Financial Statements for the Years Ended
         December 31, 1995, 1994 and 1993                                           F-8

ZAPATA PROPERTIES AND BAYOU SORREL FIELD

   Independent Auditors' Report                                                    F-21
   Schedules of Revenues, Selected Direct Operating Expenses and Production Taxes
         for the Years Ended December 31, 1994 and 1993                            F-22
   Notes to the Schedules of Revenues, Selected Directed Expenses and Production
         Taxes for the Years Ended December 31, 1994 and 1993                      F-23

PANACO, INC. -  UNAUDITED FINANCIAL STATEMENTS

   Balance  sheets,  September 30, 1996 and December 31, 1995 F-28 Statements of   F-27
   Income operating for the nine months and three months ended
         September 30, 1996                                                        F-29
   Statement of Changes in Stockholders' Equity for the nine months ended
         September 30, 1996                                                        F-30
   Statements of Cash Flows for the nine months ended September 30, 1996           F-31
   Notes to Financial Statements for the nine months ended September 30, 1996      F-32

AMOCO PROPERTIES

   Independent Auditors' Report                                                    F-34
   Statement of Revenues and Direct Operating Expenses                             F-35
   Notes to the Statement                                                          F-37
F-1
Independent Auditors' Report

To the Board of Directors
PANACO, Inc.

We have  audited the  accompanying  balance  sheets of PANACO,  Inc. (a Delaware
corporation)  as of December 31, 1995 and 1994,  and the related  statements  of
income (operations),  changes in Stockholders' equity and cash flows for each of
the  three  years  in the  period  ended  December  31,  1995.  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  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 audits provide a reasonable basis for our opinion.

As  discussed  in Note 1 to the  Financial  Statements,  the  Company  has given
retroactive effect to the change in accounting for its oil and gas operations.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of PANACO, Inc. as of December 31,
1995 and 1994,  and the  results of its  operations,  changes  in  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1995 in conformity with generally accepted accounting principles.

BARRETT & ASSOCIATES
Overland Park, Kansas

February 26, 1996, except for Note 1, which the date is June 7, 1996.

                                      F-2
PANACO, INC.
                                 BALANCE SHEETS

                                     ASSETS

                                                                           December 31,
                                                                 1995               1994
CURRENT ASSETS:

Cash and cash equivalents                                     $   1,198,000      $   1,583,000
Accounts receivable
    Trade                                                         3,294,000          2,230,000
    Other                                                         1,092,000              1,000
    Prepaid expenses                                                465,000            272,000
                                                            ---------------     --------------
       Total current assets                                       6,049,000          4,086,000
                                                             --------------     --------------

OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
    Oil and gas properties                                      103,105,000         89,010,000
    Less accumulated depreciation, depletion, amortization,
       and valuation allowances                                (73,620,000)       (65,065,000)
                                                               -----------        -----------
       Net oil and gas properties                                29,485,000         23,945,000
                                                               ------------       ------------

PROPERTY, PLANT, AND EQUIPMENT
    Equipment                                                       196,000            158,000
    Less accumulated depreciation                                  (92,000)           (68,000)
                                                            --------------      -------------
       Net property, plant, and equipment                           104,000            90,000
                                                             --------------     -------------

OTHER ASSETS:
    Loan costs, net                                                 471,000            714,000
    Certificates of deposit - escrow                                 26,000             47,000
    Other                                                             5,000              6,000
    Accounts receivable - other                                       8,000            186,000
    Note receivable                                                  21,000             21,000
                                                            ---------------     --------------
       Total other assets                                           531,000            974,000
                                                            ---------------     --------------

TOTAL ASSETS                                                   $ 36,169,000        $29,095,000
                                                               ============        ===========
The  accompanying  notes to financial  statements  are an integral
part of this statement.

                                       F-3
LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                December 31,
                                                      1995                      1994

CURRENT LIABILITIES
Accounts payable                             $  4,444,000             $   1,528,000
    Interest payable                                  161,000                   185,000
    Current portion of long-term debt                     -0-                       -0-
                                                -------------              ------------
       Total current liabilities                    4,605,000                 1,713,000
                                                -------------             -------------

LONG-TERM DEBT                                     22,390,000                12,500,000
                                                 ------------              ------------

STOCKHOLDERS' EQUITY

    Preferred Share, $.01 par value,
       1,000,000 shares authorized; no
       shares issued and outstanding                      -0-                       -0-
    Common Share, $.01 par value,
       20,000,000 shares authorized;
       11,504,615 and 10,220,138 shares
       issued and outstanding, respectively           115,000                   102,000
    Additional paid in capital                     21,155,000                17,586,000
    Retained earnings (deficit)                  (12,096,000)               (2,806,000)
                                                ------------               ------------
       Total Stockholders' Equity                   9,174,000                14,882,000
                                                -------------              ------------

TOTAL LIABILITIES AND STOCKHOLDERS'   EQUITY     $ 36,169,000              $ 29,095,000
                                                 ============              ============
The  accompanying  notes to financial  statements  are an integral
part of this statement.

                                       F-4
PANACO, INC.
                        STATEMENTS OF INCOME (OPERATIONS)

                                                                           Year Ended December 31,
                                                                1995                 1994                1993
REVENUES
Oil and gas sales                                       $18,447,000          $17,338,000        $ 12,605,000

COSTS AND EXPENSES
    Lease operating                                           8,055,000            5,231,000           5,297,000
    Depreciation, depletion and amortization                  8,064,000            6,038,000           4,288,000
    General and administrative                                  690,000              587,000             542,000
    Production and ad valorem taxes                           1,078,000            1,006,000             754,000
    Exploration expenses                                      8,112,000                  -0-                 -0-
    Provision for losses and (gains) on disposition
       and write-down of assets                                 751,000            1,202,000           3,824,000
                                                         --------------        -------------       -------------
       Total                                                 26,750,000           14,064,000          14,705,000
                                                           ------------         ------------        ------------

NET OPERATING INCOME (LOSS)                                 (8,303,000)            3,274,000         (2,100,000)
                                                          ------------         -------------       -------------

OTHER INCOME (EXPENSE)
    Interest income                                               5,000               46,000              27,000
    Interest expense                                          (992,000)          (1,669,000)         (1,913,000)
                                                         -------------         ------------        ------------
    Total                                                     (987,000)          (1,623,000)         (1,886,000)
                                                         --------------        ------------        ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM                                (9,290,000)            1,651,000         (3,986,000)
INCOME TAXES (BENEFIT)                                              -0-                  -0-                 -0-
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM                                          (9,290,000)            1,651,000         (3,986,000)
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT                                                  -0-            (536,000)                 -0-
                                                          -------------        -------------       -------------

NET INCOME (LOSS)                                         $ (9,290,000)        $   1,115,000       $ (3,986,000)
                                                          ============         =============       =============

EARNINGS (LOSS) PER COMMON SHARE
    Primary:
       Earnings (loss) before extraordinary item     $            (.81)   $              .16  $            (.53)
       Extraordinary loss                                           -0-                (.05)                 -0-
                                                    -------------------   ----------------- --------------------
       Net earnings (loss)                           $            (.81)   $              .11  $            (.53)
                                                     =================    ==================  =================
    Assuming full dilution:
       Earnings (loss) before extraordinary item     $            (.81)   $              .16  $            (.53)
       Extraordinary loss                                           -0-                (.05)                 -0-
                                                    -------------------    ----------------  -------------------
       Net earnings (loss)                           $            (.81)   $              .11  $            (.53)
                                                     =================    ==================  =================
    Weighted average shares outstanding:
       Primary                                             $ 11,504,615         $  9,952,870       $   7,583,761
                                                           ============         ============       =============
    Assuming full dilution                                 $ 11,504,615          $10,039,042       $   7,583,761
                                                           ============          ===========       =============
The  accompanying  notes to financial  statements  are an integral
part of this statement.

                                       F-5
PANACO, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         AND RETAINED EARNINGS (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

                                                                      Common         Additional         Retained
                                                                       Share           Paid-In          Earnings
                                                       Shares        Par Value         Capital          (Deficit)
Balances, December 31, 1992                      $   7,534,496    $    75,000       $ 11,298,000    $     65,000
Net loss                                                   -0-            -0-                -0-     (3,986,000)
Exercises of stock options and warrants                620,759          7,000          1,285,000             -0-
                                                   -----------   ------------      ------------------------------
Balances, December 31, 1993                          8,155,255      $  82,000        $12,583,000    $(3,921,000)

Net income                                                 -0-            -0-                -0-       1,115,000
Exercises of stock options and warrants and
 shares  issued under Employee Stock
   Ownership Plan                                    2,064,883         20,000          5,003,000             -0-
                                                    ----------    -----------       ------------------------------
Balances, December 31, 1994                       $ 10,220,138       $102,000        $17,586,000    $(2,806,000)

Net Loss                                                   -0-            -0-                -0-     (9,290,000)
Exercise of stock options and warrants               1,181,602         12,000          3,137,000             -0-
Issuance of new shares                                 102,875          1,000            432,000             -0-
                                                   -----------   ------------       -----------------------------
Balances, December 31, 1995                       $ 11,504,615      $ 115,000        $21,155,000   $(12,096,000)
                                                  ============      =========        ===========    ============
The  accompanying  notes to financial  statements  are an integral
part of this statement.

                                       F-6
PANACO, INC.
                            STATEMENTS OF CASH FLOWS

                                                                               Year Ended December 31,
                                                                     1995              1994                1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary item                  $(9,290,000)         $1,651,000      $ (3,986,000)
   Adjustments to reconcile net income (loss) to
       net cash provided by operating activities:
     Depreciation, depletion, and amortization                     8,065,000          6,038,000          4,288,000
     Amortization of loan discount                                       -0-            340,000            512,000
     Exploration expenses                                          8,112,000                -0-                -0-
     Provision for losses and (gains) on disposition
       and write-down of assets                                      751,000          1,202,000          3,824,000
   Changes in operating assets and liabilities:
     Accounts receivable                                         (2,155,000)        (1,202,000)          1,261,000
     Prepaid expenses                                              (193,000)          (113,000)           (20,000)
   Other assets                                                      200,000          (388,000)           (11,000)
     Accounts payable                                              2,916,000           (79,000)          (896,000)
     Interest payable                                               (24,000)             26,000           (40,000)
   Extraordinary loss                                                    -0-          (536,000)                -0-
                                                              --------------      ------------  ------------------
     Net cash provided by operating activities                     8,382,000          6,939,000          4,932,000
                                                              --------------      -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Sale of oil and gas properties                                     11,000            300,000             41,000
   Capital expenditures and acquisitions                        (21,803,000)       (12,101,000)          (790,000)
   Purchase of other property and equipment                         (38,000)           (37,000)           (52,000)
   Sale of other property and equipment                                  -0-             10,000                -0-
   Purchase of certificate of deposit                                    -0-                 -0-          (26,000)
                                                              --------------      --------------  ---------------
     Net cash used by investing activities                      (21,830,000)       (11,828,000)          (827,000)
                                                              --------------      ------------     --------------

CASH FLOW FROM FINANCING ACTIVITIES:
   Long-term debt proceeds                                        16,890,000          5,564,000                -0-
   Repayment of long-term debt                                   (7,000,000)        (7,326,000)        (3,535,000)
   Issuance of common shares - exercise of
     warrants and options                                          3,173,000          5,023,000          1,163,000
                                                               -------------      -------------      -------------
   Net cash provided (used) by financing activities               13,063,000          3,261,000        (2,372,000)
                                                                ------------      -------------      ------------

NET INCREASE (DECREASE) IN CASH                                    (385,000)        (1,628,000)          1,733,000

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF YEAR                                               1,583,000          3,211,000          1,478,000
                                                               -------------       ------------      -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                        $  1,198,000       $  1,583,000       $  3,211,000
                                                                ============       ============       ============
The  accompanying  notes to financial  statements  are an integral
part of this statement.

                                       F-7
PANACO, INC.

                          NOTES TO FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of PANACO, Inc. (the Company) is
presented to assist in understanding  the Company's  financial  statements.  The
financial statements and notes are representations of the Company's  management,
who  are  responsible  for  the  integrity  and  objectivity  of  the  financial
statements.  These accounting  policies conform to generally accepted accounting
principles  and  have  been  consistently  applied  in  the  preparation  of the
financial statements.

