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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------

                                    FORM 10-Q


                                   (Mark One)

          [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 1996




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


                         Commission File Number 0-26662


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


            Delaware                                  43 - 1593374
(State or other jurisdiction 
of incorporation or organization)        (I.R.S. Employer Identification Number)


1050 West Blue Ridge Boulevard, PANACO Building,
                  Kansas City, MO                        64145-1216
  (Address of principal executive offices)               (Zip Code)

      Registrant's telephone number, including area code: (816) 942 - 6300






         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______ .




   12,345,361  shares of the  registrant's  $.01 par  value  Common  Stock  were
outstanding as of September 30, 1996.



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

--------------------------------------------------------------------------------
<PAGE>

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



<TABLE>
<CAPTION>

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


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


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


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


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

<PAGE>

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


<TABLE>
<CAPTION>


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


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


 STOCKHOLDERS' EQUITY:
      Preferred stock, ($.01 par value,
         5,000,000 shares authorized; no
         shares issued and outstanding)                                                -                                -
      Common stock, ($.01 par value, 40,000,000 shares authorized and 12,345,361
         and 11,504,615 shares issued and outstanding, respectively)               123,000                          115,000
      Additional paid-in capital                                                23,090,000                       21,155,000
      Retained earnings (deficit)                                             (12,715,000)                     (12,096,000)
                                                                    -----------------------         ------------------------
         Total Stockholders' Equity                                             10,498,000                        9,174,000
                                                                    -----------------------         ------------------------









 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $       44,444,000            $          36,169,000
                                                                    =======================         ========================


</TABLE>
<PAGE>



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

<TABLE>
<CAPTION>



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

 COSTS AND EXPENSES
          General & administrative                                                573,000                           442,000 
          Depletion, depreciation & amortization                                4,981,000                         6,277,000
          Exploration expenses                                                         -                          2,174,000 
          Provision for losses and (gains) on
                   disposition and write-downs of assets                          (4,000)                                -
          Lease operating                                                       6,049,000                         5,729,000 
          Taxes                                                                   429,000                           810,000
                                                                           ---------------                    --------------
                   Total                                                       12,028,000                        15,432,000
                                                                           ---------------                    --------------
 NET OPERATING INCOME (LOSS)                                                    1,229,000                       (1,772,000)
                                                                           ---------------                    --------------
 OTHER INCOME (EXPENSE)
          Interest expense (net)                                              (1,347,000)                         (720,000)
                                                                           ---------------                    --------------

 NET INCOME (LOSS) BEFORE INCOME TAXES
          & EXTRAORDINARY ITEM                                                  (118,000)                       (2,492,000)

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

 NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                    (118,000)                       (2,492,000)

 EXTRAORDINARY LOSS                                                             (500,000)                                 -
                                                                           ---------------                    --------------
 NET INCOME (LOSS)                                                         $    (618,000)                     $ (2,492,000)
                                                                           ===============                    ==============

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

<PAGE>


                                  PANACO, INC.
                Statements of Income (Successful Efforts Method)
                    For the Three Months Ended September 30,
                                   (Unaudited)

<TABLE>
<CAPTION>



                                                                                 1996                              1995
                                                                              ---------                         ---------
 REVENUES
<S>                                                                           <C>                              <C>            
          Oil and natural gas sales                                        $    2,449,000                   $    4,001,000 

 COSTS AND EXPENSES
          General & administrative                                                191,000                          128,000
          Depletion, depreciation & amortization                                1,169,000                        1,879,000 
          Exploration expenses                                                         -                                -
          Provision for losses and (gains) on
                   disposition and write-downs of assets                          (4,000)                               -

          Lease operating                                                       1,865,000                        2,112,000 
          Taxes                                                                   102,000                          184,000
                                                                           ---------------                    -------------
                   Total                                                        3,323,000                        4,303,000 
                                                                           ---------------                    -------------
 NET OPERATING INCOME (LOSS)                                                    (874,000)                        (302,000)
                                                                           ---------------                    -------------
 OTHER INCOME (EXPENSE)
          Interest expense (net)                                                (445,000)                        (241,000)
                                                                           ---------------                    -------------

 NET INCOME (LOSS) BEFORE INCOME TAXES
          & EXTRAORDINARY ITEM                                                (1,319,000)                        (543,000)

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

 NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                  (1,319,000)                        (543,000)

