PENNACO ENERGY INC, 10SB12G, 1998-09-08

PENNACO ENERGY INC
10SB12G, 1998-09-08

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------

FORM 10-SB

GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS

UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

PENNACO ENERGY, INC.
(Name of Small Business Issuer in its charter)

NEVADA
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)

1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(Address of Principal Executive Office) (Zip Code)

ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-629-6700
-------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class Name of each exchange on
to be so registered which each class is to be registered
------------------- ------------------------------------
COMMON STOCK

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK
(TITLE OF CLASS)
-----------------------------------
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INFORMATION REQUIRED IN REGISTRATION STATEMENT

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

FORWARD-LOOKING STATEMENTS

THIS REGISTRATION STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF THE COMPANY COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF FACTORS INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN
THIS REGISTRATION STATEMENT.

OVERVIEW

Pennaco Energy, Inc. (the "Company") is an independent, natural gas and
oil company primarily engaged in the development, production, and acquisition
of coal bed methane ("CBM") properties in the Rocky Mountain region of the
United States. The Company is currently one of the largest holders of oil
and gas lease and option rights in the Powder River Basin in northeastern
Wyoming and southeastern Montana, with approximately 440,000 net acres
subject to lease or option rights. The Company's management team possesses
extensive experience and expertise in CBM development. The Company plans to
drill its first 50 to 100 CBM wells in the Powder River Basin in the second
half of 1998, with initial natural gas production expected in early 1999.
The Company estimates that its capital expenditures will total approximately
$10 million to $15 million for the second half of 1998, which will be
allocated approximately 50% to drilling and completion and 50% to lease
acquisition.

Some of the largest coal mines in the United States are found in the
Powder River Basin. The CBM play in the Powder River Basin is a rapidly
emerging, relatively low-risk natural gas play located down dip, but in the
same coal seams as the large coal mines. The CBM wells in the Powder River
Basin are 350 to 1,200 feet in depth, typically take only one day to drill,
and have low completion costs resulting in low finding and development costs
for the average well. The methane requires no treating or processing, but
does require dehydration and compression. Management estimates that over 600
wells have been drilled by the industry into the thick Wyodak/Anderson coal
seam in the Fort Union Formation of the Powder River Basin, and current CBM
production from the Powder River Basin is approximately 90 million cubic feet
per day ("mmcf/d") from approximately 600 producing wells.

Several large exploration and production companies are active in the CBM
play in the Powder River Basin, including Barrett Resources and Western Gas
Resources in a joint venture that plans to drill 400 wells in 1998, and Devon
Energy which is in a joint venture with Redstone Resources. Barrett, Western
Gas, and Redstone each have approximately 200,000 net acres under lease and
net production of 10 to 25 mmcf/d.

Drilling and production growth in the Powder River Basin is currently
impeded by two principal factors: (i) a natural gas pipeline bottleneck out
of the Powder River Basin, and (ii) completion of an area-wide environmental
impact statement ("EIS") on a portion of the federal lands in the Basin.
These two factors have slowed the pace of drilling in the Powder River Basin
and, in turn, confirmation of the reserves and well economics. The Company
believes that this delay has been beneficial to the Company by enabling the
Company to quickly establish a sizable acreage position at reasonable cost
prior to economic delineation of the play. Operators are currently competing
for the limited number of drilling permits allowed by the Bureau of Land
Management ("BLM") until the EIS is complete and the pipeline capacity
limitation is rectified. The EIS is scheduled for completion in June 1999.
Several pipeline construction and expansion projects have been proposed, two
of which are permitted and acquiring rights of way. It is expected that the
pipeline take-away capacity will increase significantly in early 1999.

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BUSINESS STRATEGY

The Company's business strategy is to build an exploration and
production company that is focused on creating value for its shareholders
through growth in reserves, production, cash flow, and net income per share.
The key components of the Company's business strategy include the following:
(i) concentrate on activities in the Rocky Mountain and Mid-Continent regions
of the U.S. in order to leverage the expertise of its technical and
management team in areas of prior experience, (ii) acquire producing
properties with development and exploitation potential through industry
contacts and opportunities known to the Company's senior management, (iii)
assemble acreage positions through lease acquisition and farm-ins to conduct
a balanced exploration and development effort, (iv) seek to acquire operating
control and majority ownership interests in order to optimize the timing and
efficiency of operations, (v) participate in gas gathering, processing,
transportation, and marketing activities in order to maximize product price
realizations, and (vi) maintain a strong balance sheet in order to be in a
position to capitalize on opportunities as they occur.