Revenue Recognition
The Company  recognizes its ownership  interest in oil and gas sales as revenue.
It records revenues on an accrual basis,  estimating  volumes and prices for any
months for which actual information is not available.  If actual production sold
differs  from  its  allocable  share  of  production  in a  given  period,  such
differences would be recognized as deferred or accounts receivable.

Hedging Transactions
The Company engages in natural gas futures contracts within the normal course of
its business. The Company uses futures and floor contracts to reduce the effects
of  fluctuations  in natural  gas prices.  Changes in the market  value of these
contracts are deferred and subsequent gains and losses are recognized monthly in
the same  period as the hedged  item based on the  difference  between the First
Nearby  Contract  for Natural Gas - NYMEX and the  contract  price.  The Company
entered into a hedge agreement  beginning in January,  1996, for the delivery of
15,000  MMBTU of gas for each day in 1996  with  contract  prices  ranging  from
$1.7511/MMBTU to $2.253/MMBTU.  Prior to this agreement, the Company had entered
into a floor  contract that expired  December,  1994, and a hedge contract which
expired September, 1993.

Income Taxes
In 1993, the Company adopted Statement of Financial  Accounting  Standards (FAS)
No. 109 - "Accounting for Income Taxes",  which requires recognition of deferred
tax assets and liabilities  for the expected  future tax  consequences of events
that have been included in the financial  statements or tax returns.  Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities  using  enacted  tax  rates in  effect  for the  year in  which  the
differences are expected to reverse.  Generally, FAS 109 allows for at least the
partial  recognition of deferred tax assets in the current period for the future
benefit of net operating loss carry forwards.

Income (Loss) per share
The  computation  of  earnings  or loss per  share in each  year is based on the
weighted  average  number of common shares  outstanding.  When  dilutive,  stock
options and warrants are included as share  equivalents using the treasury share
method. Stock options and warrants were not included in the calculation for 1993
and 1995, as the effects were not dilutive. Shares to be contributed to the ESOP
plan are treated as common share equivalents.

Property, Plant & Equipment
Other property and equipment is recorded at cost. Depreciation is provided using
the straight-line method based on estimated useful lives which range from 5 to 7
years.

Oil and Gas Producing Activities and Depreciation, Depletion and Amortization
     Effective  December 31, 1995,  PANACO  changed its method of accounting for
oil and gas operations from the
                                       F-8
full cost method to the successful efforts method. Management concluded that the
successful efforts method will more  appropriately  reflect PANACO's oil and gas
operations  and will enable  investors  and others to better  compare  PANACO to
similar  oil and gas  companies,  the  majority of which  follow the  successful
efforts  method.  All prior period  financial  statements  have been restated to
reflect the change.

Under the successful  efforts method,  lease  acquisition costs are capitalized.
Exploratory drilling costs are also capitalized pending  determination of proved
reserves.  If proved  reserves are not  discovered,  the  exploratory  costs are
expensed. All development costs are capitalized.  Provision for depreciation and
depletion is determined on a field-by-field  basis using the  unit-of-production
method.  The  carrying  amounts of proven and unproven  properties  are reviewed
periodically  on a  property-by-property  basis,  based on future net cash flows
determined by an  independent  engineering  firm,  and an impairment  reserve is
provided  as  conditions  warrant.  The  provision  for write down of assets was
$751,000 for 1995, $1,202,000 for 1994, and $3,824,000 for 1993.

The  change in the  Company's  accounting  method  increased  1995 net income by
$2,054,000 or $0.18 per share from  previously  reported  results under the full
cost method.  The change  decreased 1994 and 1993 net income by  $1,298,000,  or
$0.13  per  share  and  $3,800,000,  or  $0.51  per  share,  respectively,  from
previously reported results under the full cost method. As of December 31, 1995,
retained  earnings was  decreased by  $2,797,000  as a result of the  accounting
change and additional paid in capital was reduced by $1,264,000.

Amortization of Note Discount
The note  discount was being  amortized  utilizing  the interest  method,  which
applies a constant  rate of interest  to the book value of the note.  Additional
interest expense of $0, $234,000,  and $512,000,  was recorded in 1995, 1994 and
1993,  respectively,  from the  amortization of the discount.  Effective July 1,
1994 the debt related to the note discount was extinguished,  and the balance of
the note discount totaling $106,000 was recorded as an extraordinary item.

Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all cash investments
with maturities of three months or less to be cash equivalents.

Use of Estimates
Management  relies on the use of estimates  for oil and gas reserve  information
and the  valuation  allowance for deferred  income taxes in preparing  financial
statements  in  accordance  with  generally  accepted   accounting   principles.
Estimates  related  to oil  and gas  reserve  information  and the  standardized
measure  are based on  estimates  provided by third  parties.  Changes in prices
could significantly affect these estimates from year to year.

Reclassification
Certain  financial  statement  items  have been  reclassified  to conform to the
current year's presentation.

Note 2 - LOAN COSTS

Loan costs in the amount of $602,000 and $255,000 are being  amortized  over the
lives of the loans,  three years and six years,  respectively.  Additional  loan
costs of $402,000 were incurred during 1994.

Note 3 - MAJOR CUSTOMERS

One  purchaser  accounted  for  69%  and  83% of  revenues  in  1995  and  1994,
respectively, and two purchasers accounted for 65% and 17% of revenues in 1993.

Note 4 - CERTIFICATE OF DEPOSITS - ESCROW

The Company has CD's to satisfy  plugging  obligations  with certain  government
entities.

                                       F-9
Note 5- LONG-TERM DEBT
                                   1995                       1994
                            -------------                 -----------
Note payable (a)            $   5,000,000               $   5,000,000
Note payable (b)               17,390,000                   7,500,000
                            -------------                -------------
                               22,390,000                  12,500,000

Less current portion                   -                          -
                            -------------                ------------
    Long-term debt          $  22,390,000                $ 12,500,000
                            ============                 ============

     (a) Note payable  dated  December 31, 1993 due to a group of six lenders in
the  amount  of  $5,000,000  bearing  interest  at 12%.  The  lenders  at  their
discretion  can loan an  additional  $5,000,000  to the  Company.  Payments  for
interest only are required  quarterly.  The Company may deliver up to $1,000,000
in PIK (payment in kind) notes,  bearing interest at 12%, in satisfaction of all
or part of any interest payment. The loan agreement limited the use of the first
$5,000,000 to capital expenditures and the next $5,000,000 (assuming the lenders
approve  additional  borrowings) to  acquisitions.  The loan agreement  contains
certain  financial  covenants  including  future  indebtedness  and  payment  of
dividends.  The note  matures on December  31, 1999 and is  collateralized  by a
second  mortgage on a  substantial  portion of offshore oil and gas  properties,
production  proceeds and receivables.  The lenders were issued 816,526 warrants,
at an exercise price of $2.25, expiring December 31, 1998 in connection with the
financing (see Note 8).
     (b)  Reducing  Revolving  Line of Credit  dated July 1, 1994 with a maximum
debt  incurred  equal to the lesser of thirty  million  dollars or the Borrowing
Base ($21,000,000 at December 31, 1995). The Borrowing Base reduces on a monthly
basis at a rate of $500,000 and is reviewed on a semi-annual basis as of June 30
and December 31. The note is due July 1, 1998 and bears interest at either prime
or Libor plus 1.0% to 1.75%  depending on the  percentage of the borrowing  base
used (8% and 7.625% at December 31, 1995,  respectively).  At December 31, 1995,
the Company had $3,025,000 borrowed at 7.625%,  $10,500,000 borrowed at 7.5625%,
and $3,865,000 borrowed at 7.6875%. Interest is due on the last day of the month
for prime notes and is due on the last day of the interest period or every three
months on Libor notes.  A commitment  fee of .375% to .5% of the average  unused
portion of the Borrowing Base is due on a quarterly basis. The revolving line of
credit is collateralized by a substantial portion of the oil and gas properties,
receivables,  inventory and general  intangibles.  The loan  agreement  contains
certain  covenants  including  maintaining a positive  indebtedness to cash flow
ratio,  a  positive  working  capital  ratio,  a  certain  tangible  net  worth,
limitations on future debt,  guarantees,  liens,  dividends,  mergers,  material
change in ownership by management,  and sale of assets. In addition,  the Lender
has issued the  Company a letter of credit for  $3,000,000  to  collateralize  a
plugging bond which reduces the available Borrowing Base.

Maturities of long-term debt are as follows:

                 December 31, 1997                        $17,390,000

                 December 31, 1999                        $  5,000,000
                                                          ------------
                                                           $22,390,000

Note 6 - STOCKHOLDERS' EQUITY

During 1995,  1,181,602  shares were issued  related to the exercise of warrants
and options, 97,680 shares were issued related to property acquisition costs and
5,195 shares were issued for board of directors fees.

During 1994,  2,034,033  shares were issued  related to the exercise of warrants
and options, and 30,850 shares were issued related to the Company's ESOP.

During 1993,  12,294  shares were awarded to three new  directors,  1,200 shares
were issued in exchange for oil and gas  properties,  36,363  shares were issued
for payment of a finders fee on new  financing  (see Note 5) and 575,000  shares
were issued related to the exercise of warrants and options.

                                      F-10
During 1993,  4,098 shares were  relinquished  to the Company under the terms of
the Long-Term  Incentive Plan by a director upon his  resignation.  These shares
were reissued in the above transactions during 1993.

Shares outstanding are as follows:
     Year Ending December 31,
                                                      Common           Preferred
                                                      Shares            Shares
                         1993                       8,155,255              -
                         1994                      10,220,138              -
                         1995                      11,504,615              -

Note 7- WARRANTS

Warrants  outstanding  at December 31,  1995   to acquire  common  shares are as
follows:

                    Number of     Price per
                      Shares        Share         Expiration Date
                    --------     ----------     ------------------
                    160,000        $2.375           June 1, 1996
                     90,000        $2.000           June 1, 1996
                     39,365        $2.000           December 31, 1997
                   ---------
                    289,365

During 1995, warrants with exercise prices ranging from $2.00 to $4.00 per share
were exercised for a total of 495,735 shares.

Note 8 -  LENDER WARRANTS

In  connection  with the note  payable  dated  December  31,  1993  (See Note 4)
warrants were issued to a group of six lenders. These warrants differ from those
described  in Note 5;  they have  stronger  antidilution  provisions,  effective
January 1, 1996 the holders can demand  registering  the warrant  shares  either
issuable  upon  exercise or held by the holder,  and the holder may also, if the
Company  files a  Registration  Statement,  have an  opportunity  to include the
warrant shares in such Registration Statement. Warrants to acquire Common Shares
were as follows:

                      Number of         Price per
                      Shares            Share            Expiration Date
                      816,526           $2.25            December 31, 1998

Early in 1996, the warrants were exercised.

Note 9 - STOCK OPTIONS AND LONG-TERM INCENTIVE PLAN

On August 26,  1992,  the  shareholders  approved  a  long-term  incentive  plan
allowing  the  Company  to  grant  incentive  and  nonstatutory  stock  options,
performance units,  restricted stock awards and stock appreciation rights to key
employees,  directors, and certain consultants and advisors of the Company up to
a maximum of 20% of the total number of shares outstanding.

At December 31, 1995, there were no stock options outstanding.

During 1995, options with exercise prices ranging from $2.00 to $3.975 per share
were exercised for a total of 759,712 shares.

Under the terms of the Long-Term  Incentive Plan,  three  directors  surrendered
73,845 shares to exercise 124,400 options.  New options were issued equal to the
number of shares surrendered at a price of $2.0313

                                      F-11
per share.

Note 10 - RELATED PARTY TRANSACTIONS

During  1995,  25,000  warrants at a price of $2.50 per share were issued to and
exercised by a director.

During 1994,  650,000  warrants at a price of $2.75 per share were issued to the
Board of Directors. All warrants were exercised during 1994.

