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

                                  FORM 10-Q/A


                                   (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>
PART I.

Item I.  Financial Information


                                  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>                      <C>       
     Cash and cash equivalents                                            $766,000                 $1,198,000
     Accounts receivable                                                 4,435,000                  4,386,000
     Accounts receivable - sale of Bayou Sorrel                         11,152,000                          0
     Prepaid expenses                                                      359,000                    465,000
                                                           ------------------------   ------------------------
        Total Current Assets                                            16,712,000                  6,049,000
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
     SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
     Oil and gas properties                                             98,015,000                103,105,000
     Less: accumulated depreciation,
        depletion and amortization                                    (77,526,000)               (73,620,000)
                                                           ------------------------   ------------------------
        Net Oil and Gas Properties                                      20,489,000                 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:
     Earnest deposit - Amoco acquisition                                 5,000,000                          0
     Restricted deposits                                                 1,733,000                          0
     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                                               7,117,000                    531,000


TOTAL ASSETS                                                           $44,444,000                $36,169,000
                                                           ========================   ========================







         The accompanying notes are an integral part of this statement.


</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                                                  0                               0
                                                                              -----------                     -----------
        Total Current Liabilities                                               8,809,000                       4,605,000

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

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






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









         The accompanying notes are an integral part of this statement.

</TABLE>
<PAGE>

                                                


                                  PANACO, INC.

                Statements of Income (Successful Efforts Method)
             For the Nine Months Ended September 30, 1996 and 1995
                                  (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                                                               0               2,174,000
     Provision for losses and (gains) on
        disposition and write-downs of assets                                     (4,000)                       0
     Lease operating                                                            6,049,000               5,729,000
     Production and ad valorem taxes                                              429,000                 810,000
     West Delta fire loss                                                         500,000                       0
                                                                       -------------------      ------------------
        Total                                                                  12,528,000              15,432,000

NET OPERATING INCOME (LOSS)                                                       729,000             (1,772,000)

OTHER INCOME (EXPENSE)
     Interest expense (net)                                                   (1,347,000)               (720,000)

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

INCOME TAXES                                                                            0                       0

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

Net income (loss) per share                                                       ($0.05)                 ($0.21)









         The accompanying notes are an integral part of this statement.

</TABLE>

<PAGE>




                                  PANACO, INC.
  Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
                  For the nine months ended September 30, 1996
                                  (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                                                   0                      0                    0             (618,000)

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


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









         The accompanying notes are an integral part of this statement.
</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)                                                       ($618,000)            ($2,492,000)
     Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
        Depletion, depreciation and amortization                              4,824,000               6,052,000
        Exploration expenses                                                          0               2,174,000
        Amortization of loan costs                                              157,000                 225,000
        Changes in operating assets and liabilities:
            Certificates of Deposits - escrow                                   (1,000)                  21,000
            Accounts receivable                                                (49,000)               (110,000)
            Prepaid expenses                                                    106,000               (405,000)
            Other assets                                                              0                  44,000
            Accounts payable                                                  4,231,000                 916,000
            Interest payable                                                     79,000                (34,000)
                                                                              ---------               ---------
                       Net cash provided by operating activities              8,729,000               6,391,000

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

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

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

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

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

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

     Disclosure of accounting policies:
        1.  For purposes of the statement of cash flows, the Company considers all cash investments
            with original maturities of three months or less to be cash equivalents.
        2.  24,220 Common Shares were issued related to the Company's ESOP in a non-cash
            transaction.








            The accompanying are an integral part of this statement.
                                                                 
</TABLE>
<PAGE>


                                  PANACO, INC.
                          NOTES TO FINANCIAL STATEMENTS

              For the nine months ended September 30, 1996 and 1995

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

Note 2.  Effective  December  31,  1995,  the  Company  changed  its  method  of
accounting  for oil and gas  operations  from  the full  cost to the  successful
efforts method.  In connection with the change to the successful  efforts method
of accounting,  all prior periods have been restated,  including the nine months
ended  September  30, 1995.  Net income for the nine months ended  September 30,
1995 was  reduced  by  $3,963,000,  or $.36 per share from  previously  reported
amounts.  Management  concluded that the  successful  efforts method will better
enable  investors  and others to  compare  the  Company  to similar  oil and gas
companies, the majority of which follow the successful efforts method.