The Company believes that the CBM play in the Powder River Basin will
enable the Company to establish a large, long-lived reserve base with
relatively low risk compared to other more conventional oil and gas plays.
The Company plans to drill over 600 wells in the Powder River Basin by the
end of 1999.

The Company currently maintains its principal executive offices at 1050
17th Street, Suite 700, Denver, CO 80265. The Company's telephone number is
(303) 629-6700; and the facsimile number is (303) 629-6800. The Company also
maintains a Nevada office at 3651 Lindell Road, Suite A, Las Vegas, Nevada
89103.

RECENT DEVELOPMENTS

The Company recently entered into a drilling arrangement with a CBM
drilling contractor, CBM Drilling, LLC, ("CBMD"). Pursuant to this
arrangement, the Company prepaid $250,000 of drilling expenses to ensure that
drilling rigs appropriate for Powder River Basin CBM drilling are available
for the Company's planned drilling program which is scheduled to commence in
the second half of 1998. CBMD currently has four drilling rigs that will be
primarily dedicated to the Company's drilling program.

RISK FACTORS

NO OPERATING HISTORY AND REVENUES. The Company is in its initial stages
of development with no revenues or income and is subject to all the risks
inherent in the creation of a new business. Since the Company's principal
activities to date have been limited to organizational activities, prospect
development, and acquisition of leasehold interests, it has no record of any
revenue-producing operations. Consequently, there is no operating history
upon which to base an assumption that the Company will be able to achieve its
business plans.

BRIDGE LOAN. The Company entered into agreements to purchase leasehold
interests in which substantial non-refundable down payments and/or option
fees were paid to secure option rights. Management of the Company believed it
was in the best interests of the Company to borrow $4,000,000 from Venture
Capital Sourcing, S.A. ("VCS")., to meet the obligations of said lease
purchase agreements. In order to borrow these funds, the Company pledged to
VCS a significant percentage of its mineral lease interests in the Powder
River Basin to the lender as security for the loan. VCS extended the bridge
loan, which was due on July 14, 1998, for an additional 51 days on
substantially the same terms as the original borrowing. The Company is
attempting to raise funds to repay the loan either through the sale of equity
securities or further borrowings to meet this obligation. If the Company is
unable to pay the loan, the lender is entitled to foreclose on the pledged
collateral after October 4, 1998. A foreclosure and forfeiture of the
pledged collateral would substantially disrupt and curtail the Company's
development and drilling activities in the Powder River Basin and threaten
the viability of the Company's development efforts.

POSSIBLE CHALLENGE TO OWNERSHIP RIGHTS TO DRILL FOR COAL BED METHANE. Some
of the leases acquired by the Company encompass lands that are owned, or were
subject to patents issued, by the federal government. In 1909 and 1910, the U.S.
Congress enacted statutes reserving the coal to the United States under lands
owned by the United States (Coal Lands Act of March 3, 1909, 35 Stat. 844,
codified at 30 U.S.C. Section 81 and Act of June 22, 1910, 36 Stat. 583,
codified at 30 U.S.C. Section 85). Until recently, in reliance upon an opinion
published by the

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Solicitor of the Department of the Interior, producers of CBM extracted from
lands currently or formerly owned by the federal government were not
concerned with this reservation. In July, 1997, the U.S. Court of Appeals,
Tenth Circuit, issued an opinion (SOUTHERN UTE TRIBE V. AMOCO PRODUCTION CO.,
119 F.3d 816 (10th Cir. 1997)) that held that CBM gas is reserved by the
United States in patents issued subject to a reservation of coal. As
successor in interest to the statutory reservation of coal, the Southern Ute
Tribe asserted claims based on trespass, conversion, and violation of certain
federal civil rights statutes. The Plaintiff sought remedies of declaratory
judgment regarding CBM ownership, quiet title, injunction and damages. The
producers in the SOUTHERN UTE case filed a motion requesting that all of the
Judges sitting on the 10th Circuit appellate court hear their arguments. On
March 17, 1998, the court heard arguments and issued an opinion on July 20,
1998 which affirmed the earlier 10th Circuit decision. (The U.S. 10th
Circuit includes Wyoming; Montana is included in the 9th Circuit Court of
Appeals). The court stated that the Coal Lands Act of 1909 and 1910 did not
unambiguously include or exclude the coal bed methane. The court relied on
the principle that ambiguity regarding land grants and mineral reservations
should be resolved in the favor of the government. Amoco has the option to
appeal to the U.S. Supreme Court. The Company has committed to purchase fee
leasehold interests pursuant to the Taylor Oil Agreement and the High Plains
Agreement and the Company has and will continue to purchase certain fee
leasehold interests that could possibly be effected by an adverse decision in
the SOUTHERN UTE case. Management has decided to purchase these leases after
a careful weighing of the risks and rewards presented by such purchases.
There can be no assurance given whatsoever that these leases will not become
of little or no value if an adverse decision against certain fee holders is
rendered by a court of competent jurisdiction in the SOUTHERN UTE case and
the U.S. Government vigorously asserts claim to CBM ownership. The Company
estimates that approximately 31% of its lease acreage is held by fee leases
where the fee owner does not hold the coal rights and which could be
adversely affected by a decision affirming the 10th Circuit decision. The
Company believes that planned legislation action may preclude a judicial
decision as to leases executed prior to July 20, 1998.

