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

                                  FORM 10Q-SB

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

                For the quarterly period ended: March 31, 1999

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

               For the transition period from ________to________

                       Commission file number 000-24881


                             PENNACO ENERGY, INC.
                (Name of small business issuer in its charter)

                NEVADA                                  88-0384598
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

1050 17th Street, Suite 700, Denver, Colorado             80265
(Address of principal executive offices)                (Zip Code)

                                (303) 629-6700
                         Registrant's telephone number


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

     Yes  /X/                 No / /


The registrant had no operating revenues in the quarter ended March 31, 1999.


As of May 13, 1999, the registrant had 15,144,179 shares of Common Stock
outstanding.

Transitional Small Business Disclosure Format

(Check One):     Yes  / /                 No /X/

                                       1
<PAGE>
 
                             PENNACO ENERGY, INC.

                                     INDEX

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

 Item 1.  Financial Statements

          Balance Sheet as of
          March 31, 1999 and December 31, 1998............................     3
 
          Statement of Operations for the three months
          ended March 31, 1999, the period from
          January 26, 1998 (inception) to March 31, 1998 
          and the cumulative period from January 26, 1998
          (inception)to March 31, 1999.....................................    4
 
          Statement of Cash Flows for the three months
          ended March 31, 1999, the period from
          January 26, 1998 (inception) to March 31, 1998
          and the cumulative period from January 26, 1998
          (inception)to March 31, 1999.....................................    5
      
          Notes to Financial Statements....................................  6-8
 
 Item 2.  Plan of Operation................................................ 9-10
 
PART II. OTHER INFORMATION.................................................   11

 Item 6. Exhibits and Reports on Form 8-K
</TABLE> 

SIGNATURES

                                       2
<PAGE>
 
                             PENNACO ENERGY, INC.
                         (A Development Stage Company)

                                 Balance Sheet
                                 (unaudited) 
<TABLE>
<CAPTION>
                                            
                                                                            March 31, 1999          December 31, 1998
                                                                           -----------------        ----------------- 
<S>                                                                        <C>                      <C> 
Current assets:                                                            
  Cash                                                                     $      10,428,937                5,622,776
  Accounts receivable                                                                341,107                  374,728
  Subscriptions receivable                                                                 -                  763,750
  Assets held for sale                                                               611,706                6,931,995
  Drilling deposit                                                                   533,684                  333,473
  Inventory                                                                          812,574                  231,116
  Prepaid expenses and other current assets                                          115,506                  151,858
                                                                           -----------------        ----------------- 
 
    Total current assets                                                          12,843,514               14,409,696
                                                                           -----------------        -----------------
Property and equipment, at cost:                                           
  Oil and gas properties, using the successful                             
    efforts method of accounting (note 2):                                   
  Unproved                                                                         5,442,904                4,656,965
  Proved                                                                           6,195,692                1,358,769
  Other property and equipment                                                       371,706                  296,119
                                                                           -----------------        ----------------- 
                                                                           
                                                                                  12,010,302                6,311,853
  Less accumulated depreciation                                                      (91,630)                 (61,607)
                                                                           -----------------        ----------------- 
                                                                           
  Net property and equipment                                                      11,918,672                6,250,246
                                                                           -----------------        ----------------- 
Deferred income tax asset                                                            177,000                1,266,000
Other assets                                                                          99,795                   99,795
                                                                           -----------------        ----------------- 
                                                                           
                                                                                  25,038,981               22,025,737
                                                                           =================        =================
                                                                           
Current liabilities:                                                       
  Bridge loan payable (note 3)                                                             -                5,600,000
  Lease acquisitions payable                                                         152,110                  618,586
  Accounts payable and accrued liabilities                                         1,235,607                1,964,228
  Income taxes payable                                                             2,827,000                        -
                                                                           -----------------        ----------------- 
                                                                           
    Total current liabilities                                                      4,214,717                8,182,814
                                                                           -----------------        ----------------- 
                                                                           
Stockholders' equity (note 4):                                             
  Common stock, $.001 par value. Authorized 50,000,000                    
    shares; Issued and outstanding 15,144,179 shares at                  
    March 31, 1999 and 14,795,179 at December 31, 1998                                15,144                   15,152
  Additional paid-in capital                                                      17,970,063               17,640,644
  Retained earnings (deficit) accumulated during the                      
    development stage                                                              2,839,057               (3,812,873)
                                                                           -----------------        ----------------- 
                                                                           
    Total stockholders' equity                                                    20,824,264               13,842,923
                                                                           -----------------        ----------------- 
Commitments                                                                           
                                                                                  25,038,981               22,025,737
                                                                           =================        =================
</TABLE>

See accompanying notes to financial statements.

