<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: June 30, 1999
                                      OR
                  [ ]  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 as specified in its charter)

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

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

                                (303) 629-6700
                        (Registrant's telephone number)

                                Not applicable
     (Former address and former fiscal year, if changed since last report)

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

As of August 10, 1999 there were 15,169,179 shares of the Company's common
stock, $.001 par value, outstanding.

Transitional Small Business Disclosure Format.  (Check One):

                              Yes    X        No
                                  -------       -------
<PAGE>

                              PENNACO ENERGY, INC.

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

 Item 1. Financial Statements (Unaudited)

      Balance Sheets as of
      June 30, 1999 and December 31, 1998...........................................     3

      Statements of Operations for the three months ended June 30, 1999
      and 1998, the six months ended June 30, 1999 and the period from
      January 26, 1998 (inception) to June 30, 1998 ................................     4

      Statement of Stockholders' Equity for the six months ended
      June 30, 1999.................................................................     5

      Statements of Cash Flows for the six months
      ended June 30, 1999 and the period from
      January 26, 1998 (inception) to June 30,1998..................................     6

      Notes to Financial Statements (Unaudited).....................................     7-11

Item 2.  Management's Discussion and
         Analysis of Financial Condition
         and Results of Operations..................................................     12-16

PART II. OTHER INFORMATION..........................................................     17

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

Item 6. Exhibits and Reports on Form 8-K


SIGNATURES.........................................................................      19

</TABLE>

                                                                               2
<PAGE>

PART I.  FINANCIAL INFORMATION
         ---------------------

Item 1.  Financial Statements
                             PENNACO ENERGY, INC.
                                 Balance Sheet

<TABLE>
<CAPTION>
                                                                          June 30,                             December 31,
                                                                            1999                                   1998
                                                                       --------------                         --------------
                                                                         (unaudited)
                                                                                          (in thousands)

CURRENT ASSETS:
<S>                                                                    <C>                                      <C>
     Cash                                                              $        4,714                         $        5,623
     Accounts receivable                                                        1,628                                    375
     Subscriptions receivable                                                       -                                    764
     Assets held for sale                                                         187                                  6,932
     Drilling deposit                                                             395                                    333
     Inventory                                                                    691                                    231
     Prepaid expenses and other current assets                                     92                                    152
                                                                       --------------                         --------------

        Total current assets                                                    7,707                                 14,410
                                                                       --------------                         --------------

PROPERTY AND EQUIPMENT, at cost:
     Natural gas properties, using the successful
        efforts method of accounting                                           16,533                                  6,016
     Other property and equipment                                                 443                                    296
                                                                       --------------                         --------------

                                                                               16,976                                  6,312
     Less accumulated depletion,  depreciation and amortization                  (210)                                   (62)
                                                                        --------------                         --------------

             Net property and equipment                                        16,766                                  6,250
                                                                       --------------                         --------------

OTHER ASSETS:
     Deferred income taxes                                                          -                                  1,266
     Other                                                                        100                                    100
                                                                       --------------                         --------------
        Total other  assets                                                       100                                  1,366
                                                                       --------------                         --------------

                                                                       $       24,573                         $       22,026
                                                                       ==============                         ==============
CURRENT LIABILITIES:
     Bridge loan payable                                               $            -                         $        5,600
     Lease acquisitions payable                                                     -                                    619
     Accounts payable and accrued liabilities                                   2,431                                  1,964
     Income taxes payable                                                       1,211                                      -
                                                                       --------------                         --------------

        Total current liabilities                                               3,642                                  8,183
                                                                       --------------                         --------------

DEFERRED INCOME TAXES                                                             608                                      -
                                                                       --------------                         --------------

STOCKHOLDERS' EQUITY:
     Common stock, $.001 par value  (Authorized 50,000,000
        shares; issued and outstanding 15,169,000 at
        June 30, 1999 and 14,795,000 shares at December 31,
        1998)                                                                      15                                     15
     Additional paid-in capital                                                18,014                                 17,641
     Retained earnings (deficit)                                                2,294                                 (3,813)
                                                                       --------------                         --------------

        Total stockholders' equity                                             20,323                                 13,843
                                                                       --------------                         --------------

COMMITMENTS
                                                                       $       24,573                         $       22,026
                                                                       ==============                         ==============
</TABLE>

                See accompanying notes to financial statements.