The Company entered into a triple net lease  agreement with a partnership  owned
by two directors for the lease of an office building.  The lease,  which expires
November,  2003,  has monthly rental  payments of $4,000.  During 1995 and 1994,
$48,000 per year in rent was paid under the lease  agreement.  During  1993,  no
rent was due under the lease agreement. A deposit of $4,000 was due and included
in accounts payable at December 31, 1993.

Stock  options  (see Note 7)  originally  issued to three  directors  to acquire
250,000 shares each,  were  exercisable  through  December 31, 1995 at $2.00 per
share.  During 1995,  1994 and 1993,  150,000,  275,000 and 300,000 options were
exercised  at $2.00 per  share.  In 1994 and 1993,  an  additional  275,000  and
300,000 options  respectively were issued at prices ranging from $2.32 per share
to $3.9375 per share, and all options were exercised in 1995.

Under the terms of the Long-Term  Incentive  Plan,  three  directors were issued
73,845  options at $2.0313 per share and 68,567  options at $2.1875 per share in
1995 and 1994, respectively. These options were exercised in 1995.

Warrants were issued to a director in 1991 to acquire 250,000 shares.  Of these,
160,000 shares were exercised in 1993 at $2.00 per share and 90,000 warrants are
exercisable  through  June 1,  1996 at $2.00 per  share.  In  addition,  160,000
warrants at $2.375 issued  December 10, 1993,  are  exercisable  through June 1,
1996.

Consulting fees of $80,000 were paid in 1993 to an entity of which a director is
a 100% owner. At December 31, 1993, no such fees were payable to this entity.

In 1993,  three new directors  were awarded 4,098 shares each (valued at a total
of $30,000)  pursuant to the Company's  Long-term  Incentive Plan.  These shares
become vested over a thirty month period.

During 1993, a director relinquished 4,098 shares upon his resignation.

Note 11 - LEASES

The following is a schedule of future rental  payments  required under an office
building lease described in Note 10 as of December 31, 1995.

     Year ending December 31,

                           1996                  $   48,000
                           1997                      48,000
                           1998                      48,000
                           1999                      48,000
                           2000                      48,000
                         2001-2003                  140,000
                                                 $  380,000

Rental expense incurred on a former office lease for the year ended December 31,
1993, was $26,180.

                                      F-12
Note 12 - INCOME TAXES

At December  31, 1995,  the Company had net  operating  loss carry  forwards for
federal income tax purposes of $15,765,000  which are available to offset future
federal taxable income through 2010.

Significant  components of the Company's  deferred tax liabilities and assets as
of December 31 are as follows:

                                                 1995                  1994
                                           ------------          ----------
Deferred tax assets
     Fixed asset basis differences         $1,408,000           $    557,000
     Net operating loss carry forwards      6,306,000              3,504,000
                                            ---------           ------------
        Total deferred tax assets           7,714,000              4,061,000
                                            ---------           ------------

  Valuation allowance for deferred
     tax assets                            (7,714,000)           (4,061,000)
                                           ----------            ----------
        Total deferred tax assets          $        -           $         -
                                           ===========          ===========

A valuation  allowance  is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized.

The  valuation  allowance  for  deferred  tax assets as of December 31, 1993 was
$3,704,000.  The net change in the total valuation allowance for the years ended
December  31,  1995  and  1994  was an  increase  of  $3,653,000  and  $357,000,
respectively.

Note 13 - COMMITMENT AND CONTINGENCIES

A  $3,000,000  letter of credit,  collateralizing  a plugging  bond,  expires on
December 14, 1996. The contract amount of the letter of credit  approximates its
fair value.

The Company has had a suit filed against it related to a gas gathering system in
Oklahoma  seeking  $700,000.  The Company has filed a counter  claim against the
plaintiff alleging fraud, asking that the contract,  which is the subject of the
suit, be declared void.  Management  feels the suit is without merit and will be
disposed of for less than the amount  claimed,  although  this amount  cannot be
reasonably estimated.

Concentrations of Credit Risk
Financial  instruments which potentially subject the Company to concentration of
credit risk consist  principally of bank account balances in excess of federally
insured limits and trade receivables.  The Company's  receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively,  in that these  entities  may be  similarly  affected  by changes in
economic or other  conditions.  Receivables  are generally  not  collateralized.
Historical  credit losses  incurred by the Company on receivables  have not been
significant.

Note 14 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

In August, 1994, the Company established an Employee Stock Ownership Plan (ESOP)
and Trust that covers  substantially  all  employees. The Board of Directors can
approve  contributions,  up to a maximum  of 15% of  eligible  employees'  gross
wages. The Company  incurred  $132,000 and $123,000 in costs for the years ended
December 31, 1995 and 1994, respectively.

                                      F-13
Note 15-IMPAIRMENT OF LONG-LIVED ASSETS

In 1995 the Company adopted the Statement of Financial  Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be  Disposed  Of",  which  requires  that  long-lived  assets  and  identifiable
intangibles be reviewed for impairment  when the assets  carrying amount may not
be  recoverable  based on the fair market value of the asset.  SFAS 121 requires
assets to be reviewed  for  impairment  at the lowest  level for which there are
independent, indentifiable cash flows. The adoption of SFAS 121 had no effect on
1995  financial  statements  and the Company  expects no future  impact,  as the
Company  periodically  evaluates its oil and gas properties for impairment under
the  successful  efforts  method  of  accounting  on a field by  field  basis as
prescribed by FAS No. 121.

Note 16-FINANCIAL INSTRUMENTS

Effective  December 31, 1995, the Company adopted the  requirements of Statement
of  Financial  Accounting  Standards  No. 107,  "Disclosure  about Fair Value of
Fianacial  Instruments"  requires desclosure of an estimate of the fair value of
certain  financial  instruments.  The  carrying  amount  and fair  values of the
Company's financial insturments at December 31, 1995, are as follows:

                                                     Assets (Liabilities)
                                               Carrying Amount     Fair Value  
Cash and cash equivalents                       $    1,198,000    $ 1,198,000
Receivables                                          4,415,000      4,415,000
Payables                                            (4,605,000)    (4,605,000)
Long-term variable rate debt                       (17,390,000)   (17,390,000)
Long-term fixed rate debt                           (5,000,000)    (3,675,150)
Off balance sheet financial instruments
     Letter of credit                                        0              0
     Hedge contracts                                         0     (2,000,000)

Cash and cash equivalents,  receivables,  payables,  and long-term variable rate
debt
The carrying amount reported on the consolidated  balance sheet approximates its
fair value because of the short maturities of these instruments.

Long-term, fixed rate debt
The Company estimates the fair value of its long-term, fixed rate debt generally
using descounted cash flow analysis based on the Corporation's current borrowing
rates for debt with similar maturities.

Letter of credit
A  $3,000,000  letter of credit  collateralizes  a  plugging  bond.  Fair  value
estimated on the basis of fees paid to obtain the  obligation is not material at
December 31, 1995.

Hedge contract
The fair value of the Company's futures contracts are estimated based on current
settlement values.

Concentrations of Credit Risk
Financial  instruments which potentially subject the Company to concentration of
credit risk consist  principally of bank account balances in excess of federally
insured limits and trade receivables.  The Company's  receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively,  in that these  entities  may be  similarly  affected  by changes in
economic or other  conditions.  Receivables  are generally  not  collateralized.
Historical  credit losses  incurred by the Company on receivables  have not been
significant.

Note 17 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)

The  following  table  reflects  the  costs  incurred  in oil and  gas  property
activities for each of the three years ended December 31:

                                      F-14
1995             1994              1993
                                               -------------    -------------    --------------
Property acquisition costs, proved             $12,603,000      $     352,000    $       -

Property acquisition costs, unproved           $        -       $         -      $       -

Exploration costs                              $  8,112,000     $         -      $       -
Development costs                              $  1,497,000     $ 11,749,000     $     801,000
Quantities of Oil and Gas Reserves

The estimates of proved developed and proved  undeveloped  reserve quantities at
December  31,  1995 are based upon  reports of  petroleum  engineers  and do not
purport to reflect realizable values or fair market values of PANACO's reserves.
It should be  emphasized  that reserve  estimates are  inherently  imprecise and
accordingly,  these  estimates  are  expected  to change  as future  information
becomes available. These are estimates only and should not be construed as exact
amounts. All reserves are located in the United States.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude  oil and
condensate  that  geological and engineering  data  demonstrate  with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.  Proved developed reserves are those expected
to be recovered through existing wells, equipment, and operating methods.

Proved developed and undeveloped reserves          Oil                 Gas

Estimated reserves as of December 31, 1992      1,121,000           46,595,000

     Production                                 (180,000)          (5,586,000)
     Sale of minerals in-place                   (12,000)            (155,000)
     Revisions of previous estimates            (184,000)            2,842,000
                                              ----------            ----------
Estimated reserves as of December 31, 1993        745,000           43,696,000

     Production                                 (137,000)          (8,139,000)
     Extensions and discoveries                   183,000           16,930,000
     Sale of minerals in-place                   (24,000)             (45,000)
     Revisions of previous estimates              176,000         (10,860,000)
                                              -----------         -----------
Estimated reserves as of December 31, 1994        943,000           41,582,000

     Production                                 (170,000)          (9,850,000)
     Sale of minerals in-place                    (1,000)             (22,000)
     Purchase of minerals in-place              1,140,000           20,094,000

     Revisions of previous estimates             (12,000)          (5,093,000)
                                              ----------         ------------
Estimated reserves as of December 31, 1995    1  ,900,000           46,711,000
                                              ===========          ===========

Proved developed reserves:

                                 Oil                  Gas
                               (BBLS)                (MCF)
                            --------------        -----------

    December 31, 1992            1,053,000         36,208,000
                            ==============         ==========

    December 31, 1993              745,000         24,665,000
                            ==============         ==========

    December 31, 1994              907,000         36,282,000
                            ==============         ==========

    December 31, 1995            1,794,000         40,323,000
                            ==============         ==========

                                      F-15
Standardized Measure of Discounted Future Net Cash Flows
     Future cash inflows are computed by applying year-end prices of oil and gas
(with  consideration of price changes only to the extent provided by contractual
arrangements) to the year-end  estimated future production of proved oil and gas
reserves.  Estimates of future  development  and  production  costs are based on
year-end costs and assume  continuation  of existing  economic  conditions.  The
estimated  future net cash flows are then discounted using a rate of 10 per cent
per  year to  reflect  the  estimated  timing  of the  future  cash  flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the computed discount.

     The  accompanying  table  reflects the  standardized  measure of discounted
future cash flows  relating to proved oil and gas reserves as of the three years
ended December 31:
1995             1994              1993
                                               --------------     -------------      --------------
Future cash inflows                            $140,247,000       $88,893,000        $113,419,000
Future development and production costs          50,723,000        32,197,000          38,375,000
                                               --------------     ------------       --------------
Future net cash flows                            89,524,000        56,696,000          75,044,000
Future income taxes                              11,755,000         6,304,000          13,937,000
                                               --------------     -------------      --------------
Future net cash flows after income taxes         77,769,000        50,392,000          61,107,000
10% annual discount                            (14,848,000)       (8,477,000)        (13,728,000)
                                               --------------     ------------       --------------
Standardized measure after income taxes        $ 62,921,000       $41,915,000       $  47,379,000
                                               =============      ===========        =============
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the  principal  changes in the  standardized
measure of discounted  future net cash flows  attributable to proved oil and gas
reserves for each of the three years ended December 31:
1995            1994                1993
                                                      ----------------   --------------     --------------
Beginning balance                                     $     41,915,000     $47,379,000        $ 48,163,000
Sales of oil and gas, net of production costs              (9,314,000)    (11,047,000)         (9,426,000)
Net change in income taxes                                 (4,267,000)       5,562,000         (2,130,000)
Changes in price and production costs                       11,498,000    (10,781,000)           2,199,000
Purchase of minerals in-place                               34,415,000              -                    -
Revision of previous estimates, extensions,
   discoveries, & sales of minerals in place-net          (11,326,000)      10,802,000           8,573,000
                                                        --------------     -----------       -------------
Ending balance                                           $  62,921,000     $41,915,000        $ 47,379,000
                                                      ================  ===============    ================

Price per MCF                                         $          2.24   $         1.75     $          2.40
                                                      ================  ===============    ================
Price per BBL                                         $         17.75   $        16.00     $         12.75
                                                      ================  ===============    ================
Note 18 - ACQUISITIONS

On July 12, 1995,  the Company  entered into a Purchase and Sale  Agreement with
Zapata  Exploration  Company  ("Zapata") to acquire all of Zapata's offshore oil
and gas properties in the Gulf of Mexico.  The properties consist of East Breaks
Blocks 109 and 110,  East Cameron  Block 359,  Eugene  Island  Block 372,  South
Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross acres. The
transaction closed July 26, 1995.