                                       3
<PAGE>
 
                             PENNACO ENERGY, INC.
                         (A Development Stage Company)

                            Statement of Operations
                                  (unaudited)

<TABLE> 
<CAPTION> 
                                                                                       Period from          Cumulative 
                                                                                      January 26, 1998    January 26, 1998    
                                                              Three Months ended      (inception) to       (inception) to 
                                                                March 31, 1999        March 31, 1998       March 31, 1999 
                                                              -------------------    -----------------    -----------------  
<S>                                                           <C>                    <C>                  <C> 
Revenue:                                                    
   Interest income                                            $           109,403                  458              164,689
                                                              -------------------    -----------------    -----------------   
   Total revenue                                                          109,403                  458              164,689
                                                            
Expenses:                                                  
   Exploration                                                             51,590                4,859            1,877,357
   Depreciation and amortization                                           30,023                  485               91,630
   General and administrative                                           1,044,787               58,157            5,022,379
   Interest expense                                                             -                    -              682,400
                                                              -------------------    -----------------    -----------------  
   Total expenses                                                       1,126,400               63,501            7,673,766
 
Gain on sale of properties                                             11,945,557                    -           13,358,764
                                                              -------------------    -----------------    -----------------  
                                                            
 Income (loss) before income taxes                                     10,928,560              (63,043)           5,849,687
                                                            
 Income tax expense                                                    (3,916,000)                   -           (2,650,000)
                                                              -------------------    -----------------    -----------------
                                                            
 Net income (loss)                                            $         7,012,560              (63,043)           3,199,687
                                                              ===================    =================    =================
                                                            
 Basic income (loss) per share                                $               .47                (0.01)
                                                              ===================    =================

 Diluted income (loss) per share                              $               .44                (0.01)
                                                              ===================    ================= 
                                                            
 Weighted average common shares outstanding-basic                      14,943,512            4,348,333
                                                              ===================    ================= 
                                                            
 Weighted average common shares outstanding-diluted                    16,081,739            4,348,333
                                                              ===================    ================= 
</TABLE>


See accompanying notes to financial statements.

                                       4
<PAGE>
 
                             PENNACO ENERGY, INC.
                         (A Development Stage Company)

                            Statement of Cash Flows
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                               Period from           Cumulative     
                                                                         Three months        January 26, 1998     January 26, 1998 
                                                                            ended             (inception) to       (inception) to 
                                                                        March 31, 1999        March 31, 1998       March 31, 1999
                                                                        --------------        --------------       -------------- 
<S>                                                                     <C>                  <C>                  <C> 
Cash flows from operating activities:                                                                       
  Net income (loss)                                                        $  7,012,560              (63,043)           3,199,687 
  Adjustments to reconcile net loss to net cash used                                                                              
    in operating activities:                                                                                                      
           Gain on sale of properties                                       (11,945,557)                   -          (13,358,764)
           Depreciation and amortization                                         30,023                  485               91,630 
           Compensation relating to common stock and                                                                              
            warrants issued                                                           -                    -            1,340,000 
           Stock option compensation                                             10,870                    -              460,870 
           Warrants issued for services                                               -                    -               16,500 
           Income taxes payable                                               2,827,000                    -            2,827,000 
           Deferred income tax expense (benefit)                              1,089,000                    -             (177,000)
           Changes in operating assets and liabilities:                                                    -                      
             (Increase) decrease in accounts receivable                          33,621                    -             (341,107)
             Increase in inventory                                             (581,458)                   -             (812,574)
             (Increase) decrease in prepaid expenses and other current                                                            
                   assets                                                        36,352                    -             (115,506)
             Increase in other assets                                                 -                    -              (99,795)
             Increase (decrease)in accounts payable and accrued                                                                   
                   liabilities                                                 (728,621)              66,283            1,235,607 
                                                                           -------------        ------------        --------------
                                                                                                                                  
