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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 March 31, 2002

  [   ] 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              (I.R.S. Employer Identification
 incorporation or organization)               Number)

1100 Louisiana Street, Suite 5100
         Houston, Texas                                   77002
(Address of principal executive offices)                (Zip Code)


      Registrant's telephone number, including area code: (713) 970-3100


         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  _______ .


          24,359,695 shares of the registrant's $.01 par value Common Stock were
outstanding on March 31, 2002.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                  PANACO, Inc.
                                 Balance Sheet


                                     ASSETS
<TABLE>
<CAPTION>

                                                                      As of                       As of
                                                                  March 31, 2002            December 31, 2001
                                                             ------------------------   --------------------------
                                                             ------------------------   --------------------------
<S>     <C>    <C>    <C>                                                <C>                         <C>
 CURRENT ASSETS                                                    (Unaudited)
      Cash                                                              $    580,000               $    5,582,000
      Accounts receivable, net of an
          allowance of $3,440,000                                          7,356,000                    8,363,000
      Prepaid and other                                                      393,000                      917,000
                                                             ------------------------   --------------------------
          Total current assets                                             8,329,000                   14,862,000
                                                             ------------------------   --------------------------

 OIL AND GAS PROPERTIES, AS DETERMINED BY THE
 SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
      Oil and gas properties, proved                                     289,245,000                  286,453,000
      Less proved property accumulated depletion,
          depreciation and amortization                                 (192,669,000)                (183,867,000)
      Net unproved oil and gas properties                                    304,000                      232,000
                                                             ------------------------   --------------------------
          Net oil and gas properties                                      96,880,000                  102,818,000
                                                             ------------------------   --------------------------
 PIPELINES AND EQUIPMENT
      Pipelines and equipment                                             26,508,000                   26,532,000
      Less accumulated depreciation                                      (11,601,000)                 (10,939,000)
                                                             ------------------------   --------------------------
          Net pipelines and equipment                                     14,907,000                   15,593,000
                                                             ------------------------   --------------------------

 OTHER ASSETS
      Restricted deposits                                                 11,377,000                   11,011,000
      Deferred debt costs, net                                             1,629,000                    1,780,000
                                                             ------------------------   --------------------------
          Total other assets                                              13,006,000                   12,791,000
                                                             ------------------------   --------------------------

 TOTAL ASSETS                                                         $  133,122,000              $   146,064,000
                                                             ========================   ==========================
</TABLE>

                                                                    (continued)



        The accompanying notes are an integral part of these statements.



                                       2
<PAGE>
                                  PANACO, Inc.
                                 Balance Sheets

<TABLE>
<CAPTION>
                 LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                                                 As of                        As of
                                                                            March 31, 2002              December 31, 2001
                                                                       -------------------------    -------------------------
                                                                       -------------------------    -------------------------
<S>     <C>    <C>                                                                 <C>                        <C>
 CURRENT LIABILITIES                                                          (Unaudited)
    Accounts payable and accrued liabilities                                    $    29,874,000               $   35,185,000
    Interest payable                                                                  5,504,000                    2,864,000
    Gas imbalance payable                                                             1,164,000                    1,149,000
    Restricted cash payable                                                             378,000                       25,000
    Senior Notes due 2004                                                           100,000,000                            -
    Revolving credit facility                                                        31,424,000                            -
                                                                       -------------------------    -------------------------
       Total current liabilities                                                    168,344,000                   39,223,000
                                                                       -------------------------    -------------------------

 DEFERRED CREDITS                                                                     1,365,000                    1,505,000

 LONG-TERM DEBT                                                                       2,249,000                  135,120,000

 COMMITMENTS AND CONTINGENCIES
                                                                                              -                            -

 STOCKHOLDERS' DEFICIT
    Preferred Shares, $.01 par value,
       5,000,000 shares authorized; no
       shares issued and outstanding                                                          -                            -
    Common Shares, $.01 par value,
       100,000,000 shares authorized;
       24,359,695 shares issued and outstanding                                         247,000                      247,000
    Additional paid-in capital                                                       69,089,000                   69,089,000
    Accumulated deficit                                                            (108,172,000)                 (99,120,000)
                                                                       -------------------------    -------------------------

       Total stockholders' deficit                                                  (38,836,000)                 (29,784,000)
                                                                       -------------------------    -------------------------


 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                    $   133,122,000              $   146,064,000
                                                                       =========================    =========================
</TABLE>



        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                                  PANACO, Inc.
                            Statements of Operations
                      For the Three Months Ended March 31,
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                    2002                     2001
                                                                             ------------------       ------------------
<S>     <C>    <C>                                                                   <C>                      <C>
 REVENUES
      Oil and natural gas sales                                                    $ 9,041,000             $ 26,316,000

 COSTS AND EXPENSES
      Lease operating expense                                                        3,952,000                5,305,000
      Depletion, depreciation & amortization                                         9,641,000                7,032,000
      General and administrative expense                                               864,000                1,071,000
      Production and ad valorem taxes                                                  227,000                  481,000
      Exploratory dry hole expense                                                           -                3,858,000
      Geological and geophysical expense                                                88,000                  297,000
                                                                             ------------------       ------------------
          Total                                                                     14,772,000               18,044,000
                                                                             ------------------       ------------------

 OPERATING INCOME (LOSS)                                                            (5,731,000)               8,272,000

 OTHER INCOME (EXPENSE)
      Interest income                                                                   17,000                  226,000
      Interest expense                                                              (3,221,000)              (3,344,000)
      Other income (expense)                                                          (117,000)                 379,000
                                                                             ------------------       ------------------
          Total                                                                     (3,321,000)              (2,739,000)
                                                                             ------------------       ------------------

 INCOME (LOSS) BEFORE INCOME TAXES                                                  (9,052,000)               5,533,000

 INCOME TAX EXPENSE                                                                          -                2,167,000
                                                                             ------------------       ------------------
 NET INCOME (LOSS)                                                               $  (9,052,000)             $ 3,366,000
                                                                             ==================       ==================
 BASIC AND DILUTED NET INCOME (LOSS) PER SHARE                                   $       (0.37)             $      0.14
                                                                             ==================       ==================

 Basic Shares Outstanding                                                           24,359,695               24,323,521
                                                                             ==================       ==================
 Diluted Shares Outstanding                                                         24,359,695               24,473,625
                                                                             ==================       ==================
</TABLE>




        The accompanying notes are an integral part of these statements.

