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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, 2001


[   ] 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 _______.


     24,323,521  shares of the  registrant's  $.01 par value  Common  Stock were
outstanding on March 31, 2001.



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

PART I.                             Item 1.
                             FINANCIAL INFORMATION

                                  PANACO, Inc.
                            Condensed Balance Sheets


                                     ASSETS

<TABLE>
<CAPTION>
                                                                    As of                 As of
                                                               March 31, 2001       December 31, 2000
                                                            -------------------   --------------------
 CURRENT ASSETS                                                 (Unaudited)
<S>                                                                 <C>                     <C>

    Cash                                                    $       5,427,000      $       2,878,000
    Accounts receivable, net of an allowance of
        $110,000 and $554,000, respectively                        13,276,000             17,680,000
    Accounts receivable-related party                                       -                300,000
    Prepaid and other                                                 535,000                907,000
    Deferred income taxes                                           1,276,000                      -
                                                           -------------------    ------------------
        Total current assets                                       20,514,000             21,765,000
                                                           -------------------    ------------------

 OIL AND GAS PROPERTIES, AS DETERMINED BY THE
 SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
    Oil and gas properties, proved                                296,746,000            289,892,000
    Less proved property accumulated depletion,
       depreciation and amortization                             (199,009,000)          (193,135,000)
    Net unproved oil and gas properties                             2,930,000              2,888,000
                                                          -------------------     ------------------
       Net oil and gas properties                                 100,667,000             99,645,000
                                                          -------------------     ------------------

 PIPELINES AND EQUIPMENT
    Pipelines and equipment                                        26,507,000             26,409,000
    Less accumulated depreciation                                  (8,926,000)            (8,256,000)
                                                          -------------------     ------------------
        Net pipelines and equipment                                17,581,000             18,153,000
                                                          --------------------    ------------------

 OTHER ASSETS
    Restricted deposits                                             9,548,000              8,625,000
    Deferred debt costs, net                                        2,660,000              3,128,000
    Deferred income taxes                                          20,596,000             22,763,000
                                                          -------------------     ------------------
        Total other assets                                         32,804,000             34,516,000
                                                          -------------------     ------------------


 TOTAL ASSETS                                              $     171,566,000       $    174,079,000
                                                          ===================     ==================

                                                                                 (continued)
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       2
<PAGE>
                                  PANACO, Inc.
                            Condensed Balance Sheets


                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                   As of                    As of
                                                                March 31, 2001        December 31, 2000
                                                            -------------------     --------------------
 CURRENT LIABILITIES                                            (Unaudited)
<S>                                                                <C>                        <C>

    Accounts payable and accrued liabilities                 $      30,829,000       $       31,963,000
    Interest payable                                                 5,442,000                2,917,000
    Gas imbalance payable                                            3,485,000                2,860,000
    Restricted cash payable                                                  -                  629,000
                                                            ------------------      -------------------
       Total current liabilities                                    39,756,000               38,369,000
                                                            ------------------      -------------------

 DEFERRED CREDITS                                                    1,771,000                1,609,000

 LONG-TERM DEBT                                                    116,355,000              121,693,000

 COMMITMENTS AND CONTINGENCIES

 STOCKHOLDERS' EQUITY
    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;
       24,323,521 shares issued and outstanding                        246,000                  246,000
    Additional paid-in capital                                      68,977,000               68,977,000
    Accumulated deficit                                            (53,449,000)             (56,815,000)
    Accumulated other comprehensive loss                            (2,090,000)                       -
                                                            ------------------       ------------------
       Total stockholders' equity                                   13,684,000               12,408,000
                                                            ------------------       ------------------


 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $     171,566,000        $     174,079,000
                                                            ==================       ==================
</TABLE>


          The accompanying notes are integral part of this statement.