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

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

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

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

Note 3. The results of operations  for the nine months ended  September 30, 1996
are not indicative of the results to be expected for the full year. On April 24,
1996 the Company  experienced  an explosion  and fire at Tank Battery #3 in West
Delta.  The fields were shut-in  through  October 7th the facilities  were being
repaired  and  rebuilt . 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 and rebuild Tank Battery #3.
The Company  began  producing  oil and natural gas from the West Delta fields on
October 7th, 1996.

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

Note 5. For purposes of reporting  cash flows,  the Company  considers  all cash
investments with original

<PAGE>



maturities  of three  months or less to be cash  equivalents.  

Note 6. The reserves  presented in the following  table were prepared  solely by
the Company and are  estimates  only and should not be  construed as being exact
amounts.  All  reserves  presented  are  proved  reserves  that are  defined  as
estimated  quantities  which  geological and engineering  data  demonstrate with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under  existing  economic and operating  conditions.  Sale of  minerals-in-place
reflects  the sale of the Bayou  Sorrel  Field,  effective  September  1,  1996.
Reserves  attributable to the Amoco Acquisition,  closed on October 8th, are not
included.



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

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

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

Note 7. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.

Note 8. The  Company is party to various  escrow  agreements  which  provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations.  The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging  and  abandonment  operations,  funds are  partially  or  completely
released  upon the  presentation  by the Company to the escrow agent of evidence
that the operation was or is being  conducted in compliance with applicable laws
and regulations.  These escrow amounts are included on the financial  statements
as Restricted Deposits. See "The Company - Plugging and Abandonment Escrows".


Note 9. The Company  experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta  resulting in the fields being shut-in from April 24th,
until being  returned to production  on October 7, 1996.  The loss of 67 days of
production in the second  quarter and the entire third quarter  resulted in lost
revenues of approximately $6 million. The fire was the principal  contributor to
the losses of $.08 per share for the  second  quarter of 1996 and $.11 per share
for the third quarter.  During the second quarter the Company expensed  $500,000
for its  loss as a  result  of this  explosion.  No  further  losses  have  been
recognized  or are  anticipated.  This  $500,000  amount  included  $225,000  in
deductables under the Company's insurance.

           The Company has spent $8.5  million on Tank  Battery #3  inclusive of
the $500,000 expensed during second quarter and has received  reimbursement from
its insurance  company of $3.9 million,  after  satisfaction  of the $225,000 in
deductibles.  The excess of expenditures  over insurance  reimbursement  will be
capitalized.  No additional expenditures have been made or are anticipated.  The
Company is  considering  filing suits  against the  employers of the persons who
caused the  incidents  for  recovery  of these  costs and its lost  profits.  No
assurance  can be given that the Company will  successfully  recover any amounts
sought in any such suits.



<PAGE>




Note 10. On October 8,1996,  the Company  completed the acquisition of interests
in thirteen  offshore  blocks  comprising  six fields in the Gulf of Mexico from
Amoco Production Company.  Proved reserves, net to the interests acquired, as of
September 1, 1996,  the effective date of the Amoco  Acquisition,  were1,953,000
barrels of oil and  condensate  and 28.6 Bcf of natural gas, based upon internal
reserve  reports  prepared by the  Company.  The  purchase  price for the assets
acquired  in  this  transaction  was  $40.4  million,  paid by the  issuance  of
2,000,000  Common  Shares  and by  payment  to  Amoco  of $32  million  in cash.
Concurrently  with this transaction the Company entered into a new Bank Facility
with First Union  National Bank of North Carolina and Banque Paribas under which
its  reducing  revolving  loan was  increased  to $40  million,  with an initial
borrowing base (credit limit) of $35 million.  The principal  amount of the loan
is due July 1, 1999.  Interest on the loan is computed at the bank's  prime rate
or at 1 to 1 3/4%  (depending  upon the  percentage of the facility  being used)
over the applicable London Interbank Offered Rate ("LIBOR") on Eurodollar loans.
Eurodollar  loans can be for terms of one, two, three or six months and interest
on such loans is due at the  expiration of the terms of such loans,  but no less
frequently  than every three months.  Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over  LIBOR as long as the  Company  has in excess of  $13,500,000  in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. In addition to that facility, the
Company  borrowed  $17 million  pursuant to the  Tranche A  Convertible  and the
Tranche B Bridge Loan Subordinated Notes,  provided by lenders investing through
Kayne,  Anderson  Investment  Management,  Inc. Both Tranche A  Convertible  and
Tranche B Bridge Loan bear interst at 12% per annum and are due October 8, 2003.
After the expiration of 180 days following the conclusion of this offering,  the
Tranche A Notes are  convertible  into  2,060,606  Common Shares on the basis of
$4.125 per share.  The  Company  may  deliver up to  $2,000,000  in PIK notes in
satisfaction of interest payment obligations.  Should the Tranche B Notes not be
prepaid by August 8, 1997 the interest  rate will  increase  from 12% to 14% per
annum.  The Company may deliver  PIK notes in  satisfaction  of this  additional
interest.