The purchase price for the assets acquired in this transaction was $2,748,000 in
cash and the obligation to pay a production  payment to Zapata based upon future
production. The production payment is based upon production from the East Breaks
109 Field after  production of 12 Bcfe gross (10 Bcfe net) measured from October
1,  1994.  The  Company  will pay to Zapata  $.4167 per Mcfe on the next 27 Bcfe
produced.  Payments to Zapata on this  production  payment are to be made by the
Company when it is paid for the oil or gas. Oil and gas reserves attributable to
this production  payment are not included in the reserves for the properties set
forth herein.

                                      F-16
As of November 30, 1995, the Company  entered into a Purchase and Sale Agreement
with Shell Western E&P Inc.  ("Shell") to acquire all of Shell's interest in the
Bayou  Sorrel Field in  Iberville  Parish,  Louisiana.  The  transaction  closed
December 27, 1995, and PANACO took over as operator from Shell.  Proved reserves
attributable to the field at December 31, 1995, were 898,000 barrels and 3.1 Bcf
of natural gas. In addition to the proved  reserves  management  has  identified
significant  probable  and possible  reserves  attributable  to this field.  The
purchase price of the field was $10,455,000  which included a $204,000  brokers'
fee and a related receivable of $600,000.

Both of the  acquisitions  made in 1995 were  accounted  for using the  purchase
method.  The results of the Zapata  properties  acquisition  are included in the
Company's  statement of income  (operations)  from July 27 to December 31, 1995.
The  results of the Bayou  Sorrel  acquisition  are  included  in the  Company's
statement of income (operations) from December 28 to December 31, 1995.

The unaudited pro forma  statements  of income  (operations)  for the year ended
December  31, 1995  assumes the Zapata and Bayou  Sorrel  acquisitions  had been
consummated  January  1,  1995.  The  unaudited  pro forma  statement  of income
(operations)  includes certain adjustments to give effect to the acquisitions of
the oil and gas properties.

The pro forma  statements  do not purport to be indicative of the results of the
Company  had these  acquisitions  occurred on the date  assumed,  nor is the pro
forma statement necessarily indicative of the future results of the Company. The
pro forma statement should be read together with the Financial Statements of the
Company, including the notes thereto and included elsewhere in this Statement.

                                      F-17
PANACO, INC.
          Unaudited Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1995

                                                       Zapata          Bayou                           PANACO, Inc.
                                   PANACO, Inc.      Properties    Sorrel Field      Pro Forma          Pro Forma
                                   (As Restated)     1/1-7/26/95   1/1-12/26/95     Adjustments          Combined
REVENUES
Oil and gas sales                   $ 18,447,000    $ 3,623,000      $ 3,326,000$            --       $ 25,396,000

COSTS AND EXPENSES
   Lease operating                     8,055,000      1,460,000          867,000        280,000  (a)    10,662,000
   Depreciation, depletion and
      amortization                     8,064,000             --               --      1,812,000  (b)     9,876,000
   Exploration expenses                8,112,000             --               --             --          8,112,000
   Provision for losses and
      (gains) on disposition
      & write-down of assets             751,000             --               --             --            751,000
   General and administrative            690,000             --               --             --            987,000
   Production and ad valorem
      taxes                            1,078,000             --          297,000             --          1,078,000
                                    ------------------------------------------------------------------------------
   Total                              26,750,000      1,460,000        1,164,000      2,092,000         31,466,000

NET OPERATING INCOME
   (LOSS)                            (8,303,000)      2,163,000        2,162,000    (2,092,000)        (6,070,000)
                                    ------------   ------------     ------------   ------------     --------------

OTHER INCOME (EXPENSE)
   Interest income                         5,000             --               --             --              5,000
   Interest expense                    (992,000)             --               --      (651,000)  (c)   (1,643,000)
                                   ------------------------------------------------------------     --------------
      Total                            (987,000)             --               --      (651,000)        (1,638,000)
                                   ---------------------------------------------------------------- --------------

NET INCOME (LOSS) BEFORE
   INCOME TAXES                      (9,290,000)      2,163,000        2,162,000    (2,743,000)        (7,708,000)
INCOME TAXES (BENEFIT)                        --             --               --             --                 --
                                   -------------------------------------------------------------------------------

NET INCOME (LOSS)                   $(9,290,000)     $2,163,000       $2,162,000   $(2,743,000)       $(7,708,000)
                                    ============     ==========       ==========   ============       ============

EARNINGS (LOSS) PER COMMON SHARE
   Primary
      Net earnings (loss)       $         (0.81)                                                 $          (0.67)
                                ================                                                 =================

   Assuming full dilution
       Net earnings (loss)      $         (0.81)                                                 $          (0.67)
                                ================                                                 =================

   Weighted average shares outstanding:
      Primary                         11,504,615                                                        11,504,615
                                ================                                                  ================

    Assuming full dilution            11,504,615                                                        11,504,615
                                ================                                                  ================
The  accompanying  notes  to  pro  forma  financial  statements  are an
integral part of this statement.

                                      F-18
PANACO, INC.
          Unaudited Pro Forma Combined Statement of Income (Operations)
                      For the Year Ended December 31, 1994

                                                         Zapata          Bayou                       PANACO, Inc.
                                      PANACO, Inc.     Properties    Sorrel Field       Pro Forma      Pro Forma
                                      (As Restated)   1/1-12/31/94   1/1-12/31/94      Adjustments     Combined
REVENUES
Oil and gas sales                  $ 17,338,000  $   7,540,000    $  2,888,000           --      $   27,766,000

COSTS AND EXPENSES
   Lease operating                       5,231,000      3,317,000       1,942,000         480,000  (a)  10,970,000
   Depreciation, depletion and 
   amortization                          6,038,000         --              --           1,447,000  (b)   7,485,000
   Exploration expenses                     --             --              --              --             --
   Provision for losses and (gains)
     on disposition and write-down
     of assets                           1,202,000         --              --              --          1,202,000
   General and administrative              587,000         --            310,000           --            897,000
    Production and ad valorem taxes      1,006,000         --              --              --          1,006,000
                                      --------------------------------------------------------------------------
     Total                              14,064,000      3,317,000       2,252,000       1,927,000     21,560,000
                                      ------------- --------------   -------------   -------------   ------------

NET OPERATING INCOME (LOSS)              3,274,000      4,223,000         636,000     (1,927,000)      6,206,000
                                      --------------  -------------  --------------  --------------  -----------

OTHER INCOME (EXPENSE)
   Interest income                          46,000         --              --             --              46,000
   Interest expense                    (1,669,000)         --              --           (788,000)(c) (2,457,000)
                                      --------------------------------------------------------------- -----------
     Total                             (1,623,000)         --              --           (788,000)    (2,411,000)
                                      --------------------------------------------------------------------------

NET INCOME (LOSS) BEFORE
   INCOME TAXES AND
   EXTRAORDINARY ITEM                    1,651,000      4,223,000         636,000     (2,715,000)      3,795,000

INCOME TAXES (BENEFIT)                      --             --              --             --              --
                                      --------------------------------------------------------------------------

EXTRAORDINARY ITEM-LOSS
   ON EARLY RETIREMENT OF
   DEBT                              $   (536,000)    $    --        $     --       $     --        $  (536,000)
                                      --------------------------------------------------------------------------

NET INCOME (LOSS)                     $  1,115,000    $ 4,223,000    $    636,000    $(2,715,000)   $  3,259,000
                                      ------------    -----------    ------------    ------------   ------------

EARNINGS (LOSS) PER COMMON SHARE
   Primary
     Net (loss) before extraordinary item$   0.16                                                  $           0.37
     Extraordinary loss                     (0.05)                                                            (0.05)
                                ------------------                                                 -----------------
       Net earnings (loss)       $            0.11                                                 $           0.33
                                 =================                                                 ================

   Assuming full dilution
      Earnings loss before
       extraordinary item        $           0.16                                                  $           0.38
     Extraordinary loss                     (0.05)                                                            (0.05)
                                 -----------------                                                 -----------------
       Net earnings (loss)       $            0.11                                                 $          0.33
                                 =================                                                 =================

   Weighted average shares outstanding:
     Primary                             9,952,870                                                        9,952,870
                                  ================                                                 =================
     Assuming full dilution             10,039,042                                                       10,039,042
                                  ================                                                 =================
The  accompanying  notes  to  pro  forma  financial  statements  are an
integral part of this statement.

                                      F-19
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)

1.  Basis of Presentation

The  Unaudited  Pro Forma  Statement  of Income  (Operations)  of  PANACO,  Inc.
presents the combined  effects of the  acquisition of the Zapata  properties and
Bayou Sorrel Field as if the acquisitions  had been  consummated  January 1st of
each year.

2.  Pro Forma Entries

    (a)   To record the estimated additional insurance expense.
    (b)   To record the additional  depletion and  depreciation  expense for the
          increased property costs and production volumes (see Note 4 below).
    (c) To  record  the  additional  interest  expense  for  increased  term  of
borrowing (see Note 5 below).

3.  Taxes

No  additional  operating  taxes are included for the Zapata  properties  as the
production  from these  properties  is from federal  offshore  waters and is not
subject to severance taxes.

4.  Depletion, depreciation & amortization

Additional  depletion  and  depreciation  expense is  included  to  reflect  the
additional  property costs and production  volumes  assuming the transaction was
consummated January 1. The original purchase prices are used for the cost of the
properties. The actual purchase prices of the properties were reduced by the net
income of the  properties  from the effective  dates of the purchases  until the
closing dates.

5.  Interest

Additional  interest  expense is included as if the transactions had taken place
January 1. It is assumed that the Zapata  acquisition price was paid in cash and
the Bayou  Sorrel  acquisition  price was paid for using the  Company's  Primary
Credit  Facility.  Interest  is  computed on the  additional  borrowings  at the
estimated rates in effect at January 1.

                                      F-20
Independent Auditors' Report

To the Board of Directors
PANACO, Inc.

We have  audited  the  accompanying  schedules  of  Revenues,  Direct  Operating
Expenses and Production Taxes of the Zapata  properties  (which were acquired by
PANACO,  Inc.,  on July 26, 1995) and the Bayou Sorrel Field (which was acquired
by PANACO on December  27,  1995) for each of the two years in the period  ended
December 31, 1994.  These  schedules are the  responsibility  of PANACO,  Inc.'s
management.  Our  responsibility is to express an opinion on the schedules based
on our audits.

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

The accompanying  Schedules of Revenues,  Selected Direct Operating Expenses and
Production  Taxes were prepared for the purpose of complying  with the rules and
regulations  of the  Securities  and Exchange  Commission  (for inclusion in the
current  report on Form 10-K) and is not intended to be a complete  presentation
of the Zapata properties and Bayou Sorrel Field's revenues and expenses.

In our  opinion,  the  Schedules  of  Revenues,  Direct  Operating  Expenses and
Production Taxes referred to above present fairly, in all material respects, the
revenues,  selected direct operating expenses and production taxes of the Zapata
properties  and the Bayou  Sorrel  Field for each of the two years in the period
ended  December 31, 1994,  in  conformity  with  generally  accepted  accounting
principles.