                                       4
<PAGE>

                                  PANACO, Inc.
                             Statement of Cash Flows
                      For the Three Months Ended March 31,
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                         2002                 2001
<S>     <C>    <C>                                                                       <C>                   <C>
                                                                                   -----------------    -----------------
 CASH FLOWS FROM OPERATING ACTIVITIES
      Net income (loss)                                                               $  (9,052,000)         $ 3,366,000
      Adjustments to reconcile net income to net cash
      provided by operating activities:
          Deferred income taxes                                                                   -            2,167,000
          Depletion, depreciation and amortization                                        9,641,000            7,032,000
          Exploratory dry hole expense                                                            -            3,858,000
          Plug and abandoning of wells and platforms                                       (506,000)                   -
          Changes in assets and liabilities:
             Accounts receivable                                                          1,007,000            4,404,000
             Accounts payable                                                            (4,958,000)          (4,038,000)
             Gas imbalance payable                                                           15,000              625,000
             Deferred credits                                                              (140,000)             162,000
             Interest payable                                                             2,640,000            2,525,000
             Accounts receivable-related party                                                    -              300,000
             Changes relating to derivative instruments                                     118,000             (462,000)
             Prepaid and other                                                              406,000             (232,000)
                                                                                   -----------------    -----------------
                          Net cash provided by operating activities                        (829,000)          19,707,000
                                                                                   -----------------    -----------------

 CASH FLOWS FROM INVESTING ACTIVITIES
          Capital expenditures and acquisitions                                          (2,334,000)         (10,852,000)
          Increase in restricted deposits                                                  (366,000)            (923,000)
                                                                                   -----------------    -----------------
                          Net cash used in investing activities                          (2,700,000)         (11,775,000)
                                                                                   -----------------    -----------------

 CASH FLOWS FROM FINANCING ACTIVITIES
          Long-term debt borrowings                                                       1,553,000            6,000,000
          Repayment of debt                                                              (3,000,000)         (11,338,000)
          Additional deferred financing costs                                               (26,000)             (45,000)
                                                                                   -----------------    -----------------
                          Net cash used in financing activities                          (1,473,000)          (5,383,000)
                                                                                   -----------------    -----------------

 NET INCREASE (DECREASE) IN CASH                                                         (5,002,000)           2,549,000

 CASH AT BEGINNING OF YEAR                                                                5,582,000            2,878,000
                                                                                   -----------------    -----------------

 CASH AT MARCH 31                                                                        $  580,000          $ 5,427,000
                                                                                   =================    =================
</TABLE>





        The accompanying notes are an integral part of these statements.



                                       5
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

Note 1 - BASIS OF PRESENTATION

         In the opinion of  management,  the  accompanying  unaudited  financial
statements  contain all  adjustments  necessary to present  fairly the Company's
financial position as of March 31, 2002 and December 31, 2001 and the results of
its  operations  and cash flows for the  periods  ended March 31, 2002 and 2001.
Most  adjustments  made to the financial  statements are of a normal,  recurring
nature.  Although the Company believes that the disclosures are adequate to make
the  information  presented not  misleading,  certain  information  and footnote
disclosures,  including  significant  accounting policies,  normally included in
financial  statements  prepared in accordance with generally accepted accounting
principles have been condensed or omitted  pursuant to the rules and regulations
of  the  Securities  and  Exchange  Commission  (the  "SEC").  A  more  complete
description of the accounting  policies followed by the Company are set forth in
Note 1 to the  Company's  financial  statements  in Form 10-K for the year ended
December 31, 2001. These financial statements should be read in conjunction with
the financial statements and notes included in the Form 10-K.

Note 2 - WORKING CAPITAL DEFICIT AND RESTRICTIVE COVENANTS

         Due to  substantial  losses  incurred  in 1999 and  2001 and less  than
anticipated  results  from  PANACO's  drilling  program in late 2000 and most of
2001,  the Company  accumulated  a  significant  working  capital  deficit as of
December 31, 2001.  The deficit  totaled  $24.4 million at December 31, 2001 and
had increased to $28.6 million,  excluding  debt, by March 31, 2002. The lack of
performance  from wells  drilled  during  2001 and 2000,  along  with  decreased
commodity  prices in late  2001,  reduced  estimated  future  net cash flows and
availability  under the Company's  Credit  Facility to a point at which there is
substantial doubt about the Company's ability to reduce this deficit in a timely
manner.  Based on the working  capital  deficit  and doubt  about the  Company's
ability to reduce the deficit, along with restrictive covenants contained in its
debt facilities,  the Company's auditors added an explanatory paragraph to their
2001 audit opinion due to substantial  doubt regarding the Company's  ability to
continue as a going concern.

         The Company is currently negotiating curative actions for technical and
financial  covenant  violations of the Credit  Facility.  The current  agreement
requires a working  capital  ratio (as defined in the  agreement) of 0.15 to 1.0
from January 1 to April 30, 2002, 0.20 to 1.0 from May 1 to January 1, 2003, and
0.25 to 1.0  thereafter.  The  Facility  also  requires a trailing  twelve-month
EBITDA/interest  coverage  ratio  ranging from a monthly high of 2.0 to 1.0 to a
monthly low of 0.55 to 1.0 for 2002, and 2.0 to 1.0 thereafter. The lenders have
not given the Company  notification  that they intend to declare the balance due
under the Facility. The Company is also negotiating with the lenders to possibly
increase the  availability  under the Facility.  However,  no assurances  can be
given that the Company will be able to cure the covenant  violations or increase
the availability. The balance due under the Facility is classified as short term
until the  Company is in  compliance  with all the terms of the  agreement.

         The Company has outstanding  $100 million of Senior Notes due 2004. The
Senior Notes Indenture contains certain cross defaults with the covenants in the
Credit Facility that could constitute default under the Indenture.  Based on the
cross  defaults the balance due the holders of the Senior Notes is classified as
short term until the Company is in compliance  with the  Indenture.  The
Indenture  requires a total  Adjusted  Consolidated  Net  Tangible  Asset  Value
("ACNTA"),  as defined in the Indenture,  equal to 125% of total indebtedness at
the end of each quarter.  If the Company's  ACNTA falls below this percentage of
indebtedness for two succeeding quarters, it must


                                       6
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

redeem an amount of the Senior  Notes  sufficient  to maintain  this  ratio.  At
December 31, 2001 PANACO did not meet this ratio.  While the Company did satisfy
this covenant on March 31, 2002, there can be no assurance that the Company will
meet this  ratio in the  future or that the  Company  will have the  ability  to
repurchase any of the Senior Notes if required to do so.

         The Company engaged an investment bank in early 2002 to help it explore
strategic alternatives. The outcome of this process may result in asset sales or
the sale of the  Company  as a whole.  The  Company  is also in  discussions  to
increase the Credit Facility, which may require a waiver from the holders of the
Senior  Notes.  No  assurances  can be made  that  the  Company  will be able to
implement  any plan that will  resolve  the  working  capital  deficit  and debt
covenant  violations,  or that a plan will be implemented in a timely manner. In
addition,  some of these  alternatives may require approval from PANACO's Credit
Facility  lenders  or the  approval  of the  Senior  Note  holders  as  well  as
Stockholder approval.