                                                                               3
<PAGE>

                             PENNACO ENERGY, INC.

                            Statement of Operations
                                  (unaudited)


<TABLE>
<CAPTION>


                                                                                                          Period From
                                               Three Months ended June 30,            Six Months        January 26, 1998
                                            ---------------------------------           ended            (inception) to
                                                 1999               1998            June 30, 1999        June 30, 1998
                                            --------------     --------------     -----------------    ------------------
                                                              (in thousands, except per share amounts)

Revenue:
<S>                                         <C>                <C>                <C>                  <C>
       Natural gas revenue                   $          628    $            -     $             628    $                -
                                             --------------    --------------     -----------------    ------------------
              Total revenue                             628                 -                   628                     -
                                             --------------    --------------     -----------------    ------------------

Operating expenses:
      Production and lease operating                    486                 -                   486                     -
      Production taxes                                   52                 -                    52                     -
      Exploration                                        57               855                   108                   860
      Depletion, depreciation and
           amortization                                 118                 7                   148                     8
      General and administrative                      1,380               343                 2,425                   401
                                             --------------    --------------     -----------------    ------------------
             Total expenses                           2,093             1,205                 3,219                 1,269
                                             --------------    --------------     -----------------    ------------------
Loss  from operations                                (1,465)           (1,205)               (2,591)               (1,269)

      Interest income                                   130                19                   239                    20
      Interest expense                                    -              (475)                    -                  (475)
      Gain on sale of properties                        485                 -                12,431                     -
                                             --------------    --------------     -----------------    ------------------

Income (loss) before income taxes                      (850)           (1,661)               10,079                (1,724)

Income tax (expense) benefit                            304                 -                (3,612)                    -
                                             --------------    --------------     -----------------    ------------------

Net income (loss)                            $         (546)   $       (1,661)    $           6,467    $           (1,724)
                                             ==============    ==============     =================    ==================

Basic earnings (loss)  per share             $         (.04)   $         (.14)    $             .43    $             (.19)
                                             ==============    ==============     =================    ==================

Diluted earnings (loss) per share            $         (.04)   $         (.14)    $             .37    $             (.19)
                                             ==============    ==============     =================    ==================

Weighted average common shares
      outstanding:
          Basic                                      15,153            11,692                15,048                 9,133
                                             ==============    ==============     =================    ==================

          Diluted                                    15,153            11,692                17,369                 9,133
                                             ==============    ==============     =================    ==================
</TABLE>


                See accompanying notes to financial statements.

                                                                               4
<PAGE>

                             PENNACO ENERGY, INC.

                       Statement of Stockholders' Equity
                                  (unaudited)

                        Six Months ended June 30, 1999


<TABLE>
<CAPTION>


                                           Common Stock
                                   ----------------------------          Additional             Retained
                                                                          Paid-in               Earnings
                                   Shares                Amount           Capital               (Deficit)            Total
                                   ----------------------------       ----------------       ---------------     --------------
                                                            (in thousands)
<S>                                <C>             <C>                <C>                    <C>                   <C>
Balance at December 31, 1998            15,152     $         15       $         17,641       $        (3,813)    $       13,843
Exercise of warrants                        25                -                     44                     -                 44
Issuance of additional units                 -                -                    360                  (360)                 -
Stock option compensation                    -                -                     11                     -                 11
Refund of subscriptions receivable         (14)               -                    (41)                    -                (41)
Issuance of units                            6                -                     20                     -                 20
Additional offering costs                    -                -                    (21)                    -                (21)
Net income                                   -                -                      -                 6,467              6,467
                                   -----------     ------------       ----------------       ---------------     --------------
Balance at June 30, 1999                15,169     $         15       $         18,014       $         2,294     $       20,323
                                   ===========     ============       ================       ===============     ==============
</TABLE>


                                                                               5
<PAGE>

                             PENNACO ENERGY, INC.