               Net cash provided (used) by operating activities               (2,216,210)              3,725           (5,733,452)
                                                                                                                                  
Cash flows form investing activities:                                                                                             
   Capital expenditures                                                      (6,657,370)          (9,712,173)         (25,855,809)
   Proceeds from sale of properties                                          19,224,767                    -           26,824,767 
   Drilling deposit, net                                                       (200,211)                   -             (533,684)
   Increase (decrease) in lease acquisitions payable                           (466,476)           8,826,368              152,110 
                                                                           -------------        ------------        --------------
                                                                                                                                  
               Net cash provided (used) by investing activities              11,900,710             (885,805)             587,384 
                                                                           -------------        ------------        --------------
                                                                                                                                  
Cash flows from financing activities:                                                                                             
   Proceeds from issuance of bridge loans                                             -                    -            8,800,000 
   Repayment of bridge loan                                                  (5,600,000)                   -           (8,800,000)
   Proceeds from issuance of note payable                                             -                    -              500,000 
   Repayment of note payable                                                          -                    -             (500,000)
   Proceeds from issuance of common stock, net of offering costs                721,661            2,065,497           15,575,005 
                                                                           -------------        ------------        --------------
               Net cash provided by financing activities                     (4,878,339)           2,065,497           15,575,005
                                                                               
               Net increase in cash                                           4,806,161            1,183,417           10,428,937 
                                                                                                                                  
Cash at beginning of period                                                   5,622,776                    -                    - 
                                                                           -------------        ------------        -------------
Cash at end of period                                                      $ 10,428,937            1,183,417           10,428,937 
                                                                           =============        ============        ============= 
Supplemental disclosures of cash flow information:                                                                                
   Cash paid for interest                                                             -                    -        $     682,400 
                                                                           =============        ============        ==============
                                                                                                                                  
   Cash paid for income taxes                                                         -                    -                    - 
                                                                           =============        ============        ==============
</TABLE>

See accompanying notes to financial statements.

                                       5
<PAGE>
 
                             PENNACO ENERGY, INC.
                         (A Development Stage Company)

                                March 31, 1999

                         Notes to Financial Statements
                                  (unaudited)

(1)  ORGANIZATION AND BASIS OF PRESENTATION

     Pennaco Energy, Inc. (the "Company") is an independent exploration and
     production company primarily engaged in the acquisition and development of
     natural gas production from coal bed methane properties in the Rocky
     Mountain region of the United States. The Company was incorporated on
     January 26, 1998 under the laws of the state of Nevada and its headquarters
     are in Denver, Colorado.

     The Company's activities to date have been limited to organizational
     activities, prospect development activities, acquisition of leases and
     option rights, and commencement of its drilling program. The Company
     currently has oil and gas lease rights in the Powder River Basin in
     northeastern Wyoming and southeastern Montana. As of March 31, 1999 the
     Company had no revenue producing operations. Accordingly, the Company is
     considered to be in the development stage.

     The Company was incorporated as a wholly-owned subsidiary of International
     Metal Protection Inc. ("International Metal"). Subsequently, all of the
     outstanding shares of International Metal were exchanged for shares of the
     Company and International Metal was merged into the Company. The 995,000
     shares issued in the exchange were recorded at their par value of $.001 per
     share as International Metal had no assets or liabilities at the date of
     the merger. International Metal and its predecessor, AKA Video
     Communications Inc., had been inactive for the two years ended December 31,
     1997 and prior thereto.

     In the opinion of management the accompanying financial statements reflect
     all adjustments, consisting of normal recurring adjustments, necessary to
     present fairly the Company's financial position as of March 31, 1999, and
     the results of its operations for the three-month period ended March 31,
     1999 and the period from January 26, 1998 (inception) to March 31, 1998.
     The results of operations for interim periods are not necessarily
     indicative of the results of operations for the full fiscal year. The
     accounting policies followed by the Company are included in Note 1 to the
     Financial Statements in the Company's Annual Report on Form 10-KSB for the
     period from January 26, 1998 (inception) to December 31, 1998. These
     financial statements should be read in conjunction with the Form 10-KSB.