Note 3 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT

         The Company  utilizes the  successful  efforts method of accounting for
its  oil  and  gas  properties.  Under  the  successful  efforts  method,  lease
acquisition costs are initially 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.   Non-drilling   exploratory   costs,   including   geological  and
geophysical  costs  and  rentals,   are  expensed.   Unproved   leaseholds  with
significant    acquisition    costs   are    assessed    periodically,    on   a
property-by-property basis, and a loss is recognized to the extent, if any, that
the  cost  of  the  property  has  been  impaired.   Unproved  leaseholds  whose
acquisition  costs are not  individually  significant  are  aggregated,  and the
portion of such costs  estimated to  ultimately  prove  nonproductive,  based on
experience, are amortized over an average holding period. As unproved leaseholds
are  determined to be  productive,  the related costs are  transferred to proved
leaseholds.  Provision for  depletion is  determined on a depletable  unit basis
using the  unit-of-production  method.  Estimated future  abandonment  costs are
recorded by charges to depreciation and depletion  expense over the lives of the
proved reserves of the properties.

         The  Company  performs  a review for  impairment  of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review.  For each  depletable  unit  determined  to be  impaired,  an
impairment loss equal to the difference  between the carrying value and the fair
value of the  depletable  unit will be recognized.  Fair value,  on a depletable
unit basis,  is estimated to be the present value of expected  future cash flows
computed  by applying  estimated  future oil and gas prices,  as  determined  by
management,  to estimated  future  production  of oil and gas reserves  over the
economic  lives of the reserves.  Future cash flows are based upon the Company's
estimate of proved reserves.

         Property  and  equipment  are  carried  at cost.  Oil and  natural  gas
pipelines and equipment are depreciated on the  straight-line  method over their
estimated lives,  primarily fifteen years. Other property is also depreciated on
the straight-line  method over their estimated lives,  ranging from three to ten
years.  Fees for  processing  oil and  natural  gas for others are  treated as a
reduction  of  lease   operating   expense   related  to  the   facilities   and
infrastructure.

         The Company adopted SFAS No.144 as of January 1, 2002. The adoption had
no impact on the Company's financial  statements.  Statement No.144,  Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS No.144"), retains the
fundamental provisions of SFAS No.121, Accounting for the Impairment

                                       7
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

of  Long-Lived  Assets  and for  Long-Lived  Assets  to be  Disposed  Of  ("SFAS
No.121"),  for  recognizing  and  measuring  impairment  losses while  resolving
significant  implementation issues associated with SFAS No.121. SFAS No.144 also
expands the basic  provisions  of APB Opinion No. 30,  Reporting  the Results of
Operations - Reporting  the Effects of Disposal of a Segment of a Business,  and
Extraordinary,  Unusual  and  Infrequently  Occurring  Events and  Transactions,
regarding presentation of discontinued operations in the income statement.

         The scope for reporting a  discontinued  operation has been expanded to
include a "component" of an entity.  A component  comprises  operations and cash
flows that can be clearly distinguished from the rest of the entity. It could be
a segment, a reporting unit, a consolidated subsidiary or an asset group.

Note 4 - CASH FLOW INFORMATION

         Cash  payments for  interest  totaled $0.6 million and $0.9 million for
the first three months of 2002 and 2001, respectively.  The Company did not make
any cash  payments  for income  taxes  during the first three  months of 2002 or
2001.

Note 5 - EARNINGS PER SHARE CALCULATIONS

         Basic and diluted earnings per share for the first three months of each
year were  based on the  year-to-date  weighted  average  share  outstanding  of
24,359,695  in 2002 and  24,323,521  for 2001.  The Company  did have  potential
common  shares  outstanding  during both  periods in the form of stock  options,
however, the potential common shares are excluded from the 2002 diluted earnings
per share  calculation  because  the  Company had a net loss for the first three
months of 2002 and the potential  common  shares would have been  anti-dilutive.
The 2001 diluted  earnings per share amounts are based on weighted average share
outstanding plus in the money common stock equivalents, which consisted of stock
options outstanding and totaled 150,104.

Note 6 - RESTRICTED DEPOSITS

         Pursuant to existing  agreements  with  former  property  owners and in
accordance  with  requirements  of the U.S.  Department of  Interior's  Minerals
Management  Service  ("MMS"),  the Company has put in place  surety bonds and/or
escrow agreements to provide satisfaction of its eventual responsibility to plug
and abandon  wells and remove  structures  when certain  fields are no longer in
use. As part of its agreement  with the  underwriter  of the surety  bonds,  the
Company has  established  bank trust and escrow  accounts in favor of either the
surety bond underwriter or the former owners of the particular fields.

         In the West Delta  Fields and the East Breaks 109 and 110  Fields,  the
Company  established  an  escrow  for both  Fields in favor of the  surety  bond
underwriter,  who provides a surety bond to the former  owners of the West Delta
Fields and to the MMS.  The balance in this escrow  account was $5.6  million at
March 31, 2002 and  requires  quarterly  deposits  of $375,000  until June 2003,
decreasing  thereafter  to  $125,000  until the  account  balance  reaches  $7.8
million.

         In the East Breaks 165 and 209 Fields the Company established an escrow
account in favor of the surety bond  underwriter,  who provides  surety bonds to
both the MMS and the former  owner of the  Fields.  The  balance in this  escrow
account was $4.7  million at March 31, 2002 and requires  quarterly  deposits of
$250,000 until the account balance reaches $6.5 million.

                                       8
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

         The Company has also established an escrow account in favor of BP under
which the Company will deposit 10% of the net cash flows from the properties, as
defined in the  agreement,  from the  properties  acquired  from BP. This escrow
account balance was $0.7 million at March 31, 2002.

         At March 31,  2002 the  Company  had  accrued  $378,000  of  restricted
deposits based on required deposits on March 31, 2002. The deposits were delayed
until May due to liquidity  constraints.  The  nonpayment of such deposits could
allow the surety bond  underwriter  to withdraw  bonds in place for the Company.
The bonds are  required  for the Company to operate  properties  and  nonpayment
could  result in the loss of such  ability.  Payment of such  deposits is also a
requirement of the Credit Facility.

Note 7 - COMMITMENTS AND CONTINGENCIES

         The Company is subject to various  other legal  proceedings  and claims
which arise in the ordinary  course of business.  In the opinion of  management,
the amount of  liability,  if any,  with the respect to these  actions would not
materially  affect the  financial  position  of the  Company  or its  results of
operation.