 EXTRAORDINARY LOSS                                                                    -                                -
                                                                           ---------------                    -------------
 NET INCOME (LOSS)                                                        $   (1,319,000)                 $      (543,000)
                                                                           ===============                    =============
 Net income (loss) per share                                              $        (0.11)                 $         (0.04)
                                                                           ===============                    =============

</TABLE>

<PAGE>

                                                
                                  PANACO, INC.
                  Statement of Changes in Stockholders' Equity
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                           Amount ($)
                                                  -----------------------------------------------------
                                  Number of                         Additional               Retained
                                    Common            Common          Paid-in                Earnings
                                    Shares            Stock           Capital                (Deficit)
                                 ------------     -----------    ---------------          -------------
<S>                <C> <C>        <C>            <C>               <C>                    <C>          
 Balance, December 31, 1995       11,504,615     $   115,000       $ 21,155,000           $(12,096,000)

 Net income                               -               -                  -                (618,000)

 Common shares issued - warrants
 exercised and ESOP contribution     840,746           8,000          1,935,000                      -
                                  -----------     -----------    ---------------          -------------
 Balance, September 30, 1996      12,345,361   $     123,000       $ 23,090,000           $(12,714,000)
                                   ==========     ===========    ===============          =============


</TABLE>









<PAGE>

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

                                                                                         1996                        1995
                                                                                     -----------                  ----------
 CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                         <C>           
          Net income (loss) before extraordinary item                             $    (118,000)              $  (2,492,000)
          Adjustments to reconcile net income (loss) before extraordinary
          item to net cash provided by operating activities:
                   Depletion, depreciation and amortization                            4,824,000                   6,052,000
                   Exploration expenses                                                       -                    2,174,000 
                   Amortization of loan costs                                            157,000                     225,000 
                   Changes in operating assets and liabilities:
                            Certificates of Deposits - escrow                            (1,000)                      21,000 
                            Accounts receivable                                         (49,000)                   (110,000)
                            Prepaid expenses                                             106,000                   (405,000)
                            Other assets                                                      -                       44,000 
                            Accounts payable                                           4,231,000                     916,000 
                            Interest payable                                              79,000                    (34,000)
                            Extraordinary item - fire loss                             (500,000)                          -
                                                                                     ------------                ------------
                                     Net cash provided by operating activities         8,729,000                   6,391,000 
                                                                                     ------------                ------------
 CASH FLOWS FROM INVESTING ACTIVITIES:
                   Accounts receivable - sale of Bayou Sorrel                       (11,152,000)                          -
                   Sale of oil and gas properties                                     11,158,000                       9,000 
                   Capital expenditures and acquisitions                            (11,804,000)                 (5,396,000)
                   Purchase of other property and equipment                             (52,000)                    (33,000)
                   Increase in restricted deposits                                   (1,886,000)                          -
                                                                                     ------------                ------------
                                     Net cash used by investing activities          (13,736,000)                 (5,420,000)

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

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

 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                        1,198,000                   1,583,000 
                                                                                     ------------                ------------

 CASH AND CASH EQUIVALENTS AT SEPTEMBER 30,                                        $     766,000               $   1,473,000 
                                                                                     ============                ============

          Supplemental disclosures of cash flow information:  Cash paid for nine
                   months ended September 30:
                                     Interest                                      $   1,180,000               $     757,000 

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

</TABLE>

<PAGE>



                                  PANACO, INC.
                          NOTES TO FINANCIAL STATEMENTS



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

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

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

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

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

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

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

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

5. The  reserves  presented  in the  following  table are based upon  reports of
independent  petroleum  engineers  and are  estimates  only  and  should  not be
construed as being exact  amounts.  All reserves  presented are proved  reserves
that are defined as estimated  quantities  which geological and engineering data
demonstrate  with  reasonable  certainty to be  recoverable in future years from
known reservoirs under existing economic and operating conditions.


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

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

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

     6. The  Company's  common stock is quoted on the National  Market System of
NASDAQ. The last trade on September 30 was at $5.375 per share.