(2)  OIL AND GAS ACTIVITIES

     The Company follows the successful efforts method of accounting for its oil
     and gas activities. Accordingly, costs associated with the acquisition,
     drilling and equipping of successful exploratory wells are capitalized.
     Geological and geophysical costs, delay and surface rentals and drilling
     costs of unsuccessful exploratory wells are charged to expense as incurred.
     Costs of drilling development wells, both successful and unsuccessful, are
     capitalized. Upon the sale or retirement of oil and gas properties, the
     cost thereof and the accumulated depreciation and depletion are removed
     from the accounts and any gain or loss is credited or charged to
     operations. Upon the sale of a partial interest in an unproved property,
     the proceeds are treated as a recovery of cost. If the proceeds exceed the
     carrying amount of the property, a gain is recognized in operations.
     Depletion of capitalized acquisition, exploration and development costs is
     computed on the units-of-production method by individual fields as the
     related proved reserves are produced.

     Capitalized costs of unproved properties are assessed periodically and a
     provision for impairment is recorded, if necessary, through a charge to
     operations.

     Proved oil and gas properties are assessed for impairment on a field-by-
     field basis. If the net capitalized costs of proved oil and gas properties
     exceeds the estimated undiscounted future net cash flows from the property
     a provision for impairment is recorded to reduce the carrying value of the
     property to its estimated fair value.

(3)  CMS TRANSACTION

     On October 23, 1998, the Company and CMS Oil and Gas Company signed a
     definitive agreement (the "CMS Agreement") relating to the development of
     the Company's Powder River Basin acreage (the "CMS Transaction"). Pursuant
     to the terms of the CMS Agreement, CMS Oil and Gas Company acquired an
     undivided 50% working interest in approximately 492,000 net acres of
     Pennaco's leasehold position in the Powder River Basin for $28,000,000. The
     Company acquired the leasehold position which was conveyed to CMS in the
     CMS Transaction for approximately $7,000,000. The purchase price provided
     for in the CMS Agreement was the result of arm's length negotiations
     between the Company and CMS. The joint operating agreement between the
     parties will be modeled after the 1989 AAPL Model Form of Joint Operating
     Agreement. The CMS Agreement provides that the parties will in good faith
     negotiate a development agreement for the exploration, development and
     production of coal bed methane from the leases. The development agreement
     will provide that each party will operate approximately 50% of the wells
     drilled in the area of mutual interest. Pennaco and CMS have divided the
     acreage in the area of mutual interest into project areas which will be
     operated by one party or the 

                                       6
<PAGE>
 
     other. As is customary in oil and gas leasehold transactions, the agreement
     provides for the adjustment of the purchase price for title defects
     discovered prior to closing and for the opportunity for one party to
     participate in acquisitions made by the other party in the area of mutual
     interest defined in the agreement. The agreement also provides for a
     preferential purchase right to the other party in the event either CMS or
     the Company attempts to sell a portion of its interest in the acreage
     covered by the agreement. There is no preferential purchase right in the
     event that either party enters into a merger, reorganization or
     consolidation. All of the leases in the area of mutual interest are
     dedicated to CMS Gas Transmission and Storage, an affiliate of CMS Oil and
     Gas Company, for gathering, compression and transportation.

     Pursuant to the terms of the CMS Agreement, CMS agreed to pay Pennaco
     $5,600,000 of earnest money in the form of a non-interest bearing bridge
     loan (the "CMS Bridge Loan") which was secured by substantially all of the
     Company's oil and as leases. Approximately $3,200,000 of such amount was
     paid directly to existing creditors of the Company. The CMS Transaction was
     structured such that the conveyance of the working interests was to occur
     at two separate closings. The first closing occurred on November 20, 1998,
     and the second occurred on January 15, 1999. The Company received
     $7,600,000 at the first closing and received $14,800,000 at the second
     closing, less approximately $1,800,000 which was held in escrow subject to
     customary closing adjustments. As of March 31, 1999, approximately
     $1,200,000 was held in escrow pending CMS closing adjustments. The CMS
     Bridge Loan was canceled at the second closing. Under the terms of the CMS
     Agreement, CMS will pay the Company for its share of the costs of acquiring
     any acreage in excess of the original 492,000 net acres. The joint venture
     acreage in the area of mutual interest is approximately 560,000 net acres 
     as of January 15, 1999.
     
