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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 June 30, 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 _______.


     24,359,695  shares of the  registrant's  $.01 par value  Common  Stock were
outstanding on June 30, 2001.



--------------------------------------------------------------------------------
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<PAGE>
                                    Item 1.
                             FINANCIAL INFORMATION

                                PANACO, Inc.
                            Condensed Balance Sheets


                                     ASSETS
<TABLE>
<CAPTION>


                                                            As of                As of
                                                        June 30, 2001      December 31, 2000
                                                      ----------------    ------------------
                                                         (Unaudited)
<S>                                                          <C>                 <C>

 CURRENT ASSETS
   Cash                                              $    1,458,000       $     2,878,000
   Accounts receivable, net of an allowance of
      $303,000 and $554,000, respectively                15,465,000            17,680,000
   Accounts receivable-related party                              -               300,000
   Prepaid and other                                      1,938,000               907,000
                                                     --------------       ---------------
      Total current assets                               18,861,000            21,765,000
                                                     --------------       ---------------

 OIL AND GAS PROPERTIES, AS DETERMINED BY THE
 SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
   Oil and gas properties, proved                       272,608,000           289,892,000
   Less proved property accumulated depletion,
      depreciation and amortization                    (166,137,000)         (193,135,000)
   Net unproved oil and gas properties                    1,905,000             2,888,000
                                                     --------------       ---------------
      Net oil and gas properties                        108,376,000            99,645,000
                                                     --------------       ---------------

 PIPELINES AND EQUIPMENT
   Pipelines and equipment                               26,523,000            26,409,000
   Less accumulated depreciation                         (9,588,000)           (8,256,000)
                                                     --------------       ---------------
      Net pipelines and equipment                        16,935,000            18,153,000
                                                     --------------       ---------------

 OTHER ASSETS
   Restricted deposits                                    9,926,000             8,625,000
   Deferred debt costs, net                               2,199,000             3,128,000
   Deferred income taxes                                 22,230,000            22,763,000
                                                     --------------       ---------------
      Total other assets                                 34,355,000            34,516,000
                                                     --------------       ---------------


 TOTAL ASSETS                                        $  178,527,000       $   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
                                                        June 30, 2001      December 31, 2000
                                                       ---------------    ------------------
                                                         (Unaudited)
<S>                                                         <C>                     <C>

 CURRENT LIABILITIES
   Accounts payable and accrued liabilities           $  36,309,000          $  31,963,000
   Interest payable                                       2,809,000              2,917,000
   Gas imbalance payable                                  1,007,000              2,860,000
   Restricted cash payable                                        -                629,000
   Deferred income taxes                                  1,127,000                      -
                                                      -------------          -------------
      Total current liabilities                          41,252,000             38,369,000
                                                      -------------          -------------

 DEFERRED CREDITS                                         1,683,000              1,609,000

 LONG-TERM DEBT                                         120,352,000            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;
      24,359,695 and 24,323,521 shares
      issued and outstanding, respectively                  247,000                246,000
   Additional paid-in capital                            69,089,000             68,977,000
   Accumulated deficit                                  (55,941,000)           (56,815,000)
   Accumulated other comprehensive income                 1,845,000                      -
                                                      -------------          -------------
      Total stockholders' equity                         15,240,000             12,408,000
                                                      -------------          -------------


 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $ 178,527,000          $ 174,079,000
                                                      =============          =============
</TABLE>


          The accompanying notes are integral part of this statement.

                                       3

<PAGE>
                                  PANACO, Inc.
                            Statements of Operations
                        For the Six Months Ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>

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

 REVENUES
   Oil and natural gas sales                           $ 46,373,000             $ 36,900,000
   Gain on property sales                                 3,967,000                        -
   Lawsuit recovery                                               -                  990,000
                                                       ------------             ------------
     Total                                               50,340,000               37,890,000

 COSTS AND EXPENSES
   Lease operating expense                               12,914,000               10,076,000
   Depletion, depreciation & amortization                15,341,000               12,457,000
   General and administrative expense                     2,436,000                2,300,000
   Production and ad valorem taxes                          890,000                  965,000
   Exploratory dry hole expense                           4,590,000                  447,000
   Geological and geophysical expense                       599,000                  852,000
   Impairment of oil and gas properties                   6,542,000                        -
                                                      -------------             ------------
     Total                                               43,312,000               27,097,000
                                                      -------------             ------------