                                       3


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

<TABLE>
<CAPTION>
                                                                   2001                     2000
                                                               ------------             ------------
<S>                                                               <C>                        <C>

 REVENUES
   Oil and natural gas sales                              $     26,316,000         $     15,619,000

 COSTS AND EXPENSES
   Lease operating expense                                       5,305,000                4,191,000
   Depletion, depreciation & amortization                        7,032,000                5,711,000
   General and administrative expense                            1,071,000                  984,000
   Production and ad valorem taxes                                 481,000                  259,000
   Exploratory dry hole expense                                  3,858,000                  320,000
   Geological and geophysical expense                              297,000                  301,000
                                                         -----------------        -----------------
     Total                                                      18,044,000               11,766,000
                                                         -----------------        -----------------

 OPERATING INCOME                                                8,272,000                3,853,000

 OTHER INCOME (EXPENSE)
   Interest income                                                 226,000                   54,000
   Interest expense                                             (3,344,000)              (3,654,000)
   Other income                                                    379,000                        -
                                                         -----------------        -----------------
     Total                                                      (2,739,000)              (3,600,000)
                                                         -----------------        -----------------

 INCOME BEFORE INCOME TAXES                                      5,533,000                  253,000

 INCOME TAX EXPENSE                                              2,167,000                        -
                                                         -----------------        -----------------

 NET INCOME                                               $      3,366,000         $        253,000
                                                         =================        =================

 BASIC AND DILUTED NET INCOME PER SHARE                             $ 0.14                   $ 0.01
                                                         =================        =================

 Basic Shares Outstanding                                       24,323,521               24,075,400
                                                         =================        =================
 Diluted Shares Outstanding                                     24,473,625               24,075,400
                                                         =================        =================
</TABLE>

           The accompanying notes are integral part of this statement.

                                       4


<PAGE>
                                  PANACO, Inc.
                             Statement of Cash Flows
                      For the Three Months Ended March 31,
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         2001              2000
                                                                     -----------       -----------
<S>                                                                     <C>                <C>

 CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                      $   3,366,000      $    253,000
   Adjustments to reconcile net income to net cash
   provided by operating activities:
      Deferred income taxes                                            2,167,000                 -
      Depletion, depreciation and amortization                         7,032,000         5,711,000
      Exploratory dry hole expense                                     3,858,000           320,000
      Changes in assets and liabilities:
         Accounts receivable                                           4,404,000        (4,319,000)
         Accounts payable                                             (4,038,000)         (721,000)
         Gas imbalance payable                                           625,000                 -
         Deferred credits                                                162,000                 -
         Interest payable                                              2,525,000         2,662,000
         Accounts receivable-related party                               300,000                 -
         Change relating to derivative instruments                      (462,000)                -
         Prepaid and other                                              (232,000)           46,000
                                                                   -------------     -------------
                Net cash provided by operating activities             19,707,000         3,952,000
                                                                   -------------     -------------

 CASH FLOWS FROM INVESTING ACTIVITIES
      Capital expenditures and acquisitions                          (10,852,000)       (7,998,000)
      Increase in restricted deposits                                   (923,000)         (500,000)
                                                                   -------------     -------------
                Net cash used in investing activities                (11,775,000)       (8,498,000)
                                                                   -------------     -------------

 CASH FLOWS FROM FINANCING ACTIVITIES
      Issuance of common shares                                                -           129,000
      Long-term debt borrowings                                        6,000,000         8,538,000
      Repayment of long-term debt                                    (11,338,000)       (3,500,000)
      Additional deferred financing costs                                (45,000)          (51,000)
                                                                   -------------     -------------
                Net cash provided by (used in) financing activities   (5,383,000)        5,116,000
                                                                   -------------     -------------

 NET INCREASE IN CASH                                                  2,549,000           570,000

 CASH AT BEGINNING OF YEAR                                             2,878,000         5,575,000
                                                                   -------------     -------------

 CASH AT MARCH 31                                                   $  5,427,000      $  6,145,000
                                                                   =============     =============
</TABLE>

           The accompanying notes are integral part of this statement.

                                       5


<PAGE>
                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 1 - BASIS OF PRESENTATION

     In  the  opinion  of  management,   the  accompanying  unaudited  condensed
financial  statements  contain all  adjustments  necessary to present fairly the
Company's  financial position as of March 31, 2001 and December 31, 2000 and the
results of its  operations  and cash flows for the periods  ended March 31, 2001
and 2000.  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,  2000.  These  financial   statements  should  be  read  in
conjunction with the financial statements and notes included in the Form 10-K.