                            Statement of Cash Flows
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                                                         Period from
                                                                                                       January 26, 1998
                                                                             Six  Months ended          (inception) to
                                                                               June 30, 1999            June 30, 1998
                                                                             -----------------         ----------------
                                                                                           (in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>                       <C>

   Net income (loss)                                                         $           6,467         $         (1,724)
   Adjustments to reconcile net income (loss) to net cash used
     in operating activities:
       Gain on sale of properties                                                      (12,431)                       -
       Depletion, depreciation and amortization                                            148                        8
       Compensation relating to common stock and
         warrants issued                                                                    11                        -
       Deferred income tax expense (benefit)                                             1,874                        -
       Changes in operating assets and liabilities:
         Increase in accounts receivable                                                (1,253)                       -
         Increase in inventory                                                            (460)                       -
         (Increase) decrease in prepaid expenses and other current
           assets                                                                           60                      (51)
         Increase in other assets                                                            -                      (67)
         Increase in accounts payable and accrued
           liabilities                                                                     467                      736
         Increase in income taxes payable                                                1,211                        -
                                                                             -----------------         ----------------

         Net cash used in operating activities                                          (3,906)                  (1,098)
                                                                             -----------------         ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Capital expenditures                                                                (11,546)                 (12,856)
   Proceeds from sale of  properties                                                    20,058                        -
   Drilling deposit, net                                                                   (62)                    (250)
   Increase (decrease) in lease acquisitions payable                                      (619)                      55
                                                                             -----------------         ----------------

         Net cash provided by (used in)  investing activities                            7,831                  (13,051)
                                                                             -----------------         ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of bridge loan                                                     -                    4,075
   Repayment of bridge loan                                                             (5,600)                       -
   Proceeds from issuance of common stock,  net of offering costs                          723                   10,609
   Proceeds from exercise of warrants                                                       44                        -
   Proceeds from issuance of units                                                          20                        -
   Additional offering costs                                                               (21)                       -
                                                                             -----------------         ----------------

         Net cash provided  by (used in) financing activities                           (4,834)                  14,684
                                                                             -----------------         ----------------

NET INCREASE (DECREASE) IN CASH                                                           (909)                     535

CASH AT BEGINNING OF  PERIOD                                                             5,623                        -
                                                                             -----------------         ----------------

CASH AT END OF  PERIOD                                                       $           4,714         $            535
                                                                             =================         ================

Supplemental disclosures of cash flow information:
  Cash paid for interest                                                     $               -         $              -
                                                                             =================         ================
  Cash paid for income taxes                                                 $             528         $              -
                                                                             =================         ================
</TABLE>

                See accompanying notes to financial statements.

                                                                               6
<PAGE>

                             PENNACO ENERGY, INC.
                                 June 30, 1999

                         Notes to Financial Statements
                                  (unaudited)

(1)  ORGANIZATION AND BASIS OF PRESENTATION

     Pennaco Energy, Inc. (the "Company") is an independent exploration and
production company.  The Company's current operations are completely focused on
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 is
headquartered in Denver, Colorado.

     From its inception through March 31, 1999, the Company's activities had
been limited to organizational activities, prospect development activities,
acquisition of leases and option rights, and commencement of its drilling
program. The Company has oil and gas lease rights in the Powder River Basin in
northeastern Wyoming and southeastern Montana. In April 1999 the Company began
gas production from certain of its gas properties in the South Gillette Area. As
a result, the Company is no longer considered a development stage company.