Note 11.   Effective  September 1, 1996, the Company sold its Bayou Sorrel Field
to National Energy Group,  Inc. for $11,000,000,  $9,000,000 in cash and 477,612
shares of  National  Energy  Group,  Inc.  common  stock,  which were  valued at
$2,000,000  on  September  30,  1996.  National  Energy  Group,  Inc.  will also
reimburse the Company for deposits it has made into an escrow  agreement for the
plugging  and  abandonment  obligation.  Through  September  30, this amount was
$152,000.  The Company will also retain a 3% overriding  royalty interest in the
deep rights of the field.  The results of the Bayou Sorrel Field are included in
the Company's Statement of Income only through August 31, 1996.

Note 12. At December 31, 1995, the Company had net operating loss carry forwards
for federal  income tax purposes of  $15,765,000  which are  available to offset
future federal taxable income through the year 2010.
 <PAGE>



                         PRO FORMA FINANCIAL INFORMATION


           On October 8,1996, the Company completed the acquisition of interests
in thirteen  offshore  blocks  comprising  six fields in the Gulf of Mexico from
Amoco Production Company.  Proved reserves, net to the interests acquired, as of
September 1, 1996 , the effective date of the Amoco Acquisition,  were 1,953,000
barrels of oil and  condensate  and 28.6 Bcf of natural gas, based upon internal
reserve  reports  prepared by the  Company.  The  purchase  price for the assets
acquired  in  this  transaction  was  $40.4  million,  paid by the  issuance  of
2,000,000  Common  Shares  and by  payment  to  Amoco  of $32  million  in cash.
Concurrently  with this transaction the Company entered into a new Bank Facility
with First Union  National Bank of North Carolina and Banque Paribas under which
its  reducing  revolving  loan was  increased  to $40  million,  with an initial
borrowing base (credit limit) of $35 million. In addition to that facility,  the
Company  borrowed  $17 million  pursuant to the  Tranche A  Convertible  and the
Tranche B Bridge Loan Subordinated Notes,  provided by lenders investing through
Kayne, Anderson Investment Management, Inc.

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

           On November 22, 1996, the Company closed its sale of the Bayou Sorrel
Field  to  National  Energy  Group,  Inc.  for a  sales  price  of $11  million,
consisting  of $9 million in cash and 477,612  shares of National  Energy Group,
Inc.  common  stock,  which were  valued at $2 million as of the  closing  date.
Because the sale was effective  September 1, September  revenues and expenses of
the Bayou Sorrel Field are not inlcuded in the  Statement of Income for the Nine
Months Ended September 30, 1996.
                                 

<PAGE>


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


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

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

COSTS AND EXPENSES
      Lease operating                               6,049    3,158         108        9,315     (733)         8,582
      Depreciation, depletion and amortization      4,981        0       5,655       10,636     (888)         9,748
      Exploration expenses                              0        0           0            0         0             0
      Provision for losses and (gains) on
           disposition and write-down of assets       (4)        0           0          (4)         0           (4)
      General and administrative                      573        0           0          573         0           573
      Production and ad valorem taxes                 429        0           0          429     (239)           190
      West Delta fire loss                            500        0           0          500         0           500
           Total                                   12,528    3,158       5,763       21,449   (1,860)        19,589

NET OPERATING INCOME (LOSS)                           729    7,977     (5,763)        2,943     (150)         2,793

OTHER INCOME (EXPENSE)
      Interest expense (net)                      (1,347)        0     (1,611)      (2,958)       588       (2,370)

NET INCOME (LOSS) BEFORE INCOME TAXES               (618)    7,977     (7,374)         (15)       438           423

INCOME TAXES (BENEFIT)                                  0        0           0            0         0             0

NET INCOME (LOSS)                                  ($618)   $7,977    ($7,374)        ($15)      $438          $423

EARNINGS (LOSS) PER COMMON SHARE                  ($0.05)                           ($0.00)                   $0.03

      Weighted average shares outstanding          12,253                2,000       14,253                  14,253


The  accompanying  notes to financial  statements  are an integral  part of this
statement
</TABLE>

<PAGE>


                                  PANACO, Inc.