Note 8 -DEBT

         The Company  maintains a Credit Facility that is a reducing,  revolving
loan and is collateralized by a first mortgage on the Company's properties.  The
amount  available to the Company  under the Credit  Facility is  determined by a
borrowing base typically  based on the estimated  value of the properties  under
mortgage to the lender, less any amounts borrowed under the Credit Facility.  In
October 1999 the Company entered into a new Facility with Foothill Capital Corp.
("Foothill") as the Agent for the lenders.  The Foothill facility had an initial
term of two years with two  six-month  extension  options  available at the sole
option of the Company.

         In November 2001, the Company  amended the Foothill  facility to, among
other  changes,  extend the  expiration  date an additional  two years.  The new
Credit Facility is a $40 million  facility with a borrowing base of $40 million.
At March 31,  2002,  $31.4  million was  outstanding  under the  facility,  with
availability of $7.4 million,  of which $2.3 million was reserved under a letter
of credit.  The borrowing base is subject to monthly  determinations  made using
internally  prepared  engineering  reports,  using a  two-year  average of NYMEX
future  commodity  prices and are based on our  semi-annual  third party reserve
reports. Indebtedness under this Credit Facility constitutes senior indebtedness
with respect to the Senior Notes.

         The Company is currently negotiating curative actions for technical and
financial  covenant  violations of the Credit  Facility.  The current  agreement
requires a working  capital  ratio (as defined in the  agreement) of 0.15 to 1.0
from January 1 to April 30, 2002, 0.20 to 1.0 from May 1 to January 1, 2003, and
0.25 to 1.0  thereafter.  The  Facility  also  requires a trailing  twelve-month
EBITDA/interest  coverage  ratio  ranging from a monthly high of 2.0 to 1.0 to a
monthly low of 0.55 to 1.0 for 2002, and 2.0 to 1.0 thereafter. The lenders have
not given the Company  notification  that they intend to declare the balance due
under the Facility. The Company is also negotiating with the lenders to possibly
increase the  availability  under the Facility.  However,  no assurances  can be
given that the Company will be able to cure the covenant  violations or increase
the availability. The balance due under the Facility is classified as short term
until the  Company is in  compliance  with all the terms of the  agreement.  The
agreement also contains  limitations on dividends,  mergers and asset sales.
                                       9
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

         The Company has outstanding  $100 million of Senior Notes due 2004. The
Senior Notes Indenture contains certain cross defaults with the covenants in the
Credit Facility that could constitute default under the Indenture.  Based on the
cross  defaults the balance due the holders of the Senior Notes is classified as
short term until the Company is in compliance with the Indenture.  The Indenture
requires a total Adjusted  Consolidated Net Tangible Asset Value  ("ACNTA"),  as
defined in the Indenture, equal to 125% of total indebtedness at the end of each
quarter.  If the Company's ACNTA falls below this percentage of indebtedness for
two succeeding quarters, it must redeem an amount of the Senior Notes sufficient
to  maintain  this ratio.  At December  31, 2001 PANACO did not meet this ratio.
While the Company did satisfy this  covenant on March 31, 2002,  there can be no
assurance  that the  Company  will  meet  this  ratio in the  future or that the
Company will have the ability to repurchase  any of the Senior Notes if required
to do so.

         The Company  also has a production  payment  obligation  totaling  $2.2
million to a former  lender,  which is paid with a portion of the revenues  from
certain  wells.  The production  payment is a  non-recourse  loan related to the
development of certain wells acquired upon acquisition.  The agreement  requires
repayment of principal plus an amount  sufficient to provide an internal rate of
return of 18%.

Note 9 - INCOME TAXES

         Based on its review  during  the third  quarter  of 2001,  the  Company
determined  that it was more likely than not that its  deferred  tax asset would
not be utilized and reestablished a valuation allowance against its deferred tax
asset.  This  determination  was due to, among other  factors,  the  significant
decrease in oil and natural gas prices and reduced reserve estimates,  losses in
the prior  years,  excluding  2000,  and current  estimates of results for 2002.
These  projections of future taxable income are  management's  estimates,  using
current  reserve  estimates,  estimates  of future  commodity  prices  and other
information currently available. While the Company believes that the assumptions
used in these  projections are reasonable,  future events,  including changes in
commodity prices, could result in a reduction in some or all of the deferred tax
asset valuation allowance in future periods.

Note 10 - ADOPTION OF SFAS 133

         On  January 1, 2001,  the  Company  adopted  SFAS 133  "Accounting  for
Derivative  Instruments and Hedging  Activities" as amended by SFAS 137 and SFAS
138.  Under SFAS 133,  all  derivative  instruments  are recorded on the balance
sheet at fair  value.  If the  derivative  does not qualify as a hedge or is not
designated  as a  hedge,  the  gain  or  loss on the  derivative  is  recognized
currently in earnings.  To qualify for hedge  accounting,  the  derivative  must
qualify either as a fair value hedge, cash flow hedge or foreign currency hedge.

         The Company periodically enters into derivative  commodity  instruments
to hedge  its  exposure  to price  fluctuation  on  natural  gas and  crude  oil
production.  At March 31,  2002,  the  Company  had two  derivative  instruments
outstanding.  Based on the  documentation  criteria  required under SFAS 133 the
derivative

                                       10
<PAGE>

                                  PANACO, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

instruments are marked to market at the end of each period and the change in the
value of the derivative instruments is accounted for in other income (expense).

         The derivative  instrument is a crude oil swap covering 500 barrels per
day from May 1 through  October 31, 2002.  The prices per barrel  average $25.45
per barrel and are based on the average daily  settlement price of the NYMEX WTI
Light  Sweet  Crude  Oil  for  the  respective  months.  The  second  derivative
instrument is a costless collar covering 3,000 MMBtu per day of natural gas from
May 1 through  October 31,  2002.  The  collars  have a floor price of $3.00 per
MMBtu and a cap price of $3.45 per MMBtu.

         During the first  quarter of 2002 the Company  recognized a decrease in
earnings  of $0.1  million  based on the  change in the  value of the  Company's
derivative contracts on March 31, 2002.

         During the first quarter of 2001 the Company recorded an after-tax loss
of $6.1 million in Other  Comprehensive  Loss representing the cumulative effect
of an  accounting  change to recognize  the fair value of a natural gas swap. In
addition,  the  Company  realized  after tax  losses of $1.3  million on hedging
activity  incurred in the first quarter 2001,  which were transferred from Other
Comprehensive  Loss to natural gas revenues for the production  months the hedge
related.  The Company also recognized  Other Income of $0.3 million,  after tax,
for the ineffective portion of a natural gas swap.

         All  derivative  instrument  transactions  are subject to the Company's
risk  management  policy and are approved by the Board of Directors,  which does
not permit speculative positions.