     In the accompanying financial statements, the proceeds are treated as a
     recovery of cost of the properties. A gain was recognized to the extent the
     proceeds exceeded the carrying amount of the properties.
 
(4)  Stockholders' Equity
   
     In September 1998, the Company issued 980,000 units at $3.25 per unit. Each
     unit consists of one share of common stock and one warrant for each two
     shares issued. The warrants with an exercise price of $5.00 per share
     expire on March 4, 1999. Proceeds to the Company were approximately
     $3,165,000. Offering costs of $324,675 were charged to additional paid-in
     capital.

     Under the terms of the Company's September 1998 stock subscription
     agreement, 235,000 units were placed in an escrow account. Subscription
     payments of $763,750 were deposited into an escrow account representing the
     aggregate purchase price of 235,000 units. Under the terms of the escrow
     agreement the shares and the shares of common stock underlying the warrants
     were to be registered for resale under the Securities Act of 1933 (the
     "Act") with the Securities and Exchange Commission by December 31, 1998.
     The Company has also undertaken to have the shares qualified by way of an
     exemption order provided by the respective Securities Commissions in
     Canada.

     The escrow proceeds of $763,750 were deposited into an interest bearing
     escrow account together with certificates representing the units to be
     purchased. Under the terms of the subscription agreement, the registration
     statement was required to be declared effective and the Canadian exemption
     order was to be obtained on or before December 31, 1998. The registration
     statement was not declared effective by this date. Accordingly, as of
     December 31, 1998, the subscriber was entitled to elect to either purchase
     the escrow units or receive a refund from the escrow account paid with
     their subscription plus interest thereon, and an additional unit for each
     10 units purchased in the offering. On February 28, 1999, virtually all of
     the subscribers elected to purchase the escrow shares and all subscribers
     received an additional unit for each 10 units purchased in the offering. As
     a result, an additional 120,250 units were issued. These 120,250 units have
     been reflected in the accompanying financial statements as an addition to
     paid-in capital and as a reduction to retained earnings. Additionally,
     222,500 units were issued from escrow and proceeds of $723,125 were
     received by the Company from escrow. One subscriber elected not to purchase
     escrow shares and instead received a refund from escrow of $40,625 which
     represented 12,500 units, which were in turn not issued.

(5)  Earnings per Share

     The following table sets forth the computation of basic and diluted
     earnings per share:

<TABLE>
<CAPTION>
                                                                                                          Period from 
                                                                                Three Months            January 26, 1998 
                                                                                    Ended                (inception) to 
                                                                               March 31, 1999            March 31, 1998 
                                                                               --------------            -------------- 
<S>                                                                       <C>                        <C> 
Numerator for basic and diluted                                                                                          
  income (loss) per share--                                                                                              
  income (loss) available to common                                                                     
  stockholders                                                            $           7,012,560                   (63,043)
                                                                           --------------------      --------------------  
Denominator:                                                                                            
  Denominator for basic income (loss) per share---                                                      
  weighted average shares                                                            14,943,512                 4,348,333
  Effect of dilutive securities:                                                                        
    Stock warrants                                                                      276,644                         -
    Stock Options                                                                       861,583                         -
                                                                           --------------------      --------------------  
 Denominator for diluted income (loss) per share---                                                     
    share--adjusted weighted average                                                                    
    shares conversion                                                                16,081,739                 4,348,333
                                                                           ====================      ====================  
 Basic income (loss) per share                                            $                 .47                     (0.01)
 Diluted income (loss) per share                                          $                 .44                     (0.01)
</TABLE>

     Potentially dilutive common shares attributable to outstanding options to
purchase common shares of 608,000 and 1,000,000 options were antidilutive for 
the three months ended March 31, 1999 and the period from January 26, 1998
(inception) to March 31, 1998, respectively.