              Pro Forma Combined Statement of Income (Operations)
                  For the Nine Months Ended September 30, 1995
                  (Amounts in thousands except per share data)
                                  (Unaudited)
<TABLE>
<CAPTION>

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

REVENUES
<S>                                                  <C>               <C>             <C>                    <C>           <C>    
      Oil and gas sales                              $13,660           $3,623          $9,525                 $0            $26,808

COSTS AND EXPENSES
      Lease operating                                  5,729            1,460           1,906                314              9,409
      Depreciation, depletion and amortization         6,277                0               0              8,179             14,456
      Exploration expenses                             2,174                0               0                  0              2,174
      Provision for losses and (gains) on
           disposition and write-down of assets            0                0               0                  0                  0
      General and administrative                         442                0               0                  0                442
      Production and ad valorem taxes                    810                0               0                  0                810
           Total                                      15,432            1,460           1,906              8,493             27,291

NET OPERATING INCOME (LOSS)                          (1,772)            2,163           7,619            (8,493)              (483)

OTHER INCOME (EXPENSE)
      Interest expense (net)                           (720)                0               0            (2,311)            (3,031)

NET INCOME (LOSS) BEFORE INCOME TAXES                (2,492)            2,163           7,619           (10,804)            (3,514)

INCOME TAXES (BENEFIT)                                     0                0               0                  0                  0

NET INCOME (LOSS)                                   ($2,492)           $2,163          $7,619          ($10,804)           ($3,514)

EARNINGS (LOSS) PER COMMON SHARE                     ($0.21)                                                                ($0.26)

      Weighted average shares outstanding             11,649                                               2,000             13,649

</TABLE>

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

<PAGE>










               NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF
                  INCOME (OPERATIONS) For the nine months ended
                           September 30, 1996 and 1995


1.         Basis of Presentation


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

           Because the Bayou  Sorrel  Field was  purchased on December 28, 1995,
there was no activity  included in the Company's  results of operations in 1995,
and therefore, no pro forma elimination adjustments necessary for 1995.

           The results of the Zapata  properties  are included in the  Company's
1995 results of operations  after the closing date, July 26, 1995. The pro forma
adjustments  for the Zapata  properties  are only for the period of January 1 to
July 25,  1995.  There  are no pro  forma  adjustments  in 1996  for the  Zapata
Properties  as the results from these  properties  are included in the Company's
results of operations in 1996.

           Each period  presented  includes  the  issuance of  2,000,000  Common
Shares to Amoco Production Company in connection with the Amoco Acquisition.

            There are also no pro forma  entries for General and  Administrative
expenses because the Company  anticipates no increases in this category based on
the nature of the assets acquired.


2.         Amoco and Zapata Properties Pro Forma Adjustments


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

           Additional  depletion and depreciation  expense of $5,629,000 in 1996
and $8,179,000 in 1995 represents the estimated  depletion and  depreciation for
assets acquired in the respective  acquisitions assuming the purchase prices and
proved  reserve  amounts were identical to those that existed at the time of the
actual acquisitions.

           Additional  interest  expense of $2,154,000 in 1996 and $2,311,000 in
1995 represents the increased  borrowings at January 1, 1995. The purchase price
assumed for each  acquisition is the same as at the actual date of  acquisition.
It is  assumed  that  cash on hand at the  beginning  of 1995  was  used for the
acquisitions,  with the  balance  of any cash  required  being  funded  with the
Company's  Bank  Facility and the 1996  Subordinated  Notes,  using the rates in
effect at the time of the acquisition for the Bank Facility and 12% for the 1996
Subordinated  Notes, also the same rate received at the time of the acquisition.
These  assumptions would have required the Company to borrow $32 million for the
cash portion of the Amoco  Acquisition,  $17 million under the 12%  subordinated
Notes and $15  million  under  the  Company's  Bank  Facility,  with an  assumed
interest rate of 7.25%, the actual weighted average rate the Company incurred at
the time of the acquisition.