BARRETT & ASSOCIATES
Overland Park, Kansas

December 15, 1995

                                      F-21
ZAPATA PROPERTIES AND BAYOU SORREL FIELD

            SCHEDULES OF REVENUES, SELECTED DIRECT OPERATING EXPENSES
                              AND PRODUCTION TAXES

                                          Zapata             Bayou Sorrel
                                        Properties              Field                    Total

                                                     Year Ended December 31, 1994
Oil and gas revenues                   $  7,540,000          $  2,888,000           $  10,428,000
                                       ============          ============           =============

Selected direct operating expenses     $  3,317,000          $  1,942,000          $    5,259,000
                                       ============          ============          ==============

Production taxes                                  0         $     310,000         $       310,000
                                       ============         =============         ===============

                                                    Year Ended December 31, 1993

Oil and gas revenues                   $ 11,823,000          $  2,908,000            $ 14,731,000
                                       ============          ============            ============

Selected direct operating expenses    $   3,696,000          $  1,806,000           $   5,502,000
                                      =============          ============           =============

Production taxes                      $           0         $     352,000          $      352,000
                                      =============         =============          ==============
See accompanying notes to this schedule.

                                      F-22
ZAPATA PROPERTIES AND BAYOU SORREL FIELD

                       NOTES TO THE SCHEDULES OF REVENUES,
             SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES

                 FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993

Note 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of  significant  accounting  policies  related to the  Schedules of
Revenues,  Selected Direct Operating Expenses and Production Taxes of the Zapata
properties  and the Bayou Sorrel  Field is presented to assist in  understanding
the  schedules.  The  schedules and notes are  representations  of the Company's
management,  which is  responsible  for the  integrity  and  objectivity  of the
schedules.  These accounting  policies conform to generally accepted  accounting
principles  and  have  been  consistently  applied  in  the  preparation  of the
statement.

Acquisitions
The Zapata  properties were acquired on July 26, 1995,  from Zapata  Exploration
Co. The Bayou Sorrel Field was acquired on December 27, 1995, from Shell-Western
E&P, Inc.

Revenue Recognition
Revenues  are  recorded  on the accrual  basis,  with  volumes and prices  being
estimated for properties  during periods when actual  production  information is
not available.

Selected Direct Operating Expenses
     Selected direct operating  expenses include necessary and ordinary expenses
to maintain  production.  Insurance  expense is not  included  since  sufficient
information is not available  from the Seller.  Management  estimates  insurance
costs to be $280,000 per annum.

Depreciation, depletion and amortization
Depreciation,   depletion  and  amortization  is  not  presented  as  sufficient
information is not available from the Seller.

Operating Taxes
No  additional  tax  expense  is  included  for the  Zapata  properties,  as the
production from federal offshore waters is not subject to state severance taxes.

General, Administrative, and Overhead  Expenses
General,  administrative,  and overhead expenses are not presented as sufficient
information is not available from the Seller.

Note 2 - 1995 REVENUES, SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES
          ----------------------------------------------------------------------
          (UNAUDITED)

The following is a schedule of revenues,  selected direct operating expenses and
production taxes for the periods in 1995 that the Company did not own the Zapata
properties  and the Bayou  Sorrel  Field.  The  schedule is not intended to be a
complete presentation of the Zapata properties and Bayou Sorrel Field's revenues
and expenses.

                                      F-23
Oil and Gas         Selected Direct          Production
                                            Revenues          Operating Expenses            Taxes
Zapata Properties
January 1, 1995 to July 25, 1995      $ 3,623,000           $ 1,460,000           $        0

Bayou Sorrel
     January 1, 1995 to December 26, 1995    3,326,000               867,000              297,000
                                           ------------          -------------         ------------

TOTAL                                      $ 6,949,000           $ 2,327,000           $  297,000
                                           ===========           ===========           ===========
Note 3 -  SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
          --------------------------------------------------------------------
          (UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved  undeveloped  reserve quantities of
the Zapata  properties and the Bayou Sorrel Field at December 31, 1994 are based
upon management's  computation from the report of PANACO's independent petroleum
engineers  as of December  31,  1995,  and do not purport to reflect  realizable
values  or  fair  market  values  of the  properties'  reserves.  It  should  be
emphasized  that reserve  estimates are  inherently  imprecise and  accordingly,
these estimates are expected to change as future information  becomes available.
These are  estimates  only and should not be  construed  as exact  amounts.  All
reserves are located in the United  States.  Reserve  quantities  for the Zapata
properties  and the Bayou Sorrel Field were not  available at December 31, 1992,
1993,  and 1994,  and the balances at those dates were  derived from  production
activity during 1993 and 1994.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude oil that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating  conditions.  Proved  developed  reserves  are  those  expected  to be
recovered through existing wells, equipment, and operating methods.
Proved developed and                       OIL (BBLS)                                  GAS (MCF)
undeveloped reserves                         Bayou                                       Bayou
                                Zapata       Sorrel         Total          Zapata        Sorrel         Total
Estimated reserves as of
December 31, 1992           391,000     1,323,000      1,714,000      27,647,000    4,039,000     31,686,000

Production                     (54,000)     (143,000)      (197,000)     (4,924,000)    (228,000)     (5,152,000)
                               --------     ---------     ----------     -----------   ----------     -----------

Estimated reserves as of
   December 31, 1993           337,000     1,180,000      1,517,000      22,723,000    3,811,000     26,534,000

Production                     (67,000)     (127,000)      (194,000)     (3,419,000)    (368,000)    (3,787,000)
                               --------     ---------      ---------     -----------   ----------    -----------

Estimated reserves as of
   December 31, 1994           270,000     1,053,000      1,323,000       19,304,000   3,443,000     22,747,000
                               =======     =========      =========      ===========   =========     ==========

Proved, developed reserves:

   December 31, 1993           337,000     1,180,000      1,517,000      22,723,000    3,811,000     26,534,000
                               =======     =========      =========      ==========    =========     ==========
   December 31, 1994           270,000     1,053,000      1,323,000      19,304,000    3,443,000     22,747,000
                               =======     =========      =========      ==========    =========     ==========
F-24
Standardized Measure of Discounted Future Net Cash Flows
Future cash  inflows are  computed  by applying  year-end  prices of oil and gas
(with  consideration of price changes only to the extent provided by contractual
arrangements) to the year-end  estimated future production of proved oil and gas
reserves.  Estimates of future  development  and  production  costs are based on
year-end costs and assume  continuation  of existing  economic  conditions.  The
estimated  future net cash flows are then discounted  using a rate of 10 percent
per  year to  reflect  the  estimated  timing  of the  future  cash  flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the computed discount.

The accompanying  table reflects the standardized  measure of discounted  future
cash flows relating to the proved oil and gas reserves of the Zapata  properties
as of the two years ended December 31:
1994                                          1993
                              --------------------------------------------------------------------------------------
                                             Bayou                                          Bayou
                              Zapata         Sorrel          Total         Zapata           Sorrel         Total
Future cash inflows       $ 45,181,000    $27,233,000   $72,414,000      $52,721,000   $30,121,000     $ 82,842,000
Future development
  and production costs      15,341,000      9,021,000    24,362,000       18,658,000    11,273,000       29,931,000
                          -------------  -------------  ------------    -------------  ------------    -------------
Future net cash flows       29,840,000     18,212,000    48,052,000       34,063,000    18,848,000       52,911,000
10% annual discount
  to reflect timing of
  cash flows                 1,821,000      5,532,000     7,353,000        1,821,000     5,532,000        7,353,000
                          -------------- -------------  -------------   -------------- -------------   --------------
Standardized measure
  before income taxes     $ 28,019,000    $12,680,000   $40,699,000     $ 32,242,000   $13,316,000     $ 45,558,000
                          ============   ============   ===========     ============   ===========     ============
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the  principal  changes in the  standardized
measure of discounted  future net cash flows  attributable to proved oil and gas
reserves of the Zapata properties for each of the two years ended December 31:
1994                                          1993
                              ---------------------------------------------------------------------------------------
                                             Bayou                                          Bayou
                              Zapata         Sorrel          Total         Zapata           Sorrel         Total
Beginning balance         $ 32,242,000   $13,316,000    $45,558,000     $40,369,000    $14,066,000     $  54,435,000
  Sales of oil and gas,
  net of production
  costs                      4,223,000       636,000      4,859,000       8,127,000        750,000         8,877,000
                          -------------- -------------- -------------   -------------- --------------  ---------------

Ending balance            $ 28,019,000   $12,680,000     $40,699,000    $32,242,000   $ 13,316,000     $  45,558,000
                          ============   ===========     ===========    ============   ===========     =============
F-25
PANACO, Inc.

                               September 30, 1996

                              Financial Statements

                                   (Unaudited)

                                      F-26
PANACO, INC.
              Condensed Balance Sheets (Successful Efforts Method)
                                  (Unaudited)

ASSETS                                                      As of                      As of
                                                     September 30, 1996        December 31, 1995
CURRENT ASSETS:
Cash and cash equivalents                              $766,000                 $1,198,000
     Accounts receivable                                   4,435,000                  4,386,000
     Accounts receivable - sale of Bayou Sorrel           11,152,000                          0
     Prepaid expenses                                        359,000                    465,000
                                                       -------------               -------------
        Total Current Assets                              16,712,000                  6,049,000
                                                       -------------               -------------

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
     SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
     Oil and gas properties                              103,015,000                103,105,000
     Less: accumulated depreciation,
        depletion and amortization                      (77,526,000)               (73,620,000)
                                                       -------------               ------------
        Net Oil and Gas Properties                        25,489,000                 29,485,000
                                                       -------------               ------------

PROPERTY, PLANT AND EQUIPMENT:
     Equipment                                               248,000                    196,000
     Less: accumulated depreciation                        (122,000)                   (92,000)
                                                       -------------               ------------
        Net Property, Plant and Equipment                    126,000                    104,000
                                                       -------------               ------------

OTHER ASSETS:
     Restricted deposits                                   1,733,000                       0.00
     Loan costs, net                                         323,000                    471,000
     Certificate of deposit                                   27,000                     26,000
     Note receivable                                          21,000                     21,000
     Other                                                    13,000                     13,000
                                                       -------------               ------------
        Total Other Assets                                 2,117,000                    531,000
                                                       -------------               ------------

TOTAL ASSETS                                             $44,444,000                $36,169,000
                                                       =============               ============
The accompanying notes to financial statements are an integral part of this
statement

                                      F-27
PANACO, INC.
              Condensed Balance Sheets (Successful Efforts Method)
                                   (Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY                     As of                   As of
                                                 September 30, 1996          December 31, 1995
CURRENT LIABILITIES:
Accounts payable                                  $8,569,000              $4,444,000
     Interest payable                                     240,000                 161,000
     Current portion of long-term debt                          0                       0
                                                     ------------             -----------  
        Total Current Liabilities                       8,809,000               4,605,000
                                                     ------------             -----------

LONG-TERM DEBT                                         25,137,000              22,390,000
                                                     ------------             -----------

STOCKHOLDERS' EQUITY:
     Preferred stock, ($.01 par value,
        5,000,000 shares authorized; no
        shares issued and outstanding)                          0                       0
     Common stock, ($.01 par value,
        40,000,000 shares authorized and
        12,350,255 and 11,504,615 shares
        issued and outstanding, respectively)             123,000                 115,000
     Additional paid-in capital                        23,090,000              21,155,000
     Retained earnings (deficit)                     (12,715,000)            (12,096,000)
                                                     ------------             -----------
        Total Stockholders' Equity                     10,498,000               9,174,000
                                                     ------------             -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $44,444,000             $36,169,000
                                                     ============             ===========
The accompanying notes to financial statements are an integral part of this
statement

                                      F-28
PANACO, INC.
                Statements of Income (Successful Efforts Method)
              For the Nine Months Ended September 30, 1996 and 1995
                                   (Unaudited)

                                                          1996                    1995
REVENUES
Oil and natural gas sales                         $13,257,000             $13,660,000

COSTS AND EXPENSES
     General & administrative                              573,000                 442,000
     Depletion, depreciation & amortization              4,981,000               6,277,000
     Exploration expenses                                        -               2,174,000
     Provision for losses and (gains) on
        disposition and write-downs of assets              (4,000)                       -
     Lease operating                                     6,049,000               5,729,000
     Production and ad valoreum taxes                      429,000                 810,000
     West Delta fire loss                                  500,000                       -
                                                       -----------            ------------
        Total                                           12,528,000              15,432,000
                                                       -----------            ------------
NET OPERATING INCOME (LOSS)                                729,000             (1,772,000)
                                                       -----------            ------------
OTHER INCOME (EXPENSE)
     Interest expense (net)                            (1,347,000)               (720,000)
                                                       -----------            ------------