 OPERATING INCOME                                         7,028,000               10,793,000

 OTHER INCOME (EXPENSE)
   Interest income                                          301,000                   74,000
   Interest expense                                      (6,459,000)              (7,836,000)
   Other income                                             656,000                        -
                                                      -------------             ------------
     Total                                               (5,502,000)              (7,762,000)
                                                      -------------             ------------

 INCOME BEFORE INCOME TAXES                               1,526,000                3,031,000

 INCOME TAX EXPENSE (BENEFIT)                               652,000              (27,824,000)
                                                      -------------             ------------

 NET INCOME                                           $     874,000             $ 30,855,000
                                                      =============             ============

 BASIC AND DILUTED NET INCOME PER SHARE               $        0.04             $       1.28
                                                      =============             ============

 Basic Shares Outstanding                                24,339,709               24,199,461
                                                      =============             ============
 Diluted Shares Outstanding                              24,617,330               24,199,461
                                                      =============             ============
</TABLE>



          The accompanying notes are integral part of this statement.

                                       4
<PAGE>
                                  PANACO, Inc.
                      Consolidated Statements of Operations
                       For the Three Months Ended June 30,
                                   (Unaudited)


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

 REVENUES
   Oil and natural gas sales                           $ 20,057,000             $ 21,280,000
   Gain on property sales                                 3,967,000                        -
   Lawsuit recovery                                               -                  990,000
                                                       ------------             ------------
                                                         24,024,000               22,270,000

 COSTS AND EXPENSES
   Lease operating expense                                7,609,000                5,885,000
   Depletion, depreciation & amortization                 8,310,000                6,746,000
   General and administrative expense                     1,365,000                1,316,000
   Production and ad valorem taxes                          408,000                  706,000
   Exploratory dry hole expense                             733,000                  127,000
   Geological and geophysical expense                       302,000                  551,000
   Impairment of oil and gas properties                   6,542,000                        -
                                                       ------------             ------------
      Total                                              25,269,000               15,331,000
                                                       ------------             ------------

 OPERATING INCOME (LOSS)                                 (1,245,000)               6,939,000

 OTHER INCOME (EXPENSE)
   Interest income                                           76,000                   21,000
   Interest expense                                      (3,115,000)              (4,182,000)
   Other income                                             277,000                        -
                                                       ------------             ------------
      Total                                              (2,762,000)              (4,161,000)
                                                       ------------             ------------

 INCOME (LOSS) BEFORE INCOME TAXES                       (4,007,000)               2,778,000

 INCOME TAX EXPENSE (BENEFIT)                            (1,515,000)             (27,861,000)
                                                       ------------             ------------

 NET INCOME (LOSS)                                     $ (2,492,000)            $ 30,639,000
                                                       ============             ============

 BASIC AND DILUTED NET INCOME (LOSS) PER SHARE         $      (0.10)            $       1.26
                                                       ============             ============

 Basic Shares Outstanding                                24,355,720               24,323,521
                                                       ============             ============
 Diluted Shares Outstanding                              24,355,720               24,323,521
                                                       ============             ============

</TABLE>


          The accompanying notes are integral part of this statement.

                                       5
<PAGE>

                                   PANACO, Inc.
                             Statement of Cash Flows
                        For the Six Months Ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>


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

 CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                            $   874,000       $  30,855,000
   Adjustments to reconcile net income to net cash
   provided by operating activities:
      Deferred income taxes                                                  533,000         (27,824,000)
      Depletion, depreciation and amortization                            15,341,000          12,457,000
      Impairment of oil and gas properties                                 6,542,000                   -
      Exploratory dry hole expense                                         4,590,000             447,000
      Gain on property sales                                              (3,967,000)                  -
      Plug and abandoning of wells and platforms                          (3,676,000)                  -
      Changes in assets and liabilities:
         Accounts receivable                                               6,018,000          (6,932,000)
         Accounts payable                                                  5,184,000           1,161,000
         Gas imbalance payable                                              (490,000)            681,000
         Deferred credits                                                     74,000             625,000
         Interest payable                                                   (108,000)             56,000
         Accounts receivable-related party                                   300,000                   -
         Changes relating to derivative instruments                         (863,000)                  -
         Prepaid and other                                                (1,547,000)           (570,000)
                                                                       -------------       -------------
                   Net cash provided by operating activities              28,805,000          10,956,000
                                                                       -------------       -------------

 CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from the sale of oil and gas properties                     2,843,000                   -
      Capital expenditures and acquisitions                              (30,357,000)        (12,520,000)
      Increase in restricted deposits                                     (1,301,000)         (1,500,000)
                                                                       -------------       -------------
                   Net cash used in investing activities                 (28,815,000)        (14,020,000)
                                                                       -------------       -------------

 CASH FLOWS FROM FINANCING ACTIVITIES
      Long-term debt borrowings                                           10,000,000          10,349,000
      Repayment of long-term debt                                        (11,341,000)        (11,000,000)
      Additional deferred financing costs                                    (70,000)           (354,000)
                                                                       -------------       -------------
                   Net cash used in financing activities                  (1,411,000)         (1,005,000)
                                                                       -------------       -------------

 NET DECREASE IN CASH                                                     (1,420,000)         (4,069,000)

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

 CASH AT JUNE 30                                                       $   1,458,000       $   1,506,000
                                                                       =============       =============
</TABLE>

          The accompanying notes are integral part of this statement.

                                       6
<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 June 30, 2001 and December 31, 2000 and the
results of its operations and cash flows for the periods ended June 30, 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.   The
adjustments to the second quarter of 2000 revenues, depletion,  depreciation and
amortization  and  net  income  were   $(744,000),   $(60,000)  and  $(425,000),
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.


                                       7

<PAGE>



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

     The Company  recognized an asset  impairment  during the second  quarter of
2001  totaling $6.5  million,  relating to both proved and unproved  properties.
Based on the  decision by the Company to  discontinue  development  of potential
reserves, discovered in 1998, the Company recorded an impairment of $1.1 million
for the  capital  incurred  in  discovering  those  reserves.  In  addition,  in
connection with the Company's regular review of the recoverability of its proved
reserves' carrying values, an impairment was recorded based on reserve and price
reductions for three properties which the Company considers non-core. The proved
property  impairment  totaled  $5.4 million and was also  recognized  during the
second quarter of 2001.

     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.

     During the second  quarter of 2001,  the Company  sold its  interest in the
High  Island  309  and  310  Fields  to  the  operator  of  the  property.   The
consideration received by the Company included cash, before adjustment,  of $3.8
million  and the  forgiveness  of a $1.4  million gas  imbalance  payable by the
Company.  The sale closed on June 29, 2001 and the proceeds  from the buyer were
adjusted  to the  effective  date of the sale,  January 1, 2001,  and reduced by
amounts  owed by the  Company to the buyer.  Both the Company and the buyer also
agreed to dismiss  lawsuits filed by each party against the other as part of the
purchase and sale agreement.  The sale resulted in a gain of $4.0 million during
the second quarter of 2001.

Note 3 - CASH FLOW INFORMATION

     Cash payments for interest totaled $6.6 million and $7.9 million during the
first six months of 2001 and 2000,  respectively.  The  Company did not make any
cash payments for income taxes during the first six months of 2001 or 2000.

Note 4 - EARNINGS PER SHARE CALCULATIONS

     Basic  earnings  per share for the first six months of each year were based
on the year-to-date weighted average share outstanding of 24,339,709 in 2001 and
24,199,461  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 277,621 in 2001 and 0 in
2000. The Company had stock options  outstanding  during the first six months of
2000, which were out of the money during all of 2000 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.


                                       8

<PAGE>


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


     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 $4.8  million at
June 30, 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 June 30, 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 June 30, 2001.

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 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.

     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 June 30, 2001
was $60 million,  with availability of $32.5 million, of which, $1.8 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 evaluating its alternatives regarding this
facility,  including  extension  of this  facility or  replacing  it with a bank
facility.


                                       9

<PAGE>


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


     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.

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 several factors,  including  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 all of the  deferred tax
assets due to higher  commodity  prices and  reserve  additions,  therefore  the
valuation  allowance was removed.  The Company performs a review of the deferred
tax asset  including the  associated  utilization  estimates for the asset.  The
factors  considered in the review include historical  utilization,  tax planning
strategies that may improve the utilization and market conditions at the time of
review. While utilization estimates are important, they are not the sole factor.
The Company is evaluating several tax planning strategies that would potentially
provide utilization of its deferred tax assets including the sale of properties,
which would result in potentially significant gains.