3.         Bayou Sorrel Pro Forma Adjustments


           The  adjustments  with  respect to the sale of the Bayou Sorrel Field
represent  the  revenues  and expenses of the Field from January 1 to August 31,
1996.  Interest  expense is reduced to reflect the  elimination of the financing
for the  acquisition,  closed on December  28, 1995.  The  reduction in interest
expense is based on the Company's pro forma  elimination of the debt  associated
with the purchase of the Bayou Sorrel Field.



<PAGE>




The Company borrowed $10.5 million for the purchase which closed on December 28,
1995,  and had reduced this amount  throughout  1996. The interest rate averaged
approximately  7.5%.  The  purchase  price for the Field was  $10,455,000  which
included a related receivable of $600,000 and a brokers fee of $205,000.

           Although  the sale of the Bayou  Sorrel  field closed on November 22,
1996,  the buyer  assumed all  benefits and  liabilities  of the field after the
effective date of the sale, September 1, 1996.



PART I.

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

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


General

      The oil and 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 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.


      The Company  experienced  an explosion  and fire on April 24, 1996 at Tank
Battery #3 in West Delta  resulting in the fields being shut-in from April 24th,
until being  returned to production  on October 7, 1996.  The loss of 67 days of
production in the second  quarter and the entire third quarter  resulted in lost
revenues  estimated by management to be approximately  $6 million.  The fire was
the principal contributor to the losses of $.08 per share for the second quarter
of 1996 and $.11 per share for the third  quarter  of 1996.  During  the  second
quarter  the  Company  expensed  $500,000  for  its  loss  as a  result  of this
explosion.  No further  losses have been  recognized  or are  anticipated.  This
$500,000 amount included $225,000 in deductibles under the Company's insurance.

      The Company has spent $8.5  million on Tank  Battery #3  inclusive  of the
$500,000 expensed during second quarter and has received  reimbursement from its
insurance  company  of $3.9  million,  after  satisfaction  of the  $225,000  in
deductibles.  The excess of expenditures  over insurance  reimbursement  will be
capitalized.  No additional expenditures have been made or are anticipated.  The
Company is  considering  filing suits  against the  employers of the persons who
caused the  incidents  for  recovery  of these  costs and its lost  profits.  No
assurance  can be given that the Company will  successfully  recover any amounts
sought in any such suits.


Results of Operations

      "Oil  and  Gas  revenue"  decreased  only  3% for the  nine  months  ended
September 30, 1996 when compared to the nine months ended September 30, 1995, in
spite  of the  explosion  and  fire  at  West  Delta.  The  fire  and  explosion
substantially  reduced  oil and natural  gas  production  for the nine months in
1996, as  production  from the West Delta Fields was shut-in from the day of the
explosion  and fire (April 24,  1996)  until  October 7, 1996.  The  decrease in
production from West Delta was offset by production  from  properties  acquired.
The Bayou Sorrel  Field was acquired on December 28, 1995 and had no  production
realized by the Company in 1995. The offshore  properties of Zapata  Exploration
Company were acquired on July 26, 1996 with the production from these properties
being  included  in the  Company's  results of  operations  from July 27 through
September 30, 1995.

      Production.  Natural gas production decreased 39% to 4,590,000 Mcf for the
first nine months of 1996 from  7,578,000  Mcf in 1995.  Natural gas  production
from West Delta  decreased  from 6,700,000 Mcf for the first nine months of 1995
to  1,500,000  Mcf for the same  period  in  1996,  primarily  a  result  of the
explosion and fire on April 24, 1996. A secondary factor in the decrease in West
Delta  production was a decline in 1996 production  from four  horizontal  wells
drilled in 1994. These four wells produced more natural gas in January to April,
1995  than  they did for the same  period  in 1996 (in the  period  prior to the
explosion and fire). Natural




<PAGE>




gas production  primarily from the Zapata Properties,  and from the Bayou Sorrel
Field  (primarily  an oil  field),  somewhat  offset the  decrease in West Delta
production.  The increase in Zapata production realized by the Company is due to
the fact that they were  acquired on July 26, 1995.  The  production  from these
properties  included in the nine months  ended  September  30, 1995 is only from
July 27 to  September  30,  while the  production  for the full  nine  months is
included in 1996.