     The accompanying financial statements are unaudited; however, 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 June 30, 1999, and the results of
its operations for the three-month periods ended June 30, 1999 and 1998, the
six-month period ended June 30, 1999 and the period from January 26, 1998
(inception) to June 30, 1998. The results of operations for interim periods are
not 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
natural 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 which would include uneconomical pilot
projects are charged to expense as incurred. Costs of drilling development
wells, both successful and unsuccessful, are capitalized. Upon the sale or
retirement of gas properties, the cost thereof and the accumulated depreciation
and depletion are removed from the accounts and any gain or loss is recorded 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

                                                                               7
<PAGE>

                         Notes to Financial Statements
                                  (continued)

recognized.  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 gas properties are assessed for impairment on a field-by-
field basis. If the net capitalized costs of proved 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 the value
of its estimated undiscounted future net cash flows.

(3)  CMS TRANSACTION

     On October 23, 1998, the Company and CMS Oil and Gas Company ("CMS") 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 acquired an undivided 50% working interest in
approximately 492,000 net undeveloped acres of the Company's leasehold position
in the Powder River Basin for $28,000,000. The Company acquired the 50%
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 other. Under the Company's accounting policies,
the proceeds from the sale are treated as a recovery of cost, with any
additional amounts recorded as a gain. The proceeds on the sale of these
undeveloped properties exceeded their cost. Accordingly, the Company has no
basis in its retained 50% ownership in such properties. 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, for gathering, compression and
transportation.

     Pursuant to the terms of the CMS Agreement in October 1998, CMS paid
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 gas leases.

                                                                               8
<PAGE>

                         Notes to Financial Statements
                                  (continued)

Approximately $3,200,000 of such amount was used to repay existing creditors of
the Company. The CMS Transaction was structured such that the conveyance of the
working interests occurred 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 $18,600,000 at the second
closing. The remaining $1,800,000 was held in escrow subject to customary
closing adjustments. The CMS Bridge Loan was canceled at the second closing.
Subsequent to the second closing, the Company has received approximately
$1,458,000 from the escrow account leaving approximately $342,000 as of June 30,
1999, pending closing adjustments.

     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 in the area of mutual interest. The joint venture acreage in the area
of mutual interest includes approximately 580,000 net acres as of June 30, 1999.

(4)  Stockholders' Equity

     In September 1998, the Company issued 980,000 units at $3.25 per unit,
which includes proceeds received subsequent to December 31, 1998 of $20,000
relating to 6,250 of such units. The units consists of i) 980,000 shares of
common stock and ii) warrants to acquired an additional 490,000 shares of common
stock at an exercise price of $5.00 per share. The Company received proceeds of
approximately $3,165,000. The Company incurred offering costs of $325,000 which
were charged to additional paid-in capital.

     Under the terms of the Company's September 1998 Stock Subscription
Agreement, 235,000 additional units were issued under the same terms as above
and placed in an escrow account. Subscription payments of $763,750 were
deposited into an escrow account, together with certificates representing the
units to be purchased, representing the aggregate purchase price of the 235,000
units. Under the terms of the escrow agreement, the common stock shares and the
shares of common stock underlying the warrants were to be registered 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.

     Under the terms of the subscription agreement, if the registration
statement was not declared effective and the Canadian exemption order was not
obtained on or before December 31, 1998, the subscriber was entitled to
additional rights. The registration statement was not declared effective by this
date. Accordingly, as of December 31, 1998, the subscriber was entitled to elect
to either receive the units from the escrow account or receive a cash refund
from the escrow account plus interest thereon. Additionally, the Company was
required to issue to the subscribers an additional unit for each 10 units
purchased in the offering. On February 28, 1999, subscribers representing
222,500 units held in escrow elected to receive the escrowed units and the
Company received proceeds of $723,000 from the escrow account. One subscriber
representing 12,500 units elected not to receive the escrowed units

                                                                               9
<PAGE>

                         Notes to Financial Statements
                                  (continued)

and instead received a refund from escrow of $41,000.  Therefore, the total
units issued in connection with the September 1998  Stock Subscription Agreement
included the original 1,202,500 units and the 120,250 additional units required
to be issued, as discussed above, for a total of 1,322,750 units. The warrants
issued in connection with the units expired unexercised on March 4, 1999.  The
120,250 additional units have been reflected in the accompanying financial
statements as an increase to paid in capital and as a reduction to retained
earnings of $360,000.