     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  events,  including  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


                                       10

<PAGE>


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

hedged  forecast  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 June 30, 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
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. For the period of
July 1 through December 31, 2001 the Company's average price for its natural gas
swap is $4.54 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 June 30,
2001 the  Company  recognized  a $0.3  million  decrease in  earnings,  pre-tax,
related to the decrease in the 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  Income/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 six months
of 2001,  the  Company  realized  after tax  losses of $1.5  million  on hedging
activity  incurred in the first six months  2001,  which were  transferred  from
Other  Comprehensive  Income/Loss  to natural gas  revenues  for the  production
months the hedge  related.  The Company  also  recognized  Other  Income of $0.5
million, after tax, for the ineffective portion of the natural gas swap. At June
30,  2001  $1.8  million,  net of tax,  of  deferred  net  gains  on  derivative
instruments  recorded  in Other  Comprehensive  Income/Loss  are  expected to be
reclassified to earnings during the next twelve months.

     All hedge  transactions are subject to the Company's risk management policy
and are 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


                                       11

<PAGE>


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

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 six months ended June 30, 2001:

<TABLE>
<CAPTION>
<S>                                                                                               <C>


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

    Net Income                                                                                 874,000

    Accumulated Other Comprehensive Income (net of tax)
          Cumulative effect of change in accounting principle - January 1, 2001             (6,134,000)
          Changes in fair value of outstanding hedging positions                             7,017,000
          Financial derivative settlements transferred from
                  Accumulated Other Comprehensive Income                                       962,000
                                                                                          ------------

    Accumulated Other Comprehensive Income                                                   1,845,000
                                                                                          ------------

    Comprehensive Income                                                                  $  2,719,000
                                                                                          ============
</TABLE>


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


                                       12

<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 six
months of 2001, net cash provided by operating activities totaled $28.8 million,
which,  along with cash on hand, was used to fund capital  expenditures,  net of
property sales, of $26.1 million,  for required  restricted deposit increases of
$1.3 million and to reduce debt by $1.4  million.  Net capital  expenditures  of
$26.1  million for the first six months of 2001  represents a 109% increase over
capital  expenditures  totaling $12.5 million for the comparable period of 2000.
For the year 2001,  our Board of Directors  has  approved a $45 million  capital
budget.  We believe that cash flows from operations and  availability  under our
Credit Facility will fund this level of capital expenditures.

     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 June 30, 2001 this working capital deficit totaled $22.4 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
properties  that  we own and  for  acquiring  additional  oil  and  natural  gas


                                       13

<PAGE>

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 June 30, 2001, $18.1 was outstanding under the Credit Facility,  a
decrease of $1.3 million  during the first six months of 2001. We are evaluating
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 June 30, 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 June 30, 2001 the fair value of these hedges was a gain of $3.8 million,
pre-tax.


                                       14

<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 six months 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

     Net capital  expenditures totaled $26.1 million for the first six months of
2001,   representing   a  109%  increase  over  the  $12.5  million  of  capital
expenditures incurred in the comparable period of 2000. The capital expenditures
incurred  in 2001  were  concentrated  primarily  in four  fields in the Gulf of
Mexico, as follows.

     In late June 2000,  we began a  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 six months of 2001 we spent  $15.3  million  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 on the #A-13 well
which was completed and began production during the second quarter,  in addition
to the #A-7 well, which was completed and began production in late January 2001.

     On April  13,  2001  PANACO  acquired  100% of West  Delta  Block 52 for $4
million,  before  purchase  price  adjustments  to  the  effective  date  of the
acquisition, January 1, 2001. The acquisition included approximately 1.1 million
barrels of proved  reserves and is contiguous to our existing West Delta Fields.
During the second  quarter we spent  $3.3  million in capital  expenditures,  in
addition to the  acquisition  cost,  primarily for the  completion of previously
shut-in wells to new gas zones.

     PANACO also incurred capital expenditures totaling $5.0 million in the East
Breaks 205 and 161  Fields  during  the  second  quarter  of 2001.  We own a 25%
working  interest  in the first  well,  the East  Breaks 205 #1 well,  which was
drilled and completed during the second quarter.  The #1 well, which is operated
by Unocal,  was successful and is expected to begin production during the fourth
quarter of 2001. The Block 161 #2 well was spudded during the second quarter and
completed during the third quarter of 2001. This well was also successful and is
expected to begin production during the fourth quarter of 2001. PANACO also owns
a 25% working interest in the Block 161 #2 well.

     During  the first six months of 2001 we spent $1.5  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.


