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

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------
                                    FORM 10-K
         [ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934
                   
                  For the fiscal year ended December 31, 1997

         [    ] 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 Number)
 incorporation or organization)                                        
        

1050 West Blue Ridge Boulevard, PANACO Building,
              Kansas City, MO                                 64145-1216

 (Address of principal executive offices)                     (Zip Code)

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

                 Securities registered pursuant to Section 12(d)
                                  of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value
                                (Title of Class)

         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 _______ .

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  form  10-K or any
amendment to this Form 10-K. [ X ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant was approximately $87,559,090 as of March 31, 1998.

      23,920,280 shares of the registrant's Common Stock were outstanding
                             as of March 31, 1998.

                       Documents Incorporated by Reference

                                      None


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

<PAGE>



                     GLOSSARY OF SELECTED OIL AND GAS TERMS

2-D Seismic. Seismic data and the related technology used to acquire and process
such data to yield a two-dimensional view of a "slice" of the subsurface.

3-D Seismic. Seismic data and the related technology used to acquire and process
such data to yield a three-dimensional picture of the subsurface. 3-D Seismic is
created by the propagation of sound waves through sedimentary rock layers, which
are then detected and recorded as they are  reflected and refracted  back to the
surface.  By  measuring  the time  taken for the sound to  return  and  applying
computer  technology  to  process  the  resulting  data in  volume,  imagery  of
significantly  greater  accuracy and usefulness than older-style 2-D Seismic can
be created.

Bbl. One stock tank barrel,  or 42 U.S.  gallons liquid  volume,  used herein in
reference to oil or other liquid hydrocarbons.

Bcf. One billion cubic feet of natural gas.

Bcfe.  One billion cubic feet of natural gas  equivalents  converting one Bbl of
oil to six Mcf of natural gas.

Block. One offshore unit of lease acreage, generally 5,000 acres.

Btu.  British  Thermal Unit, the quantity of heat required to raise one pound of
water by one degree Fahrenheit.

Condensate. A hydrocarbon mixture that becomes liquid and separates from natural
gas when the gas is produced and is similar to crude oil.

Developed  Acreage.  The number of acres which are  allocated or  assignable  to
producing wells or wells capable of production.

Development Well. A well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.

Dry Hole. A well found to be incapable of producing either oil or natural gas in
sufficient quantities to justify completion as an oil or natural gas well.

Estimated Future Net Revenues.  Revenues from production of oil and natural gas,
net of all production-related taxes, lease operating expenses and capital costs.

Exploratory  Well.  A well  drilled to find and produce oil or natural gas in an
unproved  area,  to find a new  reservoir  in a  field  previously  found  to be
productive of oil or natural gas in another reservoir.

Farmout. An agreement whereby the lease owner agrees to allow another to drill a
well or wells and thereby earn the right to an assignment of a portion or all of
the lease,  with the original  lease owner  typically  retaining  an  overriding
royalty interest and other rights to participate in the lease.

Gross acres or gross  wells.  The total  acres or wells,  as the case may be, in
which a working interest is owned.

Group  3-D  Seismic.  Seismic  procured  by a  group  of  parties  or  shot on a
speculative basis by a seismic company.

MBbl. One thousand Bbls of oil or other liquid hydrocarbons.

Mcf. One thousand cubic feet of natural gas.

Mcfe. One thousand cubic feet of natural gas  equivalents  converting one Bbl of
oil to six Mcf of natural gas.

Mcfe/d. Mcfe per day.
<PAGE>

MMbbl. One million Bbls of oil or other liquid hydrocarbons.

MMbtu. One million Btu.

MMcf. One million cubic feet of natural gas.

MMcfe.  One million cubic feet of natural gas equivalents  converting one Bbl of
oil to six Mcf of natural gas.

Natural Gas Equivalent. The amount of natural gas having the same Btu content as
a given  quantity  of oil,  with one Bbl of oil  being  converted  to six Mcf of
natural gas.

Net Acres or Net Wells.  The sum of the fractional  working  interests  owned in
gross acres or gross wells.

Net Oil and Gas  Sales.  Oil and  natural  gas sales  less oil and  natural  gas
production expenses.

Net  Pay.  The  thickness  of  a  productive  reservoir  capable  of  containing
hydrocarbons.

Net  Production.  Production  that is owned by the Company  after  royalties and
production due others.

Net Revenue  Interest.  A share of the Working  Interest  that does not bear any
portion of the expense of drilling and completing a well and that represents the
holder's  share of  production  after  satisfaction  of all royalty,  overriding
royalty, oil payments and other non-operating interests.

Overriding  Royalty  Interest.  An interest  in an oil and natural gas  property
entitling the owner to a share of oil and natural gas  production  free of costs
of exploration and production.

Payout.  That  point  in  time  when a party  has  recovered  monies  out of the
production from a well equal to the cost of drilling and completing the well and
the cost of operating the well through that date.

Productive  Well. A well that is producing oil or natural gas or that is capable
of production in paying quantities.

Proprietary 3-D Seismic. Seismic privately procured and owned by the procurer.

Proved  Developed  Non-Producing  Reserves.  Reserves that consist of (i) Proved
Reserves  from wells which have been  completed and tested but are not producing
due to lack of market or minor  completion  problems  which are  expected  to be
corrected and (ii) Proved Reserves  currently  behind the pipe in existing wells
and which are expected to be productive due to both the well log characteristics
and analogous production in the immediate vicinity of the wells.

Proved  Developed  Producing  Reserves.  Reserves  that  can be  expected  to be
recovered  from  currently  producing  zones under the  continuation  of present
operating methods.

Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.

Proved  Reserves.  The estimated  quantities of oil, natural gas and natural gas
liquids which  geological  and  engineering  data  demonstrate  with  reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.

Proved Undeveloped  Reserves.  Proved reserves that are expected to be recovered
from new wells on undrilled  acreage,  or from existing wells where a relatively
major expenditure is required for recompletion.
<PAGE>

Recompletion.  The  completion  for  production  of an  existing  well bore in a
different  formation  or  producing  horizon  from  that in  which  the well was
previously completed.

Royalty Interest.  An interest in an oil and natural gas property  entitling the
owner to a share of oil and natural gas production free of costs of production.

SEC PV-10. The present value of proved reserves is an estimate of the discounted
future net cash flows from each of the  properties  at December 31, 1997,  or as
otherwise  indicated.  Net cash flow is  defined  as net  revenues  less,  after
deducting  production and ad valorem  taxes,  future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of the
Commission,  the future net cash flows have been discounted at an annual rate of
10% to determine  their "present  value." The present value is shown to indicate
the  effect  of time on the  value  of the  revenue  stream  and  should  not be
construed as being the fair market value of the  properties.  In accordance with
Commission  rules,  estimates  have been made using constant oil and natural gas
prices and operating costs, at December 31, 1997, or as otherwise indicated.

Shut-In.  To close  down a  producing  well or  field  temporarily  for  repair,
cleaning  out,  building  up  reservoir  pressure,  lack of a market or  similar
conditions.

Sidetrack.  A drilling  operation  involving the use of a portion of an existing
well to drill a second  hole,  in which a  milling  tool is used to grind  out a
"window" through the side of a drill casing at some selected depth. The drilling
bit is then  directed  out of the  window at a  desired  angle  into  previously
undrilled  strata.  From this  directional  start a new hole is  drilled  to the
desired formation depth and casing is set in the new hole and tied back into the
older casing,  generally at a lower cost because of the utilization of a portion
of the original casing.

Tcf. One trillion cubic feet of natural gas.

Undeveloped  Acreage.  Lease  acreage on which  wells  have not been  drilled or
completed to a point that would permit the  production of commercial  quantities
of oil and  natural gas  regardless  of whether  such  acreage  contains  proved
reserves.

Working  Interest.  The  operating  interest  that  gives the owner the right to
drill,  produce and conduct operating  activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens and
to all  costs  of  exploration,  development  and  operations  and all  risks in
connection therewith.


<PAGE>



                                     PART 1



Item 1. Business.


           Unless the  context  otherwise  requires,  all  references  herein to
  "PANACO" or the "Company" include PANACO,  Inc., a Delaware  corporation,  its
  consolidated  subsidiaries  and the Company's  predecessor  Pan Petroleum MLP.
  Certain  capitalized  terms  relating to the oil and natural gas  business are
  defined in the Glossary. The Company's website may be found at www.panaco.com.

         PANACO,  Inc. is in the business of  acquiring,  drilling and operating
offshore oil and natural gas properties in the Gulf of Mexico and onshore in the
Gulf Coast Region  (collectively,  the "GOM Region").  The Company is a Delaware
corporation that was organized in October 1991. Effective September 1, 1992, Pan
Petroleum MLP, the Company's predecessor,  was merged into the Company.  Between
1984 and 1988,  this  predecessor  acquired a total of 114 limited  partnerships
engaged in the onshore oil and natural gas business. With the acquisition of the
West Delta Fields in 1991, the Company shifted its emphasis offshore. Additional
offshore  properties were acquired in 1994, 1995, 1996 and 1997. The Company has
experienced  substantial  growth  as a result  of the  acquisition  of  offshore
properties from Amoco (the "Amoco Acquisition") and Gulf Coast properties,  both
onshore  and in  Texas  and  Louisiana  State  waters,  acquired  as part of the
Goldking Companies, Inc. (the "Goldking Acquisition").

         The  Company's  headquarters  are  located  at  1050  West  Blue  Ridge
Boulevard,  PANACO Building, Kansas City, Missouri 64145-1216, and its telephone
number at such offices is (816) 942-6300, FAX (816) 942-6305. The Houston office
is located at 1100 Louisiana,  Suite 5100,  Houston,  Texas 77002-5220,  and the
telephone number is (713) 970-3100, FAX (713) 970-3151.

Business Strategy

         The  Company's  strategy  is  to  systematically   grow  its  reserves,
production,  cash flow and earnings through a program focused on the GOM Region,
including  (i)  strategic   acquisitions  and  mergers,  (ii)  exploitation  and
development of acquired properties,  (iii) marketing of existing  infrastructure
and (iv) a selective  exploration  program. As a result of the Amoco Acquisition
and the Goldking  Acquisition,  described below, the Company has an inventory of
development and exploration  projects that provide additional reserve potential.
The key elements of the Company's objectives are outlined as follows:

Strategic Acquisitions and Mergers

         The Company has an  acquisition  strategy  which focuses its efforts on
GOM  Region  properties  that have a backlog  of  development  and  exploitation
projects, significant operating control,  infrastructure value and opportunities
for cost  reduction.  The properties the Company seeks to acquire  generally are
geologically  complex with multiple reservoirs,  have an established  production
history and are candidates for  exploitation.  Geologically  complex fields with
multiple  reservoirs  are  fields in which  there  are  multiple  reservoirs  at
different  depths and wells which penetrate more than one reservoir and have the
potential  for  recompletion  in more  than  one  reservoir.  In  pursuing  this
strategy,  the Company  identifies  properties that may be acquired,  preferably
through negotiated transactions or, where appropriate,  sealed bid transactions.
Once properties are acquired,  the Company  focuses on reducing  operating costs
and   implementing   production   enhancements   through  the   application   of
technologically advanced production and recompletion techniques.

         Over  the  past  seven  years,  the  Company  has  taken  advantage  of
opportunities to acquire interests in a number of producing properties which fit
its acquisition strategy. The historical success,  through December 31, 1997, of
the Company's acquisition strategy is illustrated below:
<PAGE>

<TABLE>
<CAPTION>

                                                                        Cumulative         Cumulative         
                                              Purchase     Purchase       Capital             Cash         SEC
Acquisition                 Seller              Date         Price      Expenditures(a)      Flow(b)     PV 10(c)   

                                                                     (dollars in millions)

<S>                                                <C>     <C>          <C>                <C>         <C>
West Delta Fields(d)     CATO(e)               May 1991    $  19.6      $   18.8            $   53.3    $  17.4
Zapata Properties        Zapata                Jul 1995        2.7(f)        0.9                13.7       10.5
Bayou Sorrel(g)          Shell Western         Dec 1995        9.9           3.4                 1.3       N/A
Amoco Properties         Amoco                 Oct 1996       40.4          26.9                17.8       49.1
Goldking                 Shareholders          Jul 1997       27.5(h)        1.7                 1.4       48.4
---------------

(a) Excludes exploration expenses for each acquisition subsequent to the date of acquisition.
(b) Defined as net revenues less direct operating expense.
(c) As of December 31, 1997.
(d) Excludes $4.0 million for repair of Tank Battery #3 in the West Delta Fields.
(e) Conoco, ARCO, Texaco and Oxy.
(f) Excludes a production payment and fee sharing agreement with the seller.
(g) The Company sold the Bayou Sorrel Field September 1, 1996 for $11.0 million.
(h) Excludes debt and liabilities of Goldking in the amount of $22.3 million.
</TABLE>

        While the Company  tends to focus on  acquisitions  of  properties  from
large  integrated oil companies,  it evaluates a broad range of acquisition  and
merger  opportunities.  The  Company  has  assembled  a staff  with  significant
technical  experience  in  evaluating,  identifying  and  exploiting  GOM Region
properties.  In addition, the Company is regarded in the industry as a competent
buyer with the proven ability to close transactions in a timely manner. Based on
these  factors,  the Company is usually  asked to bid on  significant  producing
property sales in the GOM Region.

Exploitation and Development of Acquired Properties

        The  Company  has  an  inventory  of  exploitation   projects  including
development   drilling,   workovers,   sidetrack  drilling,   recompletions  and
artificial  lift  enhancements.  As of December 31, 1997,  17% of the  Company's
total SEC PV-10  relates  to  Proved  Undeveloped  Reserves.  The  Company  uses
advanced technologies where appropriate in its development activities to convert
Proved  Undeveloped  Reserves  to Proved  Developed  Producing  Reserves.  These
technologies   include   horizontal   drilling  and  through  tubing  completion
techniques, new lower cost coiled tubing workover procedures and reprocessed 2-D
and 3-D Seismic  interpretation.  All of the identified  capital projects can be
completed  with the  Company's  existing  platform and pipeline  infrastructure,
thereby improving project economics.

Marketing of Existing Infrastructure

        Along  with its  purchase  of  producing  properties,  the  Company  has
platform,  pipeline and  processing  equipment  infrastructure.  The Company has
interests in 22 offshore  platforms and 69 miles of offshore oil and natural gas
pipelines with diameters of 10" or larger. To enhance the value of these assets,
the Company has marketed this  infrastructure  to operators and leasehold owners
in adjacent fields. The Company currently has pipeline and processing agreements
relative to its West Delta Fields, East Cameron 359 Field, East Breaks 109 Field
and East Breaks 160 Field.  The annual revenue received from these contracts for
use of the Company's  infrastructure  currently  totals $3.2  million,  which is
accounted  for as a reduction of lease  operating  expense.  The location of the
East Breaks  facilities is strategic to deepwater  development  in the area, and
the  replacement  costs of the  platforms,  processing  facilities and pipelines
exceed $100 million.  As a result of the development  costs,  any operators with
discoveries in the surrounding deepwater area will have the incentive to use the
Company's East Breaks facilities, thus increasing the revenue potential of these
platforms and pipelines and extending their economic life.


<PAGE>



Selective Exploration Program

        The Company participates in selective  exploration projects for exposure
to additional reserve  potential.  The Company has farmed out the deep rights in
West Delta Blocks 52 through 56 to Ocean Energy,  Inc. (formerly Flores & Rucks,
Inc.) in exchange  for a new 3-D  Seismic  survey over these five Blocks and the
option to retain a 12.5%  overriding  royalty interest or a 50% working interest
in any  proposed  deep  exploration  wells.  In  addition,  through the Goldking
Acquisition,  the Company  acquired an inventory of 15  diversified  exploratory
drilling prospects with varying risk profiles. The Company is devoting a portion
of its capital expenditure budget to drilling exploratory wells.

Geographic Focus

        The Company's  reserve base is focused primarily in the GOM Region which
has historically  been the most prolific basin in North America.  The GOM Region
currently  accounts  for over 30% of the  natural gas  production  in the United
States  and  continues  to be  the  most  active  region  in  terms  of  capital
expenditures  and new  reserve  additions.  Because  of upside  potential,  high
production  rates,  technological  advances and acquisition  opportunities,  the
Company has focused its efforts in this region.  The Company believes it has the
technical  expertise  and  infrastructure  in  place  to take  advantage  of the
inherent  benefits  of the  GOM  Region.  In  addition,  as the  integrated  oil
companies move to deeper water, the Company believes it will continue to be well
positioned to use its expertise to acquire and exploit GOM Region properties.

Quality Reserve Base

        Two of the  Company's  largest  properties,  the West  Delta  Fields and
Umbrella Point Field,  are prolific fields with total  cumulative  production of
over one Tcf of  natural  gas and 50  MMbbls of oil.  These  fields  typify  the
Company's  focused  GOM  Region  asset  base  with  multiple  pay  horizons  and
significant  recompletion  and  workover  potential.  The West Delta Fields were
developed without the benefit of 3-D Seismic and the Company is currently in the
process of acquiring and applying 3-D Seismic technology to identify  additional
potential.  The majority of the Company's  properties  have multiple  reservoirs
providing a diverse set of  opportunities  for production rate  acceleration and
value  enhancement.  The number of  potential  reservoirs  also reduces the risk
associated with determining remaining reserves and forecasting future production
from the properties.

Inventory of Exploitation and Development Projects

        The  Company  has   identified   development   drilling   locations  and
recompletion and workover opportunities.  The Company believes that the majority
of these  opportunities  have a moderate risk profile and could add  incremental
reserves and  production.  In addition to these  identified  opportunities,  the
Company  believes  that  with  the  use of 3-D  Seismic  technology,  additional
potential may be exploited in the known  reservoirs as well as deeper  undrilled
horizons.

Application of Advanced Technologies

        The  Company  has  been  successful  historically  due to its use of 3-D
Seismic, horizontal drilling and coiled tubing technologies.  As a result of its
acquisitions,  the Company has a seismic  database  with a total of 2,424 linear
miles of 2-D Seismic data and 186 square miles of 3-D Seismic data.  The Company
was also among the first  offshore  operators to drill and  complete  successful
horizontal  wells  offshore.  The Company has drilled a total of four horizontal
wells in the West Delta Fields.  The Company  applies  coiled tubing  technology
where  applicable  to  decrease  workover  costs and avoid  using  drilling  and
workover rigs for  recompletions.  The Company uses existing inactive  wellbores
whenever  possible to sidetrack  drill to decrease costs and receive  production
tax benefits where  applicable.  Also, the Company has performed the less costly
through tubing recompletions in several of its existing fields.


Significant Operating Control

        The  Company  operates  55% of its  properties  as measured by SEC PV-10
value.  This level of operating control benefits the Company in numerous ways by
enabling   the  Company  to  (i)  control  the  timing  and  nature  of  capital
expenditures,  (ii) identify and implement cost control programs,  (iii) respond
quickly to  operating  problems and (iv) receive  overhead  reimbursements  from
other working interest owners. In addition to significant operating control, the
geographic  focus of the  Company  allows it to operate a large value asset base
with relatively few employees,  thereby decreasing  lease-operating expense on a
unit of production basis.
<PAGE>

Goldking Acquisition

        Effective  July 31, 1997,  the Company  acquired  Goldking,  a privately
owned, Houston-based oil and natural gas company. Through this acquisition,  the
Company  obtained  estimated  additional  Proved  Reserves of 37.9 Bcfe from 234
wells  located  primarily  in Texas and  Louisiana,  both  onshore  and in State
waters.  Goldking  also  had  a  sizeable  portfolio  of  exploration  prospects
developed using 3-D Seismic data, an extensive  development  program and a staff
of people  experienced in Gulf Coast oil and natural gas operations.  As part of
the transaction,  the Company also acquired three pipelines totaling 19 miles in
length.  The  acquisition  provides  the  Company  with  attractive  development
opportunities in the currently active Lower  Frio/Vicksburg play in Trinity Bay,
Chambers County, Texas.

         The Company  acquired  Goldking by merging its  corporate  parent,  The
Union Companies, Inc. ("Union") into Goldking Acquisition Corp., a newly formed,
wholly-owned  subsidiary of the Company.  The individual  shareholders  of Union
received merger  consideration  consisting of $7.5 million in cash, $6.0 million
in notes (which were paid in October 1997) and 3,154,930  Company Common Shares,
valued for  purposes of the  transaction  at $14.0  million.  The  Company  also
assumed the debt and net liabilities of Goldking in the amount of $22.3 million.

Public Offering

        On March 7, 1997,  the Company  received net  proceeds of $22.0  million
from a public  offering of its common  shares.  The proceeds  were used to repay
certain subordinated indebtedness and to develop the Company's properties.

Well Operations

           The Company  operates  70 offshore  wells and owns all of the working
interests in a majority of those  wells.  The  Company's  96 remaining  offshore
wells are  operated  by third party  operators,  including  Unocal  Corporation,
Coastal Oil & Gas Corp., Phillips Petroleum Company,  Texaco, Anadarko Petroleum
Corporation  and Burlington.  The Company  operates 76 onshore wells in which it
owns a majority or all of the working  interest.  In  addition,  it owns working
interests  in 369 wells  operated by others.  Where  properties  are operated by
others,  operations are conducted  pursuant to joint  operating  agreements that
were  in  effect  at the  time  the  Company  acquired  its  interest  in  these
properties.  The Company  considers  these joint  operating  agreements to be on
terms  customary  within the  industry.  The  operator of an oil and natural gas
property supervises  production,  maintains  production  records,  employs field
personnel,   and  performs  other  functions  required  in  the  production  and
administration of such property.  The compensation paid to the operator for such
services customarily varies from property to property,  depending on the nature,
depth, and location of the property being operated.

Acquisition, Development, and Other Activities

         The Company  utilizes  its capital  budget for (a) the  acquisition  of
interests  in other  producing  properties,  (b)  recompletions  of its existing
wells, and (c) the drilling of development and exploratory wells.

         In recent years,  major oil companies  have been selling  properties to
independent  oil  companies  because they feel these  properties do not have the
remaining reserve potential needed by a major oil company.  Several  independent
oil companies have acquired these properties and achieved significant success in
further  exploitation.  Even though a property  does not meet the  criteria  for
further  development  by a major oil  company,  that does not mean it is lacking
further  exploitation  potential.  The majors are simply moving further offshore
into  deeper  water and to other  countries  where they can find and produce the
super-fields  that fit their criteria.  Present day technology  permits drilling
and completing wells in water in excess of 10,000'.
<PAGE>

Amoco Acquisition.

         In October 1996, the Company acquired  interests in six offshore fields
from Amoco  Production  Company for $40.4  million.  In  consideration  for such
interests,  the Company issued Amoco 2,000,000 Common Shares and paid the sum of
$32.0  million  in cash.  The  interests  acquired  include  (1) a 33a%  working
interest  in the East Breaks 160 Field (two  Blocks) and a 33a%  interest in the
High Island 302 Field, both operated by Unocal  Corporation;  (2) a 50% interest
in the High Island 309 Field (two Blocks), a 12% interest in the High Island 330
Field  (three  Blocks)  both  operated by Coastal  Oil and Gas Corp.,  (3) a 12%
interest  in the High  Island 474 Field  (four  Blocks),  operated  by  Phillips
Petroleum  Company;  and (4) a 12.5% interest in the West Cameron 180 Field (one
Block) operated by Texaco.

         Future  acquisitions of properties may include  acquisitions of working
interests,  royalty interests,  net profits interests,  production payments, and
other forms of direct or indirect  ownership  interest or  interests  in oil and
natural gas production.  The Company may also acquire general or limited partner
interests in general or limited  partnerships  and interests in joint  ventures,
corporations,  or other  entities  that own,  manage,  or are formed to acquire,
explore  for,  or develop  oil and  natural  gas  properties  or  conduct  other
activities associated with the ownership of oil and natural gas production.  The
Company  may also  acquire  or  participate  in the  expansion  of  natural  gas
processing plants and natural gas transportation or gathering systems.

         The  success  of the  Company's  acquisitions  will  depend  on (a) the
Company's  ability to establish  accurately the volumes of reserves and rates of
future production from producing properties being considered for acquisition and
the future net revenues  attributable to reserves from such  properties,  taking
into account  future  operating  costs,  market  prices for oil and natural gas,
rates of inflation,  risks attendant to production of oil and natural gas, and a
suitable  return  on  investment,  and (b) the  Company's  ability  to  purchase
properties  and produce and market oil and natural gas  therefrom  at prices and
rates that over time will generate cash flows resulting in an attractive  return
on the initial investment. The Company's cash flow and return on investment will
vary to the extent that the Company's  production  from an acquired  property is
greater or less than that estimated at the time of  acquisition  because of, for
example,  the results of drilling or improved recovery programs,  the demand for
oil and  natural  gas,  or changes in the prices of oil and natural gas from the
prices used to  calculate  the  purchase  price for  producing  properties.  The
Company will evaluate any  economically  feasible project that would enhance the
value of its  properties.  Such a project may involve  both the  acquisition  of
developed and undeveloped properties and the drilling of infield wells.

         The Company  expects that its primary  activities  will  continue to be
concentrated  offshore  in the Gulf of  Mexico  and  onshore  in the Gulf  Coast
region.  The Company can, if it so chooses,  invest in any geographic  area. The
number and type of wells  drilled by the Company will vary from period to period
depending on the amount of the capital budget  available for drilling,  the cost
of each well,  the Company's  commitment to  participate in the wells drilled on
properties  operated  by  third  parties,  the  size of the  fractional  working
interest  acquired  by the  Company in each well and the  estimated  recoverable
reserves  attributable  to each well.  Drilling on and production  from offshore
properties often involves higher costs than does drilling on and production from
onshore properties, but the production achieved on successful wells is generally
much greater.


1996 Fire at West Delta

         The Company  experienced a fire on April 24, 1996 at Tank Battery #3 in
West Delta  resulting in the fields being  shut-in from April 24th,  until being
returned to  production  on October 7, 1996.  This  resulted in lost revenues of
approximately $6.0 million. The fire was the principal contributor to the losses
in 1996.  During  1996 the Company  expensed  $500,000 as a result of this fire,
which  included  $225,000 in  deductibles  under the  Company's  insurance.  The
Company has repaired Tank Battery #3 at a cost of $8.5 million  inclusive of the
$500,000 expensed during second quarter and has received  reimbursement from its
insurance  company  of $3.9  million,  after  satisfaction  of the  $225,000  in
deductibles.  The Company has filed suits  against the  employers of the persons
who caused the incidents  for recovery of these costs and its lost  profits.  No
assurance  can be given that the Company will  successfully  recover any amounts
sought in any such suits.
<PAGE>

Use of 3-D Seismic Technology

         The  use  of  3-D  Seismic  and  computer-aided   exploration  ("CAEX")
technology is an integral component of the Company's acquisition,  exploitation,
drilling  and  business  strategy.  In  general,  3-D  Seismic is the process of
obtaining  seismic data along multiple lines and grids within a large geographic
area. 3-D Seismic differs from 2-D Seismic in that it provides  information with
respect to multiple horizontal and vertical points within a geological formation
instead of  information  on a single  vertical line or multiple  vertical  lines
within the formation. By expanding the amount of data obtained with respect to a
geological formation, the user is better able to correlate the data and obtain a
greater  understanding  and image of the  formation.  While it is  impossible to
predict  with  certainty  the  specific  configuration  or  composition  of  any
underground  geological  formation,  3-D Seismic  provides a mechanism  by which
clearer and more accurate projected images of complex geological  formations can
be obtained  prior to drilling for  hydrocarbons  therein.  In  particular,  3-D
Seismic  delineates  smaller  reservoirs  with  greater  precision  than  can be
obtained with 2-D Seismic.

         3-D Seismic and CAEX  technology  have been in existence  since the mid
1970's;  however,  it was not until the late  1980's,  with the  development  of
improved  data  acquisition   equipment  and  techniques  capable  of  gathering
significant  amounts  of  data  through  a  large  number  of  channels  and the
availability  of improved  computer  technology  at reasonable  costs,  that the
method  became  economically  available to firms such as the  Company.  Prior to
that, it was the exclusive  province of large  multinational oil companies.  The
Company owns its own processing equipment,  but it also utilizes the services of
outside firms to process and interpret seismic data.