     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.

     During the six months ended June 30, 1999 warrants for the purchase of
25,000 shares of common stock were exercised for $44,000.

(5)  Earnings per Share

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

<TABLE>
<CAPTION>




                                                                Three Months Ended                          Period from
                                                                     June 30,             Six Months      January 26, 1998
                                                               ---------------------        Ended          (inception) to
                                                                 1999         1998       June 30, 1999     June 30, 1998
                                                               --------     --------    ---------------   ----------------
                                                               (in thousands, except per share amounts)
<S>                                                            <C>          <C>         <C>               <C>


Numerator for basic and diluted  income (loss) per share--
  Income (loss) available to common stockholders               $   (546)    $ (1,661)   $         6,467   $         (1,724)


Denominator:
  Denominator for basic income (loss) per share--
  Weighted average shares                                        15,153       11,692             15,048              9,133
  Effect of dilutive securities:
     Stock warrants                                                   -            -                443                  -
     Stock Options                                                    -            -              1,878                  -
                                                               --------     --------    ---------------   ----------------

Denominator for diluted income (loss) per share--
  Adjusted weighted average shares diluted                       15,153       11,692             17,369              9,133
                                                               ========     ========    ===============   ================

Basic income (loss) per share                                  $   (.04)    $   (.14)   $           .43   $           (.19)
                                                               ========     ========    ===============   ================
Diluted income (loss) per share                                $   (.04)    $   (.14)   $           .37   $           (.19)
                                                               ========     ========    ===============   ================
</TABLE>

                                                                              10
<PAGE>
                        Notes to Financial Statements
                                  (continued)

Potentially dilutive common shares attributable to outstanding options and
warrants to purchase common shares of 4,501,000, 2,121,000, 97,000 and 2,121,000
were excluded from the calculation of diluted earnings (loss) per share for the
three month periods ended June 30, 1999 and 1998, the six month period ended
June 30, 1999 and the period from January 26, 1998 (inception) to June 30, 1998,
respectively, as their effect was antidilutive.


(6)  EVENTS SUBSEQUENT TO JUNE 30, 1999

     Bank Facility
     -------------

       On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association ("USB"). The Credit Agreement provides for loans of
up to $25,000,000 based upon a borrowing base determined by USB. The borrowing
base has been determined to be $10,000,000 through September 30, 1999. The
Credit Agreement includes the following provisions: i) is secured by mortgages
on all of the Company's properties; ii) provides for a revolving period
generally ending on June 30, 2001 afterwhich the loan is to be repaid based upon
a 48 month amortization period; iii) provides that, on a quarterly basis, the
Company's working capital (including unused commitment amount, minus outstanding
letters of credit) not to be less than $0; the Company's tangible net worth,
beginning on or after December 31, 1999, not to be less than (a) $20,000,000,
plus (b) 50% of the Company's cumulative net income for all periods ending after
July 23, 1999, plus (c) 50% of all equity proceeds; and that, beginning on or
after December 31, 1999, the Company will not permit its fixed charge coverage
ratio to be less than 1.0:1.0; and iv) provides for an interest at either a
Libor or prime base rate.

  As of August 10, 1999 the Company had no borrowings outstanding under the
revolving credit agreement.

                                                                              11
<PAGE>

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations

                                    General
                                    -------

       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.