                                       15

<PAGE>


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

Results of Operations

For the six months ended June 30, 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 for both oil and natural gas.  Since March 2001,  natural gas prices have
decreased from their highs in January 2001.

Revenues

     Oil and natural gas sales totaled $46.4 million during the first six months
of 2001,  an increase  of $9.5  million,  or 26% when  compared to the first six
months of 2000.  While both oil and natural gas  production  decreased  in 2001,
improved natural gas prices have offset lower oil prices and lower production.

<TABLE>
<CAPTION>

Production and Prices:
                                                                                      % Increase
                                                 2001               2000              (Decrease)
                                                 ----               ----              ----------
<S>                                               <C>                <C>                  <C>


      Natural gas production (MMcf)              6,019              6,664                (10%)
      Average price per Mcf
       excluding hedging                       $  6.05            $  3.26                 86%
      Average price per Mcf
       including hedging                       $  5.65            $  3.23                 75%

      Oil Production (MBbl)                        449                541                (17%)
      Average price per Bbl
       excluding hedging                       $ 27.56            $ 28.92                 (5%)
      Average price per Bbl
       including hedging                       $ 27.56            $ 28.42                 (3%)

</TABLE>

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

     The most  significant  decreases  in  natural  gas  production  were in the
Umbrella Point Field (1,139 MMcf), High Island 309 and 310 Fields (566 MMcf) and
the East  Breaks 160 and 161 Fields  (583  MMcf),  which were due  primarily  to
natural  declines in the  production  from those  fields.  Those  declines  were
somewhat  offset by increases in the East Breaks 109 and 110 Fields (1,343 MMcf)
and the West Delta Fields (745 MMcf),  the primary focus of our current  capital
expenditure program. Likewise, oil production has decreased from the East Breaks
165 Field (92 Mbbl) and East  Breaks  160 and 161  Fields (32 Mbbl) due to lower
capital  expenditures in those fields and the rapid production declines from the
wells in those fields, which are inherent in the areas that we operate. The bulk
of the capital expenditures in 2001 are for projects that should produce natural
gas, rather than oil.

     We also recognized a gain of $4.0 million on the sale of an oil and natural
gas property during the second quarter of 2001. We sold PANACO's entire interest
in High Island  Blocks 309 and 310 to the  operator of the fields for cash,  the


                                       16

<PAGE>

assumption  of a gas  imbalance  liability  and the  dismissal  of a lawsuit the
operator had filed against us for non-payment of invoices. The property sale was
completed on June 29, 2001.

Cost and Expenses

     Lease operating expenses increased $2.8 million,  to $12.9 million,  during
the first six  months  of 2001  compared  to $10.1  million  in 2000.  On an Mcf
equivalent  ("Mcfe") basis,  lease operating expenses also increased to $1.48 in
2001 from $1.02 in 2000.  During  2001,  we have spent a large amount of capital
for repairs and maintenance of PANACO's offshore  platforms,  a large portion of
which has been  required by the  regulatory  agencies in the Gulf of Mexico.  We
expect this program to continue throughout 2001, specifically in the East Breaks
area of the Gulf of Mexico, where we own 3 platforms.  Total repair and workover
expenses  for the first six months of 2001 was $5.1  million,  compared  to $2.4
million during 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 $0.90 and $0.77 for the first six months
of 2001 and 2000, respectively.

     Depletion,  depreciation and amortization  ("DD&A")  increased 23%, or $2.9
million  primarily due to a 37% increase in DD&A per unit of  production,  which
was offset slightly by a 12% 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.

     Exploratory  dry hole expense  increased $4.1 million  primarily due to the
unsuccessful  #A-4 well  drilled  during  the first  quarter of 2001 in the East
Breaks 109 and 110 Fields.

     Geological and geophysical  expense decreased $0.3 million primarily due to
3-D  Seismic  purchases  and land  rentals  incurred  during  2000 that were not
included in 2001 spending.

     During the second quarter of 2001,  PANACO  recognized an impairment for an
unproved  oil and  natural  gas  property  and three  proved oil and natural gas
properties.  The unproved  property  impairment was based on our decision to not
further develop potential reserves based on the significant  capital required to
develop  the  field  and the low  potential  to be  realized  based on  numerous
evaluations  made by PANACO  and  other  partners  in the  field.  Also,  due to
reductions in future  reserve  estimates by our third party  engineers,  and the
resulting lower future net cash flows from certain  fields,  we were required to
impair three non-core proved properties.