                                       7
<PAGE>
 
Item 2.  Plan of Operation
 
               This Quarterly Report on Form 10-QSB includes "forward-looking
          statements" within the meaning of Section 27A of the Securities Act of
          1933, as amended (the "Securities Act") and Section 21E of the
          Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
          statements other than statements of historical fact included in this
          Form 10-QSB, including without limitation statements regarding planned
          capital expenditures, the Company's financial position, business
          strategy and other plans and objectives for future operations, are
          forward-looking statements. Although the Company believes that the
          expectations reflected in such forward-looking statements are
          reasonable, it can give no assurance as that such expectations will
          prove to have been correct. A number of risks and uncertainties could
          cause actual results to differ materially from these statements,
          including, without limitation, fluctuations in the price of natural
          gas, the success rate of drilling efforts, expected production levels,
          operating expenses, capital expenditures, completion of gathering and
          pipeline projects and availability of equipment and personnel, as well
          as other risk factors described from time to time in the Company's
          documents and reports filed with the SEC. All subsequent written and
          oral forward-looking statements attributable to the Company or persons
          acting on its behalf are expressly qualified in their entirety by such
          factors.
 
               Pennaco Energy, Inc. is an independent, development stage
          exploration and production company. The Company's current operations
          are completely focused on the acquisition, development and production
          of natural gas from coal bed methane ("CBM") properties in the Rocky
          Mountain region of the United States. Pennaco is one of the largest
          holders of oil and gas leases covering CBM properties in the Powder
          River Basin in the northeastern Wyoming and southeastern Montana. As
          of March 1, 1999, the Company owned oil and gas lease rights with
          respect to approximately 311,800 net acres in the Powder River Basin.

               The Company initiated its drilling program on November 15, 1998
          and had drilled approximately 32 gross (30 net) wells as of December
          31, 1998. Pennaco has operated all of its wells drilled to date. As of
          March 31, 1999, the Company had drilled approximately 140 gross (123
          net) CBM wells since the beginning of its drilling program, and plans
          to drill approximately 330 net CBM wells in 1999. There can be no
          assurances that the Company will have sufficient funds to drill all of
          these wells, that it would be economic to do so or that these wells
          will ultimately be productive.

               At December 31, 1998, the Company estimated net proved reserves
          of 18.1 Bcfe with present value of estimated future net revenues
          before income taxes (utilizing a 10% discount rate) of $8.5 million
          and a standardized measure of discounted future net cash flows of $6.1
          million. Natural gas constituted 100% of the Company's estimated net
          proved reserves, all of which were located in the Powder River Basin
          and 30% of which were developed but non-producing at year-end. The
          Company operates all of the wells on its proved developed non-
          producing properties.
 
               As a development stage company, the Company had no revenues from
          operations in 1998 or in the three months ended March 31, 1999. During
          the period from the Company's inception (January 26, 1998) through
          March 31, 1999, the Company reported net income of $3,199,687. The
          Company realized a gain on sale of properties of $13,358,764 based on
          the $26,824,767 of proceeds received in the first and second closing
          of the CMS Transaction which occurred on November 20, 1998 and January
          15, 1999 respectively. Expenses incurred from the Company's inception
          (January 26, 1998) through March 31, 1999 totaled $7,673,766,
          including general and administrative expenses of $5,022,379 and
          exploration expenses of $1,877,357, including geologic consulting
          fees, geologic data and lease rentals. During the three month period
          ended March 31, 1999, the Company reported net income of $7,012,560.
          The Company realized a gain on sale of properties of $11,945,557
          received in the second closing of the CMS Transaction which occurred
          on January 15, 1999. Expenses incurred during the three month period
          ended March 31, 1999 totaled $1,126,400 including general and
          administrative expenses of $1,044,787 and exploration expenses of
          $51,590, including geologic consulting fees, geologic data and lease
          rentals.


          Liquidity and Capital Resources
          -------------------------------

               The capital resources of the Company are limited. Until April
          1999, the Company had not produced any revenues and its main source of
          funds has been the sale of the Company's equity securities and the
          proceeds from CMS Transaction. The Company had approximately $10.4
          million in cash as of March 31, 1999.