       The Company's stock is traded on the American Stock Exchange under the
symbol "PN". The Company's principal executive offices are located at 1050 17th
Street, Suite 700, Denver, Colorado 80265. The telephone number is (303) 629-
6700 and the facsimile number is (303) 629-6800. The Company also maintains a
field office at 4988 S. Highway 14-16, Suite 102, Gillette, Wyoming, 82716.

       The Company is an independent, 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 July 29,
1999, the Company owned oil and gas lease rights with respect to approximately
330,000 net acres in the Powder River Basin.

       From its inception on January 26, 1998, the Company has focused its
activities on the acquisition of leases and beginning in November 1998 began its
drilling program. The source of funds to finance these activities have been
obtained through the sale of securities and to a larger extent the CMS
Transaction where the Company sold a 50% undivided interest in certain of its
properties for $28,000,000

       The Company 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 the Company's in the Company's South
Gillette Area. The Company also entered into

                                                                              12
<PAGE>

               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
                                  (continued)

an agreement with a transportation company to compress and transport 11 MMcf per
day of gas from the compressor station located southwest of the Company's South
Gillette Area to the interconnect with Williston Basin Interstate Pipeline
("WBI") at Recluse, Wyoming. This gas is being sold under two gas sales
contracts for 5,000 MMBtu per day each (approximately 11 MMcf per day of
wellhead production in total) for 12 months beginning April 1, 1999. The price
received for one contract is fixed at $1.55 per MMBtu for gas delivered at
Recluse, Wyoming. The other contract contains a floating price determined
monthly using published index prices which together with a fixed-for-floating
swap agreement which the Company has entered into for the same 12 month period,
results in a price received by the Company for such gas of $1.625 per MMBtu for
gas delivered at Recluse, Wyoming.

      On March 30, 1999, the Company and CMS announced that the Company 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 the
Company 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 Gas Gathering Project discussed below.

      In late April 1999 the Company began to sell its gas production. As of
July 29, 1999 the Company had drilled 280 gross (246 net) gas wells and had
gross production of approximately 11 MMcf per day from 96 gross (91 net) wells
located in its South Gillette Area. The Company had 146 gross (136 net) wells
which were waiting on pipeline connections or which were being completed. The
Company believes many of these wells will be put into production as soon as one
of the two new pipeline projects currently under construction is operating. The
Fort Union Gas Gathering Project, a 450 MMcf per day pipeline joint venture
involving CMS Energy, Enron, Western Gas Resources, Barrett Resources and
Colorado Interstate Gas, is expected to be operational on or about September 1,
1999. The Thunder Creek Gas Services Project, a 450 MMcf per day pipeline being
built by Devon Energy and KN Energy, is also expected to be operational in
September 1999. The Company expects to move its excess South Gillette area gas,
as well as additional deliverability which the Company is developing, through
these new pipelines. As a first step in this process, the Company has entered
into an agreement to sell approximately 6,000 Mcf per day of wellhead production
from September 1, 1999 through March 31, 2000 at a floating price determined
monthly using published index prices.

      The Company and CMS have drilled 38 gross (19 net) wells in pilot areas
within the Pennaco/CMS area of mutual interest where the partners are in the
process of evaluating the reserve and production potential.

                                                                              13
<PAGE>

               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
                                  (continued)

                             RESULTS OF OPERATIONS

     Due to the fact that the Company's first gas sales occurred in late April
1999 and are currently limited by pipeline takeaway capacity, the Company does
not believe its results of operations for the quarter and six months ended June
30, 1999 are indicative of the expected future results of the Company.

     The Company had a net loss of $546,000 and net income of $6,467,000 for the
quarter and six months ended June 30, 1999, respectively, compared to a net loss
of $1,661,000 and $1,724,000 for the quarter ended June 30, 1998 and the period
from inception, on January 26, 1998 ("Inception"), to June 30, 1998.  Such
amounts include a gain on the sale of properties in connection with the CMS
Transaction of $485,000 and $12,431,000 for the quarter and six months ended
June 30, 1999.  The Company had no revenues from operations until late April of
1999.  The quarter ended June 30, 1999 reflects net production of 398,000
thousand cubic feet ("Mcf") at an average realized price of  $1.58 per Mcf.
General and administrative expenses for 1999 increased over 1998 due to the
substantial increase in the scope of operations by the Company.  The 1999
periods also show a reduction of interest expense and an increase in interest
income due to the repayment of debt and increase in short term investments
resulting from proceeds received in the CMS Transaction.