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

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

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

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


<PAGE>



PART I
                                     Item 2.
                           MANAGEMENT'S DISCUSSION AND
                         ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

General

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


Liquidity and Capital Resources

         As  discussed  in  notes  to  the  financial  statements,  the  Company
experienced  an explosion  and fire on April 24, 1996 at Tank Battery #3 in West
Delta resulting in the fields being shut-in through October 7, 1996. The loss of
67 days of production  in the second  quarter and the entire third  quarter,  an
extraordinary  loss incurred in repairing the facility and a decrease in some of
the direct  operating  expenses and production  taxes have resulted in a loss of
($.19) per share for the second and third  quarters of 1996 versus per share net
income of $.02 from previous estimates.

         The shut-in of West Delta brought about a loss in year to date revenues
of $5.4  million.  The decrease in  production  also brought about a decrease in
operating  taxes of $178,000,  as a portion of the production from West Delta is
in Louisiana  State  waters and is subject to State  severance  taxes.  Although
production  was shut in for 67 days in the second  quarter and the entire  third
quarter,  resulting  in a decrease  in West Delta  lease  operating  expenses of
$805,000 from expected levels,  a large part of the lease operating  expenses in
West Delta are fixed expenses and continued throughout both quarters.

         The Company is incurring the expenditures of repairing the facility and
being reimbursed by its insurance  company.  The Company did not begin receiving
these reimbursements until the third quarter of 1996. These repair expenditures,
coupled with the decrease in net operating cash flows  discussed  above resulted
in higher borrowing levels and interest expense.

         The resulting decrease in revenues, net of the corresponding production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased  current assets (cash and accounts  receivable) by approximately  $1.9
million at the end of the third quarter of 1996. The repair expenditures on Tank
Battery #3, with the delay in insurance  reimbursement,  also decreased cash and
increased  accounts payable and long-term debt.  Through  September 30, 1996 the
Company  had paid or accrued  approximately  $7.0  million  for  repairs of Tank
Battery #3. These  expenditures  impacted current assets and liabilities as well
as limited the Company's ability to pre-pay its long-term debt.

         The price received for natural gas averaged $2.34 per Mcf ($1.55 net of
the  natural  gas swap  agreements)  and $19.21 per barrel for oil for the three
month period ended  September  30,  1996.  Cash flow is currently  being used to
reduce liabilities and pay general and administrative overhead.

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

         In 1991 certain  lenders  received a net profits  interest (NPI) in the
West Delta  properties.  During the three months ended March 31, 1996,  payments
with respect to this NPI averaged  $53,000 per month.  Due to the  explosion and
fire at Tank  Battery #3, no NPI  payments  were made in the three  months ended
June 30 or September 30, 1996.
<PAGE>

         On October 8, 1996 the  Company  amended its Bank  Facility  with First
Union National Bank of North  Carolina (60%) and Banque Paribas (40%).  The loan
is a reducing  revolver  designed  to  provide  the  Company  up to $40  million
depending on the  Company's  borrowing  base.  The Company's  borrowing  base at
October 8, 1996 was $35 million. The principal amount of the loan is due July 1,
1999. However, at no time may the Company have outstanding  borrowings under the
Bank Facility in excess of its borrowing base. Should the borrowing base ever be
determined  to be less than the  outstanding  principal  owed the  Company  must
immediately pay that difference to the lenders. Interest on the loan is computed
at the bank's prime rate or at 1 to 1 3/4% (depending upon the percentage of the
facility being used) over the applicable London Interbank Offered Rate ("LIBOR")
on Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the  expiration of the terms of such
loans, but no less frequently than every three months.  Beginning April 1, 1997,
the interest rate on the applicable margin will increase by .5% at the beginning
of each  quarter  to a maximum of 2.0% as long as the  Company  has in excess of
$8,500,000  in  subordinated  debt.  Management  feels  that this Bank  Facility
greatly  facilitates  its  ability to make  necessary  capital  expenditures  to
maintain and improve  production  from its properties and makes available to the
Company additional funds for future acquisitions.

         From time to time the Company  has  borrowed  funds from  institutional
lenders who are represented by Kanye,  Anderson Investment  Management,  Inc. In
each case these loans are due at a stated maturity, require payments of interest
only at 12% per annum 45 days  after the end of each  calendar  quarter  and are
secured by a second  mortgage on the Company's  offshore oil and gas properties.
The loans are as follows:

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

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

         (c) On October 8, 1996,  $8,500,000 was borrowed,  due October 8, 2003,
but prepayable any time after May 8, 1998. This loan is convertible  into Common
Shares  on the  basis of  $4.125  per  share.  The  Company  may  deliver  up to
$2,000,000 in PIK notes in satisfaction of interest payment obligations.