               On December 23, 1998, the Company and CMS Oil and Gas Company
          announced the CMS Transaction. Pursuant to the terms of the CMS
          Agreement, CMS paid Pennaco $5.6 million in the form of the CMS Bridge
          Loan secured by substantially all of the Company's oil and gas leases.
          Approximately $3.2 million of such amount was paid directly to
          existing creditors of the Company. The Company used the balance for
          general corporate purposes. The Company received $7.6 million at the
          first closing on November 20, 1998 and $13.6 million at the second
          closing on January 15, 1999. Additionally, approximately $1.8 million
          which was deposited into an escrow account subject to customary
          closing adjustments. The CMS Bridge Loan was canceled at the second
          closing. As of May 12, 1999, approximately $0.3 million remained in
          escrow pending closing adjustments for the CMS Transaction. While the
          proceeds of the CMS transaction allowed the Company to repay its
          current liabilities and should allow the Company to fund its planned
          $18.4 million capital expenditure program for 1999, the Company will
          require further funding, either from cash flow from operations, bank
          credit facilities or the public markets, to meet its capital
          expenditure plans for the year 2000 and beyond.

               Should the Company's cash flow from operations continue to be
          insufficient to satisfy its planned capital expenditure requirements,
          there can be no assurance that additional debt or equity financing
          will be available to meet these requirements. At present, there are no
          agreements or understandings between the Company and its officers and
          directors or affiliates and any investment banking firms with respect
          to any debt or equity financings. The Company is currently pursuing a
          bank credit facility commitment. There can be no assurances as to the
          availability or borrowing capacity of such a bank facility.

               Should the Company be able to obtain debt financing in the
          future, its level will have several important effects on the Company's
          future operations, including (1) a substantial portion of the
          Company's cash flow could be dedicated to the payment of interest on
          its indebtedness and would not be available for other purposes and (2)
          the Company's ability to obtain additional financing in the future may
          be impaired.

               To address the operational and administrative requirements of the
          Company's

                                       8
<PAGE>
 
     ongoing development activities, it is anticipated that during the next 12
     months employee requirements will increase to approximately 18 employees.
     Currently, the Company has 15 full-time employees.

          The Company had capital expenditures of approximately $7.0 million in
     the first quarter of 1999, including approximately $2.7 million for lease
     acquisitions and $3.9 million for drilling activities. On February 4, 1999,
     the Company announced a capital spending budget of $18.4 million for 1999,
     all of which will be directed towards the Company's Powder River Basin CBM
     project. The Company plans to spend approximately $9.4 million to drill
     approximately 330 net wells in the Powder River Basin during 1999, although
     there can be no assurance that it will have sufficient funds to drill all
     of these wells, that it would be economic to do so or that these wells will
     ultimately be productive. The wells will be a combination of joint
     Pennaco/CMS wells drilled in the area of mutual interest and Pennaco wells
     drilled primarily on a 100% working interest basis located outside of the
     CMS area of mutual interest in the South Gillette Area. The balance of the
     1999 capital budget, approximately $9.0 million, is allocated to lease
     acquisition. The Company does not anticipate the need for additional
     funding in order to execute the announced capital spending plan for 1999
     based upon the Company's current cash position.

Year 2000
---------

          The Company has conducted a review of its computer systems to identify
     the systems that could be affected by the "Year 2000" issue. The Year 2000
     problem is the result of computer programs being written using two digits
     rather than four to define the applicable year. Any of the Company's
     programs that have time-sensitive software may recognize a date using '00'
     as the year 1900 rather than the year 2000. This could result in a major
     system failure or miscalculations.

          The Company believes that Year 2000 problem will not pose material
     operational problems for the Company and that it is adequately prepared for
     the Year 2000. The Company's computer software provider has assured the
     Company that all of the Company's software is Year 2000 compliant (i.e.
     will function properly in the year 2000 and beyond). To the Company's
     knowledge after investigation, no "imbedded technology" (such as microchips
     in an electronic control system) of the Company poses a material Year 2000
     problem.

          Because the Company believes that it has no material internal Year
     2000 problems, the Company has not and does not expect to expend a material
     amount of funds to address Year 2000 issues. It is Company policy to
     continue to review the year 2000 compliance of its supplier's, gas
     purchasers and service providers; however, such monitoring does not involve
     a significant cost to the Company.

          In addition to the foregoing, the Company has contacted its major
     vendors and is in the process of obtaining either oral or written
     assurances from its major vendors that they have no material Year 2000
     problems.

          In the event that one or more of the Company's vendor provided systems
     were to have a material Year 2000 problem, the Company believes that the
     most reasonably likely worst case scenario would be a temporary delay in
     revenue collection caused by an interruption in computerized billing and
     not an interruption in the actual flow of the Company's coal bed methane,
     which would have no substantial long-term impact on the Company's ability
     to conduct operations.