                        LIQUIDITY AND CAPITAL RESOURCES

     The capital resources of the Company are limited. Until late 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, to a greater extent, the
proceeds from the CMS Transaction. The Company had approximately $4,714,000 in
cash as of June 30, 1999.  The proceeds of the CMS Transaction have allowed the
Company to repay certain of its current liabilities and have funded its cash
used in operating activities of  $3,906,000 and capital expenditures of
$11,546,000 for the six months ended June 30, 1999. During the period from
January 26, 1998 (inception) to June 30, 1998, the Company had net cash used in
operating activities of $1,098,000. This use of cash was less than the 1999
six-month period due to the start-up nature of the Company in early 1998, as it
did not begin its drilling operations until November 1998. The Company had
capital expenditures during the 1998 period of $12,856,000, which were funded by
loans and proceeds from the sale of the Company's equity securities.

     The Company had capital expenditures of approximately $11,546,000 in the
six months ended June 30, 1999, including approximately $4,140,000 for lease
acquisitions and $7,406,000 for drilling activities. On June 16, 1999, the
Company announced a revised capital spending budget of $26,500,000 for 1999
which was an $8,100,000 increase from the Company's original capital budget, all
of which will be directed towards the Company's Powder River Basin CBM project.
The Company plans to spend approximately $18,000,000 to drill approximately 460
net wells in the Powder River Basin during 1999. 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 $8,500,000, is allocated to lease acquisition.
However, there can be no assurance that the Company will have sufficient funds
to execute its capital expenditure plan, that it will be economic to do so, that
the wells drilled will ultimately be productive or that any additional leasehold
acreage will be acquired.

                                                                              14
<PAGE>

               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
                                  (continued)


     On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association  ("USB").  The Credit Agreement provides for loans
of up to $25,000,000 based upon a borrowing base determined by USB.  The
borrowing base has been determined to be $10,000,000 through September 30, 1999,
with the capacity for expansion as the Company's reserve base increases.  As of
August 10, 1999 the Company had no borrowings outstanding under the revolving
credit facility.  However, the Company expects to begin to utilize such facility
in the near future in connection with the above described capital expenditure
budget for 1999.

     Should the Company's cash flow from operations or availability under its
revolving credit agreement 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.

     The Company's future debt level will have several important effects on the
Company's future operations, including that 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 that the
Company's ability to obtain additional financing in the future may be impaired.

June 30, 1999 Reserve Update
----------------------------

     Due to the Company's significant drilling program in 1999, the Company
updated its estimated  net proved reserves as of June 30, 1999, to 42.7 billion
cubic feet (Bcf) of natural gas, a 24.6 Bcf increase from the 18.1 Bcf of
estimated net proved reserves reported as of December 31, 1998.  All of the net
proved reserves were located in the South Gillette Area in the Company's Powder
River Basin CBM Project in Wyoming.  Approximately 52%, or 22.3 Bcf, of the
reserves were classified as proved developed producing based upon 94 producing
wells and 17%, or 7.2 Bcf, were proved developed shut-in, representing 32 wells
which were drilled and completed but awaiting pipeline connection.  The
remaining 31%, or 13.2 Bcf were classified as proved undeveloped.

     The present value of estimated future net revenues from the 42.7 Bcf of
proved reserves, before income taxes, totaled approximately $28,300,000, using a
10% discount rate and a June 30, 1999 natural gas price of $2.00 per thousand
cubic feet (CIG Rocky Mountain index) held constant.  The reserve evaluation was
performed by Ryder Scott Company.