         A new 3-D  Seismic  survey will be shot in 1998 by Ocean  Energy,  Inc.
(formerly Flores & Rucks,  Inc.) on the Company's West Delta Fields. The Company
generated  a prospect in the  northern  portion of West Delta Block 58 using 3-D
Seismic,  which it farmed out to Tana Oil & Gas Corp.  in 1996.  Tana  drilled a
successful  well to 12,800'  which  encountered  85' of net pay and is currently
producing  12,300  Mcf per day.  The  Company  retained  an  overriding  royalty
interest  that  converted  to a 25% working  interest at Payout  (September  26,
1997).  Three of the  fields  in the  Amoco  Acquisition  have  proprietary  3-D
Seismic,  while all of the Amoco Properties have Group 3-D Seismic.  The Company
has  experienced  success in High Island 309 Field,  acquired from Amoco, in the
drilling of new wells,  sidetracks out of existing wells,  and  recompletions of
existing  wells  based upon an  extensive  reevaluation  of the field  using 3-D
Seismic.

Marketing of Production

          Production  from the  Company's  properties  is marketed in accordance
with industry practices,  which include the sale of oil at the wellhead to third
parties and the sale of natural gas to third  parties at prices based on factors
normally  considered in the industry,  such as the spot price for natural gas or
the posted price for oil, and the quality of the oil and natural gas.

         The Company markets all of its offshore oil production to Amoco, Citgo,
Conoco,  Texaco,  Unocal and Vastar.  Citgo, Conoco, Texaco and Vastar each have
25% calls  (exclusive  rights to purchase) on the oil  production  from the West
Delta Fields at their average  posted price for each month.  Amoco has a call on
all of the oil production from the Amoco  Properties at their posted prices.  If
the Company has a bona fide offer from a crude oil  purchaser  at a higher price
than Amoco's posted price, then Amoco must match that price or release the call.
Oil from the Zapata  Properties is currently being sold to Unocal and Amoco, but
can be sold to any crude oil purchaser of the Company's  choice.  Natural gas is
sold on the spot market.  There are numerous  potential  purchasers for offshore
natural  gas.  Notwithstanding  this,  natural  gas  purchased  by  Tenneco  Gas
Marketing  Company  (now El Paso Gas  Marketing  Co.)  accounted  for 69% of the
revenues in 1997.  There are numerous  natural gas purchasers  doing business in
the  areas  involved  as  well as  natural  gas  brokers  and  clearing  houses.
Furthermore,  the  Company can  contract  to sell the  natural  gas  directly to
end-users.  The  Company  does not  believe  that it is  dependent  upon any one
customer or group of customers for the purchase of natural gas.
<PAGE>

         The Company  hedges the prices of its oil and  natural  gas  production
through  the use of oil and  natural  gas hedge and swap  contracts  within  the
normal  course of its  business.  The Company  uses hedge and swap  contracts to
reduce the effects of fluctuations in oil and natural gas prices. Changes in the
market value of these  contracts are deferred and subsequent  realized gains and
losses are recognized  monthly as adjustments to revenues in the same production
period as the hedged item,  based on the difference  between the index price and
the contract price.

         Starting in 1997 the Company's natural gas hedge transactions are based
upon published  natural gas pipeline index prices and not the NYMEX. This change
has significantly  reduced price  differential risk due to  transportation.  The
Company  has  natural  gas hedged in  quantities  ranging  from 10,000 to 50,000
MMbtu's per day in each of the months in 1998 for a total of 11,980,000 MMbtu's,
at  pipeline  prices  averaging  approximately  $2.05  per  MMbtu,  for a  NYMEX
equivalent of approximately  $2.20 per MMbtu. The Company has hedged 7,356 MMbtu
per day in 1999, all at an average pipeline index swap price of $1.89 per MMbtu.
The  Company  has hedged  218 MMbtu for each day in 2000 at an average  pipeline
index swap price of $1.87.  The Company hedged 1,268 Bbls of oil for each day in
1998 at an average swap price of $19.06 per Bbl, with a 40% participation  above
$19.28 on 500 Bbls of the 1,268 Bbls. The Company has hedged 223 Bbls of oil for
each day in 1999 at an average  price of $17.27 per Bbl.  The Company has hedged
232 Bbls of oil for each day in 2000 at an average price of $17.28 per Bbl.

Plugging and Abandonment Escrows

         Pursuant  to  existing  agreements  the  Company is required to deposit
funds in  escrow  accounts  to  provide a reserve  against  satisfaction  of its
eventual  responsibility  to plug and abandon wells and remove  structures  when
certain  fields no longer  produce oil and natural  gas. The Company has entered
into an escrow agreement with Amoco  Production  Company under which the Company
will deposit,  for the life of the fields,  in a bank escrow account ten percent
(10%) of the net  cash  flow,  as  defined  in the  agreement,  from  the  Amoco
Properties.  These funds and interest  earned  thereon will be available for the
expenses of plugging  wells and removing  structures  when that time comes.  The
Company has established the "PANACO East Breaks 110 Platform Trust" at Bank One,
Texas, NA in favor of the Minerals  Management Service of the U.S. Department of
the Interior. This trust was initially funded by deposit of $846,720 in December
1996, and remaining  deposits of $244,320 due at the end of each quarter in 1999
and $144,000 due at the end of each quarter in 2000,  for a total of $2,400,000.
In addition,  the Company has  $9,250,000 in surety bonds to secure its plugging
and abandonment  obligations;  including a $4,100,000 bond which was provided to
the original  sellers of the West Delta Fields; a $2,400,000  supplemental  bond
provided  to the  Minerals  Management  Service  of the U.S.  Department  of the
Interior in connection with the plugging and structure  removal  obligations for
the  Company's   East  Breaks  Block  110  Platform  and  a  $300,000   Pipeline
Right-of-Way Bond.

Insurance

          The Company maintains insurance coverage as is customary for companies
of a similar size engaged in operations similar to the Company's.  The Company's
insurance  coverage includes  comprehensive  general liability  insurance in the
amount of $50 million per occurrence for personal injury and property damage and
cost of control and operators  extra expense  insurance of $3 million on onshore
wells,  $20  million on wells in  Louisiana  State  waters and $50  million  per
occurrence in Federal offshore waters, which limits are proportionately  reduced
when the Company  owns less than 100% of the  respective  property.  The Company
maintains $77 million in property insurance on its offshore properties. There is
no  assurance  that such  insurance  will be adequate to cover all such costs or
that such  insurance  will  continue to be  available in the future or that such
insurance  will be available at premium  levels that justify its  purchase.  The
occurrence of a significant event not fully insured or indemnified against could
have  a  material  adverse  effect  on the  Company's  financial  condition  and
operations.
<PAGE>

Funding of Business Activities

           During 1997, the Company's capital  expenditures  were  approximately
$80,000,000,  for (1) construction of an offshore pipeline,  (2) the development
of its oil and gas properties and (3) the Goldking Acquisition.  The majority of
the development costs were incurred to drill exploratory and developmental wells
on the Amoco  Properties,  primarily  the High Island 309 Field.  The sources of
funds for capital expenditures were cash flow from operations, borrowings on the
Company's existing bank facility and proceeds of the issuances of Common Shares.
The cash flow generated by the Company's activities would decline in the absence
of the  acquisition  and  development of other oil and natural gas properties or
increases in the  Company's  production  of oil and natural gas  resulting  from
exploration or the development of its properties.

     The Company may issue  additional  Common  Shares or other  securities  for
cash,  to the  extent  that  market  and other  conditions  permit,  and use the
proceeds to fund its activities.  During 1996 shareholders'  equity increased by
$1,837,000,  as a result of the exercise of warrants, and $8,400,000 as a result
of  2,000,000  shares being  issued to Amoco  Production  Company as part of the
Amoco Acquisition. During 1997, shareholders' equity increased by $21,997,000 as
a result of the  issuance of  6,000,000  Common  Shares in the public  offering,
$1,236,000  as a result of issuance and exercise of warrants,  contributions  to
the Company's ESOP and employee stock  bonuses,  and  $14,414,000 as a result of
the issuance of 3,154,930 Common Shares to the beneficial owners of Goldking and
84,000  Common  Shares as a finders fee,  both in  connection  with the Goldking
Acquisition.

 Senior Notes

     On October 10, 1997 the Company  issued  $100,000,000  aggregate  principal
amount of 10 5/8% Senior Notes due October 1, 2004. Interest on the Senior Notes
accrues  from the date of  original  issuance  and is payable  semi-annually  in
arrears on each April 1 and October 1, commencing April 1, 1998.

         The Senior Notes are general  unsecured  obligations of the Company and
rank pari passu with any  unsubordinated  indebtedness  of the  Company and rank
senior in right of payment to all subordinated  obligations of the Company.  The
Senior Notes are  effectively  subordinated  to all secured  indebtedness of the
Company  and of the  Subsidiary  Guarantors  to the  extent  of the value of the
assets securing such indebtedness.

         The Senior Notes are  unconditionally  guaranteed  on a senior basis by
the  Company's  Subsidiary  Guarantors.  The  Guarantees  are general  unsecured
obligations  of  the  Subsidiary   Guarantors  and  rank  pari  passu  with  any
unsubordinated  indebtedness  of the  Subsidiary  Guarantors  and rank senior in
right of payment to all subordinated  obligations of the Subsidiary  Guarantors.
The Guarantees are effectively  subordinated to all secured  indebtedness of the
Subsidiary  Guarantors  to the extent of the value of the assets  securing  such
indebtedness.

         The Senior Notes are redeemable,  in whole or in part, at the option of
the Company on or after October 1, 2001, at set redemption prices,  plus accrued
interest, if any, thereon to the date of redemption. In addition, at any time on
or prior to October 1, 2000, the Company may, at its option, redeem up to 35% of
the aggregate  principal amount of the Senior Notes  originally  issued with the
net cash proceeds of one or more equity  offerings,  at a redemption price equal
to 110.625% of the aggregate principal amount of the Senior Notes to be redeemed
plus accrued  interest,  if any,  thereon to the date of  redemption;  provided,
however,  that, after giving effect to any such redemption,  at least 65% of the
aggregate  principal  amount  of the  Senior  Notes  originally  issued  remains
outstanding.

         Upon a Change of Control, each holder of the Senior Notes will have the
right to require the Company to repurchase such holder's Senior Notes at a price
equal to 101% of the principal  amount  thereof plus accrued  interest,  if any,
thereon to the date of repurchase.

         The Indenture  contains  certain  restrictive  covenants that limit the
ability of the Company  and its  subsidiaries  to,  among  other  things,  incur
additional  indebtedness,   pay  dividends  or  make  certain  other  restricted
payments,  consummate certain asset sales, enter into certain  transactions with
affiliates,  incur  liens,  impose  restrictions  on the ability of a Restricted
Subsidiary  to pay  dividends  or make  certain  payments to the Company and its
Restricted  Subsidiaries,  merge or  consolidate  with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company.  In addition,  under  certain  circumstances,  the
Company will be required to offer to purchase the Senior  Notes,  in whole or in
part,  at a purchase  price equal to 100% of the principal  amount  thereof plus
accrued  interest to the date of repurchase,  with the proceeds of certain Asset
Sales.
<PAGE>

New Credit Facility

         The Company  has a $75  million  revolving  credit  facility  (the "New
Credit  Facility")  from  First  Union  National  Bank  of  North  Carolina,  as
Administrative  Agent and Banque  Paribas  (collectively,  the  "Lenders").  The
purpose  of the New Credit  Facility  is to provide  funds for  working  capital
support and general corporate purposes and to have available letters of credit.

         The New Credit  Facility is a revolving  credit  subject to a borrowing
base  determination  made April 1 and October 1 of each year by the Lenders.  At
present the borrowing base is $40 million. However, the only borrowing under the
New  Credit  Facility  is a $1  million  letter  of  credit.  If at any time the
borrowing  base is  determined  to be less than the current  loan  balance,  the
Company will be required to pay down the excess in two equal  payments due three
and six months after notification from the Administrative Agent.

         Under the terms of the New Credit Facility, the Company must maintain a
ratio of EBITDA to consolidated interest expense of not less than 2.0 to 1 until
December  31,  1998 and 2.5 to 1  thereafter.  The  Company  must also  maintain
current assets of not less than current liabilities.

         The  Company may elect to pay  interest  on the New Credit  Facility at
either the Bank's  prime  rate or at LIBOR plus 1 to 1.75%,  depending  upon the
percentage  of  utilization  of borrowing  base.  LIBOR is the London  Interbank
Offered Rate on Eurodollar loans. Eurodollar loans can be for terms of one, two,
three or six months and interest on such loans is due at the  expiration  of the
terms of such loans, but no less frequently than every three months.

         The New Credit  Facility  has a maturity of five years with no required
principal  payments  until  maturity,  provided that the  outstanding  principal
balance does not exceed the borrowing base determinations  established from time
to time by the Lenders.  Indebtedness under the New Credit Facility  constitutes
senior indebtedness with respect to the Senior Notes.  Outstanding  indebtedness
is secured by first  priority  mortgages  and  security  interests  taken by the
lenders in substantially all properties and assets owned by the Company.  All of
the capital stock of all  subsidiaries of the Company is pledged pursuant to the
New Credit Facility.  Each of the Company's wholly owned subsidiaries guarantees
the New Credit Facility.

         The New Credit Facility also contains  certain  covenants,  including a
minimum tangible net worth test, and negative covenants imposing  limitations on
mergers, additional indebtedness, and pledges and sales of assets.

Competition, Markets, Seasonality and Environmental and Other Regulation

         Competition.  There are a large  number of  companies  and  individuals
engaged  in  the  exploration  for  and  development  of  oil  and  natural  gas
properties.  Competition is particularly intense with respect to the acquisition
of oil and natural gas producing properties and securing experienced  personnel.
The Company  encounters  competition  from various  independent oil companies in
raising  capital and in acquiring  producing  properties.  Many of the Company's
competitors  have financial  resources and staffs  considerably  larger than the
Company.

         Markets.  The  ability of the  Company  to  produce  and market oil and
natural gas  profitably  depends on numerous  factors  beyond the control of the
Company.  The  effect  of  these  factors  cannot  be  accurately  predicted  or
anticipated.  These  factors  include the  availability  of other  domestic  and
foreign  production,  the  marketing of  competitive  fuels,  the  proximity and
capacity of pipelines,  fluctuations in supply and demand, the availability of a
ready  market,  the  effect of  federal  and  state  regulation  of  production,
refining,   transportation,   and  sales  of  oil  and  natural  gas,  political
instability or armed conflict in oil-producing regions, and general national and
worldwide  economic  conditions.  In  recent  years,  worldwide  oil  production
capacity  and natural gas  production  capacity  in the United  States  exceeded
demand and resulted in a substantial decline in the price of oil and natural gas
in the United States.

         Since early 1986,  certain  members of the  Organization  of  Petroleum
Exporting  Countries  ("OPEC")  have, at various times,  dramatically  increased
their  production of oil,  causing a significant  decline in the price of oil in
the world market.  The Company cannot predict future levels of production by the
OPEC  nations,  the prospects for war or peace in the Middle East, or the degree
to which oil and natural gas prices will be  affected,  and it is possible  that
prices for any oil, natural gas liquids,  or natural gas produced by the Company
will be lower than those currently available.

         The  demand for  natural  gas in the United  States has  fluctuated  in
recent years due to economic factors, a deliverability surplus, conservation and
other  factors.  This lack of  demand  has  resulted  in  increased  competitive
pressure on producers.  However,  environmental legislation is requiring certain
markets to shift  consumption from fuel oils to natural gas, thereby  increasing
demand for this cleaner burning fuel.
<PAGE>

         In view of the many  uncertainties  affecting the supply and demand for
oil,  natural  gas,  and refined  petroleum  products,  the Company is unable to
predict  future  oil  and  natural  gas  prices.  In  order  to  minimize  these
uncertainties the Company,  from time to time, hedges prices on a portion of its
production.

         Seasonality.  Historically  the nature of the demand  for  natural  gas
caused  prices  and demand to vary on a seasonal  basis.  Prices and  production
volumes  were  generally  higher  during the first and fourth  quarters  of each
calendar year. For example,  during 1991 the price the Company  receives for its
natural  gas fell from a high of $1.78 per Mcf in  January  to a low of $1.09 in
July and then  climbed to a new high of $1.95 in December,  averaging  $1.49 for
the year.  However,  the  substantial  amount of natural  gas  storage  becoming
available in the U.S. is altering this  seasonality.  During 1993, 1994 and 1995
the Company's natural gas prices ranged from $2.78 to $1.64,  $2.43 to $1.39 and
$2.37 to $1.37,  averaging $2.13, $1.88 and $1.58,  respectively,  in each case,
per Mcf. Gas prices  averaged  $2.17 per Mcf during 1996.  The Company sells its
natural  gas on the spot  market  based  upon  published  index  prices for each
pipeline. Historically the net price received by the Company for its natural gas
has averaged about $.10 per MMbtu below the NYMEX Henry Hub index price,  due to
transportation differentials.  Fields that are located further offshore, such as
the Amoco  Properties,  will  generally  sell their  natural  gas for as much as
$.1244  below that  index  price.  Early  1997  pipeline  index  prices  were at
historical highs, moderated during the late winter and spring only to rebound in
the last half of the year.  During 1997 the Company  sold its natural gas for an
average of $2.49 per Mcf.

         Environmental and Other Regulation.  The Company's business is affected
by  governmental  laws  and  regulations,   including  price  control,   energy,
environmental,  conservation, tax and other laws and regulations relating to the
petroleum  industry.  For example,  state and federal agencies have issued rules
and  regulations  that require  permits for the drilling of wells,  regulate the
spacing of wells,  prevent the waste of natural gas and crude oil reserves,  and
regulate  environmental and safety matters including  restrictions on the types,
quantities and concentration of various substances that can be released into the
environment  in connection  with drilling and production  activities,  limits or
prohibitions  on drilling  activities on certain lands lying within wetlands and
other protected areas, and remedial  measures to prevent  pollution from current
and former operations. Changes in any of these laws, rules and regulations could
have a material  adverse effect on the Company's  business.  In view of the many
uncertainties  with  respect to current  law and  regulations,  including  their
applicability  to the Company,  the Company cannot predict the overall effect of
such laws and regulations on future operations.

         The  Company  believes  that  its  operations  comply  in all  material
respects with all applicable laws and regulations and that the existence of such
laws and regulations have no more restrictive  effect on the Company's method of
operations  than on other  similar  companies  in the  industry.  The  following
discussion  contains  summaries of certain laws and regulations and is qualified
in its entirety by reference thereto.

         Various  aspects of the  Company's oil and natural gas  operations  are
regulated by  administrative  agencies under statutory  provisions of the states
where such  operations  are  conducted  and by certain  agencies  of the federal
government  for  operations of federal  leases.  The Federal  Energy  Regulatory
Commission  (the "FERC")  regulates  the  transportation  and sale for resale of
natural gas in interstate  commerce pursuant to the Natural Gas Act of 1938 (the
ANGA") and the Natural  Gas Policy Act of 1978 (the  "NGPA").  In the past,  the
federal  government  has regulated the prices at which oil and natural gas could
be sold.  Currently,  sales by  producers of natural gas, and all sales of crude
oil,  condensate  and natural gas  liquids  can be made at  uncontrolled  market
prices,  but Congress could reenact price controls at any time.  Deregulation of
wellhead  sales in the natural gas industry began with the enactment of the NGPA
in 1978. In 1989,  Congress enacted the Natural Gas Wellhead Decontrol Act which
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993.

         Sales of crude oil,  condensate  and natural gas liquids by the Company
are not regulated and are made at market prices.  The price the Company receives
from the sale of these  products  is affected  by the cost of  transporting  the
products  to market.  Effective  as of January  1,  1995,  the FERC  implemented
regulations  establishing  an indexing system for  transportation  rates for oil
pipelines,  which  would  generally  index such rates to  inflation,  subject to
certain conditions and limitations. These regulations could increase the cost of
transporting  crude oil, liquids and condensates by pipeline.  These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect,  if any, these  regulations will have on it,
but  other  factors  being  equal,   the   regulations   may  tend  to  increase
transportation costs or reduce wellhead prices for such conditions.
<PAGE>

         Additional  proposals  and  proceedings  that might  affect the oil and
natural gas industry are pending before Congress,  the FERC and the courts.  The
Company cannot predict when or whether any such proposals may become  effective.
In the past,  the  natural  gas  industry  historically  has been  very  heavily
regulated. There is no assurance that the current regulatory approach pursued by
the FERC  will  continue  indefinitely  into  the  future.  Notwithstanding  the
foregoing,  it is not anticipated that compliance with existing  federal,  state
and local laws,  rules and  regulations  will have a material  or  significantly
adverse effect upon the capital  expenditures,  earnings or competitive position
of the Company.

         Extensive federal,  state and local laws and regulations govern oil and
natural  gas   operations   regulating  the  discharge  of  materials  into  the
environment or otherwise relating to the protection of the environment. Numerous
governmental  departments  issue rules and  regulations to implement and enforce
such laws which change frequently, are often difficult and costly to comply with
and which carry  substantial  civil  and/or  criminal  penalties  for failure to
comply.  Some  laws,  rules and  regulations  to which the  Company  is  subject
relating to protection of the environment may, in certain circumstances,  impose
"strict  liability" for environmental  contamination,  rendering a person liable
for  environmental  damages and response  costs without  regard to negligence or
fault  on the  part of such  person.  For  example,  the  federal  Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, also
known as the "Superfund" law, imposes strict,  joint and several liability on an
owner and operator of a facility or site where a release of hazardous substances
into the environment has occurred and on companies that disposed or arranged for
the  disposal of the  hazardous  substances  released  at the  facility or site.
Similarly,  the Oil Pollution Act of 1990 ("OPA")  imposes strict  liability for
remediation  and  natural  resource  damages  in the event of an oil  spill.  In
addition to other  requirements,  the OPA requires  operators of oil and natural
gas leases on or near  navigable  waterways to provide $35 million in "financial
responsibility", as defined in the Act. At present the Company is satisfying the
financial  responsibility  requirement with insurance  coverage.  The regulatory
burden on the oil and natural gas industry  increases its cost of doing business
and consequently  affects its  profitability.  These laws, rules and regulations
affect the operations and costs of the Company.  Furthermore, the Company cannot
guarantee  that such laws as they apply to oil and natural gas  operations  will
not change in the future in such a manner as to impose  substantial costs on the
Company. While compliance with environmental requirements generally could have a
material adverse effect upon the capital  expenditures,  earnings or competitive
position of the Company,  the Company  believes  that other  independent  energy
companies  in the oil  and  natural  gas  industry  likely  would  be  similarly
affected. The Company believes that it is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on the Company.

          Offshore  operations  of the Company are conducted on both federal and
state  lease  blocks  of the Gulf of  Mexico.  In all  offshore  areas  the more
stringent  regulation  of the  federal  system,  as  implemented  by the Mineral
Management  Service  of the  Department  of the  Interior,  will  ultimately  be
applicable  to state as well as federal  leases,  which could impose  additional
compliance  costs on the Company.  While there can be no guarantee,  the Company
does not expect these costs to be material.  See "Risk  Factors -  Environmental
and Other Regulations."

Employees

         The Company has 28 full time employees, eight of whom are officers. The
Company  utilizes an  additional  43 contract  personnel in the operation of the
offshore properties, and uses numerous outside geologists, production engineers,
reservoir  engineers,  geophysicists  and other  professionals  on a  consulting
basis.

Year 2000 Issue

         The  Company  utilizes  accounting  and  other  software  that has been
modified to accommodate the transition to the year 2000 and beyond.  No material
expenditures are anticipated.

Office Facilities

         The  Company's  headquarters  are  located  at  1050  West  Blue  Ridge
Boulevard,  Panaco Building, Kansas City, Missouri 64145-1216, and its telephone
number is (816)  942-6300,  FAX (816)  942-6305.  The  Houston,  Texas office is
located at 1100 Louisiana, Suite 5100, Houston, Texas 77002-5220, telephone
(713) 970-3100, FAX (713) 970-3151.



<PAGE>



Risk Factors

         Information  contained  or  incorporated  by  reference  in this Annual
Report  may  contain  "forward-looking  statements"  within  the  meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use  of   forward-looking   terminology  such  as  "may,"  "expect,"   "intend,"
"anticipate,"  "estimate"  or  "continue"  or  the  negative  thereof  or  other
variations thereon or comparable terminology.  The following matters and certain
other  factors  noted  throughout  this  Annual  Report  constitute   cautionary
statements   identifying   important   factors   with   respect   to  any   such
forward-looking  statements,  including  certain risks and  uncertainties,  that
could  cause   actual   results  to  differ   materially   from  those  in  such
forward-looking statements.

Finding and Acquiring Additional Reserves; Depletion

         The  Company's  future  success  depends  upon its  ability  to find or
acquire   additional  oil  and  natural  gas  reserves  that  are   economically
recoverable. Except to the extent the Company conducts successful exploration or
development  activities or acquires properties  containing Proved Reserves,  the
Proved Reserves of the Company will generally decline as they are produced.  The
decline rate varies depending upon reservoir  characteristics and other factors.
The  Company's  future  oil  and  natural  gas  reserves  and  production,  and,
therefore, cash flow and income are highly dependent upon the Company's level of
success in exploiting its current  reserves and acquiring or finding  additional
reserves.  The business of exploring  for,  developing or acquiring  reserves is
capital  intensive.  To the extent  cash flow from  operations  is  reduced  and
external sources of capital become limited or unavailable, the Company's ability
to make the necessary  capital  investments to maintain or expand its asset base
of oil and natural gas  reserves  could be  impaired.  There can be no assurance
that the Company's planned development projects and acquisition  activities will
result in significant  additional reserves or that the Company will have success
drilling  productive wells at economic returns to replace its current and future
production.

Substantial Leverage; Ability to Service Debt

         The Company is  significantly  leveraged,  with  outstanding  long-term
indebtedness of approximately  $101.7 million and stockholders'  equity of $55.2
million as of December 31, 1997. The Company's level of indebtedness has several
important effects on its future operations,  including (i) a substantial portion
of the  Company's  cash flow from  operations  is  dedicated  to the  payment of
interest on its indebtedness  and is not available for other purposes,  (ii) the
covenants  contained in the New Credit Facility and the Senior Notes require the
Company  to meet  certain  financial  tests and limit the  Company's  ability to
borrow  additional  funds or to acquire  or  dispose  of  assets,  and (iii) the
Company's ability to obtain additional  financing in the future may be impaired.
Additionally,  the senior status of the Senior Notes, the Company's high debt to
equity  ratio,  and the use of  substantially  all of the  Company's  assets  as
collateral  for the New  Credit  Facility  will  for the  present  time  make it
difficult for the Company to obtain financing on an unsecured basis or to obtain
secured   financing   other   than   certain   "purchase   money"   indebtedness
collateralized by the acquired assets.

         The  Company's  ability  to meet its  financial  covenants  and to make
scheduled  payments  of  principal  and  interest  to  repay  its  indebtedness,
including the Senior  Notes,  is dependent  upon its  operating  results and its
ability  to  obtain  financing.  However,  there  can be no  assurance  that the
Company's  business will generate  sufficient  cash flow from operations or that
future bank  credit  will be  available  in an amount  sufficient  to enable the
Company  to service  its  indebtedness,  including  the  Senior  Notes,  or make
necessary capital expenditures.  In such event, the Company would be required to
obtain  such  financing  from  the  sale of  equity  securities  or  other  debt
financing.  There can be no assurance  that any such financing will be available
on terms acceptable to the Company if at all. Should  sufficient  capital not be
available, the Company may not be able to continue to implement its strategy.

         The New Credit  Facility  limits the  Company's  borrowings  to amounts
determined  by the lenders,  in their sole  discretion,  based upon a variety of
factors including the amount of indebtedness  which can be adequately  supported
by the value of oil and natural  gas  reserves  and assets  owned by the Company
(the  "Borrowing  Base").  The Company  presently has $40.0 million in borrowing
availability  under the  Borrowing  Base of the New Credit  Facility.  If oil or
natural gas prices decline below their current levels, the availability of funds
under the New Credit Facility could be materially adversely affected.
<PAGE>

         The New  Credit  Facility  requires  the  Company  to  satisfy  certain
financial ratios in the future. The failure to satisfy these covenants or any of
the other  covenants in the New Credit  Facility  would  constitute  an event of
default thereunder and, subject to certain grace periods, may permit the lenders
to accelerate the indebtedness  then  outstanding  under the New Credit Facility
and demand immediate repayment thereof. See "New Credit Facility."