NET INCOME (LOSS) BEFORE INCOME TAXES                    (618,000)             (2,492,000)

INCOME TAXES                                                     -                       -
                                                       -----------            ------------

NET INCOME (LOSS)                                       ($618,000)            ($2,492,000)
                                                       ===========            ============

Net income (loss) per share                                ($0.05)                 ($0.21)
                                                       ===========            ============
The accompanying notes to financial statements are an integral part of this
statement

                                      F-29
PANACO, INC.
  Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
                  For the nine months ended September 30, 1996
                                   (Unaudited)

                                                                                  Amount ($)
                                      Number of                                   Additional            Retained
                                       Common                  Common              Paid-in              Earnings
                                       Shares                   Stock               Capital             (Deficit)
Balance, December 31, 1995            11,504,615               $115,000          $21,155,000         ($12,096,000)

Net income                                     0                      0                    0             (618,000)

Common shares issued - warrants
exercised and ESOP contribution          840,746                  8,000            1,935,000                     0
                                     -----------              ---------         ------------        --------------

Balance, September 30, 1996           12,345,361               $123,000          $23,090,000         ($12,714,000)
                                     ===========              =========         ============        ==============
The accompanying notes to financial statements are an integral part of this
statement

                                      F-30
PANACO, INC.
                             Statement of Cash Flows
                         Nine Months Ended September 30,
                                   (Unaudited)

                                                                                1996                    1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                       ($618,000)            ($2,492,000)
     Adjustments to reconcile net income (loss) 
     to net cash provided by operating activities:
        Depletion, depreciation and amortization                              4,824,000               6,052,000
        Exploration expenses                                                          0               2,174,000
        Amortization of loan costs                                              157,000                 225,000
        Changes in operating assets and liabilities:
            Certificates of Deposits - escrow                                   (1,000)                  21,000
            Accounts receivable                                                (49,000)               (110,000)
            Prepaid expenses                                                    106,000               (405,000)
            Other assets                                                              0                  44,000
            Accounts payable                                                  4,231,000                 916,000
            Interest payable                                                     79,000                (34,000)
                                                                           ------------             -----------
                       Net cash provided by operating activities              8,729,000               6,391,000
                                                                           ------------             -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Accounts receivable - sale of Bayou Sorrel                         (11,152,000)                       0
        Sale of oil and gas properties                                       11,158,000                   9,000
        Capital expenditures and acquisitions                              (11,804,000)             (5,396,000)
        Purchase of other property and equipment                               (52,000)                (33,000)
        Increase in restricted deposits                                     (1,886,000)                       0
                                                                           ------------             -----------
                       Net cash used by investing activities               (13,736,000)             (5,420,000)
                                                                           ============             ===========

CASH FLOWS FROM FINANCING ACTIVITIES:
        Long-term debt proceeds                                               7,500,000               3,365,000
        Repayment of long-term debt                                         (4,753,000)             (7,000,000)
        Issuance of common stock-exercise of warrants                         1,837,000               2,554,000
        Additional loan costs                                                   (9,000)                       0
                                                                           ------------             -----------
            Net cash provided (used) by financing activities                  4,575,000             (1,081,000)
                                                                           ------------             -----------

NET INCREASE (DECREASE) IN CASH                                               (432,000)               (110,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                1,198,000               1,583,000
                                                                           ------------             -----------
                         
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30,                                     $766,000              $1,473,000
                                                                           ============             ===========
     Supplemental disclosures of cash flow information:
        Cash paid for nine months ended September 30:
                       Interest                                              $1,180,000                $757,000

     Disclosure of accounting policies:
        1.  For purposes of the statement of cash flows, the Company considers all highly liquid debt
            instruments purchased with a maturity of six months or less to be cash equivalents.
        2.  24,220 Common Shares were issued related to the Company's ESOP in a non-cash
            transaction.
The accompanying notes to financial statements are an integral part of this
statement

                                      F-31
PANACO, INC.
                          NOTES TO FINANCIAL STATEMENTS

              For the nine months ended September 30, 1996 and 1995

Note 1. In the  opinion of  management,  the  accompanying  unaudited  financial
statements  contain all  adjustments  necessary to present  fairly the financial
position  as of  September  30,  1996 and  December  31, 1995 and the results of
operations  and changes in  Stockholders'  Equity and cash flows for the periods
ended  September  30,  1996 and 1995.  Most  adjustments  made to the  financial
statements are of a normal,  recurring nature.  Other  adjustments,  if any, are
discussed in later notes.

Note 2.  Effective  December  31,  1995,  the  Company  changed  its  method  of
accounting  for oil and gas  operations  from  the full  cost to the  successful
efforts  method.  Management  concluded that the successful  efforts method will
better enable investors and others to compare the Company to similar oil and gas
companies, the majority of which follow the successful efforts method.

           Under the successful  efforts  method,  lease  acquisition  costs are
capitalized.   Exploratory   drilling   costs  are  also   capitalized   pending
determination  of proved  reserves.  If proved reserves are not discovered,  the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production   method.   The  carrying  amounts  of  proved  and  unproved
properties are reviewed periodically on a  property-by-property  basis, based on
future net cash flows  determined by an independent  engineering  firm,  with an
impairment reserve provided if conditions warrant.

           The Company recognizes its ownership interest in oil and gas sales as
revenue and records revenues on an accrual basis.

           Capital costs of oil and gas properties  include the estimated  costs
to develop proved reserves and the costs of plugging offshore wells and removing
structures.  The capital costs are amortized on the units of production  method,
using the ratio of current  production to the calculated  future production from
the remaining proved oil and gas reserves.

           Reserve  determinations  are  subject  to  revision  due to  inherent
imprecisions  in estimating  reserves and are revised as additional  information
becomes available.

Note 3. The results of operations  for the nine months ended  September 30, 1996
are not indicative of the results to be expected for the full year. On April 24,
1996 the Company  experienced  an explosion  and fire at Tank Battery #3 in West
Delta.  The fields were  shut-in  through  October 7th while  repairs were being
made. No revenues for the 67 remaining  days in the second  quarter and the full
third  quarter of 1996 were  recorded,  while at the same time,  a large part of
lease operating  expenses  associated with West Delta are fixed costs,  and have
stayed at  relatively  the same  level as  before  the  fire.  Production  taxes
decreased as a result of the lost  production  from West Delta , a large part of
which is in Louisiana State waters and is subject to severance  taxes.  Interest
expense is also up as a result of the fire due to reduced  cash  flows,  coupled
with increased  spending to repair Tank Battery #3. The Company did not begin to
receive insurance advances for repairing the platform until the third quarter of
1996. The Company began producing oil and natural gas from the West Delta fields
on October 7th, 1996.

Note 4. The net income per share for the nine months  ended  September  30, 1996
and 1995 has been calculated based on 12,253,382 and 11,649,091 weighted average
shares outstanding,  respectively and 12,345,361 and 11,661,540 weighted average
shares for the three months ended September 30, 1996 and 1995, respectively.

                                      F-32
Note 5. The reserves  presented in the following  table were prepared  solely by
the Company and are  estimates  only and should not be  construed as being exact
amounts.  All  reserves  presented  are  proved  reserves  that are  defined  as
estimated  quantities  which  geological and engineering  data  demonstrate with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing  economic and operating  conditions.  Sale  of  minerals-in-place
reflects  the sale of the Bayou  Sorrel  Field,  effective  September  1,  1996.
Reserves  attributable to the Amoco  Acquisition, closed on October 8th, are not
included.

Proved developed and undeveloped reserves           Oil               Gas
                                                  (Bbls)              (Mcf)

December 31, 1995 reported reserves            1,900,000           46,711,000
Purchase of minerals-in-place                        -0-                  -0-
Extensions & Discoveries                             -0-                  -0-
Production                                     (203,000)          (4,590,000)
Sale of minerals-in-place                      (805,000)          (3,102,000)
Revisions of previous estimates                      -0-                  -0-
                                            ------------          -----------
Estimated reserves at September 30, 1996         892,000          39,019,000
                                            ============          ===========

No major  discovery or other favorable or adverse event has caused a significant
change in the estimated  proved  reserves since  September 30, 1996. The Company
does not have proved  reserves  applicable to long-term  supply  agreements with
governments  or  authorities.  All  proved  reserves  are  located in the United
States.

Note 6. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.

Note 7. The  Company is party to various  escrow  agreements  which  provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations.  The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging  and  abandonment  operations,  funds are  partially  or  completely
released  upon the  presentation  by the Company to the escrow agent of evidence
that the operation was or is being  conducted in compliance with applicable laws
and regulations.  These escrow amounts are included on the financial  statements
as Restricted Deposits. See "The Company-Plugging and Abandonment Escrows"

Note 8. On April 24, 1996, the Company experienced an explosion and fire on Tank
Battery #3 in West Delta.  The fire was caused by a service  company  performing
work on the facility.  The extraordinary loss, recorded in the second quarter of
1996, is management's  estimate of the Company's shortfall on insurance advances
of repairing the facilities,  which includes a $225,000 deductible.  The Company
will seek to recover  these  costs,  along with lost  profits,  from the company
whose workers caused the fire.

Note 9. On November 22, 1996,  effective September 1, 1996, the Company sold its
Bayou Sorrel Field to National Energy Group, Inc. for $11,000,000, $9,000,000 in
cash and  $2,000,000 in National  Energy Group,  Inc.  common  shares.  National
Energy Group, Inc. will also reimburse the Company for deposits it has made into
an  escrow  agreement  for the  plugging  and  abandonment  obligation.  Through
September  30,  this  amount was  $152,000.  The  Company  will also retain a 3%
overriding royalty interest in the deep rights of the field.

Note 10. At December 31, 1995, the Company had net operating loss carry forwards
for federal  income tax purposes of  $15,765,000  which are  available to offset
future federal taxable income through the year 2010.

                                      F-33
Report of Independent Public Accountants

To the Board of Directors
PANACO, Inc.

We have audited the  accompanying  Statement  of Revenues  and Direct  Operating
Expenses of the Amoco  Properties  (to be acquired by PANACO,  Inc.) for each of
the three years in the period ended  December 31, 1995.  This  statement and the
notes  thereto  are  the  responsibility  of  PANACO,  Inc.'s  management.   Our
responsibility is to express an opinion on the statement 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 Statement of Revenues and Direct Operating  Expenses
is free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement.  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 Statement of Revenues and Direct Operating Expenses referred
to above  presents  fairly,  in all material  respects,  the revenues and direct
operating  expenses of the Amoco  Properties  for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Kansas City, Missouri
September 6, 1996

                                      F-34
AMOCO PROPERTIES

               STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
Year Ended December 31                  Six Months Ended June 30
                                            ----------------------                  ------------------------
                                                                                           (Unaudited)

                                  1995            1994            1993                1996           1995
                                  ----            ----            ----                ----           ----

Revenues:
Gas                   $ 8,769,000     $ 7,346,000    $ 8,459,000         $ 5,684,000    $ 4,379,000

         Oil & Condensate        3,759,000       3,789,000      3,620,000           2,221,000      1,979,000
                               ------------    ------------   ------------         -----------    -----------

Total Revenues                 $12,528,000     $11,135,000    $12,079,000         $ 7,905,000    $ 6,358,000
                               ===========     ===========    ===========         ===========    ===========

Direct Operating Expenses      $ 2,991,000     $ 3,158,000    $ 2,798,000         $ 1,756,000    $ 1,275,000
                               ===========     ===========    ===========         ===========    ===========
See accompanying notes to this statement.

                                      F-35
AMOCO PROPERTIES
                     NOTES TO THE STATEMENT OF REVENUES AND
                            DIRECT OPERATING EXPENSES

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Note 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  financial  statements  require the use of estimates,  and when  applicable,
specific information  regarding  significant estimates embodied in the financial
statements have been disclosed.  The Statement of Revenues and Direct  Operating
Expenses was prepared for purposes of complying  with the rules and  regulations
of the Securities  and Exchange  Commission and is not intended to be a complete
presentation  of the  financial  position or results of  operations of the Amoco
Properties.