      Oil  production  from the West Delta  Fields also  decreased  for the nine
months ended  September 30, 1996 when compared to the same period in 1995,  from
103,000  barrels  to  52,000  barrels.   However,  as  with  natural  gas,  1995
acquisitions  offset  the  decrease  from West  Delta.  The Bayou  Sorrel  Field
acquisition, which produces primarily oil, produced 93,000 barrels in 1996, with
no oil production realized by the Company in 1995, more than offset the decrease
from West Delta. Also, oil production from the Zapata Properties is included for
the first nine months of 1996,  with only the period of July 27 to  September 30
included in the same period of 1995, due to the July 26 acquisition  date,  also
offsetting  the  decrease  from West  Delta.  These  factors  resulted  in a 66%
increase in oil  production,  from 122,000  barrels for the first nine months of
1995 to 203,000 barrels in 1996.


      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.


      Prices.  Natural gas prices increased for the first nine months of 1996 to
$2.65 per Mcf compared to $1.54 for the same period 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.  A swap loss for the nine months  ended  September
30, 1996 of $2.7  million,  decreased  the net price  received by the Company to
$2.08 per Mcfe for the same period of 1996.


      Oil prices also increased, from $16.30 per barrel in the first nine months
of 1995 to $18.33 per barrel in the same period of 1996.


      "Depletion,  depreciation  and  amortization"  decreased 21% for the first
nine months of 1996  primarily  due to the  decreased  production  from the West
Delta  Properties  as a  result  of the  April  24th  explosion  and  fire,  see
discussion of production volumes in "Oil and Gas revenue".

      "Lease operating  expenses" increased $320,000 in the first nine months of
1996 primarily due to the acquisition of the Zapata  Properties and Bayou Sorrel
Field.  With the  Zapata  Properties,  the  Company  acquired  interest  in five
offshore  producing  properties.  Since the acquisition of the Zapata Properties
closed on July 26,  1995,  only the lease  operating  expenses  from July 27, to
September  30, 1995 are  included in the 1995 results of  operations,  while the
1996 period includes these expenses for the full nine months. 1996 also includes
a full nine  months of lease  operating  expenses  for the Bayou  Sorrel  Field,
acquired on December 28, 1995, with none of these expenses in the same period of
1995. West Delta lease operating  expenses did decrease in the first nine months
of 1996 ($805,000 from expected levels) with the fields being shut-in from April
25 through  October 7,  however,  a part of these lease  operating  expenses are
fixed in nature and continued.


      "Production and ad valorem taxes" decreased to 3.2% of oil and natural gas
sales in the first nine  months of 1996 from 5.9% of oil and  natural  gas sales
for the same period in 1995.  A part of the  decrease  ($178,000  from  expected
levels) is due to the lost production from the West Delta Properties for 67 days
in the second  quarter and the entire  third  quarter due to the  explosion  and
fire. A large  percentage of this  production is in Louisiana State waters which
are subject to  severance  taxes.  The  decrease is also due to the shift in the
Company's  production  volumes from  properties  subject to  severance  taxes to
properties in federal offshore waters (primarily the Zapata Properties) that are
not subject to such taxes.

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




<PAGE>



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


      "Interest  expense (net)"  increased  $627,000 , or 87% for the first nine
months of 1996  compared  to the same  period in 1995.  Average  Long-Term  Debt
levels  increased from $9 million for the nine months in 1995 to $21 million for
the same  period in 1996,  resulting  in the  primary  cause of the  increase in
interest  expense.  On December  27, 1995 the  Company  borrowed  $10 million in
connection  with the Bayou Sorrel Field  acquisition.  Through April,  1996, the
Company began to aggressively reduce Long-Term Debt, and it had reduced it by $4
million.  The April 24th  explosion and fire at West Delta reduced the Company's
discretionary  cash flows and  restricted  the Company's  ability to continue to
lower its Long-Term Debt. These two factors caused the average  borrowing levels
to be higher in the first nine  months of 1996  versus the same  period of 1995.
The  weighted  average  interest  rate for the  first  nine  months  of 1996 was
actually  slightly lower than that for the same period of 1995.  Throughout both
nine month periods,  the Company's Long-Term Debt included the 1993 Subordinated
Notes, bearing interest at 12%. The remainder of Long-Term Debt in each year was
borrowed under the Company's Bank Facility, which carried interest rates ranging
from 7% to 7 3/4%. The increased  weighted average  Long-Term Debt levels in the
first nine months of 1996, with a smaller percentage  borrowed at 12%, decreased
the weighted  average interest rate from 10% in the first nine months of 1995 to
8.6% in the same  period of 1996.  The  Company  borrowed $5 million on the Bank
Facility in late August 1996,  for an earnest money  deposit in connection  with
the acquisition of the Amoco Properties, which closed on October 8, 1996.