Volatility of Oil and Natural Gas Prices

         The Company's revenues, profitability and the carrying value of its oil
and natural gas properties are  substantially  dependent upon prevailing  prices
of, and demand for,  oil and natural  gas and the costs of  acquiring,  finding,
developing and producing reserves. The Company's ability to maintain or increase
its borrowing capacity,  to repay the Senior Notes and outstanding  indebtedness
under any current or future credit facility, and to obtain additional capital on
attractive  terms  is also  substantially  dependent  upon oil and  natural  gas
prices. Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future.  Prices for oil and natural
gas are  subject to wide  fluctuations  in  response  to: (i)  relatively  minor
changes in the supply of, and demand  for,  oil and  natural  gas;  (ii)  market
uncertainty;  and (iii) a variety of additional factors, all of which are beyond
the Company's  control.  These factors  include  domestic and foreign  political
conditions,  the price and availability of domestic and imported oil and natural
gas, the level of consumer and industrial demand, weather,  domestic and foreign
government  relations,  the  price and  availability  of  alternative  fuels and
overall economic conditions. The Company's production is weighted toward natural
gas,  making  earnings  and cash  flow  more  sensitive  to  natural  gas  price
fluctuations. Historically, the Company has attempted to mitigate these risks by
oil  and  natural  gas  hedging  transactions.  See  "Business  -  Marketing  of
Production."

Uncertainty of Estimates of Reserves and Future Net Cash Flows

         This Annual Report contains  estimates of the Company's oil and natural
gas reserves and the future net cash flows from those reserves,  which have been
prepared  by  certain  independent  petroleum  consultants.  There are  numerous
uncertainties  inherent in estimating  quantities of Proved  Reserves of oil and
natural  gas and in  projecting  future  rates of  production  and the timing of
development  expenditures,  including many factors beyond the Company's control.
The estimates herein are based on various assumptions,  including,  for example,
constant oil and natural gas prices,  operating expenses,  capital  expenditures
and  the  availability  of  funds,  and,  therefore,  are  inherently  imprecise
indications  of future net cash flows.  Actual  future  production,  cash flows,
taxes,   operating   expenses,   development   expenditures  and  quantities  of
recoverable  oil and  natural gas  reserves  may vary  substantially  from those
assumed in the estimates.  Any significant  variance in these  assumptions could
materially affect the estimated quantity and value of reserves set forth herein.
Additionally,  the  Company's  reserves  may be  subject to  downward  or upward
revision based upon actual production performance, results of future development
and exploration,  prevailing oil and natural gas prices and other factors,  many
of which  are  beyond  the  Company's  control.  See  "Properties  - Oil and Gas
Information."

         The SEC PV-10 of Proved  Reserves  referred  to  herein  should  not be
construed as the current  market value of the estimated  Proved  Reserves of oil
and natural gas  attributable  to the Company's  properties.  In accordance with
applicable  requirements of the Commission,  the estimated discounted future net
cash flows from Proved  Reserves are  generally  based on prices and costs as of
the  date of the  estimate,  whereas  actual  future  prices  and  costs  may be
materially  higher or lower.  The  calculation of the SEC PV-10 of the Company's
oil and  natural gas  reserves at December  31, 1997 is based on prices of $2.48
per Mcf of natural gas and $17.50 per Bbl of oil.  Actual  future net cash flows
also will be affected by (i) the timing of both production and related expenses;
(ii)  changes  in  consumption  levels  and (iii)  governmental  regulations  or
taxation.  In addition,  the  calculation of the present value of the future net
cash flows using a 10% discount as required by the Commission is not necessarily
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company's  reserves or the oil and natural
gas industry in general.  Furthermore,  the Company's reserves may be subject to
downward  or upward  revision  based upon actual  production,  results of future
development,  supply and  demand for oil and  natural  gas,  prevailing  oil and
natural  gas  prices  and  other  factors.   See   "Properties  -  Oil  and  Gas
Information."
<PAGE>

Acquisition Risks

         The Company has grown  primarily  through  acquisitions  and intends to
continue acquiring oil and natural gas properties. Although the Company performs
an extensive review of the properties proposed to be acquired,  such reviews are
subject to uncertainties.  Consistent with industry practice, it is not feasible
to review less significant  properties  involved in such acquisitions.  However,
even a detailed review may not reveal existing or potential  problems;  nor will
it permit the Company to become  sufficiently  familiar  with the  properties to
assess fully their deficiencies and capabilities.

         The  Company has  recently  begun to focus its  acquisition  efforts on
larger  packages  of oil and  natural  gas  properties,  such as the  properties
involved in the Amoco Acquisition. The acquisition of larger oil and natural gas
properties may involve substantially higher costs and may pose additional issues
regarding  operations  and  management.  There can be no assurance  that oil and
natural gas properties  acquired by the Company will be successfully  integrated
into the Company's operations or will achieve desired profitability  objectives.
See "Business - Acquisition, Development, and Other Activities."

Exploration and Development Risks

         The Company may increase its development  and  exploration  activities.
Exploration  drilling and, to a lesser extent,  development  drilling of oil and
natural gas reserves involve a high degree of risk that no commercial production
will be obtained and/or that production will be insufficient to recover drilling
and completion  costs.  The cost of drilling,  completing and operating wells is
often uncertain. The Company's drilling operations may be curtailed,  delayed or
canceled as a result of numerous  factors,  including  title  problems,  weather
conditions, compliance with governmental requirements and shortages or delays in
the delivery of equipment.  The drilling of exploratory  and  development  wells
involves risks such as encountering unusual or unexpected formations, pressures,
and other  conditions that could result in the Company's  incurring  substantial
losses.  Furthermore,  completion  of a well  does not  assure  a profit  on the
investment or a recovery of drilling, completion and operating costs.

Operating Hazards and Uninsured Risks

         The  Company's  oil and  natural  gas  business  involves  a variety of
operating  risks,  including,  but not  limited  to,  unexpected  formations  or
pressures,  uncontrollable  flows of oil, natural gas, brine or well fluids into
the  environment  (including  groundwater   contamination),   blowouts,   fires,
explosions,  pollution  and other  risks,  any of which could result in personal
injuries,  loss of life, damage to properties and substantial  losses.  Although
the Company carries insurance at levels which it believes are reasonable,  it is
not fully  insured  against  all  risks.  The  Company  does not carry  business
interruption  insurance.  Losses  and  liabilities  arising  from  uninsured  or
under-insured  events  could have a  material  adverse  effect on the  financial
condition and operations of the Company.

Marketing Risks

         Substantially  all of the Company's natural gas production is currently
sold to gas  marketing  firms  or end  users  either  on the  spot  market  on a
month-to-month  basis at  prevailing  spot  market  prices.  For the year  ended
December  31,  1997,  one  purchaser  accounted  for  approximately  62%  of the
Company's  revenues.  The Company does not believe that  discontinuation  of its
sales arrangement with such firm would be in any way disruptive to the Company's
natural  gas  marketing  operations.  See  "Business  -  Competition,   Markets,
Seasonality and Environmental and Other Regulation."

Hedging Risks

         Historically, the Company has reduced its exposure to the volatility of
crude oil and  natural gas prices by hedging a portion of its  production.  In a
typical hedge  transaction,  the Company will have the right to receive from the
counterparty  to the hedge the excess of the fixed price  specified in the hedge
over a floating  price.  If the  floating  price  exceeds the fixed  price,  the
Company is required to pay the counter party all or a portion of this difference
multiplied  by the  quantity  hedged,  regardless  of whether  the  Company  has
sufficient   production  to  cover  the  quantities   specified  in  the  hedge.
Significant  reductions in  production at times when the floating  price exceeds
the fixed price  could  require  the  Company to make  payments  under the hedge
agreements  even though such payments are not offset by sales of production.  In
the  past,  the  Company  has  hedged  up to,  but  not  more  than,  50% of its
anticipated  oil and natural gas  production.  Hedging also prevents the Company
from  receiving  the full  advantage  of  increases  in crude oil or natural gas
prices above the fixed amount specified in the hedge.
<PAGE>

Abandonment Costs

         Due to the  Company's  number of  offshore  properties  and  production
facilities,  government  regulations and lease terms will require the Company to
incur substantial  abandonment costs. As of December 31, 1997, total abandonment
costs for the Company's  offshore  properties  estimated to be incurred  through
2012 were approximately $11.3 million,  net of restricted cash, described below.
Estimated  abandonment costs have been included in determining  estimates of the
Company's  future net revenues from Proved  Reserves  included  herein,  and the
Company  accounts  for  such  costs  through  its  provision  for  depreciation,
depletion and amortization.  Under the terms of various agreements,  the Company
is required to fund restricted cash accounts as a reserve for abandonment  costs
on most of its offshore  properties.  See  "Business - Plugging and  Abandonment
Escrows."

Environmental and Other Regulations

         The Company's  operations are affected by extensive regulation pursuant
to  various  federal,  state  and local  laws and  regulations  relating  to the
exploration for and development,  production, gathering and marketing of oil and
natural  gas.  Matters  subject to  regulation  include  discharge  permits  for
drilling   operations,   drilling  and  abandonment  bonds  or  other  financial
responsibility  requirements,  reports  concerning  operations,  the  spacing of
wells,  unitization and pooling of properties,  and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting  the  rate of  flow  of oil  and  natural  gas  wells  below  actual
production capacity in order to conserve supplies of oil and natural gas.

         Operations  of the Company are also  subject to numerous  environmental
laws,  including  but not  limited  to,  those  governing  management  of waste,
protection  of  water,  air  quality,   the  discharge  of  materials  into  the
environment,   and  preservation  of  natural  resources.   Non-compliance  with
environmental  laws and the  discharge of oil,  natural gas, or other  materials
into the air, soil or water may give rise to  liabilities  to the government and
third  parties,  including  civil and  criminal  penalties,  and may require the
Company to incur costs to remedy the discharge. Oil and gas may be discharged in
many ways,  including from a well or drilling equipment at a drill site, leakage
from pipelines or other gathering and  transportation  facilities,  leakage from
storage  tanks,  and sudden  discharges  from oil and gas wells or  explosion at
processing plants.  Hydrocarbons tend to degrade slowly in soil and water, which
makes remediation  costly, and discharged  hydrocarbons may migrate through soil
and water supplies or adjoining property, giving rise to additional liabilities.
Laws and regulations  protecting the  environment  have become more stringent in
recent years, and may in certain  circumstances impose retroactive,  strict, and
joint and several liabilities rendering entities liable for environmental damage
without regard to negligence or fault. From time to time, the Company has agreed
to indemnify sellers of producing  properties from whom the Company has acquired
reserves against certain  liabilities for  environmental  claims associated with
such  properties.  There can be no assurance  that new laws or  regulations,  or
modifications of or new  interpretations of existing laws and regulations,  will
not increase  substantially the cost of compliance or otherwise adversely affect
the Company's  oil and natural gas  operations  and financial  condition or that
material  indemnity  claims will not arise  against the Company  with respect to
properties  acquired  by the  Company.  While the  Company  does not  anticipate
incurring  material  costs  in  connection  with  environmental  compliance  and
remediation,  it cannot guarantee that material costs will not be incurred.  See
"Business  -  Competition,  Markets,  Seasonality  and  Environmental  and Other
Regulation."

Competition

         There are many companies and individuals engaged in the exploration for
and development of oil and natural gas  properties.  Competition is particularly
intense  with  respect  to the  acquisition  of oil and  natural  gas  producing
properties  and  securing   experienced   personnel.   The  Company   encounters
competition  from various  independent  oil companies in raising  capital and in
acquiring producing properties. Many of the Company's competitors have financial
resources  and  staffs  considerably  larger  than the  Company.  See  "Business
Competition, Markets, Seasonality and Environmental and Other Regulation."
<PAGE>

Dependence Upon Key Personnel

         The success of the Company will depend almost entirely upon the ability
of a small group of key executives to manage the business of the Company. Should
one or more of these  executives  leave the Company or become  unable to perform
his duties,  no assurance  can be given that the Company will be able to attract
competent new management.  The key executives do not have employment  contracts.
See "Directors and Executive Officers of the Registrant."


Item 2. Properties.

         The Company has grown through the  acquisition of producing  properties
and the  subsequent  application of advanced  technology  such as 3-D Seismic to
exploit  potential  producing  zones which have been  overlooked  or bypassed by
previous operators.

         Since  1990,  the  Company  has made  five  acquisitions  of  producing
properties for a total of $98.0 million, which properties had Proved Reserves of
approximately 116 Bcfe as of their respective  acquisition dates. As of December
31,  1997,  the  Company  had Proved  Reserves of 100.7 Bcfe with a SEC PV-10 of
$129.0  million.  Approximately  83%  of  the  Company's  total  SEC  PV-10  are
classified as Proved Developed  Reserves and  approximately 73% of the Company's
total Proved Reserves are natural gas.

         The Company's primary  producing  properties are located along the Gulf
Coast in Texas and Louisiana and offshore in the federal and state waters of the
Gulf of Mexico.  The Company owns  interests in a total of 255 oil wells and 356
natural gas wells.  The Company owns  interests in 20 federal blocks in the Gulf
of Mexico  and nine state  water  blocks and  operates  55% of the 166  offshore
wells,  based upon the SEC PV-10 value as of December  31, 1997.  The  Company's
non-operated  offshore  properties are operated by large  independents and major
oil  companies,  including  Unocal,  Phillips,  Texaco,  Coastal,  Anadarko  and
Burlington.  The 445 onshore wells account for 14.5% of the Company's  total SEC
PV-10 value as of December  31,  1997.  The Company  operates 55% of the onshore
wells,  based upon such SEC PV-10 value.  The Company also owns  interests in 22
offshore  production  platforms  and 69 miles of  offshore  oil and  natural gas
pipelines with diameters of 10" or larger.

         The following table sets forth certain  information with respect to the
Company's  significant  properties  as of December  31, 1997.  These  properties
represent 83% of the aggregate SEC PV-10 value of the Company.
<TABLE>
<CAPTION>
                                                                        Total Proved                             % of
                                 Working                                   Reserves           SEC PV-10         Total
   Field                         Interests    Wells    Operator          MBbls    Bcf       Value(000s)       SEC PV-10
<S>                              <C>            <C>                     <C>      <C>        <C>                  <C>
Umbrella Point                   80-100%        19     PANACO           1,858    20.8       $  33,304            26%
High Island 309                      50%        16     Coastal            122    14.2          23,149            18%
East Breaks 160                    33.3%        15     Unocal           1,143     9.8          23,062            18%
West Delta Fields                   100%        35     PANACO             278    10.8          17,447            14%
East Breaks 109                     100%         9     PANACO               6     4.5           8,375             7%
---------------------- ------------------ ---------   ---------------- ------- ------- --------------- --------------
   Total                                        94                      3,407    60.1        $105,337            83%

</TABLE>
<PAGE>

Umbrella Point Field

        Since its  discovery in 1957 by Sun Oil,  the  Umbrella  Point Field has
produced  over 17 MMbbls of oil and 100 Bcf of  natural  gas from 35 wells.  The
Company owns 100% of the working  interest in Texas State Leases 73,74,87 and 88
in Trinity  Bay,  Chambers  County,  Texas,  that  encompass  the  field.  Field
production is gathered on a small platform complex in approximately 10' of water
and transported via a Company owned 5 mile oil pipeline to the Company's onshore
production  facility at Cedar Point.  Gas  production is  transported  through a
Midcon Pipeline Co. of Texas pipeline.

        The  Umbrella  Point  Field  consists of  multiple  stacked  reservoirs.
Production is from 13 main reservoirs from 7,700' to 9,000'. Prior to Goldking's
control of the field,  it was developed and produced by two different  operators
each  controlling  two  state  leases  which  created  a  competitive   drainage
situation.  This situation  resulted in several  reservoirs  that were abandoned
prematurely  as the former  operators  tried to accelerate  production in uphole
reservoirs.  Consequently,  significant development work remains to sufficiently
drain the abandoned  reservoirs.  On January 21, 1998 the Company  announced the
successful  completion of its first well in the Umbrella  Point Field.  The well
flowed 11.5 MMcf and 220 barrels of condensate  per day through a 20/64ths choke
with  flowing  tubing  pressure of 5,600 PSIG.  The Company  owns an 80% working
interest in the well. The remaining 20% is owned by Midcon Gas Services Corp.

High Island 309 Field

        The Company  purchased its interest in the High Island Block A-309 Field
from Amoco in October of 1996 and has a 50% working interest. The field consists
of the High  Island  blocks  A-309  and  A-310 in  approximately  200' of water.
Production  is from three  faulted  anticlines  with 18  productive  reservoirs.
Coastal Oil and Gas Corp. operates this property and has conducted an evaluation
of reprocessed proprietary 3-D Seismic surveys resulting in significant drilling
activity in 1997. The Company has drilled new wells,  sidetracked existing wells
into new formations and recompleted existing wells in new formations.  The field
is  currently  producing  60 MMcf per day of  natural  gas and 77 Bbl per day of
condensate  compared to 15 MMcf per day and 6 Bbl per day of  condensate  at the
beginning of 1997. The Company believes that continued review of the 3-D Seismic
may result in additional development.

East Breaks 160 Field

The  Company  acquired  a 33.3%  interest  in this  field  as part of the  Amoco
Acquisition in October 1996. The field consists of two federal  offshore blocks,
East Breaks 160 and 161, with a production platform set in 925' of water placing
this  production  facility on the edge of deep  water.  The field is operated by
Unocal  and  production  is  from  12  separate   reservoirs.   Unocal  acquired
proprietary  3-D  Seismic  over  the  field  in  1990  and  has  identified  the
undeveloped   locations.   The  Proved  Developed  Producing  Reserve  value  is
proportionately  dispersed among eleven  producing wells  decreasing the risk to
some  degree.   The  undeveloped   locations   included  are  based  on  seismic
interpretation  of attic  reserves.  The facility also receives  processing fees
from Mobil Oil Corp.  related to a subsea well drilled in Block 117.  Because of
the strategic  location of the platform on the edge of  deepwater,  the facility
has  potential  for  additional  processing  and  handling  fees as more  nearby
discoveries  are made and tied into the  platform.  In addition to the  property
interests  acquired,  the Company purchased a 33.3% interest in a 12.67 mile 12"
natural gas pipeline  connecting  the East Breaks Block 160 platform to the High
Island  Offshore  System  ("HIOS") a natural gas pipeline  system in the Gulf of
Mexico and a 33.3%  interest  in a 17.47 mile 10" oil  pipeline  connecting  the
platform to the High  Island  Pipeline  System  ("HIPS"),  a crude oil  pipeline
system in the Gulf of Mexico.  Currently such firms as Exxon,  Reading and Bates
and Santa Fe Energy  are  actively  exploring  in the East  Breaks  Area and the
Company believes that, due to the ongoing deepwater exploration in the Area, the
Company's  platform  and  pipelines  will  become  long term  strategic  revenue
generating assets after the field reserves are depleted.
<PAGE>

West Delta Fields

     These properties  consist of 13,565 acres in Blocks 52 through 56 and Block
58 in the West  Delta  Area,  offshore  Louisiana.  The West Delta  Fields  were
acquired from Conoco,  Inc.,  Atlantic  Richfield Company (now Vastar Resources,
Inc.), OXY USA, Inc. and Texaco Exploration and Production, Inc. in May 1991.

        The Company has an 87.5% net revenue interest in the field, subject to a
5% net profits  interest on the  shallower  reservoirs in favor of the Company's
former lenders and a 4.166% overriding royalty interest on the deeper reservoirs
in favor of Conoco and OXY. The Company is the operator and generally  owns 100%
of the working interest in these wells. Presently, the properties have 36 wells,
five of which were  recently  drilled,  which  produce from depths  ranging from
1,200' to 12,500'.  Because of the existing  surface  structures  and production
equipment, additional wells can be added on the properties with lower completion
costs.

        The main production facility on the West Delta Fields is a four platform
complex  designated as Tank Battery #3. There are three ancillary  platforms and
one three well  production  platform  in the eastern  portion of the  properties
connected to Tank  Battery #3. In the western  portion  there is one  production
platform designated as Platform "D" in Block 58, with three wells. The remaining
30 wells are located on satellite structures connected to Tank Battery #3 or one
of its  ancillary  platforms.  Eight wells produce oil and natural gas, with the
remaining  wells  producing  only natural gas. In 1997 the Company  replaced the
pipeline  connecting  "D"  Platform in Block 58 with Tank Battery #3 in Block 54
with  two new 6"  pipelines,  and  installed  a new 4"  pipeline  connected  "C"
Platform with "D" Platform.

        The field is  characterized  by  multiple  reservoirs  with  significant
workover and recompletion  potential.  Proved producing reserves are based on an
established   consistent  production  history.  The  behind  pipe  reserves  are
generally  uphole  recompletions  with reserves  based on volumetric  estimates.
Currently there are no Proved  Undeveloped  Reserves  assigned to the field. The
Company has been historically  successful  increasing rates and reserves through
the use of horizontal  wells and coiled tubing  operations.  In 1994 the company
drilled  4  horizontal  wells  in  the  field  increasing   production  34%  and
accelerating  reserves.  The Company is also using coiled tubing technology with
increasing frequency to avoid costly rig workovers.

        The  Company  has  farmed out the deep  rights in West  Delta  Blocks 53
through 56 to Ocean  Energy,  Inc.  (formerly  Flores & Rucks,  Inc.)  which has
committed to fund a new 3-D Seismic  survey.  The Company  retains all presently
producing  reservoirs and shallow horizons.  The Company will have the option of
retaining a 12 1/2% overriding  royalty interest or participating up to 50% as a
working  interest  owner  in any  wells  drilled  by  Ocean  Energy.  Due to the
complexity  of the  geology  and the long  history of  production,  the  Company
believes  that the  evaluation  of the 3-D Seismic over the produced  reservoirs
will create significant additional  development and exploitation  opportunities.
In addition the Company  believes  that  evaluation  of the deeper  potential by
Ocean Energy will create  exploration  opportunities with the Company having the
option to limit capital exposure.

        During 1994 the Company farmed out the deep rights (below 11,300') to an
1,875  acre  parcel  in Block 58 and sold "C"  Platform  to  Energy  Development
Corporation which drilled a successful well to 16,500'.  Production commenced in
April,  1995. The Company has a 15% overriding royalty interest in that acreage.
The well is currently producing 9,800 Mcf per day and 835 Bbls of condensate per
day. Energy  Development  Corporation was  subsequently  acquired by Samedan Oil
Corporation.

        The Company  generated a prospect in the northern  portion of West Delta
Block 58 using 3-D Seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800' which encountered 85' of net pay
and is  currently  producing  12,300  Mcf  per  day.  The  Company  retained  an
overriding royalty interest in the farmout, which was converted to a 25% working
interest at payout on September 26, 1997.

     In connection  with the  acquisition of the West Delta offshore  properties
the Company provides the sellers with a $4,100,000 plugging and abandonment bond
collateralized  in part with a bank escrow account.  See "The Company - Plugging
and Abandonment Escrows".
<PAGE>

East Breaks 109 Field

         The Company  acquired a 100% interest in the East Breaks 109 Field from
Zapata in July of 1995.  The field  consists of East Breaks  Blocks 109 and 110.
The Company operates this field which produces from six wellbores.  There are no
proved behind pipe or undeveloped  reserves  associated with the field. Over 90%
of the field value are in the A-2 well completed in the TW-3 sand.  This well is
the last remaining  producer in a large reservoir that has produced over 50 BCF.
The  A-2  well is  currently  making  approximately  4,400  Mcf per day  with no
reported water production.

         In addition to the mineral  interests  acquired,  the Company purchased
the 100%  interest  in a 31 mile 10" natural gas  pipeline  connecting  the East
Breaks 110  platform  to the High  Island  Offshore  System and a 22 mile 4" oil
pipeline  which  connects  the East  Breaks 110  platform  with the High  Island
Pipeline  System.  The HIOS and HIPS systems are the primary oil and natural gas
pipelines in this region of the Gulf of Mexico.

         The Company's East Breaks 110 platform has significant  excess capacity
for both crude oil and natural gas. Prior to the Company acquiring the property,
Zapata had entered  into a  Facilities  Sharing  Agreement  with AGIP  Petroleum
Company,  Inc. ("AGIP") to operate and process for AGIP's subsea wells in Blocks
112 and 157. Under the agreement AGIP pays certain fees to the Company and split
the cost of operating  the East Breaks 110 platform  with the Company,  based on
each  company's  proportion  of the  production.  A  portion,  not to  exceed $6
million, of the monies earned pursuant to this agreement is being paid to Zapata
as part of the acquisition of the properties.

         The  purchase  price for the Zapata  properties  included a  production
payment to Zapata  based upon future  production  from the East Breaks 109 Field
after  production  of 12 Bcfe gross (10 Bcfe net) measured from October 1, 1994.
The  Company  will pay to  Zapata  $.4167  per Mcfe on the next 27 Bcfe of gross
production, if that much is produced. The Company's oil and natural gas reserves
are stated net of this production payment.

Other Properties

         Great  River/Fort St. Phillips  Fields.  The Company acquired the Great
River  (33  1/3%  working  interest)  and  Fort St.  Phillips  (43 1/3%  working
interest) Fields as part of the Goldking acquisition.  The Company operates both
properties,  which total 1,688  acres and are  geologically  located on the same
fault  and  only  two  miles  apart.  These  fields  are low  relief  anticlinal
structures  with  stacked  reservoirs  from 7,600' to 10,000'.  The reserves are
spread over three active  completions  in two zones.  Behind pipe  reserves were
assigned to four sands considering analogous performance. The Proved Undeveloped
reserves  that  have  been   identified  in  the  fields   represent  attic  gas
accumulations.  New shallow  sands and deeper pay were  encountered  with the SL
#14645 #1 re-entry well. More wells are being  considered to further develop the
shallow and deep pay sands.

         High Island A-302 Field. High Island Block A-302 acquired from Amoco in
1996 is in  approximately  200'  of  water.  The  Company  owns a 33.3%  working
interest  and  Unocal  Corporation  is the  operator.  Production  is from  four
producing horizons on a faulted anticlinal  structure.  A speculative 3-D survey
was shot in 1991 and processed in 1992.

         High Island  A-330  Field.  The field  consists of three  blocks,  High
Island A-330,  High Island A-349 and West Cameron 613, located in 280' of water.
The Company owns a 12% working  interest , which it acquired from Amoco in 1996.
Coastal Oil and Gas Corporation is the operator. Three wells were recompleted in
1996. This field produces from a faulted anticline with 24 productive  horizons.
Significant  upside  potential  was  delineated  by a recently  shot 3-D Seismic
survey.  A well in West Cameron  Block 613 has been proposed by the operator for
1998 to offset a field operated by Shell Offshore in Block A-350.

         High Island  A-474 Field.  This field  consists of three full blocks in
the High Island Area, A-474,  A-489,  A-499, and part of Block A- 475. The water
depth is 250' to 285' and Phillips  Petroleum  Company is the operator.  In 1996
the  Company  acquired  from Amoco a 12% working  interest  in Blocks  A-474 and
A-489, a 13.1% working  interest in Block A-499,  and a 12% working  interest in
Block  A-475.  There are 23  productive  horizons in this faulted  anticline.  A
proprietary 3-D Seismic survey was shot in 1991 and processed in 1993.

         West Cameron 180 Field.  This field  consists of a single  block,  West
Cameron 144, in 40' of water.  Texaco is the operator.  The Company acquired its
12.5%  working  interest  from  Amoco  in  1996.  The  producing  feature  is  a
north-plunging faulted anticline that underlies West Cameron Blocks 173 and 180.
There are three  productive  horizons.  A new well was completed in January 1998
and is producing 17 MMcf and 250 barrels of condensate per day.
<PAGE>

     East Cameron Block 359. The Company  acquired its 30.7% working interest in
this field from Zapata in 1995.  Anadarko  Petroleum Corp. is the operator.  The
property  has eight wells and is in 330' of water.  The  platform  also  handles
production for a nearby field owned by others.