Acquisition
The Amoco  Properties  are to be acquired by the Company on October 8, 1996 from
Amoco Production  Company  (seller)  pursuant to the purchase and sale agreement
dated  August 26,  1996.  The  properties  to be acquired  are Amoco  Production
Company's existing interests in the following offshore blocks:  East Breaks 160,
East Breaks  161,  High Island (HI) 302, HI 309, HI 310, HI 330, HI 349, HI 474,
HI 489, HI 499, a portion of the HI 475 Block,  West  Cameron  (WC) 613,  and WC
144.

Revenue Recognition
Revenues  are  recorded  on an accrual  basis,  with  volumes  and prices  being
estimated for properties  during periods when actual  production  information is
not available.  Revenues are recognized based on volumes of production taken and
sold by Amoco which is not materially  different from the entitlement method for
the  three  year  period  ending  December  31,  1995.  For each of the  periods
presented,  Amoco sold  substantially all of their production to a related party
at market based prices.

Direct Operating Expenses
Direct operating  expenses include  necessary and ordinary  expenses to maintain
production.  Insurance  expense is not included since sufficient  information is
not available from the Seller.  Depreciation,  depletion and amortization is not
included.  No severance tax expense is included for the Amoco Properties,  since
the production  from federal  offshore waters are not subject to state severance
taxes.

General, Administrative, and Overhead  Expenses
General,  administrative,  and overhead expenses are not presented as sufficient
information is not available from the Seller.

Note 2 -  SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
          --------------------------------------------------------------------
          (UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved  undeveloped  reserve quantities of
the Amoco Properties at December 31, 1995 are based upon PANACO's computation at
September 1, 1996 from a report of independent petroleum engineers,  retained by
Amoco, and do not purport to reflect  realizable values or fair market values of
the properties'  reserves.  It should be emphasized  that reserve  estimates are
inherently imprecise and accordingly,  these estimates are expected to change as
future information becomes available. These are estimates only and should not be
construed  as exact  amounts.  All  reserves  are located in the United  States.
Reserve  quantities for the Amoco  Properties were not available at December 31,
1992,  1993,  1994,  and 1995, and the balances at those dates were derived from
production activity during 1993, 1994, 1995 and 1996.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude oil that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating  conditions.  Proved  developed  reserves  are  those  expected  to be
recovered through existing wells, equipment, and operating methods.

                                      F-36
Proved developed and               OIL (BBLS)                     GAS (MCF)
undeveloped reserves

Estimated reserves as of
December 31, 1992                2,772,000                     45,227,000

Production                           (216,000)                    (3,874,000)
                                     ---------                    -----------

Estimated reserves as of
   December 31, 1993                2,556,000                     41,353,000

Production                           (236,000)                    (4,057,000)
                                     ---------                    -----------

Estimated reserves as of
   December 31, 1994                2,320,000                     37,296,000

Production                           (216,000)                    (5,704,000)
                                  ------------                   ------------

Estimated reserves as of
    December 31,1995                2,104,000                      31,592,000
                                   ===========                    ===========

Proved developed reserves:
                                   OIL (BBLS)                    GAS (MCF)

   December 31, 1993                2,185,000                     35,202,000
                                   ==========                     ==========

   December 31, 1994                1,949,000                     31,145,000
                                   ==========                     ===========

   December 31, 1995                1,733,000                     25,441,000
                                   ==========                     ==========
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying  September,  1996 prices of oil and
gas  (with  consideration  of  price  changes  only to the  extent  provided  by
contractual  arrangements) to the estimated future  production of proved oil and
gas reserves.  Estimates of future development and production costs are based on
September,  1996 costs and assume continuation of existing economic  conditions.
The  estimated  future  net cash  flows are then  discounted  using a rate of 10
percent per year to reflect the estimated  timing of the future cash flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the discount at September 1, 1996.

                                      F-37
The accompanying  table reflects the standardized  measure of discounted  future
cash flows  relating to the proved oil and gas reserves of the Amoco  properties
as of the three years ended December 31:

                                1995             1994               1993
                                ----             ----               ----

Future cash inflows         $ 108,399,000     $120,927,000       $132,062,000
Future development
  and production costs         31,112,000       34,103,000         37,261,000
                             ------------     ------------     --------------
Future net cash flows          77,287,000       86,824,000         94,801,000
10% annual discount
  to reflect timing of
  cash flows                   23,045,000       23,045,000         23,045,000
                            -------------   --------------     --------------
Standardized measure
  before income taxes       $  54,242,000     $ 63,779,000      $  71,756,000
                            =============    =============      =============

Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the changes in the  standardized  measure of
discounted  future  net  cash  flows  from  the  sales  of oil and  gas,  net of
production  costs  attributable  to  proved  oil and gas  reserves  of the Amoco
properties for each of the three years ended December 31:

                                 1995             1994              1993
                                 ----             ----              ----

Beginning balance           $   63,779,000     $ 71,756,000      $ 81,037,000
  Sales of oil and gas,
  net of production
  costs                          9,537,000        7,977,000         9,281,000
                           ---------------   --------------    --------------

Ending balance             $    54,242,000     $ 63,779,000      $ 71,756,000
                           ===============     ============      ============

                                      F-38
No  dealer,  salesperson  or other  person  has been  authorized  to give any
information or to make any representations not contained in this Prospectus, and
if given or made, such information or representation  must not be relied upon as
having been authorized by the Company or the  Underwriter.  Neither the delivery
of this Prospectus nor any sale hereunder shall, under any circumstances, create
any  implication  that there has been no change in the  affairs  of the  Company
since the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities to any person in any jurisdiction
in which such offer or solicitation  is not  authorized,  or in which the person
making  such offer or  solicitation  is not  authorized,  or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such an offer or solicitation.
TABLE OF CONTENTS
Prospectus Summary.............................     3                             8,403,305
Risk Factors...................................     6                           Common Shares
Use of Proceeds................................    10
Capitalization.................................    10
Price Range of Common Shares...................    11
Dividend Policy................................    11
Pro Forma Financial Information................    12
Selected Financial Data........................    20
Management's Discussion and Analysis...........    20
The Company....................................    25
Properties.....................................    35
Management.....................................    43                               [LOGO]
Principal Shareholders.........................    51
Certain Relationships and Related Transactions     52
Selling Shareholders...........................    53
Description of Capital Shares and Other
     Securities................................    53
Underwriting...................................    58
Shares Eligible for Future Sale................    60
Other Matters..................................    61
Legal Matters..................................    62
Experts........................................    62                             PROSPECTUS
Glossary of Selected Oil and Gas Terms.........    63                                , 1996
Index to Financial Statements..................    F-1

                                                       `                        Nolan Securities
                                                                                 Corporation
Until ,all dealers  effecting  transactions in the Common Shares,  whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the  obligation  of dealers to deliver a Prospectus  when
acting  as  Underwriter   and  with  respect  to  their  unsold   allotments  or
subscriptions.
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.  Other Expenses of Issuance and Distribution.

         The estimated expenses in connection with the Offering are as set forth
in the following table. All amounts except the SEC registration fee and the NASD
filing fee are estimates.

 SEC Registration Fee                                             $    16,106.00
 NASD Filing Fee and legal clearance fee                                5,815.00
 Blue Sky Legal Fees and Filing and Qualification Fees                 11,000.00
 Printing and Engraving Expenses                                       30,000.00
 Legal Fees and Expenses
 Accounting Fees and Expenses                                          25,000.00
 Transfer Agent's Fees                                                  2,000.00
 Miscellaneous Expenses (including travel and promotion expenses)      10,000.00
                                                                     -----------

             TOTAL                                                $

Item 14.  Indemnification of Directors and Officers.

         Article Twelve of the Certificate of Incorporation of PANACO, INC. (the
"Company")  provides that the Company must  indemnify its officers and directors
to the extent  allowed by the  Delaware  General  Corporation  Law.  Pursuant to
Section 145 of the Delaware General  Corporation Law, the Company  generally has
the power to indemnify  its present and former  directors  and officers  against
expenses and  liabilities  incurred by them in connection with any suit to which
they are, or are  threatened  to be made, a party by reason of their  serving in
those  positions  so long as they  acted  in good  faith  and in a  manner  they
reasonably  believed  to be in, or not  opposed  to, the best  interests  of the
Company,  and with respect to any criminal action,  they had no reasonable cause
to believe their conduct was unlawful.  With respect to suits by or in the right
of the Company, however, indemnification is generally limited to attorney's fees
and other  expenses and is not  available if the person is adjudged to be liable
to the Company unless the court determines that  indemnification is appropriate.
The statute expressly provides that the power to indemnify authorized thereby is
not  exclusive  of any  rights  granted  under any  by-law,  agreement,  vote of
shareholders or disinterest  directors,  or otherwise.  The Company also has the
power to  purchase  and  maintain  insurance  for its  directors  and  officers.
Additionally,  Article Twelve of the Certificate of Incorporation provides that,
in the event that an officer or director files suit against the Company  seeking
indemnification of liabilities or expenses  incurred,  the burden will be on the
Company  to prove  that the  indemnification  would not be  permitted  under the
Delaware General Corporation Law.

         The preceding discussion of the Company's  Certificate of Incorporation
and Section 145 of the Delaware  General  Corporation  Law is not intended to be
exhaustive and is qualified in its entirety by the Certificate of  Incorporation
and Section 145 of the Delaware General Corporation Law.

Item 15.  Recent Sales of Unregistered Securities.

         During  the three  years  preceding  the  filing  of this  Registration
Statement,  the Company sold the following  securities in transactions that were
not registered  under the  Securities Act of 1933, as amended,  in reliance upon
the  exemption  provided by Section 4(2)  thereof and the rules and  regulations
promulgated thereunder.

                                      II-1
1.  Effective  December  31,  1993,  the  Company  concluded  a private
         placement in which it issued promissory notes in an aggregate amount of
         $5,000,000,  the 1993  Subordinated  Notes, and warrants to purchase an
         aggregate of 816,526  Common  Shares to six  investors for an aggregate
         consideration  of $5,000,000.  Each investor  executed a loan agreement
         confirming  that it was an accredited  investor (as defined in Rule 501
         under the Securities  Act) and  containing  other  representations  and
         agreements customary for private placement transactions.

         2. Effective October 8, 1996, the Company concluded a private placement
         in  which  it  issued  promissory  notes  in  an  aggregate  amount  of
         $17,000,00,  the 1996 Tranche A Convertible  Subordinated Notes and the
         1996 Tranche B Bridge Loan Subordinated Notes, and warrants to purchase
         an aggregate  of  2,060,606  Common  Shares to seven  investors  for an
         aggregate  consideration of $17,000,000.  Each investor executed a loan
         agreement  confirming that it was an accredited investor (as defined in
         Rule 501 under the Securities Act) and containing other representations
         and agreements customary for private placement transactions.

         3. On October 8, 1996,  the Company issued  2,000,000  Common Shares to
         Amoco Production  Company as part of the purchase price for certain oil
         and gas  properties,  in a private  placement.  The  purchase  and sale
         agreement  confirmed that Amoco is an accredited investor and contained
         the  representations  and  agreements  customary  in private  placement
         transactions.

         4. In the past three years  various  persons and entities have acquired
         Common Shares upon the exercise of options and warrants.  In 1993 seven
         investors  acquired 575,000 Common Shares.  In 1994 eighteen  investors
         acquired  1,719,900 Common Shares.  In 1995 twelve  investors  acquired
         1,255,447  Common Shares.  In each instance the person or entity was an
         officer or former  officer,  director  or former  director,  lenders or
         investment  bankers.  In  each  instance  the  documentation  contained
         appropriate   representations   and   agreements   to   establish   the
         availability of the exemption.

         5. In the first quarter 1996 the six investors,  described in paragraph
         (1) above,  exercised  their  warrants to acquire  the  816,526  Common
         Shares,  which were issued in reliance upon the exemption and the facts
         relied upon above.

Item 16. Exhibits and Financial Statement Schedules.

         (a) Exhibits

     Exhibit
     Number      Description
     1.0*** Underwriting Agreement

     1.1*** Selling Stockholders' Custody Agreement

     1.2*** Selling Stockholders' Power of Attorney

     3.1* Certificate of Incorporation of the Company.