         Pursuant  to  existing  agreements  the  Company is required to deposit
funds in escrow accounts to assure  satisfaction of its eventual  responsibility
to plug and abandon wells and remove  structures  when certain  fields no longer
produce oil and gas. Each month $25,000 is deposited, until another $350,000 has
been  deposited,  to satisfy such  obligations  with respect to a portion of its
West Delta  properties.  Pursuant  to the  Company's  agreement  to acquire  the
offshore properties with Zapata Exploration  Company, it agreed to escrow 80% of
the net income  from the East  Breaks  Fields  until  such time as the  Minerals
Management  Service of the  Department of the Interior,  which has  jurisdiction
over oil and gas  operations in the Outer  Continental  Shelf,  has approved the
transfer of East Breaks 109 and 110 to the Company,  which  approval is expected
during  fourth  quarter  1996.  In  addition,  the  Company  has  $8,150,000  in
performance bonds to secure its plugging and abandonment operations.
<PAGE>

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

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

         During 1995 the Company  raised  $3,173,000  in equity by virtue of the
exercise of options and  warrants.  Through  September  30, 1996 the Company had
raised $1,837,000 in equity as a result of the exercise of warrants.




<PAGE>



Results of Operations

For the nine months ended September 30, 1996:

         Effective   December  31,  1995  the  Company  changed  its  method  of
accounting for its oil and gas  operations  from the full cost to the successful
efforts method.  As such, the three month and nine month periods ended September
30, 1995 have been restated and will not agree with previously reported amounts.

     Oil and  natural gas sales  decreased  3% for the first nine months of 1996
when compared to the same period in 1995.

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

         Oil  production  was also reduced by the Tank Battery #3 explosion  and
fire,  however,  production  for the first nine months of 1996  increased 66% to
203,000  barrels from 122,000 barrels in the same period in 1995. Oil production
from the Zapata and Bayou Sorrel  properties  more than offset the decrease from
West Delta.

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

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

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

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

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

         Taxes  decreased to 3.2% of oil and natural gas sales in the first nine
months  of 1996 from 5.9% of oil and  natural  gas sales for the same  period in
1995. A part of the decrease is due to the lost  production  from West Delta for
67  days in the  second  quarter  and the  entire  third  quarter  where a large
percentage of its  production is in Louisiana  State waters which are subject to
severance taxes.

         The  decrease  is also  due to the  shift in the  Company's  production
volumes from  properties  subject to severance  taxes to  properties  in federal
offshore waters  (primarily the Zapata  properties) that are not subject to such
taxes.

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

         The Company borrowed $5 million on the Bank Facility in late August for
an earnest deposit in connection  with the acquisition of the Amoco  Properties,
the Amoco transaction was closed on October 8th.
<PAGE>

For the three months ended September 30, 1996:

         Effective   December  31,  1995  the  Company  changed  its  method  of
accounting for its oil and gas  operations  from the full cost to the successful
efforts method.  As such, the three month and nine month periods ended September
30, 1995 have been restated and will not agree with previously reported amounts.

     Oil  and  natural  gas  sales  decreased  39% for the  three  months  ended
September 30, 1996 when compared to the same period in 1995.

         Natural  gas  production  decreased  60% to  924,000  Mcf for the third
quarter of 1996 from 2,294,000 Mcf for the same period in 1995. This decrease is
primarily due to two factors: no production from West Delta due to the April 24,
1996 explosion and fire;  and higher  production in 1995 in West Delta from four
horizontal  wells drilled in 1994 that had declined  significantly by the end of
1995. These two factors are offset by the production from the Zapata  properties
acquired  July 26,  1995,  and the  Bayou  Sorrel  acquisition  which  closed on
December 26, 1995.

         Oil  production  was also reduced by the Tank Battery #3 explosion  and
fire,  however,  production  for the three months ended  September 30, 1996 only
decreased 9% to 52,000  barrels from 57,000  barrels in the same period in 1995.
Oil production from the Zapata and Bayou Sorrel  properties  offset the decrease
from West Delta.

         On an Mcf  equivalent  basis,  total  oil and  natural  gas  production
decreased 53% for the three months ended September 30, 1996 compared to the same
period in 1995.