     The Company has restated its financial results for the first three quarters
of 2000.  The  adjustments  reflect an increase in the  Company's  gas imbalance
payable  and  associated  reduction  of  revenues  in the  quarters to which the
imbalance relates. The changes reflect adjustments to natural gas production and
revenues,  depletion, income before income taxes and net income. The adjustments
to the first quarter of 2000 revenues, depletion,  depreciation and amortization
and net income were $63,000, $(35,000) and $98,000, respectively.

Note 2 - 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.


                                       6
<PAGE>


                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

     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.

Note 3 - CASH FLOW INFORMATION

     Cash payments for interest totaled $860,000 and $1,044,000 during the first
three months of 2001 and 2000,  respectively.  The Company did not make any cash
payments for income taxes during the first three months of 2001 or 2000.

Note 4 - EARNINGS PER SHARE CALCULATIONS

     Basic earnings per share for the first three months of each year were based
on the year-to-date weighted average share outstanding of 24,323,521 in 2001 and
24,075,400  for  2000.  The  diluted  earnings  per share  amounts  are based on
weighted average share  outstanding plus in the money common stock  equivalents,
which consists of stock options outstanding and totaled 150,104 in 2001 and 0 in
2000. The Company had stock options outstanding during the first three months of
2000,  which were out of the money during the entire quarter and expired in June
2000.

Note 5 - 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 $4.4  million at
March 31, 2001 and  requires  quarterly  deposits  of $375,000  until June 2003,
decreasing 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 $4.4  million at March 31, 2001 and requires  quarterly  deposits of
$250,000 until the account balance reaches $6.5 million.

     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, 2001.


                                       7

<PAGE>


                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 6 - COMMITMENTS AND CONTINGENCIES

     An action was filed  against  the  Company in  Louisiana,  along with Exxon
Pipeline Company ("Exxon"), National Energy Group, Inc. ("NEG"), Mendoza Marine,
Inc., Shell Western Exploration & Production,  Inc. ("Shell"), and the Louisiana
Department of Transportation  and Development.  The petition was filed in August
1998, and alleges that, in 1997 and perhaps  earlier,  leaks from a buried crude
oil pipeline contaminated the plaintiffs' property. Pursuant to the purchase and
sale agreement  between PANACO and NEG, NEG is required to indemnify the Company
from any damages  attributable  to NEG's  operations  on the property  after the
sale.

     Pursuant  to another  purchase  and sale  agreement,  the  Company  may owe
indemnity  to Shell and Exxon,  from whom the  property  was  acquired  prior to
selling same to NEG. The Company believes that it has insurance coverage for the
claims  asserted in the petition,  and has notified all insurance  carriers that
might  provide  coverage  under  its  policies.  In 1999 NEG  filed  chapter  11
bankruptcy  and emerged in late 2000.  Some  discovery has occurred in the case,
but discovery is not yet complete.  Therefore,  at this point it is not possible
to evaluate the likelihood of an unfavorable  outcome, or to estimate the amount
or range of potential loss.

     In August 2000,  an action was filed against the Company by Coastal Oil and
Gas  Corporation  (now El Paso  Corporation)  for  nonpayment of joint  interest
billing invoices.  The suit seeks to recover unpaid costs from a well drilled on
a property  operated  by El Paso.  PANACO  counter  sued  alleging,  among other
things,  gross misconduct and negligence in drilling the well. The case is still
in discovery and it is not possible to evaluate the likelihood of an unfavorable
outcome or to estimate the amount or range of potential loss in addition to what
has already been accrued.

     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 7 - LONG-TERM DEBT

     In October 1999 the Company put in place a new Credit Facility. The loan is
a  reducing  revolver,  which  provides  the  Company  with  up to $60  million,
depending on the borrowing base. The Company's  borrowing base at March 31, 2001
was $60 million,  with availability of $44.6 million, of which, $5.5 million was
reserved by a letter of credit.  The principal amount of the loan is due October
1, 2001, and may be extended for two additional  six-month periods,  at the sole
option of the Company. The Company is reviewing its alternatives  regarding this
facility,  including  extension  of this  facility or  replacing  it with a bank
facility.

     Interest on the loan is computed  at Wells  Fargo's  prime rate plus .5% to
3.0%,  depending  on the  percentage  of the  facility  being  used.  The Credit
Facility is collateralized by a first mortgage on the Company's properties.  The
loan agreement contains certain covenants including an EBITDA (as defined in the
agreement)  to  interest  expense  ratio  of at least  1.5 to 1.0 and a  working
capital  ratio (as defined in the  agreement)  of at least .25 to 1.0.  The loan
agreement also contains limitations on additional debt,  dividends,  mergers and
sales of assets.