     3.2*  Amendment  to  Certificate  of  Incorporation  of the  Company  dated
November 19, 1991.

     3.3* By-laws of the Company.

     3.4  Amendment  to  Certificate  of  Incorporation  of  the  Company  dated
September  24,  1996 filed as an exhibit to the Amended  Current  Report on Form
8-K/A,  filed with the Commission on November 18, 1996, and incorporated  herein
by this reference.

                                      II-2
4.1* Article Fifth of the  Certificate of  Incorporation  of the Company in
Exhibit 3.1.

     4.2* Form of Certificate of Common Shares par value $.01 per share,  of the
Company.

     4.3 Rights Agreement, dated as of August 3, 1995, between PANACO, Inc., and
American Stock Transfer and Trust Company,  which includes as Exhibit A the Form
of Certificate of Designation of Series A Preferred Stock, Exhibit B the Form of
Rights  Certificate  and Exhibit C the  Summary of Rights to Purchase  Preferred
Stock was filed as Exhibit 1 to the  Registration  Statement on Form 8-A,  filed
with the  Commission  on  August  21,  1995,  and  incorporated  herein  by this
reference.

     5 Form of Opinion of Shughart Thomson & Kilroy, P.C. regarding the legality
of the securities being registered.

     10.1* PANACO, Inc. Long-term Incentive Plan.

     10.7* Senior Second  Mortgage Term Loan  Agreement as of December 31, 1993,
between PANACO, Inc., and seven lenders represented by Kayne Anderson Investment
Management, Inc.

     10.9  Purchase  and Sale  Agreement,  dated July 12, 1995,  between  Zapata
Exploration  Company,  Zapata  Offshore  Gathering Co., Inc., and PANACO,  Inc.,
filed as an exhibit to the Current  Report on Form 8-K filed with the Commission
on August 1, 1995, and incorporated herein by this reference.

     10.11  Assignment/East  Breaks 110,  effective October 1, 1994, from Zapata
Exploration Company to PANACO,  Inc. The Assignment/East  Breaks 109 document is
identical,  filed as an exhibit to the Current Report on Form 8-K filed with the
Commission on August 1, 1995, and incorporated herein by this reference.

     10.12  Purchase and Sale Agreement  dated November 30, 1995,  between Shell
Western E&P, Inc. and PANACO, Inc., filed as an exhibit to the Current Report on
Form 8-K filed, with the Commission on January 31, 1996, and incorporated herein
by this reference.

     10.13** PANACO, Inc. Employee Stock Ownership Plan & Trust.

     10.14  Purchase and Sale  Agreement,  dated August 26, 1996,  between Amoco
Production  Company and PANACO,  Inc., filed as an exhibit to the Current Report
on Form 8-K,  filed with the  Commission on October 28, 1996,  and  incorporated
herein by this reference.

     10.15 Amended and Restated Credit  Agreement,  dated October 7, 1996, among
First Union National Bank of North Carolina, as agent, and the lenders signatory
thereto,  and PANACO, Inc., filed as an exhibit to the Amended Current Report on
Form 8-K/A,  filed with the  Commission on November 18, 1996,  and  incorporated
herein by this reference.

     10.16 Senior  Subordinated  Mortgage Master Loan Agreement dated October 8,
1996 between PANACO,  Inc. and Offense Group Associates,  L.P., Kayne,  Anderson
Non-Traditional   Investments,   L.P.,  ARBCO  Associates,   L.P.,   Opportunity
Associates,  L.P., Kayne, Anderson Offshore Limited, Foremost Insurance Company,
TOPA  Insurance  Company and EOS  Partners,  L.P. and Offense,  as agent for the
Lenders,  filed as an exhibit to the Amended Current Report on Form 8-K/A, filed
with the  Commission  on November  18,  1996,  and  incorporated  herein by this
reference.

     23.1 Consent of Barrett and Associates.

     23.2 Consent of Ryder Scott Company.

                                      II-3
23.3 Consent of McCune Engineering, P.E.

     23.4 Consent of Shughart Thomson & Kilroy,  P.C.  (included in Exhibit 5 to
this Registration Statement.)

     23.5 Consent of Arthur Andersen LLP.

     24   Power of Attorney (included on signature page).
     27   Financial Data Schedule.

     *Filed with the  Registration  Statement on Form S-4,  Commission  File No.
     33-44486,  initially  filed December 13, 1991, and  incorporated  herein by
     this reference.

     ** Filed with the Registration  Statement on Form S-1,  Commission file No.
     33-81058,  initially  filed July 1, 1994, and  incorporated  herein by this
     reference.

     All others  filed  herewith or  incorporated  herein by  reference to prior
     filings with the Commission.

     ***To be filed by amendment.

     (b)      Financial Statement Schedules

              None.

         All other  statements and schedules for which  provision is made in the
applicable  regulation  of the  Securities  and  Exchange  Commission  have been
omitted  because  they  are  not  required  under  related  instruction  or  are
inapplicable,  or the  information  is shown  in the  financial  statements  and
related notes.

Item 17. Undertakings.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors,  officers and controlling  persons of
the  registrant  pursuant  to  the  foregoing  provisions,   or  otherwise,  the
registrant  has been advised that in the opinion of the  Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against such  liabilities  (other than the payment by the registrant of expenses
incurred or paid by a director,  officer or controlling person of the registrant
in the  successful  defense of any action,  suit or  proceeding)  is asserted by
securities being  registered,  the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,  submit to a court
of appropriate  jurisdiction the question whether such  indemnification by it is
against  public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

         The undersigned registrant hereby undertakes that:

(1) For purposes of determining  any liability under the Securities Act of 1933,
the  information  omitted  from  the  form of  prospectus  filed as part of this
Registration  Statement  in reliance  upon Rule 430A and  contained in a form of
prospectus  filed by the registrant  pursuant to Rule 424(b)(1) or (4) or 497(h)
under  the  Securities  Act  shall  be  deemed  to be part of this  Registration
Statement as of the time it was declared effective.

(2) For purposes of determining  any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration  Statement  relating to the securities offered therein,
and the  offering  of such  securities  at that  time  shall be deemed to be the
initial bona fide offering thereof.

                                      II-4
SIGNATURES

         Pursuant to the  requirements of the Securities Act, the registrant has
duly caused this  amendment  to the  Registration  Statement to be signed on its
behalf by the  undersigned,  thereunto  duly  authorized,  in the City of Kansas
City, State of Missouri on December 18, 1996.

                                                   PANACO, INC.

                                           By: /s/ H. James Maxwell
                                               H. James Maxwell, President & CEO

         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and on the dates indicated.

         We, the undersigned  directors and officers of PANACO, Inc., a Delaware
corporation,  hereby  constitute  and appoint H. James Maxwell and Todd R. Bart,
and  each of them,  the true and  lawful  agents  and  attorneys-in-fact  of the
undersigned   with  full   power  and   authority   in  said   agents   and  the
attorneys-in-fact,  and in any one or more of them, to sign for the  undersigned
and in their  respective  names as directors and officers of the Corporation the
Registration  Statement  of the  Corporation  on forms S-1 to be filed  with the
Securities and Exchange Commission,  Washington,  D.C., under the Securities Act
of 1933, as amended,  and sign any amendment or amendments to such  Registration
Statement,  in the matter of the proposed public offering by the Corporation and
certain  shareholders of the  Corporation,  hereby  ratifying and confirming all
acts taken by such agents and  attorneys-in-fact  or any one of them,  as herein
authorized.
Signature                      Title                                                  Date
/s/ H. James Maxwell          Chairman of the Board, Chief Executive Officer,            Dec. 18,1996
H. James Maxwell,             President, and Director (principal executive officer)

/s/ Bob F. Mallory            Chief Operating Officer, Executive Vice President,         Dec. 18, 1996
Bob F. Mallory                and Director

/s/ Todd R. Bart              Chief Financial Officer, Secretary, and                    Dec. 18, 1996
Todd R. Bart                  Treasurer

/s/ Larry M. Wright           Executive Vice President and Director                      Dec. 18, 1996
Larry M. Wright

/s/ N. Lynn Sieverling        Director                                                   Dec. 18, 1996
N. Lynn Sieverling

/s/ A. Theodore Stautberg, Jr.Director                                                   Dec. 18, 1996
A. Theodore Stautberg, Jr.
II-5
__________ 1996

                                  PANACO, INC.
                               8,403,305 SHARES OF
                     COMMON STOCK, PAR VALUE $.01 PER SHARE,
                       REGISTRATION STATEMENT ON FORM S-1

Dear Ladies and Gentlemen:

     We have  acted as  counsel to PANACO,  Inc.,  a Delaware  corporation  (the
"Company"), in connection with the Company's Registration Statement on Form S-1,
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933 (the "Act"),  for the registration  under the Act of the offering by the
Company and certain  persons  (the  "Selling  Shareholders")  of up to 9,663,801
common shares (including the Over-Allotment  Option),  $.01 par value per share,
of the Company (the "Common Shares").

     In that  connection,  we have examined  originals,  or copies  certified or
otherwise identified to our satisfaction, of such documents,  corporate records,
and other  instruments  as we have  deemed  necessary  for the  purposes of this
opinion,  including the following:  (a) the Certificate of  Incorporation of the
Company,  as amended and applicable  certificates of public  officials,  (b) the
By-laws of the Company, as amended,  and (c) resolutions adopted by the Board of
Directors of the Company.

     Based on the foregoing,  we are of the opinion that the authorized  capital
stock of the Company  conforms as to legal  matters to the  description  thereof
contained in the Prospectus; the outstanding Common Shares including those owned
by the selling Shareholders have been duly and validly authorized and issued and
are fully  paid and  nonassessable;  the  shares  to be  issued  and sold by the
Company  pursuant to this offering have been duly and validly  authorized,  and,
when issued,  delivered and paid for, will be fully paid and  nonassessable  and
the  issuance of such shares  will not be subject to any  preemptive  or similar
right.

         We know that we are  referred to under the heading  "Legal  Matters" in
the  Prospectus  forming  a part of the  Registration  Statement  and we  hereby
consent  to  such  use of our  name in  such  Prospectus  and to the use of this
opinion for filing as Exhibit 5 to the Registration Statement.

                                                 Very truly yours,

                                                 SHUGHART THOMSON & KILROY, P.C.

                                    Exhibit 5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

      As independent public  accountants,  Barrett & Associates  consents to the
use of our reports and to all  references to our firm included in or made a part
of this  Registration  Statement  on Form  S-1  filed  with the  Securities  and
Exchange  Commission  by  PANACO,  Inc.  under the  Securities  Act of 1933,  as
amended, including any references to our firm as experts.

                                                            BARRETT & ASSOCIATES

Overland Park, Kansas
December 18, 1996

                                  Exhibit 23.1
CONSENT OF RYDER SCOTT COMPANY

         As independent  petroleum  consultants,  Ryder Scott Company  Petroleum
Engineers  consents to the  references to our firm included in or made a part of
this  Registration  Statement on Form S-1 filed with the Securities and Exchange
Commission  by  PANACO,  Inc.  under the  Securities  Act of 1993,  as  amended,
including any references to our firm as experts.

                                                             RYDER SCOTT COMPANY
                                                             PETROLEUM ENGINEERS

Houston, Texas
December 18, 1996

                                  Exhibit 23.2
CONSENT OF MCCUNE ENGINEERING

         As independent  petroleum  consultants,  McCune Engineering,  Petroleum
Engineers  consents to the  references to our firm included in or made a part of
this  Registration  Statement on Form S-1 filed with the Securities and Exchange
Commission  by  PANACO,  Inc.  under the  Securities  Act of 1933,  as  amended,
including any references to our firm as experts.

                                                             MCCUNE ENGINEERING
                                                             PETROLEUM ENGINEERS

Kansas City, Missouri
December 18, 1996

                                  Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

         As independent public accountants,  we hereby consent to the use of our
report  (and all  references  to our  Firm)  included  in or made a part of this
Registration Statement on Form S-1.

                                                             ARTHUR ANDERSEN LLP

Kansas City, Missouri
December 18, 1996

                                  Exhibit 23.5