     Eugene  Island  Block 372.  This field was  acquired  in 1995 from  Zapata.
Unocal Corp.  is the operator and the Company owns a 25% working  interest.  The
property has seven wells and is in 414' of water.

         South  Timbalier  185.  The  Company  acquired  this field in 1995 from
Zapata. The Company owns a 7.7% working interest and Burlington Resources,  Inc.
is the operator.  The property has eleven wells and is in 180' of water.  One of
the partners,  Hall-Houston Oil Co., has proposed a 14,500'  exploratory well on
the block, to be drilled in 1998.

     West Cameron Block 538. This field is operated by the Company and it owns a
35.3%  working  interest.  The property was acquired from Zapata in 1995. It has
six wells and is located in 194' of water.
Oil and Gas Information

Oil and Gas Information

         The following tables set forth selected oil and natural gas information
for the Company, and certain  forward-looking  information about its properties.
Future  results  may  vary  significantly  from  the  amounts  reflected  in the
information  set forth herein because of normal  production  declines and future
acquisitions.  See "Risk  Factors -  Uncertainty  of  Estimates  of Reserves and
Future  Net  Cash  Flows"  and  "Finding  and  Acquiring   Additional  Reserves;
Depletion." The following information on Proved Reserves,  future net cash flows
from Proved  Reserves and the SEC PV-10 value of such estimated  future net cash
flows for the  Company's  properties  as of December  31, 1997 were  prepared by
independent  petroleum engineers,  Ryder Scott Company, W.D Von Gonten & Co. and
McCune Engingeering, P.E.

                               Proved Reserves (a)

         The following  table sets forth  information as of December 31, 1997 as
to the estimated Proved Reserves attributable to the Company's properties.

Oil and liquids (Bbl):
                Proved Developed Reserves ...................3,194,436
                Proved Undeveloped Reserves..................1,311,927
                     Total Proved Reserves...................4,506,363

Natural gas (Mcf):
                Proved Developed Reserves ..................55,689,723
                Proved Undeveloped Reserves.................17,942,400
                     Total Proved Reserves..................73,632,123
-------------
(a)    Calculated by the Company in accordance with the rules and regulations of
       the SEC, based upon December 31, 1997 prices of $17.50 per Bbl of oil and
       $2.48 per Mcf of  natural  gas,  adjusted  for basis  differentials,  Btu
       content  of  natural  gas and  specific  gravity  of oil.  The  Company's
       independent reservoir engineers prepare a reserve report as of the end of
       each calendar year.


<TABLE>
<CAPTION>
<PAGE>


                          Estimated Future Net Revenues
                            from Proved Reserves (a)

           The following table sets forth information as of December 31, 1997 as
to the estimated future net revenues (before deduction of income taxes) from the
production  and  sale  of the  Proved  Reserves  attributable  to the  Company's
properties.
                                                              Proved                  Total
                                                            Developed                Proved
                                                             Reserves               Reserves
                                                            ----------            -----------
Estimated Future net revenues (b):
<S>      <C>                                            <C>               <C>
         1998 ..........................................$   42,820,856          $  43,147,160
         1999 ..........................................    36,309,311             38,311,113
         2000 ..........................................    18,707,049             26,064,936
         2001 ..........................................    12,804,861             19,221,261
         Thereafter.....................................    20,431,036             40,282,108
         Total.......................................... $ 131,073,113          $ 167,026,578
Present value (10%) of estimated future net
         revenues (SEC PV-10)......................    $   121,922,266          $ 129,032,279
---------------
</TABLE>

(a)      Calculated by the Company in accordance  with the rules and regulations
         of the SEC,  based upon  December  31, 1997 prices of $17.50 per Bbl of
         oil and $2.48  per Mcf of  offshore  natural  gas,  adjusted  for basis
         differentials,  Btu content of natural gas and specific gravity of oil.
         The Company's  independent reservoir engineers prepare a reserve report
         as of the end of each calendar year.
(b)      Estimated future net revenues represent estimated future gross revenues
         from the  production  and sale of  Proved  Reserves,  net of  estimated
         operating costs,  future  development costs estimated to be required to
         achieve  estimated  future  production  and  estimated  future costs of
         plugging offshore wells and removing offshore structures.
<TABLE>
<CAPTION>


                        Production, Price, and Cost Data

          The following  table sets forth certain  production,  price,  and cost
data with respect to the Company's properties for the three years ended December
31, 1997, 1996 and 1995.

                                                             For the year ended December 31,
                                          
                                                          1995                 1996(a)                  1997
                                                     -------------         -------------           -----------         
 Oil and Condensate:
<S>                                                        <C>                   <C>                   <C>
             Net Production (Bbls)(b)                      170,000               276,000               515,000
             Revenue                                 $   2,853,000         $   5,356,000         $   9,287,000
             Average net Bbl per day                           466                   756                 1,411
             Average price per Bbl                   $       16.78         $       19.42         $       18.04

        Natural Gas:
             Net Production (Mcf)(b)                     9,850,000             6,788,000            11,468,000
             Revenue                                  $ 15,594,000          $ 14,707,000          $ 28,554,000
             Average net Mcf per day                        27,000                18,600                31,400
             Average price per Mcf                    $       1.58          $       2.17          $       2.49

        Total Revenues                                $ 18,477,000          $ 20,063,000          $ 37,841,000

        Production Cost:
             Production cost                          $  8,055,000          $  8,477,000          $ 11,305,000
             Mcfe(c)                                    10,870,000             8,444,000            14,557,000
             Production cost per Mcfe(c)              $        .74          $       1.00          $        .78
--------------
</TABLE>

(a)  The  information  shown for 1996 was  impacted by the fire on April 24th at
     West Delta Tank  Battery  #3,  which  resulted  in those  fields  being off
     production  until  October 7, 1996.  For that reason  management  would not
     consider this data to be indicative  of the future.  Also this  information
     includes Bayou Sorrel Field through  September 1, the date of its sale, and
     includes information with respect to the Amoco Properties only from October
     8, 1996.
(b)  Production information is net of all royalty interests,  overriding royalty
     interest and the net profits interest in the West Delta Fields owned by the
     Company's former lenders.
(c)  Oil  production  is  converted  to  Mcfe  at the  rate  of 6 Mcf  per  Bbl,
     representing the estimated relative energy content of natural gas to oil.
<PAGE>

                             Productive Wells (a)

           The  following  table  sets forth the  number of  productive  oil and
natural gas wells,  as of  December  31,  1997,  attributable  to the  Company's
properties.

                                            Productive Wells    Company Operated
    Gross productive offshore wells (b):
          Oil    ........................         50                 24
          Natural Gas   .................        116                 46
               Total  ...................        166                 70

    Net productive offshore wells (c):
          Oil    ........................         30                 24
          Natural Gas   .................         59                 42
               Total  ...................         89                 66

    Gross productive onshore wells (b):
          Oil    ........................        205                 62
          Natural Gas   .................        240                 14
               Total  ...................        445                 76

         Net productive onshore wells (c):
               Oil    ....................        69                 57
               Natural Gas   .............        12                  7
                    Total  ...............        81                 64
----------
     (a)Productive  wells  consist  of  producing  wells  and wells  capable  of
          production,  including  shut-in wells and water disposal and injection
          wells. One or more completions in the same borehole are counted as one
          well.
     (b)  A "gross  well" is a well in which a working  interest  is owned.  The
          number  of  gross  wells  represents  the sum of the  wells in which a
          working interest is owned.
     (c)  A "net well" is deemed to exist when the sum of the fractional working
          interests  in gross wells  equals one.  The number of net wells is the
          sum of the fractional working interests in gross wells.



                                Leasehold Acreage

         The following table sets forth the developed acreage as of December 31,
1997, attributable to the Company's properties.

         Developed onshore acreage (a):
                Gross acres (b).................................     82,513
                Net acres (c)...................................      6,354

         Undeveloped onshore acreage (a):
                Gross acres (b).................................      4,212
                Net acres (c)...................................      1,105

         Developed offshore acreage (a):
                Gross acres (b).................................    113,537
                Net acres (c)...................................     46,849

         Undeveloped offshore acreage (a)(d):
                Gross acres (b).................................     57,380
                Net acres (c)...................................      7,280
----------
     (a)  Developed acreage is acreage assignable to productive wells.
     (b)  A "gross  acre" is an acre in which a working  interest is owned.  The
          number  of  gross  acres  represents  the sum of the  acres in which a
          working interest is owned.
     (c)  A "net acre" is deemed to exist when the sum of the fractional working
          interests  in gross acres  equals one.  The number of net acres is the
          sum    of    the    fractional     working    interests    in    gross
          acres
     (d)  In  addition  to  these  acres,  the  Company's  undeveloped  offshore
          potential  exists  at  greater  depths  beneath   existing   producing
          reservoirs.
<PAGE>

                               Drilling Activities

     The following table sets forth the number of gross productive and dry wells
in which the Company had an interest, that were drilled and completed during the
five years ended December 31, 1997.  Such  information  should not be considered
indicative  of future  performance,  nor  should  it be  assumed  that  there is
necessarily any correlation  between the number of productive  wells drilled and
the oil and natural gas reserves  generated  thereby or the costs to the Company
of productive wells compared to the costs to the Company of dry wells.
 
                 Developmental Wells                Exploratory Wells
               Completed          Dry          Completed         Dry
              Oil     Gas     Oil     Gas     Oil     Gas    Oil     Gas
1993           3       --      --      --      --      --     --      --
1994           5        4      --      --      --       1     --      --
1995          --       --      --      --      --      --     --       3
1996          --       --       2      --      --      --     --      --
1997           6       13      --       1      --      --     --      --
Total         14       17       2       1      --       1     --       3

Title to Oil and Gas Properties

         In the case of acquired  properties title opinions are obtained for the
more significant properties.  Prior to the commencement of drilling operations a
thorough  drill site title  examination is conducted and curative work performed
with respect to significant defects.

Unproved Properties

         The Company  retained a 3% overriding  royalty  interest in depths that
are below 11,000' when it sold the Bayou Sorrel Field to National  Energy Group,
Inc.  Two  successful  wells were drilled to these depths from which the company
derives  revenue.  In connection with the Amoco and Goldking  acquisitions,  the
Company acquired what management  believes to be further reserve potential,  not
quantified in its proved reserve  evaluations,  generally at greater depths than
previously developed.  A portion of the respective purchase prices was allocated
to these unproved properties.

Gas Plant

         The Company owns an approximate 1% interest in the Yscloskey Gas Plant,
a joint  venture  operation  with Warren  Petroleum  serving as operator  for 30
producer/owners. The plant is located in St. Bernard Parish, Louisiana, on state
highway 46. It is a steam  plant of  refrigerated  absorption  oil design with a
rated gas  throughput  of 1,850  million cubic feet of gas per day. It generates
its own power with four  2,500-kilowatt  steam driven generators.  Inlet gas is
transported  from field delivery points  throughout  southeastern  Louisiana and
offshore  Gulf of Mexico by Tennessee  Gas Pipeline and residue is returned back
to the pipeline. Sixty percent of the liquid production, plus all the ethane, is
delivered by pipeline to Shell Norco  Fractionation  Plant.  The remaining forty
percent,  less ethane,  is  delivered  by pipeline to the Western Gas  Resources
Plant at Toca for fractionation.

         The original  plant was built in 1962 with a design  throughput  of 650
million cubic feet per day. In 1970 a second complete new plant was built with a
design of 1,850  million  cubic feet per day. In 1975 an  extension  process was
added to the new plant and the  ethane  recovery  unit was put in Plant "B." The
plant is  processing  about  1.5  billion  cubic  feet  per day with an  average
production of 29,000 barrels per day of total liquids.

Forward-looking Statements

         Forward-looking  statements  in this Form 10-K,  future  filings by the
Company  with the  Securities  and  Exchange  Commission,  the  Company's  press
releases and oral statements by authorized  officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking  statements
involve  risks and  uncertainty,  including  without  limitation,  the risk of a
significant  natural  disaster,  the inability of the Company to insure  against
certain  risks,  the adequacy of its loss  reserves,  fluctuations  in commodity
prices,  the  inherent  limitations  in the  ability  to  estimate  oil  and gas
reserves, changing government regulations, as well as general market conditions,
competition and pricing.  The Company believes that  forward-looking  statements
made by it are based on reasonable  expectations.  However, no assurances can be
given that actual  results will not differ  materially  from those  contained in
such forward-looking statements. The words "estimate",  "anticipate",  "expect",
"predict",   "believe"  and  similar   expressions   are  intended  to  identify
forward-looking statements.
<PAGE>

Item 3.  Legal Proceedings.

         The Company is presently a party to several legal proceedings, which it
considers to be routine and in the ordinary  course of its business.  Management
has no knowledge of any pending or threatened claims that could give rise to any
litigation which management  believes would be material to the Company. 

Item 4.   Submission of Matters to a Vote of Security Holders.

         None.


                                     PART II

Item 5. Market for Common Stock and Related Shareholder Matters.

         The  authorized  capital  shares of the Company  consist of  40,000,000
Common Shares,  par value $.01 per share, and 5,000,000  preferred  shares,  par
value $.01 per share.  The following  description  of the capital  shares of the
Company does not purport to be complete or to give full effect to the provisions
of  statutory  or common law and is subject in all  respects  to the  applicable
provisions of the Company's  Certificate of  Incorporation  and the  information
herein is qualified in its entirety by this reference.

Common Shares

         The Company is  authorized  by its  Certificate  of  Incorporation,  as
amended,  to issue  40,000,000  Common Shares,  of which  23,920,282  shares are
issued  and  outstanding  as of the  date  hereof  and are  held  by over  6,700
shareholders,  based upon information  available on individual security position
listings.

         The  holders of Common  Shares are  entitled to one vote for each share
held on all matters  submitted to a vote of common  holders.  The Common  Shares
have no cumulative voting rights,  which means that the holders of a majority of
the Common Shares  outstanding  can elect all the directors if they choose to do
so. In that event, the holders of the remaining shares will not be able to elect
any directors.

         Each Common Share is entitled to participate  equally in dividends,  as
and when declared by the Board of Directors,  and in the  distribution of assets
in the  event of  liquidation,  subject  in all  cases to any  prior  rights  of
outstanding preferred shares. The Common Shares have no preemptive or conversion
rights,  redemption  rights, or sinking fund provisions.  The outstanding Common
Shares are duly authorized, validly issued, fully paid, and nonassessable.

         During forth  quarter the Company  issued 834 Common Shares to a former
director as a directors fee and 2,315 Common Shares as a restricted  stock award
to a new  director  for coming on the board.  The  exemption  from  registration
relied upon was that of Section 4(2) of the Securities Act of 1933.

Warrants & Options

         The Company has outstanding  options to acquire 1,190,000 Common Shares
at a price of $4.45 per share,  expiring  June 20, 2000.  These  options are all
held by employees of the Company. They contain limited provisions for adjustment
of  the  number  of  shares  in  the  event  of a  subdivision,  combination  or
reclassification  of  Common  Shares.  They do not have  any  rights  to  demand
registration  or "piggy  back" rights in the event of a  registration  of Common
Shares.

         A group of the  Company's  former  lenders,  were  issued  warrants  to
acquire 2,060,606 Common Shares at $4.125 per share, expiring December 31, 1998,
which Common  Shares would be  restricted  securities  within the meaning of the
Securities  Act of 1933  and can  only be sold  pursuant  to an  exemption  from
registration  or an offering  which is the subject of an effective  registration
statement.  The holders of these shares, after exercise,  will have the right to
demand  registration  of the  shares  or "piggy  back" in the event the  Company
registers an offering of its Common Shares.

Preferred Shares

         Pursuant to the Company's Certificate of Incorporation,  the Company is
authorized to issue  5,000,000  preferred  shares,  and the  Company's  Board of
Directors,  by  resolution,  may  establish  one or more  classes  or  series of
preferred  shares  having the number of shares,  designations,  relative  voting
rights,   dividend  rates,   liquidation  and  other  rights  preferences,   and
limitations that the Board of Directors fixes without any shareholder approval.
<PAGE>

         A number of preferred shares equal to one share for every one hundredth
of one Common Share  outstanding has been reserved for issuance  pursuant to the
Company's  Shareholder Rights Plan, and designated as Series A Preferred Shares.
No shares of this Series A Preferred Shares have been issued or are outstanding.
Other than the  designation as Series A, the Series A Preferred  Shares have not
had designations,  preferences and rights established by the Board of Directors.
See "Shareholder  Rights Plan," below. The designations,  preferences and rights
will be established  if and when any of the Series A Preferred  Shares are to be
issued.

Transfer Agent

         The transfer  agent,  registrar and dividend  disbursing  agent for the
Common Shares is American Stock  Transfer and Trust  Company,  6201 15th Avenue,
Brooklyn, New York 11204.

Price Range of Common Shares

         The Common Shares are quoted on the National  Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") - National Market, under the
symbol "PANA".  They commenced  trading  September 21, 1989. The following table
sets forth, for the periods indicated, the high asked and low bid prices for the
Common Shares.

                                       1996
                                      ======
            1st Quarter    2nd Quarter      3rd Quarter         4th Quarter
High           5              4 1/2             6                 6 3/8
Low            3 7/16         3 11/16           3 3/8             4 3/8

                                       1997
                                      ======
            1st Quarter    2nd Quarter      3rd Quarter         4th Quarter
High          5 1/4           4 5/8              5                5 9/16
Low           3 5/8           3 3/4              3 7/8            3 9/16


     On March 31, 1998,  the last sale price of the Common Shares as reported on
the NASDAQ-NM was $ 4.44 per share.

Dividend Policy

         The Company has not paid any cash dividends on the Common  Shares.  The
Delaware General  Corporation Law, to which the Company is subject,  permits the
Company to pay  dividends  only out of its  capital  surplus  (the excess of net
assets over the aggregate par value of all outstanding capital shares) or out of
net  profits  for the  fiscal  year in which the  dividend  is  declared  or the
preceding  fiscal year.  The New Credit  Facility  and the Senior Notes  contain
restrictions  on  any  dividends  or  distributions  by the  Company  and on any
purchases by the Company of Common Shares.  The Company retains its earnings and
cash flow to finance the expansion and development of its business and currently
does not intend to pay dividends on the Common  Shares.  Any future  payments of
dividends  will  depend  on,  among  other  factors,  the  earnings,  cash flow,
financial condition, and capital requirements of the Company.

Shareholder Rights Plan

         On  August  2,  1995,  the  Board  of  Directors  declared  a  dividend
distribution  of one Right for each  outstanding  Common Share of the Company to
the  shareholders of record on August 3, 1995,  (the "Record Date").  Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
one share of the Series A Preferred Shares (the "Preferred Shares"),  or in some
circumstances,  Common  Shares,  other  securities,  cash  or  other  assets  as
summarized below, at a price of $30.00 per share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement  (the  "Rights  Agreement")  between the Company  and  American  Stock
Transfer and Trust Company, as Rights Agent.

         The  Shareholder  Rights Plan was designed to reduce the  likelihood of
inadequate bids, partial bids, market  accumulations and front-end loaded offers
to acquire the Company's  Common  Shares,  which are not in the best interest of
all the  Company's  shareholders.  The  adoption  of the Plan  communicates  the
Company's  intention to resist such  actions as are not in the best  interest of
all  shareholders  and provides  time for the Board of Directors to consider any
offer and seek alternative  transactions to maximize shareholder value. The Plan
was adopted upon the advice of the Company's investment bankers in 1995.
<PAGE>

         Until  the  earlier  to occur of (i) the date of a public  announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 20%
or more  of the  outstanding  Common  Shares  or (ii)  ten  days  following  the
commencement  or announcement of an intention to make a tender offer or exchange
offer that would result in a Person or group beneficially  owning 20% or more of
such  outstanding  Common  Shares (the  earlier of such dates  being  called the
"Distribution  Date"), the Rights will be evidenced,  with respect to any of the
Company's Common Share  certificates  outstanding as of the Record Date, by such
Common  Share  certificate.  The  Rights  Agreement  provides  that,  until  the
Distribution  Date, the Rights will be transferred with and only with the Common
Shares.  Until the Distribution Date (or earlier redemption or expiration of the
Rights),  new  Common  Share  certificates  issued  after the  Record  Date upon
transfer  or  new  issuance  of  the  Common  Shares  will  contain  a  notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier  redemption or expiration of the Rights),  the surrender for transfer of
any of the Company's  Common Share  certificates  outstanding  as of the Record,
will also  constitute  the  transfer  of the Rights  associated  with the Common
Shares  represented by such  certificate.  As soon as practicable  following the
Distribution  Date,  separate   certificates   evidencing  the  Rights  ("Rights
Certificates")  will be mailed to holders  of record of the Common  Shares as of
the  close  of  business  on the  Distribution  Date and  such  separate  Rights
Certificates alone will evidence the Rights.

         The Rights are not exercisable until the Distribution  Date. The Rights
will  expire on August 4,  2005,  unless  earlier  redeemed  by the  Company  as
described below.

         The Purchase  Price  payable,  and the number of  Preferred  Shares (or
Common  Shares,  other  securities,  cash or other assets,  as may be necessary)
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent  dilution (i) in the event of a stock  dividend on, or a subdivision,
combination or  reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred  Shares of certain  rights or warrants to subscribe for
Preferred Shares or convertible securities at less than the current market price
of the  Preferred  Shares  or (iii)  upon the  distribution  to  holders  of the
Preferred  Shares of  evidences of  indebtedness  or assets  (excluding  regular
periodic  cash  dividends  out of  earnings or  retained  earnings or  dividends
payable in the Preferred  Shares) or of  subscription  rights or warrants (other
than those referred to above).

         In the  event  that the  Company  were  acquired  in a merger  or other
business  combination  transaction of 50% or more of its assets or earning power
were sold, proper provision shall be made so that each holder of a Right,  other
than of Rights that are or were beneficially owned by an Acquiring Person (which
will thereafter be void) shall  thereafter  have the right to receive,  upon the
exercise thereof at the then current exercise price of the Right, that number of
common  shares of the acquiring  company  which at the time of such  transaction
would have a market value of two times the exercise  price of the Right.  In the
event that an Acquiring  Person becomes the  beneficial  owner of 20% or more of
the  outstanding  Common  Shares,  proper  provision  shall be made so that each
holder of a Right,  other than of Rights that are or were beneficially  owned by
the Acquiring  Person (which will thereafter be void),  will thereafter have the
right to receive upon  exercise  that number of the Common Shares (or in certain
other  circumstances,  assets or other securities)  having a market value of two
times the exercise price of the Right.

         With certain  exceptions,  no adjustment in the Purchase  Price will be
required until  cumulative  adjustments  require an adjustment of at least 1% in
such Purchase Price. No fractional  shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth of one Preferred Share)
and, in lieu  thereof,  an  adjustment  in cash will be made based on the market
price of the  Preferred  Shares on the last  Trading  Date  prior to the date of
exercise.

         At any time prior to 5:00 P.M. Kansas City,  Missouri time on the tenth
calendar day after the first date after the public announcement that a person or
group of affiliated or associated persons has acquired  beneficial  ownership of
20% or  more  of the  outstanding  Common  Shares  of the  Company  (the  "Share
Acquisition Date"), the Company may redeem the Rights in whole, but not in part,
at a price of $0.005 per Right (the  "Redemption  Price").  Following  the Share
Acquisition  Date,  but prior to an event listed in Section  13(a) of the Rights
Agreement,  the  Company  may  redeem the  Rights in  connection  with any event
specified in Section 13(a) in which all shareholders are treated alike and which
does  not  include  the  Acquiring  Person  or  his  Affiliates  or  Associates.
Thereafter,  the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding Common
Shares in a  transaction  or series of  transactions  not involving the Company.
Immediately upon the action of the Board of Directors of the Company electing to
redeem the Rights,  the Company shall make announcement  thereof,  and upon such
election,  the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
<PAGE>

         Until a Right is exercised,  the holder thereof,  as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.

         The  provisions of the Rights  Agreement may be amended by the Board of
Directors in order to cure any ambiguity or correct any defect or inconsistency,
extend the  Redemption  Period  and,  prior to the  Distribution  Date,  to make
changes  deemed to be in the best  interests  of the  holders  of the Rights or,
after the  Distribution  Date, to make such other changes which do not adversely
affect the  interests of the holders of the Rights  (excluding  the interests of
any Acquiring Person and its affiliates and associates).

Certain Anti-takeover Provisions

         The  provisions  of the  Company's  Certificate  of  Incorporation  and
By-laws  summarized  in the  following  paragraphs  may be  deemed  to  have  an
anti-takeover effect and may delay, defer, or prevent a tender offer or takeover
attempt  that a  shareholder  might  consider to be in that  shareholder's  best
interests,  including  attempts  that might  result in a premium over the market
price for the shares held by shareholders.  In addition,  certain  provisions of
Delaware law and the Company's  Long-Term Incentive Plan may be deemed to have a
similar effect.

         Certificate of Incorporation and By-laws. The Board of Directors of the
Company  is  divided  into  three  classes.  The term of  office of one class of
directors expires at each annual meeting of shareholders,  when their successors
are  elected  and  qualified.   Directors  are  elected  for  three-year  terms.
Shareholders  may remove a director  only for cause.  In  general,  the Board of
Directors,  not the Company's shareholders,  has the right to appoint persons to
fill vacancies on the Board of Directors.

         Pursuant to the Company's  Certificate of Incorporation,  the Company's
Board of Directors,  by resolution,  may establish one or more classes or series
of preferred  shares having the number of shares,  designation,  relative voting
rights,  dividend  rates,  liquidation  and  other  rights,   preferences,   and
limitations that the Board of Directors fixes without any shareholder  approval.
Any rights, preferences,  privileges, and limitations that are established could
have the effect of impeding or  discouraging  the  acquisition of control of the
Company.

         The  Company's  Certificate  of  Incorporation  contains a "fair price"
provision that requires the  affirmative  vote of the holders of at least 80% of
the voting shares of the Company and the affirmative vote of at least two-thirds
of the voting shares of the Company not owned,  directly or  indirectly,  by the
Related Person (hereafter defined) to approve any merger, consolidation, sale or
lease of all or substantially all of the assets of the Company, or certain other
transactions  involving  any  Related  Person.  For  purposes  of the fair price
provision,  a "Related Person" is any person  beneficially owning 10% or more of
the voting shares of the Company who is a party to the  Transaction  at issue, a
director who is also an officer of the Company and is a party to the Transaction
at issue, an affiliate of either such person,  and certain  transferees of those
persons.  The voting  requirement  is not  applicable  to certain  transactions,
including  those that are approved by the  Company's  Continuing  Directors  (as
defined in the Certificate of  Incorporation)  or that meet certain "fair price"
criteria contained in the Certificate of Incorporation.

         The  Company's  Certificate  of  Incorporation  further  provides  that
shareholders  may act only at an annual or special meeting of  shareholders  and
not by written consent, that special meetings of shareholders may be called only
by the Board of  Directors,  and that  only  business  proposed  by the Board of
Directors may be considered at special meetings of shareholders.

         The Company's  Certificate of Incorporation also provides that the only
business  (including  election of directors) that may be considered at an annual
meeting of shareholders,  in addition to business proposed (or persons nominated
to be  directors)  by the  directors  of the Company,  is business  proposed (or
persons  nominated to be directors) by  shareholders  who comply with the notice
and disclosure requirements of the Certificate of Incorporation. In general, the
Certificate of Incorporation requires that a shareholder give the Company notice
of  proposed  business  or  nominations  no later than 60 days before the annual
meeting  of  shareholders  (meaning  the  date on  which  the  meeting  is first
scheduled and not  postponements or adjournments  thereof) or (if later) 10 days
after  the  first  public  notice  of the  annual  meeting  is  sent  to  common
shareholders. In general, the notice must also contain certain information about
the  shareholder  proposing  the  business or  nomination,  his  interest in the
business,  and (with respect to nominations for director)  information about the
nominee  of the nature  ordinarily  required  to be  disclosed  in public  proxy
solicitations.  The shareholder must also submit a notarized letter from each of
his nominees  stating the nominee's  acceptance of the nomination and indicating
the nominee's intention to serve as director if elected.
<PAGE>

         The  Certificate  of  Incorporation   also  restricts  the  ability  of
shareholders  to interfere  with the powers of the Board of Directors in certain
specified ways, including the constitution and composition of committees and the
election and removal of officers.