                                       8

<PAGE>



                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 8 - INCOME TAXES

     During the second quarter of 2000, the Company  determined that it was more
likely  than  not  that  its  deferred  tax  assets  would  be  realized.   This
determination  was based on current  projections of future taxable income.  This
analysis also included  current  estimates for future oil and natural gas prices
in addition to recent  reserve  additions.  Projections of future taxable income
were  sufficient  to utilize  our  deferred  tax assets due to higher  commodity
prices and reserve additions, therefore the valuation allowance was removed.

     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 the Company believes that the assumptions
used in these  projections are reasonable,  unfavorable  future events such as a
decrease in  commodity  prices could result in a reduction in some or all of the
deferred tax assets in a future period.

Note 9 - 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.  Currently,  the Company
uses only cash flow hedges and the remaining  discussion will relate exclusively
to this type of derivative  instrument.  If the  derivative  qualifies for hedge
accounting,  the gain or loss on the derivative is deferred in Accumulated Other
Comprehensive  Income/Loss,  a component of Stockholders'  Equity, to the extent
the hedge is effective.

     The relationship between the hedging instrument and the hedged item must be
highly  effective in achieving the offset of changes in cash flows  attributable
to the  hedged  risk both at the  inception  of the  contract  and on an ongoing
basis. The Company measures effectiveness on a quarterly basis. Hedge accounting
is discontinued prospectively when a hedge instrument becomes ineffective. Gains
and losses deferred in Accumulated Other  Comprehensive  Income/Loss  related to
cash flow hedges  that become  ineffective  remain  unchanged  until the related
production is delivered.  If the Company  determines  that it is probable that a
hedged  forecasted  transaction will not occur,  deferred gains or losses on the
hedging instrument are recognized in earnings immediately.

     Gains and  losses on  hedging  instruments  related  to  Accumulated  Other
Comprehensive   Income/Loss  and  adjustments  to  carrying  amounts  on  hedged
production are included in natural gas or crude oil  production  revenues in the
period that the related  production  is  delivered.  Gains and losses of hedging
instruments, which represent hedge ineffectiveness and changes in the time value
component of options,  are included in Other  Income/Loss in the period in which
they occur.

     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, 2001, the Company had two derivative instruments:  an option to put
oil to a  purchaser  and a natural gas swap.  For 2001,  the Company has entered
into an option to put 1,000  barrels  of oil per day at $25.00  per  barrel to a
purchaser  through  September  30,  2001  for a total  of  273,000  barrels.  In


                                       9

<PAGE>
                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)

addition, the Company had entered into a natural gas price swap covering 6.6 Bcf
of production for 2001 at an average price of $4.91 per MMBtu.


     The Company  recognized a $0.3 million increase in earnings,  pre-tax,  for
the  cumulative  effect of adopting SFAS 133 on January 1, 2001 and on March 31,
2001 the  Company  recognized  a $0.3  million  decrease in  earnings,  pre-tax,
related to the decrease in time value of the put option.

     For the Company's  natural gas swap, on January 1, 2001, in accordance with
the transition provisions of SFAS 133, 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 the natural gas swap.  The
Company also recorded cash flow hedge derivative  liabilities of $9.9 million in
accounts payable and accrued liabilities.  During the first quarter of 2001, 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 the natural gas swap. At March 31, 2001 $2.1 million,  net of tax, of
deferred net losses on derivative  instruments  recorded in Other  Comprehensive
Loss are expected to be reclassified to earnings during the remainder of 2001.

     All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors, which does not permit speculative positions.
The Company formally documents all relationships between hedging instruments and
hedged  items,  as well as its  risk  management  objectives  and  strategy  for
undertaking the hedge.  This process  includes  specific  identification  of the
hedging  instrument  and the hedge  transaction,  the  nature of the risk  being
hedged and how the hedging instrument's  effectiveness will be assessed. Both at
the inception of the hedge and on an ongoing basis, the Company assesses whether
the derivatives  that are used in hedging  transactions  are highly effective in
offsetting changes in cash flows of hedged items.