                                       11
<PAGE>

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

Forward-looking Statements

        With the exception of historical  information,  the matters discussed in
this  Form  10-Q  contain   forward-looking   statements.   The  forward-looking
statements we make, not only in this Form 10-Q, but also in press releases, oral
statements  and other  reports  that we file with the  Securities  and  Exchange
Commission  ("SEC") are intended to be subject to the safe harbor  provisions of
the Private Securities Litigation Reform Act of 1995. These statements relate to
future   results  of   operations,   the  ability  to  satisfy   future  capital
requirements,  the growth of our Company and other  matters.  You are  cautioned
that all forward-looking  statements involve risks and uncertainties.  The words
"estimate," "anticipate," "expect," "predict," "believe" and similar expressions
are intended to qualify these  forward-looking  statements.  We believe that the
forward-looking  statements  that we make are based on reasonable  expectations.
However,  due to the  nature of the  business  we are in and other  factors,  we
cannot  assure  you  that  the  actual   results  will  not  differ  from  those
expectations.

General

         The oil and natural gas industry has experienced significant volatility
in recent years because of the  fluctuatory  relationship  of the supply of most
fossil fuels relative to the demand for those  products and other  uncertainties
in the world energy markets. You should consider the volatility of this industry
when reading the following.

Liquidity and Capital Resources

        With the market prices for  acquisitions  increasing,  PANACO focused on
developmental  and exploratory  drilling  during 2001 and 2000.  During 2001, we
used all of our cash flows from  operating  activities  for  drilling new wells,
primarily  in the Gulf of Mexico,  and for the  acquisition  of an oil  property
contiguous with a property that we already owned.  While we were successful on a
percentage  completion  basis,  (85%) of total new wells  drilled,  the reserves
discovered  did not  amount  to the  level  anticipated.  The  result  was lower
production  during  2001  and  lower  reserves  in  place  at the  end of  2001.
Consequently,  the  combination  of lower  production and a decline in commodity
prices during 2001 resulted in lower than projected cash flows from operations.

Working capital deficit and restrictive covenants

         Due to  substantial  losses  incurred  in 1999 and  2001 and less  than
anticipated  results  from  PANACO's  drilling  program in late 2000 and most of
2001, we had  accumulated a significant  working  capital deficit as of December
31,  2001.  The  deficit  totaled  $24.4  million at  December  31, 2001 and had
increased to $28.6  million,  excluding  debt,  by March 31,  2002.  The lack of
performance  from wells  drilled  during  2001 and 2000,  along  with  decreased
commodity prices in late 2001, have reduced  estimated future net cash flows and
availability  under  the our  Credit  Facility  to a point  at  which  there  is
substantial  doubt about the Company's ability to reduce the deficit in a timely
manner. Our auditors added an explanatory  paragraph to their 2001 audit opinion
on the basis that these facts raised  substantial  doubt regarding the Company's
ability to continue as a going concern.


                                       12
<PAGE>


         We  are  currently  negotiating  curative  actions  for  technical  and
financial  covenant  violations of the Credit  Facility.  The current  agreement
requires a working  capital  ratio (as defined in the  agreement) of 0.15 to 1.0
from January 1 to April 30, 2002, 0.20 to 1.0 from May 1 to January 1, 2003, and
0.25 to 1.0  thereafter.  The  Facility  also  requires a trailing  twelve-month
EBITDA/interest  coverage  ratio  ranging from a monthly high of 2.0 to 1.0 to a
monthly low of 0.55 to 1.0 for 2002, and 2.0 to 1.0 thereafter. The lenders have
not given  notification  that they  intend to declare  the balance due under the
Facility.  We are also  negotiating  with the lenders to possibly  increase  the
availability  under the facility.  However,  no assurances  can be given that we
will be able to cure the covenant  violations or increase the availability under
the  Facility.  The balance due under the Facility is  classified  as short term
until the  Company is in  compliance  with all the terms of the  agreement.

         PANACO's  $100 million of Senior Notes due 2004  outstanding  require a
total Adjusted  Consolidated Net Tangible Asset Value  ("ACNTA"),  as defined in
the Indenture,  equal to 125% of total  indebtedness at the end of each quarter.
If the  Company's  ACNTA falls below this  percentage  of  indebtedness  for two
succeeding quarters,  it must redeem an amount of the Senior Notes sufficient to
maintain  this ratio.  At December  31, 2001 PANACO did not meet this ratio.  On
March 31,  2002 the  Company did meet this  requirement  and is not  required to
repurchase any of the Senior Notes. However, the Senior Notes Indenture contains
certain cross defaults with the covenants  under the Credit  Facility that could
constitute default under the Indenture.  Based on the cross defaults the balance
due the  holders  of the  Senior  Notes is  classified  as short  term until the
Company is in compliance  with the  Indenture.

         In  early  2002 we  engaged  an  investment  bank  to  help us  explore
strategic alternatives. The outcome of this process may result in asset sales or
the sale of the Company as a whole.  We are also in  discussions to increase the
Credit  Facility,  which may  require a waiver  from the  holders  of the Senior
Notes. No assurances can be made that we will be able to implement any plan that
will resolve the working capital deficit and debt covenant violations, or that a
plan  will be  implemented  in a  timely  manner.  In  addition,  some of  these
alternatives  may require  approval from PANACO's Credit Facility lenders or the
approval of our Senior Note holders as well as Stockholder approval.

Restricted deposits

         At March 31,  2002 the  Company  had  accrued  $378,000  of  restricted
deposits based on required deposits on March 31, 2002. The deposits were delayed
until May due to liquidity  constraints.  The  nonpayment of such deposits could
allow the surety bond  underwriter  to withdraw  bonds in place for the Company.
The bonds are  required  for the Company to operate  properties  and  nonpayment
could  result in the loss of such  ability.  Payment of such  deposits is also a
requirement of the Credit Facility.

Credit Facility

        Our primary  source of capital  beyond  discretionary  cash flows is our
Credit  Facility.  Our Credit Facility is secured by a first mortgage on most of
our oil and natural gas properties, and is used primarily as development capital
on  properties  that we own.  We may also use the Credit  Facility  for  working
capital support, to provide letters of credit and general corporate purposes.

        In November  2001, we amended a Credit  Facility that was originally put
in place in September 1999. The amendment  reduced the facility from $60 million
to $40 million,  in order to reduce  interest and debt service costs  associated
with the facility.  The new facility is for two years and  borrowings  under the
facility  bear interest at either the Wells Fargo prime rate plus 0.25% to 0.75%
or at LIBOR  plus  2.25% to  2.75%,  both  depending  on the  percentage  of the
facility used, and has a minimum interest rate of 6.75%.

                                       13
<PAGE>

        The Credit Facility is a revolving credit  agreement  subject to monthly
borrowing base determinations. These determinations are made based on internally
prepared engineering reports, using a two year average of NYMEX future commodity
prices  and  are  based  on  our  semi-annual   third  party  reserve   reports.
Indebtedness  under this Credit Facility  constitutes  senior  indebtedness with
respect  to  the  Senior  Notes.  The  Credit  Facility  also  contains  certain
limitations on mergers, additional indebtedness and pledging or selling assets.