                                                                              15
<PAGE>

               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
                                  (continued)

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 gas.  The
Company believes that any such delays would have no substantial long-term impact
on the Company's ability to conduct operations.

                                                                              16
<PAGE>

PART II.  OTHER INFORMATION
          -----------------

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

The Company held its annual meeting of stockholders in Denver, Colorado on June
15, 1999.  The following sets forth matters submitted to a vote of the
stockholders:

(a)      The following individuals were elected to the Board of Directors as
     stated in the Company's Proxy Statement dated May 10, 1999, for terms
     expiring as set forth below or until their successors have been elected and
     qualified -Class I Director to serve until the 2000 Annual Meeting: Jeffrey
     L. Taylor; Class II Directors to serve until the 2001 Annual Meeting: Glen
     C. Warren, Jr. and David W. Lanza; Class III Directors to serve until the
     2002 Annual Meeting: Paul M. Rady and Gregory V. Gibson.

Every Director was elected by a vote of 11,572,466 shares, being more than a
majority of the outstanding shares of Common Stock.

(b)      The stockholders approved an amendment to the Articles of Incorporation
     to provide for the classification of the Board of Directors into three
     classes of directors with staggered terms of office by a vote of 9,318,646
     shares, being more than a majority of the shares of Common Stock present,
     in person or by proxy, at the annual meeting and entitled to vote with
     69,785 shares voted against, 18,455 shares abstaining.

(c)      The stockholders approved an amendment to the Articles of Incorporation
     that requires that all stockholder action be taken at a stockholders'
     meeting by a vote of 7,805,250 shares, being more than a majority of the
     shares of Common Stock present, in person or by proxy, at the annual
     meeting and entitled to vote, with 1,564, 431 shares voted against, 37,205
     shares abstaining.

(d)      The stockholders approved an amendment to the Articles of Incorporation
     and the addition of a new article that requires a two-thirds vote of the
     Board of Directors to amend or repeal the By-Laws of the Corporation and
     requires a two-thirds stockholder vote to amend or repeal the By-Laws or
     certain provisions of the Articles of Incorporation by a vote of 7,652,566
     shares, being more than a majority of the shares of Common Stock present,
     in person or by proxy, at the annual meeting and entitled to vote, with
     1,579,152 shares voted against, 18,255 shares abstaining.

(e)      The stockholders approved an amendment to the Articles of Incorporation
     authorizing the Board of Directors to issue up to 10,000,000 shares of
     Preferred Stock by a vote of 7,397,421 shares, being more than a majority
     of the shares of Common Stock present, in person or by proxy, at the annual
     meeting and entitled to vote, with 1,786,577 shares voted against, 65,975
     shares abstaining.

(f)      The stockholders ratified the appointment of KPMG LLP to audit the
     financial statements of the Company and its subsidiaries for the year
     ending December 31, 1999, by a vote of 11,105,309 shares, being more than a
     majority of the shares of Common Stock present, in person or by proxy, at
     the annual meeting and entitled to vote, with 4,875 shares voted against,
     7,905 shares abstaining.

                                                                              17
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     *4.1  Credit Agreement dated as of July 23, 1999 between the Company and
           U.S. Bank National Association.

     *27   Financial Data Schedule

(b)  Reports on Form 8-K.
     No reports on Form 8-K were filed during the quarter ended June 30,1999.

      *Filed herewith

                                                                              18
<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.



August 10, 1999            By: /s/ Paul M. Rady
                     -----------------------------------
                     Paul M. Rady, President and Chief
                     Executive Officer



August 10, 1999            By: /s/ Glen C. Warren, Jr.
                     -----------------------------------
                     Glen C. Warren, Jr. Executive Vice President
                       and Chief Financial Officer



August 10, 1999            By: /s/ Charles E. Brammeier
                     -----------------------------------
                     Charles E. Brammeier, Controller

                                                                              19