Note 10 - COMPREHENSIVE INCOME

     Comprehensive  income  includes  net  income  and  certain  items  recorded
directly  to   shareholders'   equity  and  classified  as   Accumulated   Other
Comprehensive  Loss.  The Company  recorded Other  Comprehensive  Income for the
first time in the first  quarter of 2001.  On January 1, 2001,  upon adoption of
SFAS  133,  the  Company  recorded  an  after-tax  charge to  Accumulated  Other
Comprehensive Loss of $6.1 million for the fair value of the Company's cash flow
hedges. The following table illustrates the calculation of comprehensive  income
for the quarter ended March 31, 2001:


                                       10

<PAGE>

                                  PANACO, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
<TABLE>
<CAPTION>
        <S>                                                                                <C>

    Accumulated Other Comprehensive Income, December 31, 2000                        $          --

    Net Income                                                                       $   3,366,000

    Accumulated Other Comprehensive Loss (net of tax)
          Cumulative effect of change in accounting principle - January 1, 2001         (6,134,000)
          Changes in fair value of outstanding hedging positions                         2,990,000
          Financial derivative settlements transferred from
                  Accumulated Other Comprehensive Loss                                   1,054,000
                                                                                     -------------

    Accumulated Other Comprehensive Loss                                             $  (2,090,000)
                                                                                     -------------

    Comprehensive Income                                                             $   1,276,000
                                                                                     =============
</TABLE>

    There were no other items in Comprehensive Income/Loss during 2001.


                                       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

     In  implementing  our business  strategy of  increasing  our reserve  base,
increasing cash flows from operations and to reduce debt, we reinvest cash flows
from  operations  as capital  expenditures  or to reduce debt.  During the first
three months of 2001,  net cash provided by operating  activities  totaled $19.7
million,  which, along with cash on hand, was used to fund capital  expenditures
of $10.9 million,  for required restricted deposit increases of $0.9 million and
to reduce debt by $5.4 million.  Capital  expenditures  of $10.9 million for the
first three months of 2001  represents a 36% increase over capital  expenditures
totaling $8.0 million for the comparable  period of 2000. For the year 2001, our
Board of Directors has approved a $37.1 million capital budget.  We believe that
cash flows from  operations  will fund this  level of  capital  expenditures  in
addition to reducing outstanding debt when compared to December 31, 2000.

     In an attempt to reduce  interest  costs, we keep as little cash on hand as
possible and apply available cash to our Credit Facility balance.  The timing of
receipt of monies due us and the payment of amounts due others also  affects our
working capital.  These two factors cause us to typically have a working capital
deficit.  On March 31, 2001 this working  capital deficit totaled $19.2 million.
We believe that cash flows from operations and borrowing  availability under our
Credit  Facility  will be  sufficient  to fund this working  capital  deficit in
addition to ongoing operations and capital expenditures.

Credit Facility

     The primary source of capital beyond discretionary cash flows is our Credit
Facility.  The 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


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<PAGE>

properties  that  we own and  for  acquiring  additional  oil  and  natural  gas
reserves.  We may also use the Credit Facility for working capital  support,  to
provide letters of credit and general corporate purposes.

     In  October  1999 we put in  place a new  Credit  Facility,  with  Foothill
Capital  Corp. as the Agent,  and includes  Foothill  Partners,  L.P. and Ableco
Finance, a subsidiary of Cereberus Capital Management, L.P. This Credit Facility
is a $60  million  line,  with  a term  of  two  years,  and  extendable  for an
additional year at our option.  Borrowings  under this Facility bear interest at
rates ranging from prime plus .5% up to prime plus 3.0%  depending on the amount
borrowed.  On March 31, 2001, $14.1 was outstanding under the Credit Facility, a
decrease of $5.4 million  during the first quarter of 2001. We are reviewing the
alternatives  available  regarding the Credit Facility,  including  extension of
this facility or replacing it with a bank facility.

     The Credit  Facility is a  revolving  credit  agreement  subject to monthly
borrowing base  determinations.  These  determinations are 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.