         The Certificate of Incorporation  provides that approval by the holders
of at least two-thirds of the outstanding voting shares is required to amend the
provisions  of the  Certificate  of  Incorporation  discussed  in the  preceding
paragraphs and certain other provisions,  except that approval by the holders of
at least 80% of the  outstanding  voting  shares of the Company,  together  with
approval by the holders of at least two-thirds of the outstanding  voting shares
not owned,  directly or indirectly,  by the Related Person, is required to amend
the fair price  provisions  and except that  approval of the holders of at least
80% of the  outstanding  voting  shares  is  required  to amend  the  provisions
prohibiting shareholders from acting by written consent.

         Delaware  Anti-takeover  Statute. The Company is a Delaware corporation
and is  subject to Section  203 of the  Delaware  General  Corporation  Law.  In
general,  Section 203 prevents an "interested shareholder" (defined generally as
a person owning 15% or more of the  Company's  outstanding  voting  shares) from
engaging  in a  "business  combination"  (as  defined in  Section  203) with the
Company for three years  following  the date that  person  became an  interested
shareholder unless (a) before that person became an interested shareholder,  the
Board of  Directors  of the  Company  approved  the  transaction  in  which  the
interested shareholder became an interested shareholder or approved the business
combination,  (b) upon  consummation  of the  transaction  that  resulted in the
interested  shareholder's  becoming an interested  shareholder,  the  interested
shareholder owns at least 85% of the voting shares of the Company outstanding at
the time the transaction  commenced  (excluding shares held by directors who are
also  officers of the  Company  and by employee  stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange  offer),  or (c)  following
the  transaction  in which that person  became an  interested  shareholder,  the
business  combination  is approved by the Board of  Directors of the Company and
authorized at a meeting of shareholders  by the affirmative  vote of the holders
of at least two-thirds of the outstanding voting shares of the Company not owned
by the interested shareholder.

         Under  Section  203,  these  restrictions  also do not apply to certain
business  combinations  proposed  by an  interested  shareholder  following  the
announcement  or  notification  of one  of  certain  extraordinary  transactions
involving the Company and a person who was not an interested  shareholder during
the  previous  three  years or who  became an  interested  shareholder  with the
approval  of a  majority  of the  Company's  directors,  if  that  extraordinary
transaction  is approved or not opposed by a majority of the  directors who were
directors  before any person  became an interested  shareholder  in the previous
three years or who were  recommended  for  election  or elected to succeed  such
directors by a majority of such directors then in office.

         Long-Term  Incentive  Plan.  Awards  granted  pursuant to the Company's
Long-Term  Incentive  Plan may  provide  that,  upon a change in  control of the
Company,  (a) each  holder of an option  will be granted a  corresponding  stock
appreciation  right,  (b) all outstanding  stock  appreciation  rights and stock
options become immediately and fully vested and exercisable in full, and (c) the
restriction  period on any restricted  stock award shall be accelerated  and the
restrictions shall expire.

         Debt.  Certain  provisions in the New Credit  Facility and Senior Notes
may also impede a change in control,  in that they  provide  that the Bank loans
and  Senior  Notes  become  due if there is a change  in the  management  of the
Company or a merger with another company.

Item 6.  Selected Financial Data.

         The following  historical selected  consolidated  financial data of the
Company  are  derived  from,  and  qualified  by  reference  to,  the  Company's
Consolidated Financial Statements and the notes thereto. The historical selected
financial  data for the five years ended December 31, 1997 were derived from the
Company's audited consolidated  financial statements.  The information contained
in this table should be read in conjunction  with  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial  Statements  of the Company and the notes thereto  included  elsewhere
herein.


<PAGE>

<TABLE>
<CAPTION>



                                                               For the year ended December 31,
                                                 1993        1994       1995      1996         1997   
                                               ======================================================
           Summary of Operating Data:                (dollars in thousands, except per share data)
<S>                                            <C>        <C>        <C>        <C>
Oil and natural gas sales                      $ 12,605   $ 17,338   $ 18,447   $ 20,063    $ 37,841
Depreciation, depletion & amortization                                                       
 expense                                          4,288      6,038      8,064      9,022      18,866
Lease operating expense                           5,297      5,231      8,055      8,477      11,305
Production and ad valorem taxes                     754      1,006      1,078        559         721
Geological and geophysical expense                   --         --         --         --         286
Exploratory dry hole expense                         --         --      8,112         --          67
General and administrative expense                  542        587        690        772       1,764
Provision for losses on disposition                                                            
 and write-downs of assets                        3,824      1,202        751         --          --
West Delta fire loss                                 --         --         --        500          --
Net operating income (loss)                   $  (2,100)   $ 3,274    $(8,303)   $   733     $ 4,832
Interest expense (net)                            1,886      1,623        987      2,514       3,930  
Gain (loss) on investment in
 Common stock                                        --         --         --       (258)         75
Extraordinary item- loss on early
 retirement of debt                                  --       (536)        --         --        (934)
                                              ---------    -------   --------   --------    --------
Net income (loss)                             $  (3,986)   $ 1,115   $ (9,290)  $ (2,039)   $     43
                                              =========    =======   ========   ========    ========                      
                                                                                        
Net income (loss) per Common Share            $   (0.53)  $   0.11   $  (0.81)  $  (0.16)   $    --

Summary Balance Sheet Data:
Oil and gas properties (net)                  $  19,183   $ 23,945   $ 29,485   $ 50,540   $112,548
Total assets                                     24,432     29,095     36,169     73,768    179,629
Long-term debt                                   12,465     12,500     22,390     49,500    101,700
Stockholders' equity                              8,744     14,882      9,174     17,498     55,188
Dividends per Common Share                           --         --         --         --         --

Other Data:
EBITDA(a)                                     $   6,012  $  10,514  $   8,624  $  10,255   $  23,840
Capital expenditures(b)                             842     12,128     21,841     43,050      41,997
-----------
</TABLE>
     (a)  EBITDA is defined as net income  (loss)  before  income taxes plus the
          sum of depletion, depreciation and amortization, provisions for losses
          and gains on  disposition  and write-down of assets,  exploratory  dry
          hole expenses,  interest expense and non-recurring charges.  EBITDA is
          not a  measure  of  cash  flow as  determined  by  generally  accepted
          accounting principles. The Company has included information concerning
          EBITDA  because  EBITDA  is a measure  used by  certain  investors  in
          determining   the   Company's   historical   ability  to  service  its
          indebtedness. EBITDA should not be considered as an alternative to, or
          more  meaningful  than,  net  income or cash  flows as  determined  in
          accordance  with  generally  accepted  accounting  principles or as an
          indicator of the Company's operating performance or liquidity.

     (b)  Capital  expenditures  include  cash  expended for  acquisitions  plus
          additions to oil and natural gas  properties  and other fixed  assets,
          without taking into consideration sales of capital assets.
<PAGE>

         The  following  discussion  should  be read  in  conjunction  with  the
Company's  Consolidated  Financial Statements,  "Selected Consolidated Financial
Data" and respective notes thereto,  included  elsewhere herein. The information
below should not be construed  to imply that the results  discussed  herein will
necessarily  continue into the future or that any conclusion reached herein will
necessarily  be  indicative  of actual  operating  results in the  future.  Such
discussion  represents  only the best present  assessment  of  management of the
Company. Because of the size and scope of the Company's recent acquisitions, the
results of operations from period to period are not necessarily comparative.


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

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 such products and other uncertainties in
the world energy markets.  These industry  conditions  should be considered when
this analysis of the Company's operations is read.

         The Company  experienced a fire on April 24, 1996 at Tank Battery #3 in
the West Delta Fields  resulting  in these fields being  shut-in from April 24th
until being returned to production on October 7, 1996. The fire resulted in lost
revenues estimated by management to be approximately $6,000,000.

         The Company has spent  $8,500,000  on Tank  Battery #3 inclusive of the
$500,000 expensed during 1996 and has received  reimbursement from its insurance
company of $3,900,000,  after  satisfaction of the $225,000 in deductibles.  The
excess of expenditures over insurance  reimbursement  has been capitalized.  The
Company has filed  suits  against  the  employers  of the persons who caused the
incidents for recovery of these costs and its lost profits.  No assurance can be
given that the Company will successfully  recover any amounts sought in any such
suits.

Year 2000 Compliance

         The  Company  does not expect  that the cost to modify and  replace its
information technology infrastructure to be Year 2000 compliant will be material
to its results of  operations.  The Company  does not  anticipate  any  material
disruption in its  operations as a result of any failure by the Company to be in
compliance.

Liquidity and Capital Resources

         On October 9, 1997, the Company issued $100 million principal amount of
10.625%  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.  Of the  $96.2  million  net  proceeds,  $54.7  million  was used to repay
substantially all of the Company's  outstanding  indebtedness with the remaining
$41.5  million to be used for capital  expenditures.  At  December  31, 1997 the
Company had $36.9 million in cash and $27.2 million in working capital.

         On March 5, 1997, the Company completed an offering of 8,403,305 common
shares at $4.00 per  share,  $3.728  net of the  underwriter's  commission.  The
offering  consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders,  primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000  from the offering were used to prepay
$13,500,000  of its 12%  subordinated  debt and the remainder was used to reduce
borrowings under the Company's bank facility.

         In October 1997, the Company amended its bank facility. See "New Credit
Facility." The loan is a reducing revolver designed to provide the Company up to
$75 million  depending on the  Company's  borrowing  base,  as determined by the
lenders. The Company's borrowing base at December 31, 1997 was $40 million, with
availability under the revolver of $39 million. The principal amount of the loan
is due October 22, 2002.  However,  at no time may the Company have  outstanding
borrowings in excess of its borrowing base.  Interest on the loan is computed at
the bank's prime rate or at 1 to 1 3/4%  (depending  upon the  percentage of the
facility being used) over the applicable London Interbank Offered Rate ("LIBOR")
on Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the  expiration of the terms of such
loans,  but no less  frequently  than every three  months.  The bank facility is
collateralized  by a first mortgage on the Company's  offshore  properties.  The
loan agreement contains certain covenants  including a requirement to maintain a
positive  indebtedness  to cash flow ratio, a positive  working capital ratio, a
certain  tangible net worth, as well as limitations on future debt,  guarantees,
liens, dividends,  mergers, material change in ownership by management, and sale
of assets.
<PAGE>

         From time to time the Company  has  borrowed  funds from  institutional
lenders.  In each  case  these  loans  were due at a stated  maturity,  required
payments of interest only at 12% per annum and were secured by a second mortgage
on the  Company's  offshore  oil and gas  properties.  At December 31, 1996 such
loans totaled $22 million. The loans were all repaid during 1997.


         At  December  31,  1997,  70%  of  the  Company's   total  assets  were
represented by oil and natural gas properties,  pipelines and equipment,  net of
depreciation, depletion and amortization.

                  The product prices received by the Company,  net of the impact
of hedge  transactions  discussed below,  averaged $2.49 per Mcf for natural gas
and $18.04 per Bbl for oil for the year ended  December 31, 1997.  In 1997,  the
Company's natural gas hedge  transactions were based upon published gas pipeline
index prices instead of the NYMEX.  This change  mitigated the risk of the price
differential due to transportation. In 1997, 14,000 MMbtu per day was hedged, at
a swap price of $1.80 per MMbtu with  varying  levels of  participation  (93% in
January to 40% in September) in settlement prices above the $1.80 per MMbtu swap
price  level.  The Company has natural  gas hedged in  quantities  ranging  from
10,000 to 50,000  MMbtu's  per day in each of the  months in 1998 for a total of
11,980,000 MMbtu's, at pipeline prices averaging  approximately $2.05 per MMbtu,
for a NYMEX equivalent of approximately  $2.20 per MMbtu. The Company has hedged
7,356  MMbtu per day in 1999,  all at an  average  pipeline  index swap price of
$1.89 per  MMbtu.  The  Company  has hedged 218 MMbtu for each day in 2000 at an
average  pipeline index swap price of $1.87. In 1997 the Company also hedged its
oil prices by selling the equivalent of 720 Bbls of oil per day at $20.00,  with
a 40%  participation  in prices above the $20.00 swap price  level.  The Company
hedged 1,268 Bbls of oil for each day in 1998 at an average swap price of $19.06
per Bbl,  with a 40%  participation  above $19.28 on 500 of the 1,268 Bbls.  The
Company  has hedged 223 Bbls of oil for each day in 1999 at an average  price of
$17.27 per Bbl.  The  Company has hedged 232 Bbls of oil for each day in 2000 at
an  average  price of  $17.28  per Bbl.  Management  has  generally  used  hedge
transactions  to protect its cash flows when the  Company's  levels of long-term
debt have been higher and refrained from hedge  transactions when long-term debt
has been lower. For accounting  purposes,  gains or losses on hedge transactions
are recognized in the production month to which a hedge contract relates.

         Pursuant  to  existing  agreements,  the Company is required to deposit
funds  in  bank  trust  and  escrow   accounts  to  provide  a  reserve  against
satisfaction of its eventual responsibility to plug and abandon wells and remove
structures  when  certain  fields no longer  produce  oil and natural  gas.  The
Company has entered into an escrow agreement with Amoco Production Company under
which the Company deposits, for the life of the fields, in a bank escrow account
ten percent  (10%) of the net cash flow,  as defined in the  agreement,  for the
Amoco  properties.  The Company  has  established  the  "PANACO  East Breaks 110
Platform  Trust"  in  favor  of the  Minerals  Management  Service  of the  U.S.
Department of the Interior.  This trust required an initial  funding of $846,720
in December  1996,  and  remaining  deposits of $244,320  due at the end of each
quarter in 1999 and  $144,000 due at the end of each quarter in 2000 for a total
of $2,400,000. In addition, the Company has $9,250,000 in surety bonds to secure
its plugging and abandonment operations.

         In  1997,   the  Company   spent   $41,997,000   in  cash  for  capital
expenditures, approximately $2,300,000 of which was for the completion of an oil
and natural  gas  pipeline in the West Delta  Fields and the  remainder  was for
property acquisitions and development of its oil and natural gas properties.

For the years ended December 31, 1997 and 1996:

Results of Operations

         Production.  Natural gas production  increased 69% to 11,468,000 Mcf in
1997 from 6,788,000 Mcf in 1996. Oil production increased 87% in 1997 to 515,000
Bbls,  from 275,000 Bbls in 1996.  Results for 1997 include  production from the
former Amoco and Goldking  properties,  purchased in October 1996 and July 1997,
respectively.  Results for 1997 also included increased production from the West
Delta Fields, which were shut-in from April 24, 1996 until October 1996. They do
not include  production  from the Bayou Sorrel Field which was sold September 1,
1996.

         In March, 1997 the federal  production from the West Delta Block 58 was
brought back on-line for the first time since April 1996 with the  completion of
a dual six inch,  eight  mile  pipeline  to the West  Delta  central  processing
facility,  Tank Battery #3. This pipeline also allowed  Samedan  Corporation  to
resume  production from their well,  drilled on a farm-out from the Company,  on
which the Company  receives  overriding  royalty revenue and fees for processing
the oil and low pressure natural gas.

<PAGE>

         Prices. Natural gas prices, net of the impacts of hedging transactions,
increased  from  $2.17 per Mcf in 1996 to $2.49 in 1997.  The 1997  natural  gas
hedge  program had the effect of reducing  natural gas prices by only ($.10) per
Mcf in 1997,  compared to ($.58) per Mcf in 1996. The 1997 hedge program allowed
the Company more  participation  in increases in market  prices for natural gas,
while  providing  the price  stability of no less than $1.80 per MMbtu on 14,000
MMbtu per day.  Oil prices  decreased  in 1997 to $18.04 per Bbl from $19.42 per
Bbl in 1996.

         "Oil  and  natural  gas  sales"  increased  89%  in  1997.  Significant
increases in both natural gas and oil production  were the primary factor in the
increase in  revenues.  The former Amoco and  Goldking  properties,  acquired in
October  1996 and July  1997,  respectively,  coupled  with  the  resumption  of
production from the West Delta Fields, and the Company's  development program on
the former Amoco properties has significantly increased production.

         "Depletion,    depreciation   and   amortization   expense"   increased
$9,844,000,  or 109%  also in  part  due to the  purchase  of the  former  Amoco
properties in October 1996.  The amount per Mcf  equivalent  also increased from
$1.07 in 1996 to $1.30 in 1997,  due to several  factors.  Downward  engineering
revisions,  in the West Delta and East Breaks 110 Fields at year-end 1996 were a
significant part of the increase.  Also, $4,000,000 in capital expenditures made
during 1996 (over and above insurance reimbursement) to rebuild Tank Battery #3,
the  central  processing  facility  for the West  Delta  Fields,  increased  the
depletion cost per Mcf equivalent for those fields.

         "Lease operating expense" increased $2,827,000, or 33% in 1997 with the
addition of interests in thirteen  offshore blocks acquired in October 1996 from
Amoco and the interests in the properties  acquired in the Goldking  acquisition
in July  1997.  As a  percent  of oil and  natural  gas  sales,  lease-operating
expenses decreased to 30% in 1997 from 42% in 1996.

         "Production and ad valorem taxes" increased 29% in 1997,  however, as a
percentage of oil and natural gas sales they decreased to 2%, from 3% of oil and
natural gas sales in 1996. The decrease is due to the Company's shift to federal
offshore waters where there are no state severance taxes.

         "Geological  and  geophysical   expense"  in  1997  resulted  from  the
non-drilling exploratory costs incurred in the fourth quarter.

         "Exploratory dry hole expense" incurred in 1997 resulted from an option
paid to  participate in an  exploratory  well in the High Island Area,  offshore
Texas  which was  condemned  before the well was  drilled  because of a dry hole
drilled  by  another  company  on an  adjacent  block.  There will be no further
exploration expenses associated with this prospect.

         "General and  administrative  expense" increased $992,00 primarily as a
result of the  Goldking  acquisition.  As a  percentage  of oil and  natural gas
sales,  general and  administrative  expenses increased to 5% in 1997 from 4% in
1996.

         "Interest  expense  (net)"  increased 56% in 1997  primarily due to the
increased  average  borrowing  levels  from the  debt  assumed  in the  Goldking
acquisition and to a lesser extent the offering of 10.625%  $100,000,000  Senior
Notes in October 1997.

     "Gain(loss)  on  investment in common stock" is the gain on the sale of the
Company's 477,612 shares of National Energy Group, Inc. common stock realized in
1997.

<PAGE>

For the years ended December 31, 1996 and 1995:

Capital Spending

         In  1996,  the  Company  made  $43,000,000  in  capital   expenditures,
including  $32,000,000  on the purchase of oil and natural gas assets from Amoco
Production Company,  $4,000,000 for repair and rebuilding of the West Delta Tank
Battery #3, net of insurance  reimbursements,  and the remainder for development
of its oil and natural gas  properties.  The majority of the  development  costs
were incurred to drill two  unsuccessful  development  wells in the Bayou Sorrel
Field and for the  Company's  share of  successfully  recompleting  two wells on
Eugene Island Block 372, which is operated by Unocal Corporation.

Results of Operations

         Production.  Natural gas  production  decreased 31% to 6,788,000 Mcf in
1996 from  9,850,000  Mcf in 1995.  Natural gas  production  from the West Delta
Fields decreased from 7,825,000 Mcf in 1995 to 2,058,000 Mcf in 1996,  primarily
as a result of the fire on April 24, 1996. The Company's  production  would have
been much  lower were it not for the  Zapata  acquisition  in 1995 and the Amoco
acquisition in 1996.

         Likewise,  oil production  from the West Delta Fields also decreased in
1996 when compared to 1995, from 132,000 Bbls to 57,000 Bbls.  However,  as with
natural gas,  acquisitions offset the decrease from West Delta. The Bayou Sorrel
Field,  which produces  primarily oil, produced 93,000 Bbls in 1996 which, along
with the Amoco  properties  more than  offsetting  the decrease from West Delta.
Also, oil production from the Zapata Properties is included for the full year in
1996,  with only the period of July 27 to December  31  included  in 1995,  also
offsetting  the  decrease  from West  Delta.  These  factors  resulted  in a 62%
increase in oil production, from 170,000 Bbls in 1995 to 276,000 Bbls in 1996.

     On a Mcf equivalent basis,  total oil and natural gas production  decreased
22% in 1996 when compared to 1995

          Prices. Natural gas prices increased in 1996 to $2.75 per Mcf compared
to $1.58  in  1995.  The  Company  entered  into a  natural  gas swap  agreement
beginning  January 1, 1996 for the sale of 15,000  MMbtu of natural gas each day
in 1996, with contract prices ranging from $1.75 per MMbtu to $2.25 per MMbtu. A
swap loss for the year ended December 31, 1996 of $3,900,000,  decreased the net
price  received  by the  Company to $2.17 per Mcf for the year.  Oil prices also
increased, from $ $16.78 per Bbl in 1995 to $19.42 per Bbl in 1996.

         "Oil and natural gas sales"  increased 8% for 1996 when  compared  with
1995, in spite of the fire at West Delta. The fire substantially reduced oil and
natural gas  production  for 1996, as production  from the West Delta Fields was
shut-in  from April 24, 1996 until  October 7, 1996.  However,  the  decrease in
production from West Delta was offset by production  from  properties  acquired.
The Amoco  properties,  acquired on October 8, 1996, and the Bayou Sorrel Field,
acquired on December 28, 1995 had no production realized by the Company in 1995.
The offshore  properties of Zapata Exploration Company were acquired on July 26,
1995 with the production from these  properties  being included in the Company's
results of operations from July 27 through December 31, 1995.

         "Depletion,  depreciation  and amortization  expense"  increased 12% in
1996  despite  the  reduced  production  from the West Delta  Fields.  While the
production  from properties  acquired  accounted for a part of the 12% increase,
depletion, depreciation and amortization per Mcf equivalent also increased, from
$0.74 in 1995 to $1.07 in 1996,  due to year-end 1996  engineering  revisions on
the West  Delta  and East  Breaks  109  Fields,  and  production  from the Amoco
properties in the fourth quarter of 1996,  which had higher  depletion rates per
Mcf equivalent than previously owned properties.
<PAGE>

         "Lease operating  expense"  increased $422,000 in 1996 primarily due to
the  Amoco,  Zapata  and  Bayou  Sorrel  Field  acquisitions.  With  the  Zapata
properties,   the  Company  acquired   interests  in  five  offshore   producing
properties.  Since the acquisition of the Zapata  Properties  closed on July 26,
1995, only the lease  operating  expenses from July 27, to December 31, 1995 are
included in the 1995 results of operations, while the 1996 period includes these
expenses for the full year.  Also 1996 includes eight months of lease  operating
expenses for the Bayou  Sorrel Field (sold  September 1) and almost three months
(October 8 - December 31) of the Amoco  properties,  with none of these expenses
included  in 1995.  West Delta lease  operating  expenses  did  decrease in 1996
($805,000  from  expected  levels) with the fields  being  shut-in from April 25
through October 7, however,  a part of these lease operating  expenses are fixed
in nature and continued.

         "Production and ad valorem taxes"  decreased to 2.8% of oil and natural
gas sales in 1996 from 5.8% of oil and natural gas sales in 1995.The decrease is
primarily due to the shift in the Company's  production  volumes from properties
subject to severance  taxes to properties in federal  offshore waters (the Amoco
and  Zapata  properties)  that  are not  subject  to such  taxes.  A part of the
decrease ($178,000 from expected levels) is also due to the lost production from
the West Delta Fields due to the fire. A large  percentage of this production is
in Louisiana State waters, which are subject to severance taxes.

         "Exploratory  dry hole expense" in 1995  consisted of costs of $796,000
on Eugene Island Block 50, $1,378,000 on South Timbalier Block 33, and
$5,938,000 on West Delta Block 54.

         "Provision for losses on disposition and write-downs of assets" in 1995
relates to the write-down of a group of onshore properties acquired in the early
1980's.

         "West Delta fire loss" is the  expense of the fire at Tank  Battery #3,
the central  processing  facility  for the West Delta  Fields.  Included in this
expense  are  the  insurance   deductibles   and  the  cost  of   non-reimbursed
expenditures, which were not capitalized.

     "Interest  expense  (net)"  increased  $1,500,000,  or 155%  in  1996  when
compared to 1995.  Average  Long-Term Debt levels  increased from $11,000,000 in
1995 to  $28,000,000  for 1996, as a result of debt incurred in connection  with
acquisitions.

     "Gain  (loss) on  investment  in  common  stock" in 1996 was a result of an
unrealized  decrease in the market value at December 31, 1996 of 477,612  shares
of National Energy Group, Inc. common stock received in connection with the sale
of the Bayou Sorrel Field.

     "Net operating income (loss)"  increased  significantly in 1996 in relation
to the  $8,100,000  exploration  expenses  and  the  $751,000  onshore  property
write-down in 1995.
         
Sale of Bayou Sorrel Field

         Effective September 1, 1996, the Company sold its Bayou Sorrel Field to
National  Energy  Group,  Inc.  for  $9,000,000  in cash and  477,612  shares of
National  Energy  Group,  Inc.  common  stock.  The  Company  also  retained  an
overriding  royalty  interest in the deep  rights of the field for depths  below
11,000'. The field was acquired by the Company from Shell Western E.P., Inc. for
$10,500,000 on December 28, 1995.  During the eight months the Company owned the
field two wells were drilled  which did not result in  production  in commercial
quantities.  After having made the Amoco acquisition,  management  believed that
the Company's resources could be better utilized elsewhere.

<PAGE>

Item 7a. Qualitative and Quantitative Disclosure About Market Risks.

         The Company follows a conservative hedging strategy designed to protect
against  the  possibility  of  severe  price  declines  due  to  unusual  market
conditions.  Decisions  are usually  made so as to assure a payout of a specific
acquisition or development  project or to take advantage of unusual  strength in
the market.

     The Company enters into commodity  hedge  agreements to reduce its exposure
to price risk for oil and  natural  gas.  Pursuant  to these  hedge  agreements,
either the Company or the  counterparty is required to make payment to the other
each month.  The natural gas hedge agreement in 1997 provided a minimum price of
$1.80 on 14,000  MMBtu  per day of  natural  gas,  with  participations  varying
between 40% and 93% above $1.80. A loss of $1,203,000 was incurred on this hedge
in 1997.

The oil hedge agreement in 1997 provided the Company with a minimum of $20.00 on
720  Bbls of oil per  day,  based  upon  the  arithmetic  average  of the  daily
settlement  prices  for  the  New  York  Mercantile   Exchange  (NYMEX)  with  a
participation  of 40% above $20.00. A loss of $67,000 was incurred on this hedge
in 1997.

The Company  currently has hedge agreements  involving the following  provisions
for the periods shown:

<TABLE>
<CAPTION>
                                                   OIL 
==========================================================================================================
                                                 Average
                      Notional quantity        Fixed Price           Market         Company participation
                            Per day               (Bbl)              Price               above fixed
Period                     (Bbls)                                                         price
<S>    <C>                   <C>                 <C>                                          <C>
       1998                  500                 $19.80              NYMEX                    0%
       1998                  500                 $19.28              NYMEX                   40%
       1998                  268                 $17.28              NYMEX                    0%
       1999                  223                 $17.27              NYMEX                    0%
       2000                  232                 $17.35              NYMEX                    0%

                                                NATURAL GAS 
==========================================================================================================                       
                      Notional quantity        Average Fixed           Market        Company participation
                       Per day (MMBtu)         Price (MMBtu)             Price             above fixed
Period                                                                                      price
1998                        10,000                 $ 1.89         Pipeline Prices             0%
1998 (February to           10,000                 $ 2.10         Pipeline Prices             0%
September)
1998 (February to           10,000                 $ 2.04         Pipeline Prices            50%
September)
1998 (April to              20,000                 $ 2.22         Pipeline Prices             0%
September)
1999                         7,356                 $ 1.89         Pipeline Prices             0%
2000                           218                 $ 1.87         Pipeline Prices             0%
</TABLE>

These hedge  agreements  provide for the  counterparty  to make  payments to the
Company to the extent the market prices (as  determined  in accordance  with the
agreement) are less than the fixed prices for the notional  amount  hedged,  and
the Company to make payments to the counterparty to the extent market prices are
greater  than the fixed  prices.  For oil "market  prices and fixed  prices" are
referenced  to NYMEX.  However,  for  natural  gas,  "market  prices" and "fixed
prices" are referenced to published  pipeline  index prices,  which are also the
prices at which  the  Company  sells its  natural  gas on the spot  market.  The
Company  accounts for the gains and losses in oil and natural gas revenue in the
month of hedged production.  The annual notional quantity of oil and natural gas
under  the  hedge  agreements  in 1998 is  equal to  approximately  68% and 61%,
respectively, of its anticipated 1998 production based upon the year end reserve
reports.  At December 31,  1997,  the  estimated  fair market value of the hedge
agreements was a loss of $61,000.
<PAGE>

Item 8.  Financial Statement and Supplementary Data.