     Interest  expense  decreased  $1.3  million due to lower  weighted  average
borrowing  levels during 2001 in addition to lower  interest rate for our Credit
Facility, which is based on the prime rate.

     Other income  increased $0.7 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.

     During the second  quarter of 2000, we  determined  that it was more likely
than not that the deferred tax assets would be realized.  This determination was
based on  several  factors,  including  current  projections  of future  taxable


                                       17

<PAGE>

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 all of the deferred tax assets due to
higher commodity prices and reserve additions, therefore the valuation allowance
was  removed.  We  perform a review of the  deferred  tax  asset  including  the
associated  utilization  estimates for the asset. The factors  considered in the
review include historical utilization,  tax planning strategies that may improve
the utilization and market  conditions at the time of review.  While utilization
estimates are important, they are not the sole factor. We are evaluating several
tax  planning  strategies  that would  potentially  provide  utilization  of the
deferred  tax assets  including  the sale of  properties,  which would result in
potentially significant gains.

     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.

Net Income

     Although  total  revenues  increased  33%,  to $50.3  million,  a  property
impairment of $6.5 million  recognized  during the second quarter of 2001 and an
income tax benefit of $27.8 million recognized during the second quarter of 2000
were the primary  factors in a decrease of $30 million in net income and a $1.24
per share decrease in net income per share.

Results of Operations

For the three months ended June 30, 2001 and 2000:

Revenues

     Oil and natural gas sales totaled $20.1 million  during the second  quarter
of 2001, a decrease of $1.2 million,  or 6%, when compared to the second quarter
of 2000.

<TABLE>
<CAPTION>


Production and Prices:
                                                                                      % Increase
                                                2001                 2000             (Decrease)
                                                ----                 ----             ----------
<S>                                             <C>                   <C>                 <C>


      Natural gas production (MMcf)             2,955                3,541               (17%)
      Average price per Mcf
       excluding hedging                      $  4.86             $   3.78                29%
      Average price per Mcf
       including hedging                      $  4.78             $   3.76                27%

      Oil Production (MBbl)                       223                  275               (19%)
      Average price per Bbl
       excluding hedging                      $ 26.65             $  29.65               (10%)
      Average price per Bbl
       including hedging                      $ 26.65             $  28.95                (8%)

</TABLE>

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


                                       18

<PAGE>


     The most  significant  decreases  in  natural  gas  production  were in the
Umbrella  Point Field (669 MMcf),  the East Breaks 165 Field (216 MMcf ) and the
East Breaks 160 and 161 Fields (332 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 (711MMcf) and the West
Delta Fields (187 MMcf),  the primary focus of our current  capital  expenditure
program.  Likewise,  oil production has decreased from the East Breaks 165 Field
(42 Mbbl) and East  Breaks  160 and 161  Fields  (19 Mbbl) due to lower  capital
expenditures in those fields and the rapid production declines from the wells in
those fields,  which are inherent in the areas that we operate.  The bulk of the
capital  expenditures  in 2001 are for projects that should produce natural gas,
rather than oil.

     We also recognized a gain of $4.0 million on the sale of an oil and natural
gas property during the second quarter of 2001. We sold PANACO's entire interest
in High Island  Blocks 309 and 310 to the  operator of the fields for cash,  the
assumption  of a gas  imbalance  liability  and the  dismissal  of a lawsuit the
operator had filed against us for non-payment of invoices. The property sale was
completed on June 29, 2001.


Cost and Expenses

     Lease operating  expenses increased $1.7 million,  to $7.6 million,  during
the  second  quarter  of  2001  compared  to $5.9  million  in  2000.  On an Mcf
equivalent  ("Mcfe") basis,  lease operating expenses also increased to $1.77 in
2001 from $1.13 in 2000.  During  2001,  we have spent a large amount of capital
for repairs and maintenance of PANACO's offshore  platforms,  a large portion of
which has been  required by the  regulatory  agencies in the Gulf of Mexico.  We
expect this program to continue throughout 2001, specifically in the East Breaks
area of the  Gulf of  Mexico,  where we own 3  platforms.  Repair  and  workover
expenses for the second  quarter of 2001 totaled $3.8 million,  compared to $1.7
million during 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 $0.88 and $0.80 for the second quarter of
2001 and 2000, respectively.