        We  are  currently   negotiating  curative  actions  for  technical  and
financial  covenant  violations of the Credit  Facility.  The current  agreement
requires a working  capital  ratio (as defined in the  agreement) of 0.15 to 1.0
from January 1 to April 30, 2002, 0.20 to 1.0 from May 1 to January 1, 2003, and
0.25 to 1.0  thereafter.  The  Facility  also  requires a trailing  twelve-month
EBITDA/interest  coverage  ratio  ranging from a monthly high of 2.0 to 1.0 to a
monthly low of 0.55 to 1.0 for 2002, and 2.0 to 1.0 thereafter. The lenders have
not given the Company  notification  that they intend to declare the balance due
under the  Facility.  We are also  negotiating  with the lenders to increase the
availability  under the Facility.  However,  no assurances can be given that the
Company  will  be  able  to  cure  the  covenant   violations  or  increase  the
availability.  The balance due under the  Facility is  classified  as short term
until the  Company is in  compliance  with all the terms of the  agreement.  See
Note 2 to financial statements.

Senior Note offering

        On October 9, 1997, we issued $100 million  principal  amount of 10 5/8%
Senior Notes due October 1, 2004. Interest on the Notes is payable semi-annually
in arrears on each April 1 and October 1, commencing April 1, 1998.

        The Senior  Notes  require a total  Adjusted  Consolidated  Net Tangible
Asset  Value  ("ACNTA"),  as  defined in the  Indenture,  equal to 125% of total
indebtedness at the end of each quarter. If the Company's ACNTA falls below this
percentage of indebtedness for two succeeding quarters, it must redeem an amount
of the Senior  Notes  sufficient  to maintain  this ratio.  At December 31, 2001
PANACO did not meet this  ratio.  On March 31,  2002 the  Company  did meet this
requirement  and is not  required to  repurchase  any of the Senior  Notes.  The
Senior Notes  Indenture  also contains  certain  cross  defaults with the Credit
Facility that could constitute  default under the Indenture.  Based on the cross
defaults the balance due the holders of the Senior Notes is  classified as short
term until the Company is in compliance with the Indenture.

Commodity price derivative instruments

        We follow a derivative  instrument  strategy designed to protect against
the possibility of severe price declines due to market  volatility.  We may also
make  derivative   instrument  decisions  to  assure  a  payout  of  a  specific
acquisition or development project.

        From May 1 through  October 31, 2002, we have  derivative  contracts for
3,000 MMBtu per day of natural gas using a costless collar.  The collar provides
for a minimum  price of $3.00 per MMBtu and a cap price of $3.45 per MMBtu.  The
corresponding  settlement prices are based on the last three trading days on the
NYMEX for the month to which  the  derivative  contract  prices  relate.  If the
settlement  prices are below the minimum price, the counterparty will pay us the
price  difference  for  the  total  MMBtu  contracted  for  that  month.  If the
settlement  prices  are  higher  than the cap  price of  $3.45,  we will pay the
counterparty the price difference for the total MMBtu contracted for that month.

                                       14
<PAGE>


         We have also put in place a swap  covering  500  barrels of oil per day
for the period of May 1 through  October 31, 2002 at an average  price of $25.45
per barrel.  The  settlement  prices are based on the average  daily  settlement
price of the NYMEX WTI Light Sweet Crude Oil for the respective  months.  If the
settlement  prices are above the swap prices,  we will pay the  counterparty the
price  difference for the volume  contracted for the  respective  month.  If the
settlement  prices are below the swap  prices the  counterparty  will pay us the
price difference for the entire volume contracted for the respective month.

         During the first  quarter of 2002 the Company  recognized a decrease in
earnings  of $0.1  million  based on the  change in the  value of the  Company's
derivative contracts on March 31, 2002.

         During the first quarter of 2001 the Company recorded an after-tax loss
of $6.1 million in Other  Comprehensive  Loss representing the cumulative effect
of an  accounting  change to recognize  the fair value of a natural gas swap. In
addition,  the  Company  realized  after tax  losses of $1.3  million on hedging
activity  incurred in the first quarter 2001,  which were transferred from Other
Comprehensive  Loss to natural gas revenues for the production  months the hedge
related.  The Company also recognized  Other Income of $0.3 million,  after tax,
for the ineffective portion of a natural gas swap.

         We produce and sell  natural  gas,  oil and natural gas  liquids.  As a
result,  our financial  results are  significantly  affected by changes in these
commodity  prices. We use derivative  financial  instruments to attempt to limit
our  exposure  to  changes in the market  price of  natural  gas and oil.  While
commodity  financial  instruments are intended to reduce exposure to declines in
these market prices,  the commodity  financial  instruments may also limit gains
from increases in the market price of natural gas and oil.

Capital expenditures

         Net  capital  expenditures  totaled  $2.3  million  for the first three
months of 2002,  representing  a 78%  decrease  from  $10.9  million  of capital
expenditures  incurred  in the  comparable  period  of 2001.  As a  result  of a
significant  working capital deficit at the end of 2001 and in conjunction  with
engaging  of  an  investment  bank  to  assist  PANACO  in  exploring  strategic
alternatives,  we have delayed most of the capital projects slated for 2002. The
bulk of the $2.3 million in capital  expenditures  incurred in 2002 were for the
completion of a new development  well in the North White Lake Field,  located in
Vermillion Parish, Louisiana.

Environmental

         Compliance  with  applicable  environmental  and safety  regulations by
PANACO has not required  any  significant  capital  expenditures  or  materially
affected  our  business or earnings.  Management  believes it is in  substantial
compliance with  environmental  and safety  regulations and foresees no material
expenditures  in the future;  however,  we are unable to predict the impact that
compliance with future  regulations may have on capital  expenditures,  earnings
and competitive position.

Results of Operations

For the three months ended March 31, 2002 and 2001:

         One of the most  significant  factors  affecting  our  business  is the
market  price of oil and natural gas that we produce and sell.  In late 1997 and
continuing  through early 1999,  both oil and natural gas prices were lower than
they had been in the proceeding years. A turnaround was seen in 1999 and through
the first quarter of 2001 where we benefited from a steady  increase in realized
prices for both oil and natural gas. Since March 2001,  both oil and natural gas
prices have decreased from their highs earlier in 2001.

                                       15
<PAGE>

Revenues

         Oil and natural gas sales  totaled $9.0 million  during the first three
months of 2002, a decrease of $17.3  million,  or 66% when compared to the first
three months of 2001.  Both oil and natural gas prices  decreased,  with natural
gas prices  decreasing  significantly.  Natural gas production also decreased in
2002, while oil production increased slightly.