Recent Developments
-------------------
 
South Gillette Gathering and Transportation Agreements

          The Company recently entered into an agreement with Bear Paw Energy,
     Inc. ("Bear Paw Energy"), a subsidiary of TransMontaigne, Inc., under which
     Bear Paw Energy will construct, own and operate gas gathering systems as
     well as provide gas gathering and compression services to Pennaco in the
     Company's South Gillette Area. On March 17, 1999, the Company entered into
     an agreement with Western Gas Resources, Inc. ("Western Gas") whereby
     Western Gas will compress and transport 11 MMcf per day of gas from the
     Dopplebock compressor station located southwest of the Company's South
     Gillette Area to the interconnect with Williston Basin Interstate Pipeline
     ("WBI") at Recluse, Wyoming. Pennaco has entered into two gas sale
     contracts to sell a total of 10,000 MMBtu per day (approximately 11 MMcf
     per day of wellhead production) of natural gas for 12 months beginning
     April 1, 1999 to two gas purchasers deliverable at Recluse, Wyoming into
     WBI. The company entered into agreements to purchase gas for the month of
     April 1999 in order to meet its gas sales contract obligations prior to
     commencement of gas production.

     Initial Gas Production

          Pennaco produced its first gas for sale in late April 1999. The
     Company anticipates that its gas production will reach 11 MMcf per day by
     the end of May 1999. Further production increases will be limited until
     September 1999, when the Fort Union Gas Gathering System is scheduled to
     commence operations at capacity of 450 MMcf per day.

     CMS Gas Gathering and Transportation Agreements

          On March 30, 1999, Pennaco and CMS announced that Pennaco has entered
     into a gas gathering agreement with CMS Continental Natural Gas, Inc. ("CMS
     Continental"), a wholly owned subsidiary of CMS Energy Corporation. Under
     this agreement, CMS Continental will provide gas gathering services to
     Pennaco and CMS Oil and Gas Company within the Pennaco/CMS area of mutual
     interest, which excludes the South Gillette Area. CMS also announced plans
     to construct a $190 million, 110 mile high pressure gathering pipeline
     through the Pennaco/CMS jointly owned acreage located in the northern
     portion of the Powder River Basin coal bed methane play, connecting at its
     southern terminus with the Fort Union pipeline project which is scheduled
     for completion in September 1999.

     There can be no assurance that any of these gathering and pipeline systems
     will ultimately be constructed or that they will be completed in the time-
     frame currently anticipated.

                                       9
<PAGE>
 
Stockholder Rights Plan

     On February 24, 1999, the Board of Directors adopted a stockholder rights
plan pursuant to which the Company distributed a dividend of one right (a
"Right") for each outstanding share of Common Stock. The Rights have anti-
takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire the Company on terms not approved by the Board of
Directors, except pursuant to an offer conditioned on a substantial number of
Rights being acquired. Each Right entitles the registered holder to purchase
from the Company one half of a share of Common Stock at an exercise price of
$20, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of February 24, 1999, between the Company
and Harris Trust and Savings Bank, as rights agent, a copy of which has been
filed with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A.

We currently maintain our principal executive offices at 1050 17th Street, Suite
700, Denver, Colorado 80265. Our telephone number is (303) 629-6700 and the
facsimile number is (303)629-6800. We also maintain an office at 3651 Lindell
Road, Suite A, Las Vegas, Nevada 89103 and a field office at 4988 S. Highway 14-
16, Suite 102, Gillette, Wyoming, 82716.

                                       10
<PAGE>
 
                          PART II.  OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)   Exhibits
           27 Financial Data Schedule

     (b)   Reports on Form 8-K.
           No reports on Form 8-K were filed during the quarter ended March 31, 
           1999.

                                       11
<PAGE>
 
                                  SIGNATURES

     In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                PENNACO ENERGY, INC.



May 17, 1999                    By: /s/ Paul M. Rady
                                    -----------------------------------
                                    Paul M. Rady, President and Chief
                                    Executive Officer
 


May 17, 1999                    By: /s/ Glen C. Warren, Jr.
                                    -----------------------------------
                                    Glen C. Warren, Jr. Executive Vice President
                                        and Chief Financial Officer

                                       12