         The financial statements are included herein beginning at page F-1. The
table of contents at the front of the financial  statements  lists the financial
statements and schedules included therein.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

         None.

Item 10.  Directors and Executive Officers of the Registrant.

         The Company has a classified  Board of  Directors,  consisting  of four
Class I directors,  three Class II directors,  and four Class III directors. The
directors are elected to serve for three-year  terms and until their  successors
are elected and qualified.  The directors  stand for election each year as their
terms expire by class. The Board of Directors consists of three employees of the
Company and eight independent directors.

         Officers  are  elected by and serve at the  discretion  of the Board of
Directors.

         Set forth below are the names,  ages,  and positions of the persons who
are executive  officers and directors of the Company,  and the committees of the
Board on which they serve.
 <TABLE> 
<CAPTION>

                                           Director
             Name                 Age       Since                                    Position
<S>                                <C>       <C>
H. James Maxwell                   53        1992      Chairman of the Board, Chief Executive Officer, and Director(a)
Larry M. Wright                    53        1992      President, Chief Operating Officer and Director (b)
Robert Wonish                      44        ---       Sr. Vice President-Operations
Edward A. Bush, Jr.                54        ---       Sr. Vice President-Geology/Geophysics
William J. Doyle                   46        ---       Vice President-Exploitation
Barbara A. Whitton                 35        ---       Vice President-Marketing/Planning
Todd R. Bart                       33        1997      Chief Financial Officer, Secretary and Director(a)
Larry W. Miller                    48        ---       Treasurer
A. Theodore Stautberg, Jr.         51        1993      Director(c)-Compensation Committee
Donald W. Chesser                  58        1992      Director(a)-Audit Committee
Leonard C. Tallerine, Jr.          47        1997      Director(c)
Mark C. Licata                     47        1997      Director (a)
James B. Kreamer                   58        1993      Director(c)-Compensation Committee
Mark C. Barrett                    47        1996      Director(b)-Audit and Compensation Committees
Michael Springs                    47        1996      Director(c)
Harold First                       61        1997      Director(b)-Audit and Compensation Committee
--------------------------------
</TABLE>

 (a)  These persons are  designated as Class III  directors,  with their term of
      office expiring at the annual meeting of shareholders in 1998.
(b)   These persons are  designated  as Class II  directors,  with their term of
      office expiring at the annual meeting of shareholders in 2000.
(c)   These  persons are  designated  as Class I  directors,  with their term of
      office expiring at the annual meeting of shareholders in 1999.
<PAGE>

      Set forth below are descriptions of the principal  occupations,  during at
least the past five  years,  of the  directors  and  executive  officers  of the
Company.

      H. James Maxwell  received a B.A.  degree in Economics from the University
of Missouri-Kansas City and received his Law Degree from that same university in
1972. Mr. Maxwell practiced securities law from 1972 to 1984, and was a frequent
author and speaker on oil and natural gas tax and securities law. He served as a
General  Partner  of  Castle  Royalty  Limited  Partnership  from  1984 to 1988,
Managing  General  Partner of PAN Petroleum MLP from 1987 to 1992, both of which
were predecessors of the Company, President of the Company from 1992 to 1997 and
Chief  Executive  Officer and  Chairman of the Board of the Company from 1992 to
date.

      Larry M. Wright received his B.S. Degree in Chemical  Engineering from the
University of Oklahoma in 1966.  From 1966 to 1976 he was with Union Oil Company
of  California  (UNOCAL).  From 1976 to 1980,  he was with  Texas  International
Petroleum  Corporation,  ultimately as division operations manager. From 1980 to
1981,  he was  with  what  is now  Transamerica  Natural  Gas  Company  as  Vice
President-Exploration  and  Production.  From  1981-1982,  he  was  Senior  Vice
President of Operations for Texas International Petroleum Corporation, and, from
1983 to 1985, he was Executive  Vice President of Funk Fuels Corp., a subsidiary
of Funk Exploration. From 1985 to 1993, Mr. Wright was an independent consultant
to the Company and its  predecessors.  From 1993 to 1997, he served as Executive
Vice  President of the Company and since October  1997,  has served as President
and Chief Operating Officer.

      Robert G. Wonish received his B.S. in Mechanical  Engineering in 1975 from
the University of Missouri-Rolla.  He was a production  engineer with Amoco from
1975 to 1977, Napeco,  Inc. from 1977 to 1979;  Division Operation Engineer with
Texas  International from 1979 to 1980;  Production Manager with Cliffs Drilling
Company  from  1980 to 1984 and  District  Superintendent  with  Ladd  Petroleum
Corporation from 1985 to 1991. He then worked as a consultant, starting with the
Company  in 1992,  and  became an  employee  in 1993,  serving  as  Senior  Vice
President - Operations.

     Edward A. Bush,  Jr.,  received  his B.S.  Degree in Geology  from  Baldwin
Wallace  College  in 1964 and his M.A.  in  Geology  from  Bowling  Green  State
University in 1966. He served in various  geological and exploration  capacities
with Exxon  (1968-75),  Union Texas  Petroleum  (1975-79),  Home Petroleum Corp.
(1979-81),  Traverse Oil Co. (1981-83) and Sohio Petroleum Co.  (1983-85).  From
1985 to 1995 he served  first as  Exploration  Manager,  then Vice  President of
Exploration  and later Vice  President of Operations for Columbia Gas Dev. Corp.
From 1995 to 1996 he  served  as Vice  President-Exploration  and  President  of
Howell  Petroleum  Corp.  He  presently  serves  with the Company as Senior Vice
President-Geology/Geophysics.

      William J. Doyle  received  his  Masters in Geology in 1975 from Texas A&M
University  and his B.S. in Earth Sciences from the University of New Orleans in
1973.  From 1975 to 1978 he was a geologist  with Mobil Oil focusing on offshore
Gulf of Mexico  projects.  From 1978 to the present he has worked as an employee
and consultant for various oil and natural gas exploration  companies  operating
in the Gulf Coast.  He joined the Company as a consulting  geologist in 1992 and
became a Vice President in 1995.

      Barbara  A.  Whitton  joined  Goldking  in 1993 as the  Manager of Revenue
Accounting and was appointed Vice President-Marketing/Planning in 1997. Prior to
Goldking,  Ms. Whitton had experience in accounting,  finance and marketing with
Hall-Houston Oil Company  (1991-1993),  UMC Petroleum  Corporation  (1987-1989),
Energy Assets International (1984-1987) and Sohio Petroleum (1982-1984). She was
made Vice-President-Marketing/Planning following the acquisition of Goldking.

      Todd R. Bart  received his B.B.A.  in  Accounting  from Abilene  Christian
University in 1987. He worked in the energy industry with Pennzoil  Company from
1987 to 1990 and the public  accounting firm of Arthur Andersen and Company from
1990 until 1992. From 1992 to 1995 he worked for Yellow Freight System,  Inc., a
trucking company, in financial  accounting and reporting.  He joined the Company
as Controller in 1995 and was elected Chief  Financial  Officer and Secretary in
1996. He received his C.P.A. designation in Texas in 1990 and in Kansas in 1993,
and is a member of the A.I.C.P.A.
<PAGE>

      Larry   W.    Miller    received    his   B.S.    Degree    in    Business
Administration/Accounting  from Central  Missouri  State  University in 1971. He
received his MBA Degree from Rockhurst College in Kansas City in 1982. From 1971
to 1975 he worked for Seaboard Allied Milling Corp., a grain company, as Manager
of the grain  accounting  department.  From 1975 to 1998 he worked for Petroleum
Production Management Inc., a privately owned independent oil & gas operator, in
various  accounting  positions  ultimately as Vice President and Chief Financial
Officer.  He joined the Company in 1998 and was elected  Treasurer  in 1998.  He
received his C.P.A. designation in Missouri in 1987 and is currently a member of
the A.I.C. P. A.

     A. Theodore Stautberg, Jr. has since 1981 been the President and a director
of Triumph  Resources  Corporation and its parent  company,  Triumph Oil and Gas
Corporation  of New York.  Triumph  engages in the oil and natural gas business,
assists others in financing energy  transactions,  and serves as general partner
of Triumph  Production  L.P.  Mr.  Stautberg  is also the  president  of Triumph
Securities  Corporation and BT Energy  Corporation.  Prior to forming Triumph in
1981,  Mr.  Stautberg  was a Vice  President  of  Butcher  &  Singer,  Inc.,  an
investment-banking firm, from 1977 to 1981. From 1972 to 1977, Mr. Stautberg was
an attorney with the  Securities  and Exchange  Commission.  Mr.  Stautberg is a
graduate of the University of Texas and the University of Texas School of Law.

      Donald W.  Chesser  received  his  B.B.A.  in  Accounting  from Texas Tech
University in 1963 and has served with several certified public accounting firms
since that time, including eight years with Elmer Fox and Company.  From 1977 to
1981, he was with IMCO  Enterprises,  Inc.  Since 1982 he has been a shareholder
and President of Chesser & Company, P.A., a certified public accounting firm. He
is also President of Financial Advisors, Inc., a registered investment advisor.

      Leonard C.  Tallerine,  Jr.,  graduated  from Rice  University's  Advanced
Management  Institute and holds undergraduate and graduate degrees in accounting
from the  University  of Houston.  Mr.  Tallerine  practiced as a CPA with Price
Waterhouse and KPMG from 1972 through 1980,  specializing in oil and natural gas
tax issues. From 1981 through 1986, he served as co-managing and general partner
of Paso Grande  Investment,  Ltd.,  an oil and  natural gas real estate  holding
company and served as Chairman of the Texas Guarantee National Bank from 1983 to
1986.  In 1987, he founded the Union  Companies and in 1991 became  Chairman and
Chief Executive Officer of Goldking.  In July 1997 Mr. Tallerine was appointed a
Director, following the Company's acquisition of Goldking.

      Mark  C.  Licata  received  a  Bachelor  of  Business  Administration  and
Accounting  (1972) and a law degree (1976) from the University of Texas.  He was
employed in the private  practice of law from 1976  through 1985 and then served
as  President  and Chief  Operating  Officer of Vista  Host,  Inc.  and later as
President and Chief  Operating  Officer of the publicly held McFaddin  Ventures,
Inc. In 1988, Mr. Licata returned to the practice of law in Houston with Looper,
Reed, Mark & McGraw,  where he remained until he joined Goldking as President in
1996. In July 1997 Mr. Licata was appointed a Director,  following the Company's
acquisition of Goldking.

      James B. Kreamer  received his B.S. Degree in Business from the University
of Kansas in 1963 and has been active in investment banking since that time.
Since 1982 he has managed his personal investments.

      Mark   C.    Barrett    received    his   B.S.    Degree    in    Business
Administration/Accounting  in 1972 and is  licensed  to  practice as a Certified
Public  Accountant  in both  Kansas and  Missouri.  He was a partner in the firm
Drees  Dunn  Lubow and  Company  from 1974  until  1981.  He  founded  Barrett &
Associates, a certified public accounting firm, in 1981 and is the president and
majority shareholder in that firm. His firm served as the Company's  independent
public accountants from 1985 to 1995.

     Michael  Springs  graduated from the Medical Field Service  School,  Brooke
Hospital,  San Antonio,  Texas in 1971 and the  University  of Missouri,  Kansas
City,  in 1969 with a degree in  Business.  He is the  President  and founder of
Ortho-Care, Inc. of Kansas City, Missouri and Ortho-Care Southeast of Charlotte,
North  Carolina.  Ortho-Care,  Inc. is a  manufacturer  of  orthopedic  fracture
management and sports  medicine  products,  and holds a number of patents in the
field. Mr. Springs is also controlling partner in Ortho-Implants,  a distributor
of total joint replacement prosthesis.

     Harold First has been  self-employed as a financial  consultant since 1993.
From 1990 to 1993 he was Chief Financial Officer of Icahn Holding Corp. and also
served as Senior Vice President of Trans World Airlines, Inc. from 1992 to 1993.
Mr. First is currently a director of Marvel  Entertainment Group, Inc., Toy Biz,
Inc., Cadus Pharmaceutical  Corp. and Tele-Save Holdings,  Inc. He was nominated
for election to the Board of Directors pursuant to an agreement with shareholder
Carl C. Icahn.

      None of the officers or directors serve pursuant to employment agreements.
<PAGE>

The Board of Directors

      The Board of  Directors  has the  responsibility  for  establishing  broad
corporate  policies  and for  the  overall  performance  and  governance  of the
Company, although it is not involved in day-to-day operating details.  Directors
are kept informed of the Company's business by various reports and documents, as
well as by operating  and  financial  reports  presented at Board and  committee
meetings by the Chairman and other officers.

      Meetings of the Board of  Directors  are  regularly  held each quarter and
following the annual meeting of the shareholders. Additional meetings, including
meetings  by  telephone  conference  call,  of the Board may be called  whenever
needed.  The Board of Directors of the Company held eleven meetings in 1997, six
of which were meetings by telephone conference call.

Committees of the Board

         The  committees  established  by the Board of Directors to assist it in
the discharge of its  responsibilities  are described  below. The previous table
identifies the committee memberships currently held.

         The Audit  Committee has three members,  none of whom is an employee of
the Company. The Committee meets with management to consider the adequacy of the
internal controls of the Company and the objectivity of its financial reporting;
the  Committee  also meets with the  independent  accountants  concerning  these
matters.   The  Committee  recommends  to  the  Board  the  appointment  of  the
independent  accountants,  subject to  ratification  by the  shareholders at the
annual meeting.  The independent  accountants  periodically  meet alone with the
Committee and have unrestricted access to the Committee.  The Committee met once
in 1997.

         The  Compensation  Committee  has  three  members,  none  of whom is an
employee of the Company.  It makes  recommendations to the Board with respect to
the compensation of Senior management of the Company and the Company's Long-Term
Incentive Plan. The Committee met once in 1997.

Beneficial Ownership Reporting Compliance

         Based  solely  upon a review of copies of Forms 3 and 4 and  amendments
thereto  furnished to the Company during the fiscal year ended December 31, 1997
and Forms 5 and amendments thereto with respect to such year and certain written
representations  that no Form 5 is  required,  the  Company  is not aware of any
failure  on the part of any  person  subject  to  Section  16 of the  Securities
Exchange  Act of 1934,  as amended  (the  "Exchange  Act"),  with respect to the
Company during fiscal 1996 to file on a timely basis any form or report required
by Section  16(a) of the  Exchange  Act during such fiscal year or prior  fiscal
years. 

Item 11. Executive Compensation.

Summary  Compensation  Table. The following table sets forth certain information
concerning the annual compensation paid to the Company's Chief Executive Officer
and each executive officer whose compensation exceeded $100,000 during 1997.

<TABLE>
<CAPTION>

                                                                         Long-Term Incentive Plan
                                                                -------------------------------------------
                                   Annual Compensation                     Awards               Payouts
                           ------------------------------------
                                                                 Restricted     Securities                     All
                                                                    Stock       Underlying        LTIP        Other
      Position             Year   Salary ($)        Bonus ($)    Award(s)($)    Options (#)    Payouts($)    Comp.($)
----------------------    -----  ------------     ------------  ------------  --------------  -----------  -----------
<S>               <C>      <C>       <C>                     <C>      <C>               <C>       <C>
H. James Maxwell           1997     215,100          21,400           0           600,000          0         22,500
  Chairman and Chief       1996     166,900             0             0              0             0         22,500
  Executive Officer        1995     153,500             0             0            24,615          0         22,500

Larry M. Wright            1997     205,500          20,500           0           400,000          0         22,500
  President                1996     160,300             0             0              0             0         22,500
                           1995     147,300             0             0              0             0         22,100

Edward A. Bush(b)          1997     121,523             0             0            20,000          0         18,200
  Senior Vice President    1996       9,231             0             0              0             0           0

Robert G. Wonish           1997     117,100          12,800        20,000          40,000          0         19,500
  Senior Vice President    1996     100,200             0             0              0             0         15,000
                           1995      92,100             0             0              0             0         13,800
----------
(a)  The "other  compensation"  represents  contributions to the accounts of the
     employees under the Company's Employee Stock Ownership Plan.
(b)  Mr. Bush joined the Company in December 1996.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


Option Grants in Last Fiscal Year

                     Number of    Percent of
                    Securities   total options
                    Underlying    granted to      Exercise or     Market price                  Per Share
                     Options      employees       Base price        at date     Expiration      Grant Date
          Name       Granted    in fiscal year    ($/Share)        of grant($)     Date         Value($)(a)
------------------  ----------  --------------   -----------      ------------  -----------     -----------
<S>                 <C>                 <C>            <C>             <C>            <C>  <C>          <C>
H. James Maxwell      600,000        50%            $4.45             $4.38       6/20/00           $1.42
Larry M. Wright       400,000        33%            $4.45             $4.38       6/20/00           $1.42
Edward A. Bush         20,000         2%            $4.45             $4.38       6/20/00           $1.42
Robert G. Wonish       40,000         3%            $4.45             $4.38       6/20/00           $1.42
</TABLE>

------
(a)  The per share  grant  date  value was  calculated  on the date of the grant
     using the Black-Scholes  Modified American Option Pricing Model. This model
     uses historical  data to forecast  future trends and economic  research has
     shown  that it may not be  indicative  of  future  results.  The  following
     assumptions  were used in the model for  calculating  the  value:  expected
     volatility-38.4%, risk free rate of return-6.1%, dividend yield-0%, term to
     exercise-date of expiration (3 years).



Aggregate Option and Warrant Exercises. The following table provides information
relating to the number and value of Common Shares  subject to options  exercised
during 1997 or held by the named executive officers as of December 31, 1997.

   Aggregated Warrant and Option Exercises in Last Fiscal Year and Fiscal Year
                               End Option Values
<TABLE>
<CAPTION>


                                                                       Number of
                                                                 Securities underlying         Value of unexercised
                            Shares                                Unexercised options              In-the-money
                           Acquired              Value           At fiscal yearend (#)        At fiscal year-end ($)
        Name            On Exercise(#)       Realized($)(a)    Exercisable/Unexercisable    Exercisable/Unexercisable
------------------     ---------------      ---------------   ---------------------------  --------------------------- 
<S>                            <C>                 <C>                  <C>     <C>                       <C>
H. James Maxwell               0                   0                    600,000/0                         0/0
Larry M. Wright             250,000             568,000                 400,000/0                         0/0
Edward A. Bush                 0                   0                     20,000/0                         0/0
Robert G. Wonish               0                   0                     40,000/0                         0/0
</TABLE>

     (a) Value  realized is  calculated  based upon the  difference  between the
         options exercise price and the market price of the Common Shares on the
         date of  exercise  multiplied  by the  number  of  shares  to which the
         exercise price relates.

Objectives  and  Approach.   The  overall  goals  of  the  Company's   executive
compensation  program  are:  (i) to  encourage  and provide an  incentive to its
executive  officers to achieve the  Company's  strategic  business and financial
goals,  both short-term and long-term,  and thereby enhance  shareholder  value,
(ii) to attract and retain well-qualified executive officers and (iii) to reward
individuals for outstanding job performance in a fair and equitable  manner when
measured not only with respect to the Company's  internal  performance goals but
also the Company's performance in comparison to its peers. The components of the
Company's executive compensation are salary,  incentive bonuses and awards under
its Long Term Incentive Plan and Employee Stock  Ownership  Plan,  each of which
assists in achieving the program's goals.

Long Term Incentive  Plan. The Company's  Long-Term  Incentive Plan provides for
the  granting,  to certain  officers  and key  employees  of the Company and its
participating  subsidiaries,  of incentive  awards in the form of stock options,
stock  appreciation  rights  ("SARs"),  stock,  and cash awards.  The  Long-Term
Incentive  Plan is  administered  by a committee of  independent  members of the
Board of  Directors  (the "Plan  Committee")  with  respect to awards to certain
executive  officers  of the  Company  but may be  administered  by the  Board of
Directors with respect to any other awards. Except for certain automatic awards,
the Plan Committee has discretion to select the employees to be granted  awards,
to determine the type,  size, and terms of the awards,  to determine when awards
will be granted, and to prescribe the form of the instruments evidencing awards.
<PAGE>

         Options,  which include  nonqualified stock options and incentive stock
options,  are rights to purchase a specified  number of Common Shares at a price
fixed at the time the option is granted.  Payment may be made with cash or other
Common  Shares  owned by the  optionee  or a  combination  of both.  Options are
exercisable at the time and on the terms that the Plan Committee determines. The
payment  of the  option  price  can be made  either  in  cash  or by the  person
exercising the option turning in to the Company,  Common Shares  presently owned
by him, which would be valued at the then current market price.  SARs are rights
to receive a payment,  in cash or Common  Shares or both,  based on the value of
the Common Shares.  A stock award is an award of Common Shares or denominated in
Common  Shares.  Cash  awards  are  generally  based  on  the  extent  to  which
pre-established performance goals are achieved over a pre-established period but
may also include  individual bonuses paid for previous,  exemplary  performance.
The Plan Committee determines performance objectives and award levels before the
beginning of each plan year.

         The  Long-Term   Incentive  Plan  allows  for  the  satisfaction  of  a
participant's  tax  withholding  with respect to an award by the  withholding of
Common Shares issuable  pursuant to the award or the delivery by the participant
of  previously  owned  Common  Shares,  in either case valued at the fair market
value, subject to limitations the Plan Committee may adopt.

         Awards  granted  pursuant to the Long-Term  Incentive  Plan may provide
that, upon a change of control of the Company, (a) each holder of an option will
be granted a corresponding SAR (b) all outstanding SARs and stock options become
immediately  and fully vested and  exercisable in full, and (c) the  restriction
period on any restricted  stock award shall be accelerated  and the  restriction
shall expire.

         The  Long-Term  Incentive  Plan  provides for the issuance of a maximum
number  of Common  Shares  equal to 20% of the  total  number  of Common  Shares
outstanding from time to time. Unexercised SARs, unexercised options, restricted
stock, and performance  units under the Long-Term  Incentive Plan are subject to
adjustment in the event of a stock dividend,  stock split,  recapitalization  or
combination  of  the  Company,   merger  or  similar  transaction  and  are  not
transferable except by will and by the laws of descent and distribution.  Except
when a participant's employment terminates as a result of death, disability,  or
retirement under an approved retirement plan or following a change in control in
certain  circumstances,  an award generally may be exercised (or the restriction
thereon may lapse) only if the participant is an officer,  employee, or director
of the Company,  or  subsidiary  at the time of exercise or lapse or, in certain
circumstance,  if the exercise or lapse occurs within 180 days after  employment
is terminated.

         Under the Company's  Long-Term  Incentive  Plan all full time employees
share a bonus equal to 1% of the Company's  cash flow, in accordance  with GAAP,
exclusive of extraordinary and non-recurring  items. The bonuses are paid to all
full time (1,000+  hours)  employees at the time of delivery of the  independent
audit.  The bonuses are  allocated to the full time  employees  based upon their
salary  at  December  31.  Former  Goldking  employees  received   proportionate
participation  for 1997,  based  upon  their  five  months  employment  with the
Company.

         The Long-Term  Incentive Plan may be amended by the Board of Directors.
No grants or awards may be made  under the  Long-Term  Incentive  Plan after the
tenth  anniversary  of the plan.  No  shareholder  approval  will be sought  for
amendments to the Long-Term  Incentive Plan except as required by law (including
Rule  16b-3  under the  Exchange  Act) or the rules of any  national  securities
exchange on which the Common Shares are then listed.

         Each non-employee  director of the Company who becomes a director will,
on the day after the first  meeting  of the  Board of  Directors  at which  that
director is in attendance,  automatically be granted a restricted stock award of
the  number  of  Common  Shares  that  have a value of  $10,000,  which  will be
calculated based on the average trading price of the Common Shares during the 60
days immediately preceding the date of grant. These restricted stock awards will
vest over two years,  with  one-third  vesting six months  following the date of
grant,  another one-third vesting on the first anniversary of the date of grant,
and the last one-third vesting on the second anniversary of the date of grant so
long as the  non-employee  director  remains a director of the  Company  through
those vesting dates.

         Each non-employee  director will be entitled to vote each share subject
to these  restricted  stock  awards  from the date of grant until the shares are
forfeited,  if ever.  The Long-Term  Incentive  Plan requires each  non-employee
director  to make an  election  under  Section  83(b) of the Code to include the
value of the  restricted  stock in his income in the year of grant and  provides
for cash awards to the non-employee  directors in amounts  sufficient to pay the
federal income taxes due with respect to the award.
<PAGE>
Employee Stock  Ownership  Plan. In 1994, the Company  adopted the PANACO,  Inc.
Employee Stock  Ownership Plan ("ESOP").  Pursuant to the terms of the ESOP, the
Company may contribute up to fifteen percent (15%) of the  participant's  annual
compensation to the ESOP. ESOP assets are allocated in accordance with a formula
based on  participant  compensation.  In order to  participate  in the  ESOP,  a
participant  must complete at least one thousand hours of service to the Company
within  twelve  consecutive  months.  Former  Goldking  employees  will  receive
proportionate  participation  for 1997, based upon their five months  employment
with the  Company.  A  participant's  interest  in the ESOP  becomes one hundred
percent  vested  after  three  years of service  to the  Company.  Benefits  are
distributed  from  the  ESOP at  such  time as a  participant  retires,  dies or
terminates  service with the Company in accordance with the terms and conditions
of the ESOP.  Benefits may be  distributed in cash or in shares of the Company's
common stock. No participant contributions are allowed to be made to the ESOP.

         Company  contributions  to the ESOP may be in the form of Common Shares
or cash.  Cash  contributions  may be used,  at the  discretion  of the Board of
Directors,  to purchase  Common Shares in the open market or from the Company at
prevailing  prices.  The  allocation  of ESOP assets is  determined by a formula
based on participant compensation. Participation in the ESOP requires completion
of more than one thousand  (1,000) hours of service to the Company.  The ESOP is
intended to satisfy any applicable  requirements of the Internal Revenue Code of
1986 and the Employee  Retirement  and Income  Security Act of 1974. The Company
has been  advised  that its  contributions  to the ESOP will be  deductible  for
Federal Income Tax purposes,  and the participants  will not recognize income on
their  allocated share of ESOP assets until such assets are  distributed.  As of
December 31, 1997,  the ESOP owned of record 77,618 Common  Shares.  Such Common
Shares are owned beneficially by the employees of the Company.

Compensation of Directors

      In order to align the  interests  of the  Company's  shareholders  and its
directors,  directors do not receive cash compensation.  Non-employee  directors
are  compensated  for their services with shares of the Company's  common stock,
receiving  $1,000 in Common  Shares for attending  Board of Directors  meetings,
$500 in Common Shares for attending committee meetings and $200 in Common Shares
for  participating in telephone  meetings.  Officers of the Company who serve as
directors  do not receive  additional  compensation  for serving on the Board of
Directors or a committee  thereof.  Directors are reimbursed for travel expenses
incurred in attending Board of Directors or committee meetings.

         The following table shows  information with respect to restricted stock
awards owned by non-employee directors.

     Name                  Date of Grant           Shares          Price
----------------          ------------------      --------        -------
Michael Springs            September 4, 1996        2,447          $4.09
Mark C. Barrett            September 4, 1996        2,447           4.09
Harold First               October 8, 1997          2,315           4.32
      Total                                         7,209


Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth  information  with respect to beneficial
ownership of the Company's  Common Stock by (a) each officer and director of the
Company,  (b) all officers and directors of the Company as a group,  and (c) for
each person who beneficially owns 5% or more of the Common Stock as of March 24,
1998.  Except as set forth in  footnote  (c) below,  each  shareholder  has sole
voting and sole investment power over all shares.