Production and Prices:
<TABLE>
                                                                                                     % Increase
<CAPTION>
                                                        2002                      2001               (Decrease)
                                                        ----                      ----               ----------
<S>     <C>    <C>                                      <C>                       <C>                    <C>
         Natural gas production (MMcf)                   1,632                     3,065                 (47%)
         Average price per Mcf
          excluding hedging                          $    2.51                  $   7.19                 (65%)
         Average price per Mcf
          including hedging                          $    2.51                  $   6.49                 (61%)

         Oil Production (MBbl)                             244                       226                   8%
         Average price per Bbl
          excluding hedging                          $   20.23                  $  28.45                 (29%)
         Average price per Bbl
          including hedging                          $   20.23                  $  28.45                 (29%)
</TABLE>

         With the  decline  in capital  expenditures  in late 2001 and the first
quarter of 2002, the decrease in natural gas production was due to the nature of
the areas in which PANACO  operates.  While  production from the East Breaks 160
Fields  increased  with the completion of two new wells in December 2001, it was
not  sufficient to offset the decline from our other  properties.  The nature of
the wells we typically drill is to produce from one to three years, with a rapid
decline from the initial completion of the well.

         With the  acquisition  of the West Delta 52 Field and the two new wells
completed in the East Breaks 160 Fields, oil production in 2002 increased 8%, or
18,000  barrels over 2001. The West Delta 52 Field is primarily an oil field and
was acquired in April 2001.

Cost and Expenses

         Lease  operating  expenses  decreased  $1.4  million,  to $4.0 million,
during  the  first  three  months  of  2002  compared  to $5.3  million  for the
comparable period in 2001. Of the total decrease,  $0.4 million was due to lower
well workover and equipment  repair expenses in 2002 and $0.4 million was due to
the sale of an offshore property in the second quarter of 2001. The remainder of
the decrease was  primarily  due to a reduction in variable  operating  expenses
with the overall decline in production. With the majority of our lease operating
expenses being fixed, the decline in overall  production  caused lease operating
expenses to increase on an Mcf equivalent  ("Mcfe") basis, from $1.20 in 2001 to
$1.28 in 2002.

         Depletion,  depreciation  and amortization  ("DD&A")  increased 37%, or
$2.6  million due to a 96%  increase in DD&A per unit of  production,  which was
partially offset by a 30% decrease in total production.  The increase in the per
unit cost was due to lowered  reserve  volumes at the end of 2001,  resulting in
the capital  expenditures for wells that were drilled and completed being spread
over fewer total units.

                                       16
<PAGE>


         General and  administrative  expenses decreased 19% to $0.9 million for
the first  quarter of 2002 from $1.1 million in the first  quarter of 2001.  The
decrease is  primarily  due to lower  salaries  and  benefits  due to  personnel
reductions throughout 2001.

         Exploratory  dry  hole  expense  decreased  $3.9  million  due  to  the
unsuccessful  #A-4 well  drilled  during  the first  quarter of 2001 in the East
Breaks 109 and 110 Fields and no exploratory dry hole expense during 2002.

         Geological and  geophysical  expense  decreased $0.2 million during the
first three  months of 2002  primarily  due to fewer  employees  and  consulting
geologists with the delay in capital expenditures in 2002.

Income Tax Expense

         As oil and natural gas prices  increased  during 2000,  we were able to
project  future  taxable  income  sufficient to utilize our net  operating  loss
carry-forwards. As such, during the second quarter of 2000 we recorded an income
tax benefit of $29 million by reversing a valuation  allowance  recorded against
these assets.  From that point forward until the second quarter of 2001,  income
tax expense had been  recognized,  at the  effective  rate,  as a percentage  of
pre-tax income.

         With the decrease in commodity prices and proved reserved, the analysis
of the  deferred  tax asset  utilization  made during the third  quarter of 2001
determined  that it was more likely than not that the  deferred tax assets would
not be realized.  This  determination  was based on several  factors,  including
decreased  projections  of future  taxable  income.  This  analysis was based on
estimates  for future oil and natural gas prices in addition to proved  reserves
at the time.  Based on this  analysis  and all other  evidence  available at the
time, the valuation  allowance was reestablished  against the deferred tax asset
and no income tax expense or benefit has been recognized.  Current  estimates of
future taxable income  continue to require the valuation  allowance  against the
deferred tax assets.

         These  projections  of future  taxable  income  are  management's  best
estimates, using current reserve estimates, estimates of future commodity prices
and other information currently available. While we believe that the assumptions
used in these  projections are reasonable,  future events,  including changes in
commodity prices, could result in a reduction in some or all of the deferred tax
asset valuation allowance in future periods.  PANACO also evaluates tax planning
strategies and utilizes them when available in order to utilize our deferred tax
assets and minimize income taxes.

Net Income (Loss)

         With the  significant  decline in  revenues,  PANACO's net loss for the
first three months of 2002 totaled $9.1 million, or $0.37  per share as compared
to net income of $3.4 million, or $0.14 per share in 2001.

Critical Accounting Policies

        Application of generally accepted accounting principles requires the use
of estimates,  judgments  and  assumptions  that affect the reported  amounts of


                                       17
<PAGE>


assets and  liabilities as of the date of the financial  statements and revenues
and expenses during the reporting  period.  In addition,  alternatives can exist
among various accounting methods. In such cases, the choice of accounting method
can also have a significant impact on reported amounts.

        The Company's  estimates of proved oil and gas reserve  quantities,  the
application of the successful  efforts method of accounting for our  exploration
and  production  activities,  the  application  of standards of  accounting  for
derivative  activities,  and the accounting method used for revenue  recognition
require  management to make numerous  estimates and  judgments.  A more complete
description of these critical accounting policies are set forth in the Company's
Form 10-K for the year ended  December  31,  2001.  These  financial  statements
should be read in conjunction  with the financial  statements and notes included
in the Form 10-K.

Outlook

        As a relatively  small,  leveraged oil and natural gas  exploration  and
production company, the success and outcome of our business are highly dependent
on oil and natural gas prices. Not only are our revenues, cash flows, results of
operations  and liquidity  impacted by commodity  prices,  our ability to obtain
financing for our business is also influenced by these prices. The nature of our
business is capital intensive,  typically requiring an investment up front and a
resulting  return on that  investment  for  successful  projects.  The resulting
return  and  success of that  investment  will vary  depending  on the prices we
receive for the oil and natural gas. Also,  due to the  geographic  area that we
operate in, the levels of capital  spending are significant and the lives of the
reserves that we own are  relatively  short.  Historically,  our reserves have a
five to seven year life,  which  tends to amplify the effect oil and natural gas
price fluctuations have on our Company.