     Depletion,  depreciation and amortization  ("DD&A") increased 23 %, or $1.6
million  primarily due to a 49% increase in DD&A per unit of  production,  which
was offset slightly by a 17% 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.

     Exploratory dry hole expense increased $0.6 million due to the bottom zones
of the #A-13 well at our East Breaks 110 Field. Although it was successful,  the
costs  associated  with the bottom  portion of the well were written off as they
did not contain hydrocarbons.

     Geological and geophysical  expense decreased $0.3 million primarily due to
3-D  Seismic  purchases  and land  rentals  incurred  during  2000 that were not
included in 2001 spending.

     During the second quarter of 2001,  PANACO  recognized an impairment for an
unproved  oil and  natural  gas  property  and three  proved oil and natural gas
properties.  The unproved  property  impairment was based on our decision to not
further develop potential reserves based on the significant  capital required to
develop  the  field  and the low  potential  to be  realized  based on  numerous
evaluations  made by PANACO  and  other  partners  in the  field.  Also,  due to
reductions in future  reserve  estimates by our third party  engineers,  and the
resulting lower future net cash flows from certain  fields,  we were required to
impair the book values of three non-core proved properties.


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<PAGE>


     Interest  expense  decreased  $1.1  million due to lower  weighted  average
borrowing  levels during 2001 in addition to lower  interest rate for our Credit
Facility, which is based on the prime rate.

     Other income  increased $0.3 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.

     During the second  quarter of 2000, we  determined  that it was more likely
than not that the deferred tax assets would be realized.  This determination was
based on  several  factors,  including  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 all of the deferred tax assets due to
higher commodity prices and reserve additions, therefore the valuation allowance
was  removed.  We  perform a review of the  deferred  tax  asset  including  the
associated  utilization  estimates for the asset. The factors  considered in the
review include historical utilization,  tax planning strategies that may improve
the utilization and market  conditions at the time of review.  While utilization
estimates are important, they are not the sole factor. We are evaluating several
tax  planning  strategies  that would  potentially  provide  utilization  of the
deferred  tax assets  including  the sale of  properties,  which would result in
potentially significant gains.

     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.

Net Income (Loss)

     Although  total  revenues  increased  8%,  to  $24.0  million,  a  property
impairment of $6.5 million  recognized  during 2001 and an income tax benefit of
$27.9 million  recognized  during 2000 were the primary factors in a decrease of
$33.1 million in net income,  to a loss of $2.5  million,  and a $1.36 per share
decrease in net income per share, to a loss of $0.10 per share.

Outlook

     As a  relatively  small,  leveraged  oil and  natural gas  exploration  and
production company, the success and outcome of our business are highly dependent
on oil and natural gas prices. Not only are our revenues, cash flows, results of
operations  and liquidity  impacted by commodity  prices,  our ability to obtain
financing for our business is also influenced by these prices. The nature of our
business is capital intensive,  typically requiring an investment up front and a
resulting  return on that  investment.  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.


                                       20

<PAGE>

     For fiscal 2001, the Board of Directors has approved a $45 million  capital
budget.  This  budget  includes   approximately  $21.5  million  of  exploratory
projects,  the  majority  of which has been spent at the 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.


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
MMBtu in January to a low of $4.485 per MMBtu in October and average  $4.914 per
MMBtu for the year.  The average price of this swap for July 1 through  December
31, 2001 is $4.54 per MMBtu. 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 June 30, 2001 the fair value of these hedges was a gain of $3.8 million,
pre-tax.


                                       21

<PAGE>


     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                             OTHER INFORMATION

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

     On June 12, 2001, the Company held its 2001 Annual Meeting of Shareholders.
At such time the following  items were submitted to a vote of security  holders.
Such matters were submitted to the security  holders through the solicitation of
proxies.

         1.       Election of Class III Directors.

     The following persons were elected to serve on the Board of Directors until
the 2004 Annual Meeting of Shareholders or until their successors have been duly
elected and qualified. The Directors received the votes set forth opposite their
respective names:


Name                                       For                     Withheld

James B. Kreamer                         21,875,204                 248,753

Robert G. Wonish                         21,774,911                 349,046

George W. Hebard, III                    20,544,721               1,579,236


                                       22

<PAGE>


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:     August 13, 2001               /s/ Todd R. Bart
     ---------------------              -------------------------------------
                                        Todd R. Bart, Chief Financial Officer


                                       23
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