Sale of Bayou Sorrel


      Effective  September  1, 1996,  the Company sold its Bayou Sorrel Field to
National  Energy  Group,  Inc.  for $9  million  in cash and  477,612  shares of
National  Energy  Group,  Inc.  common  stock.  The  Company  also  retained  an
overriding  royalty  interest  in the deep  rights of the field at depths  below
11,000'. The field was acquired by the Company from Shell Western E.P., Inc. for
$10.5 million on December  28,1995,  which included a broker's fee and a related
receivable.  During the eight months the Company  owned the field two wells were
drilled which did not result in production in commercial quantities. The Company
received  an  offer  to  purchase  the  Field.   After  having  made  the  Amoco
Acquisition,  Management  believed that the Company's  resources could be better
utilized  elsewhere.  The effective  date of the sale was September 1, 1996, the
date at which National Energy Group,  Inc.  assumed all benefits and liabilities
of owning the  property.  The Company did not record a gain or loss on the sale.
For the nine  months  ended  September  30,  1996,  the Bayou  Sorrel  field had
accounted for $2 million, or 15% of the Company's total oil and gas revenue. The
Field had also  accounted  for  $733,000,  or 12% of lease  operating  expenses,
$888,000,  or 18% of  depreciation,  and  amortization  and  $239,000  or 56% of
production  and ad  valorem  taxes.  The net  results  of the field  contributed
$150,000 to  operating  income,  or 21%.  The  purchase  price was paid in cash,
borrowed on the Company's Bank Facility.  The interest  expense incurred in 1996
by owning the field totaled $588,000 for the nine months ended September 30. The
operating  income of the field  and  interest  expense  incurred  resulted  in a
decrease in net income of $438,000.


Liquidity and Capital Resources

      At September 30, 1996, 46% of the Company's total assets were  represented
by oil  and gas  properties,  net of  accumulated  depreciation,  depletion  and
amortization.


      On October 8, 1996, the Company amended its bank facility with First Union
National Bank of North  Carolina (60%  participation),  and Banque  Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million  depending on the  Company's  borrowing
base, as determined by the lenders. The Company's borrowing base at December 31,
1996 was $31 million,  with an availability  under the revolver of $2.5 million.
The principal  amount of the loan is due July 1, 1999.  However,  at no time may
the Company have outstanding borrowings under the Bank Facility in excess of its
borrowing base. Should the borrowing base ever be determined to be less than the
outstanding  principal owed, the Company must immediately pay that difference to
the lenders. Interest on the loan is computed at the




<PAGE>




bank's  prime  rate or at 1 to 1 3/4%  (depending  upon  the  percentage  of the
facility being used) over the applicable London Interbank Offered Rate ("LIBOR")
on Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the  expiration of the terms of such
loans, but no less frequently than every three months.  Beginning April 1, 1997,
the interest rate will  increase by an  additional  .5% at the beginning of each
quarter to a maximum of 3 3/4% over LIBOR as long as the  Company  has in excess
of  $13,500,000  in  Subordinated  Notes  outstanding,   specifically  the  1993
Subordinated  Notes and the 1996 Tranche B Bridge Loan  Subordinated  Notes. See
"Use of Proceeds." Management feels that this bank facility greatly enhances its
ability  to  make  necessary  capital   expenditures  to  maintain  and  improve
production  from its  properties and makes  available to the Company  additional
funds for future  acquisitions.  The bank facility is  collateralized by a first
mortgage on the  Company's  offshore  properties.  The loan  agreement  contains
certain covenants including a requirement to maintain a positive indebtedness to
cash flow ratio, a positive working capital ratio, a certain tangible net worth,
as well as limitations on future debt, guarantees,  liens,  dividends,  mergers,
material change in ownership by management, and sale of assets.