<TABLE>
<CAPTION>

                                                                               Shares Owned Beneficially(a)
                Directors and Executive Officers                                  Number       Percent
------------------------------------------------------------------------------  ----------    ---------
<S>                                                                                        <C>               <C>
  H. James Maxwell; Chief Executive Officer and Chairman of the Board.........     897,586       3.75%
  Larry M. Wright; President, Chief Operating Officer and Director............   1,061,614       4.44
  Robert G. Wonish; Sr. Vice President-Operations.............................      66,410        .28
  Edward A. Bush, Jr.; Sr. Vice President-Geology/Geophysics..................      21,000        .09
  William J. Doyle; Vice President-Exploitation...............................      16,288        .07
  Todd R. Bart; Chief Financial Officer , Secretary and Director..............      33,997        .14
  Larry W. Miller, Treasurer..................................................          --        --
  A. Theodore Stautberg, Jr.; Director........................................      17,447        .07
  Donald W. Chesser; Director.................................................       2,235        .01
  Leonard C. Tallerine, Jr.; Director.........................................   1,548,784       6.48
  Mark C. Licata; Director....................................................   1,606,146       6.70
  James B. Kreamer; Director..................................................      52,251        .22
  Michael Springs; Director...................................................       4,292        .02
  Mark C. Barrett; Director...................................................       3,824        .02
  Harold First; Director......................................................       2,791        .01
  All Directors and Officers as a group (15 persons)..........................   5,334,665      22.30%

</TABLE>

<TABLE>
<CAPTION>

                                                                                  
                                                                                  Shares Owned Beneficially
Beneficial Owners of 5% or more (excluding persons named above)                    Number         Percent  
------------------------------------------------------------------------------    -----------   ------------
<S>                                                                                <C>           <C>
  Carl C. Icahn (b)...........................................................     3,030,000       12.67%
  % Icahn Associates Corp.
  767 Fifth Avenue, 47th Floor
  New York, NY  10153

  R. B. Haave Associates, Inc. ...............................................     1,887,600        7.89
  36 Grove Street
  New Canaan, CT  06840

  Richard A. Kayne (c)........................................................     1,757,576        7.35
  % Kayne Anderson Investment Management, Inc.
  1800 Avenue of the Stars, #200
  Los Angeles, CA  90067

  Croft-Leominster, Inc.......................................................     1,617,000        6.76
  207 East Redwood Street, Suite 802
  Baltimore, Maryland  21202
</TABLE>

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

     (a)  Includes 1,100,000  currently  exercisable options to purchase shares,
          at $4.45 per share, held  by  the following:  Mr. Maxwell-600,000; Mr.
          Wright-400,000;  Mr. Wonish-40,000;  Mr. Bush-20,000; Mr. Doyle-10,000
          and Mr.  Bart-30,000.  These options are  exercisable  any time before
          June 20,  2000.  However,  the  holder  may not  dispose of the shares
          acquired  upon exercise for a period of three years and must remain an
          employee  of PANACO  during that  three-year  period.  Otherwise,  the
          shares  may be  reacquired  by PANACO at the  person's  cost,  thereby
          denying them the benefit of the option.
     (b)  Mr. Icahn is the sole  stockholder of Riverdale  Investors Corp. Inc.,
          the  general  partner of High River  Limited  Partnership,  the record
          holder of these shares.
     (c)  The reported shares are owned by seven investment  accounts (including
          four investment limited  partnerships,  two insurance companies and an
          offshore  corporation),  managed,  with discretion to purchase or sell
          securities,  by KAIM  Non-Traditional,  L.P., a registered  investment
          adviser.  The four investment  limited  partnerships  beneficially own
          1,466,667 shares that are issuable upon the exercise of warrants which
          expire on December 31, 1998. KAIM Non-Traditional, L.P. is the sole or
          managing  general partner of three of the limited  partnerships  and a
          co-general partner of the fourth.  Richard A. Kayne is the controlling
          shareholder  of the  corporate  owner of  Kayne,  Anderson  Investment
          Management,  Inc., the sole general  partner of KAIM  Non-Traditional,
          L.P.  Mr.  Kayne is also the  managing  general  partner of one of the
          limited  partnerships  and a limited  partner  of each of the  limited
          partnerships.  KAIM Non-Traditional,  L.P. is an investment manager of
          the  offshore  corporation.  Mr.  Kayne  is a  director  of one of the
          insurance  companies.  All shares  have shared  voting and  investment
          power.

KAIM  Non-Traditional,   L.P.  disclaims  beneficial  ownership  of  the  shares
reported,  except for those shares  attributable  to it by virtue of its general
partner interests in the limited  partnerships.  Mr. Kayne disclaims  beneficial
ownership  of  the  shares  reported,   except  those  shares  held  by  him  or
attributable  to him by virtue of his limited and general  partner  interests in
the limited  partnerships and by virtue of his indirect interest in the interest
of KAIM Non-Traditional, L.P. in the limited partnerships.
<PAGE>

Item 13.  Certain Relationships and Related Transactions.

         A.  Theodore  Stautberg,  Jr., is an officer,  director and  beneficial
shareholder of Triumph  Securities  Corporation  ("Triumph  Securities"),  which
provided certain services in connection with the 1996 offering of Common Shares.
In  connection  with the  services  so  provided,  Triumph  Securities  received
$268,906, representing .8% of the 6.8% underwriters discount.

         Mark C.  Barrett's  CPA firm,  Barrett  and  Associates,  served as the
Company's  independent  accountants for the years 1985 through 1995. During 1996
his CPA firm was paid $53,400 for  accounting  services  related to the audit of
the fiscal year 1995.  Mr.  Barrett's  firm has  provided  advice on tax matters
during 1997.

         H. James Maxwell and Bob F. Mallory are the partners in 1050 Blue Ridge
Building  Partnership,  which owns a 5,200  square foot office  building at 1050
West Blue Ridge Boulevard, Kansas City, Missouri, which it leases to the Company
on a triple net basis for $4,000 per month for a term of ten years,  expiring in
2003.  Mr.  Mallory  recently  resigned  from his  positions as  Executive  Vice
President  and Director of the  Company.  The lease was approved by the Board of
Directors,  which determined that the rate was as good or better than that which
could be obtained from a non-affiliated party.

         Larry M. Wright exercised  warrants to purchase 90,000 Common Shares in
July 1997, at an exercise  price of $2.00 per share and 160,000 common shares in
October  1997 at an  exercise  price of $2.375 per share,  for an  aggregate  of
$560,000. The warrants were originally granted to Mr. Wright in 1991.

         Michael Springs and Mark C. Barrett,  were each issued restricted stock
awards of 2,447 Common  Shares upon their  election to the Board of Directors in
1996.  Harold First was likewise issued 2,315 Common Shares upon his election to
the Board of Directors in October 1997.

     In connection with the Goldking Acquisition,  Mark C. Licata and Leonard C.
Tallerine,  Jr.  were  paid a total  of  $27,539,000,  including  1,606,146  and
1,548,784 restricted Common Shares  respectively,  issued at the closing on July
31,  1997.  Messrs.  Licata and  Tallerine  have  certain  rights to require the
Company to register such Common Shares for resale.  Messrs. Licata and Tallerine
were  the  sole  beneficial  owners  of  Goldking.   See  "Business  -  Goldking
Acquisition."  After the Senior Note offering,  $6,000,000 in promissory  notes,
received  by  Messrs.  Licata  and  Tallerine  as a portion  of the  acquisition
consideration, were paid by the Company.

         On  October  8, 1996 the  Company  borrowed  $17,000,000  from  lenders
advised by Kayne, Anderson Investment  Management,  Inc. ("Kayne Anderson").  Of
this  amount,  $8,500,000  was repaid on March 6, 1997 from the  proceeds of the
Company's  public offering of common stock.  The Company paid certain  expenses,
including  legal  fees,  of those  lenders  in 1996 and 1997.  During  the first
quarter of 1996,  lenders advised by Kayne Anderson exercised warrants issued to
them in connection  with the 1993  subordinated  notes,  and  receiving  816,526
Common Shares.  Those shares were sold during 1997. In October 1997,  $8,500,000
in  1996  Tranche  A  Convertible   Subordinated  Notes  due  October  8,  2003,
convertible into 2,060,606 common shares on the basis of $4.125 per share,  were
prepaid by the Company.  Warrants to purchase 2,060,606 common shares at a price
of $4.125 per share, which may be exercised until December 31,1998,  were issued
as part of the terms of the prepayment.

         H. James  Maxwell and former  officer and  Director  Bob F. Mallory are
personal guarantors of the Company's obligation to plug the wells and remove the
platforms on the West Delta properties  acquired from Conoco, Arco (now Vastar),
Texaco and Oxy in 1991.

         Employees of the Company are eligible to receive  stock  awards,  stock
options,  stock  appreciation  rights,  and  performance  units  pursuant to the
Company's Long-Term Incentive Plan.

         The Company has several procedures,  provisions,  and plans designed to
reduce the  likelihood of a change in the  management  or voting  control of the
Company  without  the  consent  of  the  incumbent  Board  of  Directors.  These
provisions  may have the effect of  strengthening  the ability of  officers  and
directors  of the Company to continue as officers  and  directors of the Company
despite changes in share ownership of the Company.
<PAGE>

                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)    See Index to Financial Statements, Page F-1.

(b)    Reports on Form 8-K. The following  reports on Form 8-K were filed during
       the last quarter of the period covered by this report:

       October 7, 1997     Amendment to Form 8-K on Acquisition of Properties

       October 10, 1997    Amendment to Form 8-K on Acquisition of Properties

(c)    Exhibits and Financial Statement Schedules.

    Exhibit
    Number       Description
   --------     -------------
     3.1* Certificate of Incorporation of the Company.

     3.2* Amendment to Certificate of Incorporation dated November 19, 1991.

     3.3* By-laws of the Company.

     3.4  Amendment  to  Certificate  of  Incorporation  of  the  Company  dated
          September 24, 1996 filed as an exhibit to the Amended  Current  Report
          on Form 8-K/A,  filed with the  Commission  on November 18, 1996,  and
          incorporated herein by this reference.

     4.1* Article Fifth of the  Certificate of  Incorporation  of the Company in
          Exhibit 3.1.

     4.2* Form of Certificate of Common Shares par value $.01 per share,  of the
          Company.

     4.3  Rights Agreement,  dated as of August 3, 1995,  between PANACO,  Inc.,
          and American  Stock  Transfer  and Trust  Company,  which  includes as
          Exhibit A the Form of Certificate of Designation of Series A Preferred
          Stock,  Exhibit B the Form of  Rights  Certificate  and  Exhibit C the
          Summary of Rights to Purchase  Preferred  Stock was filed as Exhibit 1
          to the  Registration  Statement on Form 8-A, filed with the Commission
          on August 21, 1995, and incorporated herein by this reference.

     4.4***  Indenture  dated  October 9, 1997,  among the Company and UMB Bank,
          N.A., as trustee.

     4.5*** Registration  Rights  Agreement,  dated as of October 9, 1997, among
          PANACO,  Inc.,  and BT Alex Brown,  First Union Capital  Markets Corp,
          A.G. Edwards & Sons Inc. and Gaines, Berland Inc.

     4.6*** Form of 10 5/8 % Series B Senior Note due 2004

     10.1* PANACO, Inc. Long-Term Incentive Plan.

     10.13** PANACO, Inc. Employee Stock Ownership Plan & Trust.

     10.13.1 Amendment to PANACO, Inc. Employee Stock Ownership Plan.

     10.14Purchase and Sale  Agreement,  dated August 26,  1996,  between  Amoco
          Production  Company  and  PANACO,  Inc.,  filed as an  exhibit  to the
          Current  Report on Form 8-K,  filed with the Commission on October 28,
          1996, and incorporated herein by this reference.

     10.17Purchase and Sale Agreement,  dated November 11, 1996 between National
          Energy  Group,  Inc.  and  PANACO,  Inc.,  filed as an  exhibit to the
          Current  Report on Form 8-K filed with the  Commission  on January 29,
          1997, and incorporated herein by this reference.

     10.18Restated Merger  Agreement  dated July 30, 1997 between PANACO,  Inc.,
          The Union  Companies,  Inc.,  Leonard  C.  Tallerine,  Jr. and Mark C.
          Licata,  filed with the Commission as an exhibit to the Current Report
          on Form 8-K on  August  15,  1997,  and  incorporated  herein  by this
          reference.
<PAGE>

     10.19Form of  Executive  Officer and  Director  Indemnification  Agreement,
          filed with the  Commission as an exhibit to the Company's Form 10-Q on
          August 15, 1997, and incorporated herein by this reference.

     10.20***Form of Warrant to Purchase Shares of Common Stock of PANACO,  Inc.
          issued by the Company on October 9, 1997 to Offense Group  Associates,
          L.P.,  Kayne,  Anderson  Non-Traditional   Investments,   L.P.,  ARBCO
          Associates,   L.P.,  Opportunity  Associates,  L.P.,  Kayne,  Anderson
          Offshore Limited,  Foremost Insurance Company, TOPA Insurance Company,
          and EOS  Partners,  L.P.,  with  respect to an  aggregate of 2,060,606
          shares.

     10.21***Amended and Restated Credit Agreement, dated October 9, 1997, among
          First Union National Bank of North Carolina, as agent, and the lenders
          signatory thereto, and PANACO, Inc.

     21.1 List of subsidiaries of PANACO, Inc.


     27   Financial Data Schedule.

*Filed  with  the  Registration  Statement  on Form  S-4,  Commission  File  No.
33-44486,  initially  filed December 13, 1991, and  incorporated  herein by this
reference.

** Filed  with the  Registration  Statement  on Form  S-1,  Commission  file No.
333-18233,  initially  filed December 19, 1996 and  incorporated  herein by this
reference.

***Filed  with the  Registration  Statement  on Form  S-4,  Commission  File No.
333-39919,  initially  filed November 10, 1997 and  incorporated  herein by this
reference.

(d) Financial Statement Schedules. See Index to Financial Statements, Page F-1.

<PAGE>





                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                By: \s\H. James Maxwell
                      H. James Maxwell, Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

                By: \s\ H. James Maxwell
                     H. James Maxwell,
                     Chief Executive Officer and
                     Director

                By: \s\Larry M. Wright
                      Larry M. Wright,
                      President and Director

                By: \s\Michael Springs
                      Michael Springs, Director

                By: \s\Todd R. Bart
                      Todd R. Bart, Chief Financial
                      Officer, Secretary and Director

                By: \s\Mark C. Barrett
                      Mark C. Barrett, Director

                By: \s\A. Theodore Stautberg
                      A. Theodore Stautberg, Director


<PAGE>

   




                                   PANACO, Inc.
                          INDEX TO FINANCIAL STATEMENTS



PANACO, Inc. -  AUDITED FINANCIAL STATEMENTS                            Page
--------------------------------------------                            ----

   Report of Independent Public Accountants                              F-2
  
   Independent Auditors' Report                                          F-3
   
   Consolidated Balance Sheets, December 31, 1997 and 1996               F-4
   
   Consolidated Statements of Income (Operations) for the Years Ended
         December 31, 1997, 1996 and 1995                                F-6
   
   Consolidated Statements of Changes in Stockholders' Equity
         for the Years Ended December 31, 1997, 1996 and 1995            F-7
   
   Consolidated Statements of Cash Flows for the Years Ended
         December 31, 1997, 1996 and 1995                                F-8
   
   Notes to Consolidated Financial Statements for the Years Ended
         December 31, 1997, 1996 and 1995                               F-10



<PAGE>


                    Report of Independent Public Accountants



To the Stockholders and Board of Directors of PANACO, Inc.:

We have audited the accompanying  consolidated balance sheets of PANACO, Inc. (a
Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income (operations), changes in stockholders'
equity and cash flows for the years then ended.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of PANACO,  Inc. and
subsidiaries  as of  December  31,  1997  and  1996,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.



                                                          ARTHUR ANDERSEN LLP

Kansas City, Missouri,
    April 7, 1998



                                      F-2
<PAGE>



                          Independent Auditors' Report


To the Board of Directors
PANACO, Inc.

We have  audited the  accompanying  balance  sheets of PANACO,  Inc. (a Delaware
corporation)  as of  December  31,  1995 and the  related  statement  of  income
(operations),  changes in Stockholders' equity and cash flows for the year ended
December 31, 1995.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in the 1995 Financial Statements, the Company has given retroactive
effect to the change in accounting for its oil and gas operations.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of PANACO, Inc. as of December 31,
1995 and the results of its operations, changes in stockholders' equity and cash
flows for the year ended December 31, 1995 in conformity with generally accepted
accounting principles.



BARRETT & ASSOCIATES
Overland Park, Kansas

February  26,  1996,  except  for  the  change  in  accounting  for  oil and gas
operations, for which the date is June 7, 1996.





                                      F-3








<PAGE>


<TABLE>




                                  PANACO, Inc.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>


                                     ASSETS

                                                                                    December 31,
                                                                          1997                         1996
CURRENT ASSETS                                                           ------                       ------      

<S>                                                                  <C>                         <C>
Cash and cash equivalents                                            $   36,909,000              $   1,736,000
Accounts receivable                                                       9,735,000                  6,197,000
Investment in marketable securities                                             ---                  1,642,000
Prepaid and other                                                           626,000                    424,000
                                                                       ------------               ------------
       Total current assets                                              47,270,000                  9,999,000
                                                                       ------------               ------------

OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
    Oil and gas properties, proved                                      198,840,000                125,283,000
    Oil and gas properties, unproved                                     12,947,000                  7,128,000
    Less accumulated depreciation, depletion and amortization           (99,239,000)               (81,871,000)
                                                                       ------------                -----------
       Net oil and gas properties                                       112,548,000                 50,540,000
                                                                        -----------                -----------

PROPERTY, PLANT, AND EQUIPMENT
    Pipelines and equipment                                              14,875,000                 10,534,000
    Less accumulated depreciation                                        (1,416,000)                  (327,000)
                                                                       ------------                -----------
       Net property, plant and equipment                                 13,459,000                 10,207,000
                                                                       ------------                -----------

OTHER ASSETS
    Deferred debt costs, net                                              3,813,000                    611,000
    Restricted deposits                                                   2,256,000                  2,115,000
    Other                                                                   283,000                    296,000
                                                                      -------------                -----------
Total other assets                                                        6,352,000                  3,022,000
                                                                      -------------                -----------

TOTAL ASSETS                                                         $  179,629,000               $ 73,768,000
                                                                     ==============               ============



                   The  accompanying   notes  are  an  integral  part  of  these
consolidated statements.
</TABLE>



                                      F-4

<PAGE>



<TABLE>



                      LIABILITIES AND STOCKHOLDERS' EQUITY

<CAPTION>

                                                                                  December 31,
                                                                        1997                     1996
                                                                       ------                   ------
CURRENT LIABILITIES
<S>                                                                 <C>                      <C>
    Accounts payable                                                $ 17,225,000             $   6,246,000
    Interest payable                                                   2,416,000                   524,000
    Current portion of long-term debt                                       ---                       ---
                                                                    ------------               -----------
       Total current liabilities                                      19,641,000                 6,770,000
                                                                    ------------               -----------


LONG-TERM DEBT                                                       101,700,000                49,500,000

DEFERRED INCOME TAXES                                                  3,100,000                      ---

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,
       40,000,000 shares authorized;
       23,913,531 and 14,350,255 shares
       issued and outstanding, respectively                              239,000                   143,000
    Additional paid-in capital                                        69,041,000                31,490,000
    Retained earnings (deficit)                                      (14,092,000)              (14,135,000)
                                                                    ------------              ------------
       Total Stockholders' Equity                                     55,188,000                17,498,000
                                                                    ------------              ------------






TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 179,629,000             $ 73,768,000
                                                                   =============             ============








                   The  accompanying   notes  are  an  integral  part  of  these
consolidated statements.

</TABLE>


                                      F-5
<PAGE>
<TABLE>


                                  PANACO, Inc.
                 CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
<CAPTION>

                                                                           Year Ended December 31,
                                                              1997                 1996                1995
REVENUES                                                   ===========          ===========        ============    
<S>                                                        <C>                  <C>                <C>
    Oil and natural gas sales                              $37,841,000          $20,063,000        $ 18,447,000

COSTS AND EXPENSES
    Lease operating expense                                 11,305,000            8,477,000           8,055,000
    Depreciation, depletion and amortization                18,866,000            9,022,000           8,064,000
    General and administrative expense                       1,764,000              772,000             690,000
    Production and ad valorem taxes                            721,000              559,000           1,078,000
    Exploratory dry hole expense                                67,000                  ---           8,112,000
    Geological and geophysical expense                         286,000                  ---                 ---
    Provision for losses on disposition
       and write-down of assets                                    ---                  ---             751,000
    West Delta fire loss                                           ---              500,000                 ---
                                                          ------------          -----------         -----------
Total                                                       33,009,000           19,330,000          26,750,000
                                                          ------------          -----------         -----------

OPERATING INCOME (LOSS)                                      4,832,000              733,000          (8,303,000)
                                                          ------------          -----------         -----------

OTHER INCOME (EXPENSE)
    Gain (loss) on investment in common stock                   75,000             (258,000)                ---
    Interest income                                            745,000               29,000               5,000
    Interest expense                                        (4,675,000)          (2,543,000)           (992,000)
                                                         -------------          -----------         -----------
       Total                                                (3,855,000)          (2,772,000)           (987,000)
                                                         -------------          -----------         -----------
INCOME (LOSS) BEFORE INCOME
    TAXES AND EXTRAORDINARY ITEM                               977,000           (2,039,000)         (9,290,000)
INCOME TAXES                                                       ---                  ---                 ---
                                                         -------------          -----------         -----------
INCOME (LOSS) BEFORE
    EXTRAORDINARY ITEM                                         977,000           (2,039,000)         (9,290,000)
EXTRAORDINARY ITEM - Loss on early
    retirement of debt                                        (934,000)                 ---                 ---
                                                         -------------          -----------        ------------
NET INCOME (LOSS)                                        $      43,000         $( 2,039,000)       $ (9,290,000)
                                                         =============          ===========        ============

BASIC AND DILUTED EARNINGS (LOSS)
   PER SHARE
    Income (loss) before extraordinary item              $         .05         $       (.16)       $       (.81)
    Extraordinary item                                            (.05)                 ---                 ---
                                                         -------------          -----------        ------------
    Net income (loss)                                    $         ---         $       (.16)       $       (.81)
                                                         =============          ===========        ============

BASIC WEIGHTED AVERAGE
   SHARES OUTSTANDING                                       20,781,205            12,742,213         11,504,615
                                                         =============          ============       ============

DILUTED WEIGHTED AVERAGE
   SHARES OUTSTANDING                                       21,024,847            12,742,213         11,504,615
                                                         =============          ============       ============



                    The  accompanying  notes  are  an  integral  part  of  these
consolidated statements.
</TABLE>

                                      F-6
<PAGE>
<TABLE>


                                  PANACO, Inc.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<CAPTION>


                                                                      Common         Additional       Retained
                                                                       Share           Paid-In        Earnings
                                                       Shares        Par Value         Capital        (Deficit)
                                                    ==========      ==========       ===========   =============
Balances, December 31, 1994                         10,220,138      $ 102,000        $17,586,000   $ (2,806,000)

<S>                                                                                                  <C>
   Net loss                                                ---            ---                ---     (9,290,000)
   Exercise of stock options and warrants            1,181,602         12,000          3,137,000            ---
   Issuance of new shares                              102,875          1,000            432,000            ---
                                                    ----------     ----------         ----------    -----------
Balances, December 31, 1995                         11,504,615        115,000         21,155,000    (12,096,000)

   Net loss                                                ---            ---                ---     (2,039,000)
   Exercise of warrants, shares issued under
      Employee Stock Ownership Plan and
      Director stock bonuses                           845,640          8,000          1,955,000           ---
   Acquisition of properties                         2,000,000         20,000          8,380,000           ---
                                                    ----------      ---------         ----------    -----------
Balances, December 31, 1996                         14,350,255        143,000         31,490,000    (14,135,000)

   Net income                                              ---            ---                ---         43,000
   Exercise of warrants, shares issued under
      Employee Stock Ownership Plan and
      Director and employee stock bonuses              324,346          3,000            783,000           ---
   Issuance of warrants to retire debt                     ---            ---            450,000           ---
   Acquisition of properties                         3,238,930         33,000         14,381,000           ---
   Issuance of new shares                            6,000,000         60,000         21,937,000           ---
                                                    ----------      ---------        -----------   ------------
Balances, December 31, 1997                         23,913,531      $ 239,000        $69,041,000   $(14,092,000)
                                                    ==========      =========        ===========   ============









                   The  accompanying   notes  are  an  integral  part  of  these
consolidated statements.
</TABLE>





                                      F-7
<PAGE>
<TABLE>


                                  PANACO, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                               Year Ended December 31,
                                                                    1997              1996                1995
CASH FLOWS FROM OPERATING ACTIVITIES                          ============        ============       ============
<S>                                                             <C>               <C>                <C>
   Net income (loss)                                          $    43,000         $ (2,039,000)      $ (9,290,000)
   Adjustments to reconcile  net income (loss) to 
    net cash provided by operating activities:
     Extraordinary item                                           934,000                 ---                ---
     Depreciation, depletion and amortization                  18,866,000           9,022,000          8,065,000
     Exploratory dry hole expense                                  67,000                 ---          8,112,000
     Provision for losses on disposition
       and write-down of assets                                       ---                 ---            751,000
     Loss (gain) on investment in common stock                    (75,000)            258,000                ---
     ESOP stock contribution                                      165,000             122,000            132,000
     Changes in operating assets and liabilities,
      net of acquisitions:
         Accounts receivable                                     (969,000)         (1,811,000)        (2,155,000)
         Prepaid and other                                        129,000             274,000           (125,000)
         Accounts payable                                       4,172,000           1,803,000          2,916,000
         Interest payable                                       1,822,000             363,000            (24,000)
                                                              -----------          ----------         ----------
             Net cash provided by operating activities         25,154,000           7,992,000          8,382,000
                                                              -----------          ----------         ----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from the sale of oil and gas properties                87,000           9,017,000             11,000
   Proceeds from the sale of investment in common stock         1,717,000                 ---                ---
   Capital expenditures and acquisitions                      (41,997,000)        (43,050,000)       (21,841,000)
   Increase in restricted deposits                               (141,000)         (2,115,000)               ---
   Other                                                              ---              96,000                ---
                                                             ------------         -----------        -----------
     Net cash used in investing activities                    (40,334,000)        (36,052,000)       (21,830,000)
                                                             ------------         -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from the common stock offering, net                21,997,000                 ---                ---
   Long-term debt proceeds                                    112,459,000          38,514,000         16,890,000
   Repayment of long-term debt                                (84,742,000)        (11,753,000)        (7,000,000)
   Proceeds from the issuance of common shares -
       exercise of warrants and options                           639,000           1,837,000          3,173,000
                                                             ------------         -----------        -----------
     Net cash provided by financing activities                 50,353,000          28,598,000         13,063,000
                                                             ------------         -----------        -----------

NET INCREASE (DECREASE) IN CASH                                35,173,000             538,000           (385,000)

CASH AT BEGINNING OF YEAR                                       1,736,000           1,198,000          1,583,000
                                                             ------------         -----------        -----------

CASH AT END OF YEAR                                          $ 36,909,000        $  1,736,000       $  1,198,000
                                                             ============        ============       ============


                   The  accompanying   notes  are  an  integral  part  of  these
consolidated statements.
</TABLE>


                                      F-8

<PAGE>


      SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

For the year ended December 31, 1997:

The Company issued 10,649 common shares as director and employee bonuses
and contributed 24,332 shares to the ESOP. The Company also issued 3,238,930
common shares, $6.0 million in notes, assumed $19.2 million in debt and net
liabilities and recorded a $3.1 million deferred tax liability in connection
with an acquisition.
     
The Company issued 2,060,606  warrants to acquire common shares to a former
lender in connection with debt which was prepaid in 1997.

For the year ended December 31, 1996:

The Company issued  2,000,000  common shares totaling $8.4 million to Amoco
Production Company in connection with an acquisition of oil and gas assets.

The Company  issued 2,447 common shares each to two new  directors.  The Company
also issued 24,220 shares to the ESOP.

The Company received 477,612 shares of National Energy Group,  Inc. common stock
in connection with the sale of the Bayou Sorrel Field.