         The  reductions in production  were offset by higher natural gas prices
in 1996 when compared to 1995. Natural gas prices averaged $2.34 per Mcf for the
three months ended  September  30, 1996 compared to $1.42 for the same period in
1995.  Oil prices also increased to $19.60 per barrel for the three months ended
June 30, 1996 from $13.00 in 1995, also offsetting the decreased production.

     The Company's natural gas swap agreement  averaged ($.79) per Mcf, bringing
the net price received to $1.55 per Mcf for the third quarter of 1996.

         Depletion,  depreciation and  amortization  decreased 32% for the three
months ended June 30, 1996 primarily due to the decreased  production  from West
Delta as a result of the explosion and fire.

         Lease operating expenses  decreased in part due to expenses  associated
with the April 24, 1996 explosion and fire at Tank Battery #3 in West Delta. The
increase  as a  percentage  of oil and  natural gas sales from 53% for the third
quarter of 1995 to 76% for the same period in 1996 is  primarily  due to a large
part of the  West  Delta  operating  expenses  which  are  fixed in  nature  and
continued, even with the fields being shut-in.


         Taxes  decreased  to 4.2% of oil and  natural  gas  sales in the  three
months ended  September  30, 1996 from 4.6% of oil and natural gas sales for the
same period in 1995. A part of the decrease is due to the lost  production  from
West Delta for the entire third  quarter,  which has a large  percentage  of its
production in Louisiana State waters which are subject to severance taxes.

         The  decrease  is also  due to the  shift in the  Company's  production
volumes from  properties  located in state waters subject to severance  taxes to
federal offshore waters  (primarily the Zapata  properties) that are not subject
to such taxes.

         Interest  expense  (net)  increased  85% for the third  quarter of 1996
compared  to the same  period  in 1995 due to  higher  borrowing  levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field  acquisition.  The Company began an aggressive  debt
reduction process and through April it had reduced debt by $4 million.  However,
the  April  24  West  Delta   explosion  and  repairs   resulting  in  decreased
discretionary  cash flows reducing the Company's  ability to lower its long-term
debt levels as quickly as  anticipated,  and  correspondingly  contributed to an
increase in interest expense.

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

         The Company  currently does not intend to pay dividends with respect to
its Common Shares but rather intends to retain and reinvest its cash flow.



<PAGE>


PART II.
                                OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

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

ITEM 2.           CHANGES IN SECURITIES

         None

ITEM 3.           DEFAULT UPON SENIOR SECURITIES

         None

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

         On  September   4,  1996  the  Company  held  its  annual   meeting  of
shareholders in Kansas City, Missouri.

         The following directors were elected to serve on the Board for the next
three years:

                                        For           Against
         Jim Kreamer                9,303,103        139,512
         Ted Stautberg              9,289,971        152,644
         Michael Springs            9,303,057        139,558
         Mark Barrett               9,290,320        152,295

     The choice of Arthur  Andersen LLP as independent  accountants was approved
by a vote of 9,306,864 for to 135,751 against.

         The Company's  Certificate of Incorporation was amended to increase the
number of authorized shares to 45,000,000 shares of capital stock, consisting of
5,000,000  shares  of  authorized  preferred  stock  and  40,000,000  shares  of
authorized common stock. This matter was approved by a vote of 8,753,301 for the
amendment to 543,888 against.

ITEM 5.           OTHER INFORMATION

         On November 12, 1996 the Company  announced that it had entered into an
agreement to sell its Bayou Sorrel Field located in Iberville Parish,  Louisiana
to National Energy Group,  Inc. for $11 million.  PANACO will receive $9 million
in cash and $2 million in shares of National  Energy Group,  Inc.  common stock.
PANACO will also retain an overriding royalty interest in the deep rights of the
field. The transaction is expected to close on November 22.


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

         On March 26, 1996 the Company filed a Current Report,  Amendment Number
1 on Form 8-K/A describing its  acquisition,  on December 27, 1995, of the Bayou
Sorrel Field in Iberville Parish, Louisiana from Shell Western E & P, Inc.

         On October  28,  1996 the  Company  filed a Current  Report on Form 8-K
describing its  acquisition,  on October 8, 1996 of the interest in six offshore
fields,  comprising  13  blocks  in the Gulf of  Mexico  from  Amoco  Production
Company.

                                                        SIGNATURES

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

                                  PANACO, INC.


Date: November 15, 1996                    /s/ Todd R.Bart
                                           Todd R. Bart, Chief Financial Officer