        Due to results that were below  expectations  during 2001,  we ended the
year with lower  reserves than those at the  beginning of the year,  despite $45
million in capital  expenditures.  In an effort to reduce  the  working  capital
deficit,  we have  delayed  most of the  2002  approved  capital  budget  of $25
million.  By doing so,  production  and cash flows for 2002 could be  negatively
impacted.  The capital  budget for 2002 of $25  million  consists  primarily  of
drilling,  45% of  which we  estimate  will be  exploratory  and 55% of which we
estimate will be developmental. The execution of this budget depends on PANACO's
ability to pay for the projects  with cash flows from  operations.  Based on the
working  capital  deficit  and doubt about the  Company's  ability to reduce it,
along with restrictive covenants contained in the debt facilities,  our auditors
added an  explanatory  paragraph to their 2001 audit  opinion as to  substantial
doubt regarding the Company's ability to continue as a going concern.

          We  are currently  negotiating  curative  actions  for  technical  and
financial  covenant  violations of the Credit  Facility.  The current  agreement
requires a working  capital  ratio (as defined in the  agreement) of 0.15 to 1.0
from January 1 to April 30, 2002, 0.20 to 1.0 from May 1 to January 1, 2003, and
0.25 to 1.0  thereafter.  The  Facility  also  requires a trailing  twelve-month
EBITDA/interest  coverage  ratio  ranging from a monthly high of 2.0 to 1.0 to a
monthly low of 0.55 to 1.0 for 2002, and 2.0 to 1.0 thereafter. The lenders have
not given  notification  that they  intend to declare  the balance due under the
Facility.  We are also  negotiating  with the lenders to possibly  increase  the
availability  under the facility.  However,  no assurances  can be given that we
will be able to cure the covenant  violations or increase the availability under
the  Facility.  The balance due under the Facility is  classified  as short term
until the  Company is in  compliance  with all the terms of the  agreement.

         PANACO's  $100 million of Senior Notes due 2004  outstanding  require a
total Adjusted  Consolidated Net Tangible Asset Value  ("ACNTA"),  as defined in
the Indenture,  equal to 125% of total  indebtedness at the end of each quarter.
If the  Company's  ACNTA falls below this  percentage  of  indebtedness  for two
succeeding quarters,  it must redeem an amount of the Senior Notes sufficient to
maintain  this ratio.  At December  31, 2001 PANACO did not meet this ratio.  On
March 31,  2002 the  Company did meet this  requirement  and is not  required to
repurchase any of the Senior Notes. However, the Senior Notes Indenture contains
certain cross defaults with the covenants  under the Credit  Facility that could
constitute default under the Indenture.  Based on the cross defaults the balance
due the  holders  of the  Senior  Notes is  classified  as short  term until the
Company is in compliance  with the  Indenture.

                                       18
<PAGE>
        Given these issues,  PANACO engaged an investment  bank in early 2002 to
help the Company explore strategic alternatives. The outcome of this process may
result in asset sales or the sale of the Company as a whole.  No assurances  can
be made that the Company  will be able to  implement  any plan that will resolve
the  working  capital  deficit,  ensure we maintain  compliance  with our Credit
Facility  and Senior Note  covenants,  or that a plan will be  implemented  in a
timely  manner  and,  as a result,  the Company may not be able to continue as a
going concern.  In addition,  any of these alternatives will most likely require
approval from PANACO's Credit  Facility  lenders and may require the approval of
our Senior Note holders as well as Stockholder approval.

         At March 31,  2002 the  Company  had  accrued  $378,000  of  restricted
deposits based on required deposits on March 31, 2002. The deposits were delayed
until May due to liquidity  constraints.  The  nonpayment of such deposits could
allow the surety bond  underwriter  to withdraw  bonds in place for the Company.
The bonds are  required  for the Company to operate  properties  and  nonpayment
could  result in the loss of such  ability.  Payment of such  deposits is also a
requirement of the Credit Facility.

PART I
Item 3a.
                          QUANTITATIVE AND QUALITATIVE
                          DISCLOSURES ABOUT MARKET RISK

Commodity price derivative instruments

        We follow a derivative  instrument  strategy designed to protect against
the possibility of severe price declines due to market  volatility.  We may also
make  derivative   instrument  decisions  to  assure  a  payout  of  a  specific
acquisition or development project.

        From May 1 through  October 31, 2002, we have  derivative  contracts for
3,000 MMBtu per day of natural gas using a costless collar.  The collar provides
for a minimum  price of $3.00 per MMBtu and a cap price of $3.45 per MMBtu.  The
corresponding  settlement prices are based on the last three trading days on the
NYMEX for the month to which  the  derivative  contract  prices  relate.  If the
settlement  prices are below the minimum price, the counterparty will pay us the
price  difference  for  the  total  MMBtu  contracted  for  that  month.  If the
settlement  prices  are  higher  than the cap  price of  $3.45,  we will pay the
counterparty the price difference for the total MMBtu contracted for that month.

        We have also put in place a swap covering 500 barrels of oil per day for
the period of May 1 through  October 31, 2002 at an average  price of $25.45 per
barrel. The settlement prices are based on the average daily settlement price of
the NYMEX WTI Light Sweet Crude Oil for the respective months. If the settlement
prices  are  above  the swap  prices,  we will pay the  counterparty  the  price
difference for the volume contracted for the respective month. If the settlement
prices  are  below  the swap  prices  the  counterparty  will  pay us the  price
difference for the entire volume contracted for the respective month.

        At March 31, 2002 the change in fair value of the derivative instruments
was a loss of $0.1  million and is included in the  Statement of  Operations  as
other expense.

         The fair value of commodity  derivative  instruments  is the  estimated
amount  that  we  would  receive  or  pay to  settle  the  applicable  commodity
derivative  instrument at the reporting date, taking into account the difference
between NYMEX prices or index prices at  quarter-end  and the contract  price of
the commodity  derivative  instrument.  On January 1, 2001, the Company  adopted
SFAS 133  "Accounting  for  Derivative  Instruments  and Hedging  Activities" as
amended by SFAS 137 and SFAS 138. Under SFAS 133, all derivative instruments are


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recorded  on the  balance  sheet at fair  value.  See  Note 10 to the  Company's
Financial  Statements  for  a  discussion  of  activities  involving  derivative
financial instruments during the first three months of 2002.

PART II                        OTHER INFORMATION

Item 6.
                        EXHIBITS AND REPORTS ON FORM 8-K

  (a) Exhibits

      None.

  (b) Reports on Form 8-K

      April 25, 2002    Appointment of Robert K. McMillan to Board of Directors.
      May 8, 2002       Resignation of George W. Hebard, III from the Board of
                        Directors.

                                   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: May 20, 2002                         /s/ Todd R. Bart
      ------------                         -------------------------------------
                                           Todd R. Bart, Chief Financial Officer





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