For the year ended December 31, 1995:

The Company  issued 97,680 common shares  totaling  $409,000 in exchange for oil
and gas properties.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year ended December 31:

                               1997              1996             1995
                               ----              ----             ----

Interest                   $2,552,000        $2,218,000       $1,016,000
                           ==========        ==========       ==========

Income taxes               $     ---         $     ---        $     ---
                           ===========       ==========       ==========









                                      F-9

<PAGE>


                                  PANACO, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995



Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company is an  independent  oil and natural gas  exploration  and production
company  with  operations  focused in the Gulf of Mexico and onshore in the Gulf
Coast region.  It operates in an  environment  with many financial and operating
risks,  including,  but not  limited  to,  the  ability  to  acquire  additional
economically  recoverable oil and gas reserves, the inherent risks of the search
for,  development  of and production of oil and gas, the ability to sell oil and
gas at  prices  which  will  provide  attractive  rates of  return,  the  highly
competitive  nature of the  industry  and  worldwide  economic  conditions.  The
Company's  ability to expand its reserve base and  diversify  its  operations is
also dependent upon obtaining the necessary capital through operating cash flow,
borrowings or the issuance of additional equity.

Revenue Recognition

The Company  recognizes its ownership  interest in oil and gas sales as revenue.
Gas balancing  arrangements with partners in natural gas wells are accounted for
by the entitlements  method. At December 31, 1997 and 1996 both the quantity and
dollar amounts of such arrangements  recorded in the Consolidated  Balance Sheet
were immaterial.

Hedging Transactions

The Company hedges the prices of its oil and gas  production  through the use of
oil and natural  gas hedge and swap  contracts  within the normal  course of its
business.  The Company  uses hedge and swap  contracts  to reduce the effects of
fluctuations  in oil and natural gas prices (see Note 7).  Changes in the market
value of these  contracts  are  deferred  and  subsequent  gains and  losses are
recognized  monthly as adjustments to revenues in the same production  period as
the hedged item. Contracts are placed with major financial institutions that the
Company believes have minimal credit risk.

Income Taxes

The  Company  records  income  taxes  in  accordance  with the  requirements  of
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected  future tax  consequences  of events that have been included in
the financial statements or tax returns. Under this method,  deferred tax assets
and  liabilities are determined  based on the differences  between the financial
statement and tax bases of assets and liabilities using enacted tax rates.

Oil and Gas Producing  Activities and  Depreciation,  Depletion and Amortization

The Company utilizes the successful efforts method of accounting for its oil and
gas properties. Under the successful efforts method, lease acquisition costs are
capitalized. Non-drilling exploratory costs including geological and geophysical
costs  and delay  rentals  are  expensed.  Exploratory  drilling  costs are also
capitalized pending determination of proved reserves. If proved reserves are not
discovered,  the  exploratory  costs are  expensed.  All  development  costs are
capitalized.  Provision  for  depreciation  and  depletion  is  determined  on a
field-by-field  basis  using the  unit-of-production  method.  Estimated  future
abandonment  costs are recorded by charges to depreciation and depletion expense
over the lives of the proved reserves of the properties. The carrying amounts of
unproved  properties are not depleted until a determination of reserves has been
made.  The  carrying  amounts of proven and  unproven  properties  are  reviewed
periodically  on  a  field-by-field  basis,  based  on  future  net  cash  flows

                                      F-10
<PAGE>

determined  by  independent  engineering  firms,  and an  impairment  reserve is
provided as conditions  warrant. A provision for the write down of assets in the
amount of $751,000 was incurred in 1995.  Fees for processing  and  transporting
oil and natural gas for others are  treated as a  reduction  of lease  operating
expense related to the facilities and infrastructure.


Capitalized Interest

The Company  capitalizes  interest costs  associated  with unproved  properties.
Interest  capitalized  in  1997,  1996  and  1995  was  $513,000,   $0  and  $0,
respectively.

Property, Plant & Equipment

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.

Amortization of Deferred Debt Costs

Cost incurred in debt financing  transactions are amortized over the term of the
debt.

Per Share Amounts

Effective  December  31,  1997,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  (SFAS) No. 128,  "Earnings per Share." In accordance with
SFAS No. 128, the Company's  basic earnings per share amounts have been computed
based on the  average  number of common  shares  outstanding.  Diluted  weighted
average  shares  outstanding   amounts  include  the  effect  of  the  Company's
outstanding  stock  options and warrants  using the  treasury  stock method when
dilutive.  Basic and  diluted  earnings  per share were the same for all periods
presented.

Stock Based Compensation

The Company  accounts for  stock-based  compensation  under the intrinsic  value
method. Under this method, the Company records no compensation expense for stock
options granted when the exercise price of options granted is equal to or higher
than the fair market value of the Company's  common shares on the date of grant,
see Note 8.

Consolidated Statements of Cash Flows

For purposes of reporting cash flows, the Company considers all cash investments
with original maturities of three months or less to be cash equivalents.

Use of Estimates

The preparation of financial  statements in accordance  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets,  liabilities,  revenues and expenses, and
disclosure of contingent  assets and  liabilities  in the financial  statements,
including  the use of  estimates  for oil and gas  reserve  information  and the
valuation  allowance for deferred income taxes. Actual results could differ from
those estimates.  Estimates  related to oil and gas reserve  information and the
standardized measure are based on estimates provided by independent  engineering
firms. Changes in prices could significantly affect these estimates from year to
year.

Reclassification

Certain  financial  statement  items  have been  reclassified  to conform to the
current year's presentation.



                                      F-11
<PAGE>

Note 2 - ACQUISITIONS AND DISPOSITIONS

On July 31, 1997, the Company acquired Goldking by merging its corporate parent,
The Union  Companies,  Inc.  (Union) into Goldking  Acquisition  Corp.,  a newly
formed,  wholly-owned  subsidiary of the Company. The individual shareholders of
Union  received  merger  consideration  consisting  of $7.5 million in cash,  $6
million in notes (which were paid in October 1997) and 3,154,930  Company common
shares, valued at $14 million. The Company assumed the debt of Goldking of $15.9
million and other net  liabilities  of $3.3  million and recorded a $3.1 million
deferred tax  liability  based upon the complete  utilization  of the  Company's
deferred  tax asset  valuation  allowance  and the  requirement  for  additional
deferred tax  liabilities  resulting  from the  acquisition.  The purchase price
allocation is preliminary, based upon the estimated tax effects of the Company's
merger  with  Goldking.  Management  does not  expect  any  change  in the final
allocation  of the  purchase  price  and  the  resulting  effect  on  depletion,
depreciation and amortization to be material.

On October  8,1996,  the Company closed its acquisition of interests in thirteen
offshore  blocks  comprising  six  fields  in the  Gulf  of  Mexico  from  Amoco
Production  Company.  The  purchase  price  for  the  assets  acquired  in  this
transaction was $40.4 million,  paid by the issuance of 2,000,000 common shares,
valued at $4.20 per share, and by payment to Amoco of $32 million in cash.

Both of these  acquisitions  were accounted for using the purchase  method.  The
results  for the Amoco  acquisition  are  included in the  Company's  results of
operations  from  October 8, 1996.  The results for Goldking are included in the
Company's results of operations from August 1, 1997.

Effective  September  1,  1996,  the  Company  sold its Bayou  Sorrel  Field for
$11,000,000. This field was purchased in 1995 from Shell Western E & P, Inc. for
$10,500,000.  There  was no  gain  or loss  on the  sale  of the  field  and the
remaining net book value is assigned to an overriding royalty interest retained.

The following unaudited pro forma financial information assumes the Goldking and
Amoco  acquisitions had been  consummated  January 1, 1996, and the Bayou Sorrel
sale was completed January 1, 1996. The pro forma financial information does not
purport to be  indicative  of the results of the Company had these  transactions
occurred on the date  assumed,  nor is it  necessarily  indicative of the future
results of the Company.

                    Unaudited Pro Forma Financial Information
                 For the Years Ended December 31, 1997 and 1996

                                                    1996                 1997
                                                -----------         -----------
Revenues                                        $41,938,000         $37,164,000

Income (loss) before extraordinary item          (1,446,000)         (2,475,000)

Net income (loss)                                (2,380,000)         (2,475,000)

Net income (loss) per share                     $     (0.10)       $      (0.14)


Note 3 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

In  August  1994  the  Company   established  an  ESOP  and  Trust  that  covers
substantially all employees.  The Board of Directors can approve  contributions,
up to a maximum of 15% of eligible  employees' gross wages. The Company incurred
$165,000,  $122,000 and $132,000 in costs for the years ended December 31, 1997,
1996 and 1995, respectively.


                                      F-12
<PAGE>
Note 4 - RESTRICTED DEPOSITS

Pursuant to existing agreements the Company is required to deposit funds in bank
escrow and trust  accounts  to  provide a reserve  against  satisfaction  of its
eventual  responsibility  to plug and abandon wells and remove  structures  when
certain  fields no longer  produce  oil and gas.  Under the terms of the  escrow
agreements,  the  company  will be  required to deposit 10% of the net cash flow
from the Amoco properties (as defined) into an escrow fund in 1998. In addition,
another agreement  requires the Company to deposit into escrow accounts $997,000
during 1999 and $576,000 during 2000.

Note 5- LONG-TERM DEBT

                                              1997                    1996
                                         =============            ============
10 5/8 % Senior Notes due 2004(a)         $100,000,000            $        ---
Note payable (b)                                   ---              27,500,000
Note payable (c)                                   ---              22,000,000
Production payment(d)                        1,700,000                     ---
                                          ------------            ------------
                                           101,700,000              49,500,000

Less current portion                               ---                     ---
                                          ------------            ------------
    Long-term debt                        $101,700,000            $ 49,500,000
                                          ============            ============

(a)  In October 1997 the Company issued $100 million of 10.625% Senior Notes due
     2004. Interest is payable  semi-annually April 1 and October 1 of each year
     beginning April 1, 1998. The net proceeds of the  transaction  were used to
     repay or prepay substantially all of the Company's outstanding indebtedness
     and for capital  expenditures.  The estimated  fair value of these notes at
     December 31, 1997 was $109,420,000 based on quoted market prices. The notes
     are the  general  unsecured  obligations  of the Company and rank senior in
     right of payment to any subordinated obligations.

(b)  In October  1997,  the  Company  amended its bank  facility.  The loan is a
     reducing  revolver  designed  to  provide  the  Company  up to $75  million
     depending on the  Company's  borrowing  base, as determined by the lenders.
     The  Company's  borrowing  base at December 31, 1997 was $40 million,  with
     availability under the revolver of $39 million. The principal amount of the
     loan is due  October 22,  2002,  however,  at no time may the Company  have
     outstanding  borrowings  in excess of its borrowing  base.  Interest on the
     loan is computed at the bank's prime rate or at 1 to 1 3/4% (depending upon
     the  percentage  of the  facility  being used) over the  applicable  London
     Interbank  Offered Rate (LIBOR) on Eurodollar  loans.  The bank facility is
     collateralized  by a first mortgage on the Company's  offshore  properties.
     The loan agreement  contains certain  covenants  including a requirement to
     maintain a positive  indebtedness  to cash flow ratio,  a positive  working
     capital  ratio,  a certain  tangible net worth,  as well as  limitations on
     future debt,  guarantees,  liens,  dividends,  mergers,  material change in
     ownership by management, and sale of assets.

(c)  From  time to time  the  Company  has  borrowed  funds  from  institutional
     lenders.  In each case these loans were due at a stated maturity,  required
     payments  of  interest  only at 12% per annum 45 days after the end of each
     calendar  quarter and were  secured by a second  mortgage on the  Company's
     offshore  oil and gas  properties.  The  loans  were  repaid  in  1997.  In
     connection with the prepayment of the Convertible  Subordinated  notes, the
     Company issued these lenders warrants to acquire 2,060,606 common shares at
     an exercise price of $4.125 any time prior to December 31, 1998.

(d)  Represents a production payment obligation to a former lender which is paid
     with a portion of the revenues from certain wells.


                                      F-13
<PAGE>


Note 6 - EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT

In October  1997,  the Company  issued $100 million of 10.625%  Senior Notes due
2004,  see note 5. A portion of the proceeds from the offering was used to repay
or prepay substantially all of the Company's outstanding indebtedness.  With the
early  retirement  of the  debt,  the  Company  incurred  a  $484,000  charge to
write-off  the  deferred  financing  costs  associated  with the  previous  debt
facilities.   In  addition,  as  part  of  the  prepayment  of  the  convertible
subordinated  notes,  the Company  issued  2,060,606  warrants to acquire common
shares  at an  exercise  price of  $4.125  per  share  which  were the  existing
conversion terms of the prepaid notes. The fair value of these warrants has been
estimated by an investment banker to be approximately  $450,000,  which has been
recorded as an extraordinary item and additional paid-in capital.

Note 7 - COMMODITY HEDGE AGREEMENTS

During 1997 the Company hedged  263,000  barrels of oil and 5.1Bcf of gas, which
represented 51% and 45%, respectively,  of production, and resulted in a loss on
such hedges of $1,270,000,  thereby reducing the Company's  average gross margin
on oil and gas by $0.13 per barrel and $0.10 per Mcf, respectively.

Hedge  agreements  for 1998 are for 463,000  barrels of oil and 12.0 Bcf of gas,
which represent 68% and 61%,  respectively,  of its anticipated  1998 production
based upon the year-end  reserve  reports.  At December 31, 1997,  the estimated
fair market value of the hedge agreements was a loss of $61,000. At December 31,
1996,  the  estimated  fair market value of the hedge  agreements  was a loss of
$897,000.

These hedge  agreements  provide for the  counterparty  to make  payments to the
Company to the extent the market prices (as  determined  in accordance  with the
agreement) are less than the fixed prices for the notional amount hedged and the
Company to make  payments to the  counterparty  to the extent  market prices are
greater than the fixed  prices,  subject to the Company's  participation  in the
excess.  The  Company  accounts  for the gains and losses in oil and natural gas
revenue in the month of hedged production.

Note 8 - STOCK OPTIONS AND WARRANTS

On August 26,  1992,  the  shareholders  approved  a  long-term  incentive  plan
allowing  the  Company  to grant  incentive  and  non-statutory  stock  options,
performance units,  restricted stock awards and stock appreciation rights to key
employees,  directors, and certain consultants and advisors of the Company up to
a maximum of 20% of the total number of shares outstanding.

SFAS No. 123,  "Accounting  for Stock-based  Compensation"  defines a fair value
method of accounting for an employee stock option or similar equity  instrument.
The Company has elected to account  for its stock  options  under the  intrinsic
value method,  whereby, no compensation  expense is recognized for stock options
granted with an exercise  price equal to or greater than the market value of the
Company's  common stock on the date of the grant.  On June 18,  1997,  1,200,000
options at $4.45 per share were issued to certain employees under the provisions
of the Company's long-term incentive plan, which expire June 20, 2000. Ownership
of the stock acquired upon exercise is contractually restricted for a three-year
period from the date of exercise,  except in certain  circumstances as described
in the plan.
               
                                      F-14

<PAGE>
<TABLE>
<CAPTION>
                                               1995                       1996                        1997
                                       ======================    ======================     =========================
                                                    Wtg. Avg.                Wtg. Avg.                    Wtg. Avg.
                                        Shares      Ex. Price      Shares    Ex. Price        Shares      Ex. Price
                                        ------      ---------     -------   ----------       --------    ----------   
<S>                                     <C>           <C>        <C>             <C>               <C>            <C>
Outstanding at beginning of year        975,232       $2.44      289,365      $2.21           289,365     $ 2.21
Granted                                    0           ---           0         ---          1,200,000       4.45
Exercised                              (685,867)       2.54          0         ---           (289,365)      2.21
Forfeited                                  0           ---           0         ---            (10,000)      4.45
                                       ---------      -----     ---------     -----        -----------     ------
Outstanding at end of year              289,365        2.21      289,365       2.21         1,190,000       4.45
                                       ---------      -----     ---------     -----        -----------     ------
Exercisable at end of year              289,365       $2.21      289,365      $2.21         1,190,000      $4.45
Fair value of options granted             N/A                        N/A                       $ 1.42
</TABLE>
      
The fair value of each option in 1997 was  estimated  at the date of grant using
the  Black-Scholes  Modified  American  Option  Pricing Model with the following
assumptions:

                        Expected option life-years             3
                        Risk-free interest rate              6.1%
                        Dividend yield                         0%
                        Volatility                          38.4%

If  compensation  expense for the Company's stock option plans had been recorded
using the Black-Scholes  fair value method and the assumptions  described above,
the  Company's  net income  (loss) and earnings  (loss) per share for 1997 would
have been as shown below:

     Net income(loss):                  As reported       $   43,000
                                        Pro forma         $ (239,000)

     Earnings per share (loss)          As reported       $      ---
                                        Pro forma         $    (0.01)


 
Note 9 - MAJOR CUSTOMERS

One purchaser  accounted for 62%, 49% and 69% of revenues in 1997, 1996 and 1995
respectively.  These  transactions  represented spot sales of natural gas to one
customer.

Note 10 - INCOME TAXES

At December  31, 1997,  the Company had net  operating  loss carry  forwards for
federal income tax purposes of approximately  $40,000,000 which are available to
offset future federal  taxable income through 2012. The Company's  timing of its
utilization  of net  operating  loss carry  forwards may be limited on an annual
basis in the future due to its  issuance  of common  shares and the  purchase of
Goldking common stock.

Significant  components of the Company's deferred tax assets (liabilities) as of
December 31 are as follows:

                                                  1997             1996
                                              ------------      ------------
Deferred tax assets(liabilities)
     Fixed asset basis differences          $  (17,200,000)      $  2,312,000
     Net operating loss carry forwards          14,100,000          6,342,000
                                               -----------        -----------
        Total deferred tax assets(liabilities)  (3,100,000)         8,654,000
                                               -----------        -----------

  Valuation allowance for deferred
     tax assets                                        ---        (8,654,000)
                                               -----------        ----------
        Total deferred tax assets(liabilities) $(3,100,000)       $      ---
                                               ===========        ==========

                                      F-15
<PAGE>
A valuation  allowance  was provided at December 31, 1996 to reduce the deferred
tax assets to a level which,  more likely than not,  will be  realized.  The net
change in the total  valuation  allowance for the years ended  December 31, 1997
and 1996 was a decrease of $8,654,000 and an increase of $940,000, respectively.
The  decrease  in  the  Company's  deferred  tax  asset  in  1997  is due to the
acquisition  of  Goldking.  In  connection  with the  acquisition,  the  Company
recorded  a  $3.1  million  deferred  tax  liability  based  upon  the  complete
utilization  of the  Company's  deferred tax asset  valuation  allowance and the
requirement  for  additional   deferred  tax  liabilities   resulting  from  the
acquisition.


Note 11 - COMMITMENTS AND CONTINGENCIES

The Company is subject to various  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.

The Company has commitments  under  operating lease  agreements for office space
leases.  At December 31, 1997, the future minimum rental  payments due under the
leases are as follows:

                                1998                        $  340,000
                                1999                           360,000
                                2000                           367,000
                                2001                           420,000
                                2002                           438,000
                                Thereafter                     792,000
                                    Total                   $2,717,000


Note 12 - SUPPLEMENTAL  INFORMATION RELATED TO OIL AND GAS PRODUCING  ACTIVITIES
(UNAUDITED)

The  following  table  reflects  the  costs  incurred  in oil and  gas  property
activities for each of the three years ended December 31:

                                         1997          1996            1995
                                     ===========   ============    ============
Property acquisition costs, proved   $39,384,000   $ 26,859,000    $ 12,603,000

Property acquisition costs, unproved   6,026,000      5,390,000             ---

Exploration costs                        353,000            ---       8,112,000

Development costs                     29,276,000      8,863,000       1,497,000

Quantities of Oil and Gas Reserves

The estimates of proved reserve  quantities at December 31, 1997, are based upon
reports of third party petroleum engineers (Ryder Scott Company, W.D. Von Gonten
& Co. and McCune  Engineering,  P.E.) and do not  purport to reflect  realizable
values or fair market values of reserves.  It should be emphasized  that reserve
estimates are inherently imprecise and accordingly, these estimates are expected
to change as future information becomes available.  These are estimates only and
should not be construed as exact amounts. All reserves are located in the United
States.

Proved  reserves  are  estimated  reserves  of  natural  gas and  crude  oil and
condensate  that  geological and engineering  data  demonstrate  with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.  Proved developed reserves are those expected
to be recovered through existing wells, equipment and operating methods.


                                      F-16
<PAGE>


Proved developed and undeveloped reserves:            Oil            Gas
                                                    (BBLS)          (MCF)
                                                  =========      ==========   
Estimated reserves as of December 31, 1994          943,000      41,582,000

     Production                                    (170,000)     (9,850,000)
     Sale of minerals in-place                       (1,000)        (22,000)
     Purchase of minerals in-place                1,140,000      20,094,000
     Revisions of previous estimates                (12,000)     (5,093,000)
                                                  -----------     ----------
Estimated reserves as of December 31, 1995        1,900,000      46,711,000

     Production                                    (276,000)     (6,788,000)
     Extensions and discoveries                         ---         972,000
     Sale of minerals in-place                     (805,000)     (3,102,000)
     Purchase of minerals in-place                1,379,000      16,633,000
     Revisions of previous estimates                 41,000     (12,980,000)
                                                 -----------     -----------
Estimated reserves as of December 31, 1996        2,239,000      41,446,000

     Production                                    (515,000)    (11,468,000)
     Extensions and discoveries                     459,000      20,002,000
     Sale of minerals in-place                      (11,000)       (252,000)
     Purchase of minerals in-place                2,334,000      23,904,000
                                                 -----------     -----------
Estimated reserves as of December 31, 1997        4,506,000      73,632,000
                                                 ===========     ===========


Proved developed reserves:
                                                    Oil              Gas
                                                  (BBLS)            (MCF)
                                               -----------      ------------

    December 31, 1994                             907,000        36,282,000
                                               ==========        ==========

    December 31, 1995                           1,794,000        40,323,000
                                               ==========        ==========

    December 31, 1996                           1,867,000        39,288,000
                                               ==========        ==========

    December 31, 1997                           3,194,000        55,690,000
                                               ==========        ==========

Standardized Measure of Discounted Future Net Cash Flows

Future cash  inflows are  computed  by applying  year-end  prices of oil and gas
(with  consideration of price changes only to the extent provided by contractual
arrangements) to the year-end  estimated future production of proved oil and gas
reserves.  Estimates of future  development  and  production  costs are based on
year-end costs and assume  continuation  of existing  economic  conditions.  The
estimated  future net cash flows are then discounted  using a rate of 10 percent
per  year to  reflect  the  estimated  timing  of the  future  cash  flows.  The
standardized  measure of discounted cash flows is the future net cash flows less
the computed discount. 


                                      F-17

<PAGE>

     The  accompanying  table  reflects the  standardized  measure of discounted
future cash flows  relating to proved oil and gas reserves as of the three years
ended December 31: 
<TABLE> 
<CAPTION>
                                                1997                   1996                1995
                                          ---------------        ---------------      --------------
<S>                                        <C>                    <C>                  <C>
Future cash inflows                        $ 269,141,000          $ 210,875,000        $140,247,000
Future development and production costs     (102,114,000)            61,822,000)        (50,723,000)
                                          ---------------        ---------------      --------------
Future net cash flows                        167,027,000            149,053,000          89,524,000
Future income taxes                          (10,563,000)           (17,899,000)        (11,755,000)
                                          ---------------        ---------------      --------------
Future net cash flows after income taxes     156,464,000            131,154,000          77,769,000
10% annual discount                          (35,592,000)           (31,313,000)        (14,848,000)
                                          ---------------        ---------------      --------------
Standardized measure after income taxes    $ 120,872,000          $  99,841,000     $    62,921,000
                                            =============         ==============     ===============
</TABLE>

Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The  accompanying  table  reflects  the  principal  changes in the  standardized
measure of discounted  future net cash flows  attributable to proved oil and gas
reserves for each of the three years ended December 31:
<TABLE>
<CAPTION>
                                                    1997                1996                1995
                                              -------------        -------------         -----------
<S>                                            <C>                  <C>                     <C>
Beginning balance                              $ 99,841,000        $ 62,921,000          $41,915,000
Sales of oil and gas, net of production costs   (25,815,000)        (11,027,000)          (9,314,000)
Net change in income taxes                        5,465,000          (4,116,000)          (4,267,000)
Changes in price and production costs           (32,461,000)         44,088,000           11,498,000
Purchases of minerals in-place                   40,027,000          45,521,000           34,415,000
Sale of minerals in-place                               ---         (10,518,000)                 ---
Revision of previous estimates, extensions &
   discoveries, net                              33,815,000         (27,028,000)         (11,326,000)
                                               -------------        ------------         ------------
Ending balance                                 $120,872,000         $99,841,000          $62,921,000
                                               =============        ============         ============
</TABLE>

                                      F-18

<PAGE>
Ex. 10.13.1
                                  AMENDMENT TO

                   PANACO, INC. EMPLOYEE STOCK OWNERSHIP PLAN


     The  PANACO,  Inc.  Employee  Stock  Ownership  Plan dated  April 28,  1994
("Plan"),  is hereby  amended in  accordance  with Section 24 of the Plan in the
following respects effective July 31, 1997:

     1.   The  definition of "Board' in Section 2 of the Plan is hereby  amended
          in its entirety to read as follows:

          "Board" - The Board of Directors of PANACO, Inc."

     2.   The definition of "Company" in Section 2 of the Plan is hereby amended
          in its entirety to read as follows:

     "Company" - PANACO,  Inc., a Delaware  corporation,  whose  address is 1050
     West Blue Ridge Boulevard, Kansas City, Missouri 64145-1216, and any entity
     which is part of a Controlled Group which includes PANACO, Inc. Each entity
     meeting the  definition of "Company"  shall be considered the Company under
     the terms of the Plan except that PANACO, Inc. shall be the Plan Sponsor of
     the Plan, and shall have the sole right and responsibility to carry out the
     duties and exercises the rights of the Plan Sponsor."

     3.   The  definition of  "Compensation"  in Section 2 of the Plan is hereby
          amended by the addition thereto of the following:

     "Not withstanding  anything else herein,  "Compensation"  shall not include
     any  remuneration  received  by a  Participant  with  respect  to  services
     rendered  prior to August 1, 1997 to  Goldking  Production,  or any  entity
     which is part of a  Controlled  Group which  included  Goldking  Production
     Company on July 31, 1997."

     4.   Section 2 of the Plan is hereby amended by the addition thereto of the
          following new definition of "Controlled Group":

     "Controlled Group" - A controlled group shall consist of any entity and any
     other entity or entities who form a controlled  group of  corporations or a
     controlled group of businesses in accordance with Section 414(b) or Section
     414(c) of the Code."

     5.   Section 3(b) of the Plan is hereby amended by the addition  thereto of
          the following new subsection (e):

     " (e)  Employees who were  employed by Goldking  Production  Company or any
     entity  which  was  part of a  Controlled  Group  which  included  Goldking
     Production Company, on July 31, 1997, shall receive credit for all Hours of
     Service rendered to Goldking Production Company or any such entity, whether
     before or after July 31, 1997, for purposes of the following:

     (1) In  determining  entitlement  to share in the allocation of the Company
     Contribution  and  Forfeitures  under  Section 3(b) above for the Plan Year
     ending December 31, 1997; and

     (2) In  determining  eligibility  to  participate in the Plan in accordance
     with Section 3(a) above."

     6.   Section 14 of the Plan is hereby  amended by the  addition  thereto of
          the following new subsection (c):

     "    (c) Service With  Goldking.  Employees  who were  employed by Goldking
          Production  Company or any entity which was part of a Controlled Group
          which included  Goldking  Production  Company on July 31, 1997,  shall
          receive  credit  for  all  Hours  of  Service   rendered  to  Goldking
          Production  Company or any such entity,  whether  before or after July
          31, 1997, for purposes of determining  Plan Years and Credited Service
          taken into account for purposes of Section 13 of the Plan."

     IN  WITNESS  HEREOF,  this  Amended  has been  executed  on  behalf  of the
following party as of this 25th day of February 1998.

                                            PANACO, Inc.

 
                                            By:      /s/ H. James Maxwell 
                                                     Chief Executive Officer

                                            By:      /s/ Todd R. Bart
                                                     Secretary