     Under  the  terms of this  Credit  Facility,  we must  maintain  a ratio of
trailing twelve-month EBITDA to net interest expense of not less than 1.5 to 1.0
throughout  the term of the Facility.  We must also  maintain a working  capital
ratio,  as  defined in the  agreement,  of not less than .25 to 1.0.  Also,  the
Credit Facility contains certain limitations on mergers, additional indebtedness
and pledging or selling assets,  paying  dividends or repurchasing the Company's
stock. We were in compliance with all covenants on March 31, 2001 and anticipate
compliance throughout the term of the loan.

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.

Commodity price hedges

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

     For 2001, we have hedged 18,000 MMBtu per day of natural gas for the entire
year.  The hedge is a swap,  based on the NYMEX closing prices when the swap was
put in place in November  2000.  The swap prices range from a high of $6.415 per
MMBtu in January to a low of $4.485 per MMBtu in October and average  $4.914 per
MMBtu for the year. The  corresponding  settlement  prices are based on the last
three  trading days on the NYMEX for the month to which the swap prices  relate.
If the swap prices are higher than the settlement  prices, the counterparty will
pay us the price  difference  for the total MMBtu hedged for that month.  If the
swap prices are less than the settlement  prices,  we will pay the  counterparty
the price difference for the total MMBtu hedged for that month.

     We have also  purchased  an option to put oil to a  purchaser  at an agreed
upon price.  The put option is for 1,000  barrels of oil per day from  January 1
through September 30 at a NYMEX price of $25.00 per barrel.  The cost of the put
option was $1.00 per barrel, or $365,000.

     At  March  31,  2001 the fair  value  of  these  hedges  was a loss of $3.1
million, pre-tax.


                                       13

<PAGE>

     The fair value of commodity  hedging  instruments  is the estimated  amount
that  we  would  receive  or pay to  settle  the  applicable  commodity  hedging
instrument at the reporting  date,  taking into account the  difference  between
NYMEX prices or index prices at year-end and the contract price of the commodity
hedging 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 recorded on the balance
sheet at fair value. See Note 9 to the Company's Condensed Financial  Statements
for a discussion of activities involving derivative financial instruments during
the first quarter of 2001.

     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 hedge 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

     Capital  expenditures  totaled  $10.9 million for the first three months of
2001,  representing a 36% increase over the $8.0 million of capital expenditures
incurred in the comparable period of 2000. The capital expenditures  incurred in
2001 were primarily in two fields that we operate.

     In late June 2000,  we began a new  development  program in the East Breaks
109 and 110 Fields,  with the aid of 3-D  seismic,  which we  purchased  in late
1998. These Fields are in approximately 700 feet of water in the Gulf of Mexico.
We own a 100% working interest in these Fields and are the operator.  During the
first quarter of 2001 we spent $9.6 in continuing the drilling  program in these
Fields, $3.8 million of which related to the #A-4 well, an exploratory well that
was not  completed  and  accounted  for as  exploratory  dry hole  expense.  The
remaining  capital was  primarily  incurred in spudding  the #A-13 well which is
currently  drilling and the  completion of the #A-7 well which was completed and
began production in late January 2001.

     During  the first  quarter  of 2001 we spent  $0.6  million  for  continued
development  and  exploitation  of  the  West  Delta  Fields,  located  offshore
Louisiana, in Plaquemines Parish. We operate the West Delta Fields and generally
own a 100%  working  interest  in the wells.  These  capital  expenditures  were
incurred in  completing  two new wells in Block 54 in  addition to spudding  the
recompletion of a currently shut-in well to new zones. During the second quarter
of 2001, we purchased an adjacent  block,  West Delta 52 for $4 million,  before
adjustment,  which will provide additional capital projects for the remainder of
2001.

     The remaining capital  expenditures were incurred on several  properties in
which we own smaller interests.


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<PAGE>

Results of Operations

For the three months ended March 31, 2001 and 2000:

     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.  The average  realized  price,  net of hedges,  has  increased  147% for
natural gas and 2% for oil from the first  quarter of 2000 to the first  quarter
of 2001.

Revenues

     Oil and natural gas sales totaled $26.3 million during the first quarter of
2001, an increase of $10.7 million, or 69% when compared to the first quarter of
2000.  While both oil and  natural  gas  production  decreased  during the first
quarter of 2001, improved market prices have offset lower production.