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

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

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

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

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


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

      Pursuant to existing  agreements  the Company is required to deposit funds
in escrow  accounts to provide a reserve  against  satisfaction  of its eventual
responsibility  to plug and abandon  wells and remove  structures  when  certain
fields no longer produce oil and gas. Each month,  until November 1997,  $25,000
is deposited in a bank escrow account,  to satisfy such obligations with respect
to a portion of its West Delta  Properties.  The  Company  has  entered  into an
escrow  agreement  with Amoco  Production  Company  under which the Company will
deposit,  for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the  agreement,  from the Amoco  properties.
These funds and interest  earned  thereon will be available  for the expenses of
plugging  wells and removing  structures  when that time comes.  The Company has
established



<PAGE>




the "PANACO East Breaks 110 Platform  Trust" at Bank One,  Texas, NA in favor of
the Minerals  Management  Service of the U.S.  Department of the Interior.  This
Trust  requires an initial  funding of $846,720 in December  1996, and remaining
deposits of $244,320  due at the end of each quarter in 1999 and $144,000 due at
the end of each  quarter in 2000 for a total of  $2,400,000.  In  addition,  the
Company has  $9,250,000  in surety bonds to secure its plugging and  abandonment
obligations;  including a  $4,100,000  bond which was  provided to the  original
sellers of the West Delta Properties; a $2,400,000 supplemental bond provided to
the  Minerals  Management  Service of the U.S.  Department  of the  Interior  in
connection with the plugging and structure removal obligations for the Company's
East Breaks Block 110 Platform and a $300,000 Pipeline Right-of-Way Bond.

      During  1996 the  Company  hedged the price of natural  gas by selling the
equivalent  of 15,000  MMBtu per day for 1996 at fixed  prices which ranged from
$2.25 for January to $1.75 for July. When the closing price  (settlement  price)
on NYMEX for natural  gas  futures  was greater  than the swap price for a given
month the Company paid that  difference to the bank which  effected the swap. If
the settlement  price was less than the swap price the bank paid 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.  Since the
Company  sells its natural gas on the spot  market,  in 1996 it realized  prices
which  approximated  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.  Starting in 1997 the  Company's  hedge  transactions  on natural gas are
based upon  published gas pipeline  index prices and not the NYMEX.  This change
has eliminated the possibility of price differences due to  transportation.  The
company expects that for 1997, 14,000 MMBtu's per day are to be hedged,  reduced
to 10,000 MMBtu's in 1998 and 7,000 MMBtu's in 1999. Also the Company is hedging
at a swap price of $1.80 for 1997,  which was below the  market  when the hedges
were put in place. The Company then has varying levels of participation  (93% in
January of 1997 to 40% in September)  in  settlement  prices above to $1.80 swap
price level.  Management  has generally used hedge  transactions  to protect its
cash flows when the Company's  borrowings  under long-term debt have 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.

      Despite  a net  loss for the  nine  months  ended  September  30,  1996 of
$618,000,  the  Company had cash  provided  by  operations  of $8.7  million.  A
significant  factor in cash flows from operations was a $4.2 million increase in
accounts  payable,  primarily  a result  of work  being  done on  repairing  and
rebuilding  West Delta through the second and third quarters of 1996,  while the
Company had not begun to receive any advances from its  insurance  company until
the third quarter.

      Through  September  30, 1996,  the Company had borrowed $7.5 million under
its Bank Facility,  $5 million of which was used for the earnest deposit made in
August in connection with the Amoco Acquisition.  The remaining  borrowings were
for  development of oil and gas properties and repair and rebuilding of the West
Delta Tank Battery #3. The Company had repaid $4.8  million of these  borrowings
through September, most of which was repaid through April.

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


Capital Spending


      In the nine month period ended  September 30, 1996,  the Company had $11.8
million in  capital  expenditures,  including  (1) a $5  million  earnest  money
deposit  with  respect  to the  purchase  of the Amoco  Properties,  which  were
subsequently  acquired  on  October  8, 1996,  (2) $1.9  million  for repair and
rebuilding  of the West Delta Tank Battery #3, net of insurance  reimbursements,
and (3) $4.5 million for development of its oil and gas properties. The majority
of the  development  costs were incurred to drill two  unsuccessful  development
wells in the Bayou  Sorrel  Field and for the  Company's  share of  successfully
recompleting  two wells on Eugene Island Block 372,  which is operated by Unocal
Corporation.




<PAGE>


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   seeking  damages  for  fraud.   Management  feels  the
plaintiff's suit is without merit and any outcome would be immaterial to results
of operations or financial position.

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.

     On  January  29,  1997  the  Company  filed a  Current  Report  on Form 8-K
describing its sale of the Bayou Sorrel Field to National Energy Group, Inc.

                                   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: February 4, 1997                     /s/ Todd R.Bart
                                           Todd R. Bart, Chief Financial Officer