Production and Prices:

<TABLE>
<CAPTION>

                                                                                  % Increase
                                                2001              2000             (Decrease)
                                                ----              ----             ----------
        <S>                                     <C>               <C>                 <C>


      Natural gas production (MMcf)            3,065             3,122                 (2%)
      Average price per Mcf
       excluding hedging                     $  7.19           $  2.67                169%
      Average price per Mcf
       including hedging                     $  6.49           $  2.63                147%

      Oil Production (MBbl)                      226               266                (15%)
      Average price per Bbl
       excluding hedging                     $ 28.45           $ 28.16                  1%
      Average price per Bbl
       including hedging                     $ 28.45           $ 27.87                  2%
</TABLE>

     Both oil and natural gas production  decreased  slightly when comparing the
first quarter of 2001 to the comparable period of 2000.

     Natural gas production  decreases from the Umbrella Point Field (470 MMcf),
High  Island  309 and 310  Fields  (456 MMcf ) and the East  Breaks  160 and 161
Fields  (251 MMcf) were due  primarily  to natural  declines  in the  respective
production  from those fields.  Those declines were somewhat offset by increases
in the East Breaks 109 and 110 Fields (631 MMcf) and the West Delta  Fields (518
MMcf), the primary focus of our current capital expenditure  program.  Likewise,
oil  production  has decreased from the East Breaks 165 Field (51 Mbbl) and East
Breaks 160 and 161 Fields (14 Mbbl) due to lower capital  expenditures  in those
fields.  The bulk of the  capital  expenditures  in 2001 are for  projects  that
should produce natural gas, rather than oil.

Cost and Expenses

     Lease operating  expenses increased $1.1 million,  to $5.3 million,  during
the first quarter of 2001 compared to $4.2 million in 2000. On an Mcf equivalent
("Mcfe") basis,  lease  operating  expenses also increased to $1.20 in 2001 from
$0.89 in  2000.  Part of the  capital  spending  in 2001  includes  a number  of
workover  and repair  expenditures  included  in lease  operating  expenses  and
totaled  approximately  $1.2  million  during the first  quarter  of 2001.  This


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<PAGE>

compares to $0.8  million of similar  expenditures  during the first  quarter of
2000.  These  projects  include  production  equipment  repairs and  workover or
cleanout of  productive  zones in well bores.  Excluding  these  amounts,  lease
operating  expenses per Mcfe were $0.92 and $0.72 for the first  quarter of 2001
and 2000, respectively.

     Depletion, depreciation and amortization ("DD&A") increased 23.1 %, or $1.3
million  primarily due to a 31% increase in DD&A per unit of  production,  which
was offset  slightly by a 6% decrease in total  production.  The higher cost per
unit  relates  primarily  due to an increase in the cost per Mcfe of  production
from the East Breaks 109 and 110 Fields  along with  increased  production  from
those Fields.

     Production and ad valorem taxes increased $0.2 million,  or 86%, during the
first three  months of 2001  primarily  due to our  production  mix during 2001.
Production from  properties  onshore,  or in state waters,  which are subject to
severance  taxes became a higher  percentage  of total  production as production
from offshore properties, as a percentage of the total, decreased.

     Exploratory  dry hole expense  increased $3.5 million  primarily due to the
unsuccessful  #A-4 well  drilled  during  the first  quarter of 2001 in the East
Breaks 109 and 110 Fields.

     Interest  expense  decreased  $0.3  million due to lower  borrowing  levels
during 2001 in addition to lower interest rates for the Credit  Facility,  which
is based on the prime rate.

     Other income  increased $0.4 million and is made up of the adoption of SFAS
No. 133,  including a gain on the ineffective  portion of a natural gas swap and
the mark-to-market of an option to put oil to a purchaser.

Income Tax Expense

     As oil and  natural  gas  prices  increased  during  2000,  we were able to
project  future  net  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,  income tax expense has been recognized,
at the effective rate, as a percentage of pre-tax income.

     The reduction of the valuation  allowance during the second quarter of 2000
was  based  on the  determination  that it was  more  likely  than  not that the
deferred  tax assets  would be  realized.  This  determination  was based on our
current  projections  of future  taxable  income.  This  analysis  also included
current  estimates  for future oil and  natural gas prices in addition to recent
reserve  additions.  Our  current  projections  of  future  taxable  income  are
sufficient to utilize our deferred tax assets due to higher commodity prices and
reserve additions, therefore the valuation allowance was removed.

     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,  unfavorable  future events such as a decrease
in  commodity  prices  could  result  in a  reduction  in some or all of the net
deferred tax assets in a future period.

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


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<PAGE>

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.  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 oil and natural gas price fluctuations on our Company.

     For fiscal  2001,  the Board of  Directors  has  approved  a $37.1  million
capital budget. This budget includes  approximately $21.5 million of exploratory
projects,  the  majority  of which will be spent at our East  Breaks 109 and 110
Fields.  While this level of  exploratory  spending  is higher  than in previous
years,  based on current  seismic and  drilling  technology,  we feel that these
projects are also lower risk than the exploratory  projects we have historically
participated in.

Other Contingencies

     An action was filed  against  the  Company in  Louisiana,  along with Exxon
Pipeline Company ("Exxon"), National Energy Group, Inc. ("NEG"), Mendoza Marine,
Inc., Shell Western Exploration & Production,  Inc. ("Shell"), and the Louisiana
Department of Transportation  and Development.  The petition was filed in August
1998, and alleges that, in 1997 and perhaps  earlier,  leaks from a buried crude
oil pipeline contaminated the plaintiffs' property. Pursuant to the purchase and
sale agreement  between PANACO and NEG, NEG is required to indemnify us from any
damages attributable to NEG's operations on the property after the sale.

     Pursuant to another  purchase and sale  agreement,  we may owe indemnity to
Shell and Exxon,  from whom we acquired  the  property  prior to selling same to
NEG. We believe that we have insurance  coverage for the claims  asserted in the
petition,  and have notified all insurance  carriers that might provide coverage
under our policies.  In 1999 NEG filed for chapter 11 bankruptcy  and emerged in
late 2000.  Some  discovery  has occurred in the case,  but discovery is not yet
complete. Therefore, at this point it is not possible to evaluate the likelihood
of an unfavorable outcome, or to estimate the amount or range of potential loss.

     In August 2000,  an action was filed against the Company by Coastal Oil and
Gas  Corporation  (now El Paso  Corporation)  for  nonpayment of joint  interest
billing invoices.  The suit seeks to recover unpaid costs from a well drilled on
a property  operated  by El Paso.  PANACO  counter  sued  alleging,  among other
things,  gross misconduct and negligence in drilling the well. The case is still
in discovery and it is not possible to evaluate the likelihood of an unfavorable
outcome or to estimate the amount or range of potential loss in addition to what
we have already accrued.

PART I
Item 3a.

                          QUANTITATIVE AND QUALITATIVE
                          DISCLOSURES ABOUT MARKET RISK

Commodity price hedges

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

     For 2001, we have hedged 18,000 MMBtu per day of natural gas for the entire
year.  The hedge is a swap,  based on the NYMEX closing prices when the swap was
put in place in November  2000.  The swap prices range from a high of $6.415 per


                                       17

<PAGE>

MMBtu in January to a low of $4.485 per MMBtu in October and average  $4.914 per
MMBtu for the year. The  corresponding  settlement  prices are based on the last
three  trading days on the NYMEX for the month to which the swap prices  relate.
If the swap prices are higher than the settlement  prices, the counterparty will
pay us the price  difference  for the total MMBtu hedged for that month.  If the
swap prices are less than the settlement  prices,  we will pay the  counterparty
the price difference for the total MMBtu hedged for that month.

     We have also  purchased  an option to put oil to a  purchaser  at an agreed
upon price.  The put option is for 1,000  barrels of oil per day from  January 1
through September 30 at a NYMEX price of $25.00 per barrel.  The cost of the put
option was $1.00 per barrel, or $365,000.

     At  March  31,  2001 the fair  value  of  these  hedges  was a loss of $3.1
million, pre-tax.

     The fair value of our commodity hedging instruments is the estimated amount
that  we  would  receive  or pay to  settle  the  applicable  commodity  hedging
instrument at the reporting  date,  taking into account the  difference  between
NYMEX prices or index prices at year-end and the contract price of the commodity
hedging instrument.

PART II
Item 6.
                        EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          None.

     (b)  Reports on Form 8-K

          None.

                                   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 14, 2001                  /s/ Todd R. Bart
     ---------------------              -------------------------------------
                                        Todd R. Bart, Chief Financial Officer


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