LEASE ACQUISITION RISKS. It is customary in the oil and gas industry to
acquire a lease interest in a property based upon a preliminary title
investigation. If the title to the leases acquired by the Company prove to
be defective, the Company could lose the costs of acquisition and
development, or incur substantial costs for curative title work. The
Company's right to develop and produce oil and gas from its properties
derives from its oil and gas leases. There are many versions of oil and gas
leases in use. Oil and gas leases generally call for annual rental payments
and the payment of a percentage royalty on the oil and gas produced. Courts
in many states have interpreted oil and gas leases to include various implied
covenants, including the lessee's implied obligation to develop the lease
diligently, to prevent drainage of oil and gas by wells on adjacent land, to
seek diligently a market for production, and to operate prudently according
to industry standards. Oil and gas leases with similar language may be
interpreted quite differently depending on the state in which the property is
located. Issues decided differently in two states may not yet have been
decided by the courts of a third state, leading to uncertainty as to the
proper interpretation. For instance, royalty calculations can be
substantially different from state to state, depending on each state's
interpretation of typical lease language concerning the costs of production.
The Company believes it has followed industry standards in interpreting its
oil and gas leases in the states where it operates. However, there can be no
assurance that the leases will be free from litigation concerning the proper
interpretation of the lease terms. Adverse decisions could result in material
costs to the Company or the loss of one or more leases. It should be further
noted that a large portion of the Company's oil and gas leases are held by
High Plains Associates, Inc., the Company's lease broker, and for competitive
reasons have not yet been assigned to the Company.

NEED FOR ADDITIONAL FUNDING TO IMPLEMENT BUSINESS PLAN. The Company
believes it will need to raise additional funds in order to implement its
business plan. The Company's continued operations therefore will depend upon
its ability to raise additional funds through bank borrowings, equity or debt
financing, or asset sales. There is no assurance that the Company will be
able to obtain additional funding when needed, or that such funding, if
available, can be obtained on terms acceptable to the Company. If the
Company cannot obtain needed funds, it may be forced to curtail or cease its
activities.

PROVED RESERVES AND FUTURE NET REVENUE ESTIMATES. There are numerous
uncertainties inherent in estimating quantities of proved oil and natural gas
reserves and their values, including many factors beyond the Company's
control. Estimates of proved undeveloped reserves and reserves recoverable
through enhanced recovery techniques are by their nature uncertain. Reserve
estimates are imprecise and may materially change, as additional information
becomes available. Estimates of oil and natural gas reserves, by necessity,
are projections

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based on geologic and engineering data, and there are uncertainties inherent
in the interpretation of such data as well as the projections of future rates
of production and the timing of development expenditures. Reserve engineering
is a subjective process of estimating underground accumulations of oil and
natural gas that are difficult to measure. The accuracy of a reserve estimate
is a function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as: historical production
from the area compared with production from other producing areas, the
assumed effect of regulations by governmental agencies and assumptions
governing future oil and natural gas prices, future operational costs,
severance and excise taxes, development costs and workover and remedial
costs, all which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and
natural gas attributable to any particular group of properties,
classification of such reserves based on risk of recovery, and estimates of
the future net cash flows expected therefrom may vary substantially. Any
significant variance in the assumptions could materially affect the estimated
quantity and the value from estimates, and such variances may be material. In
accordance with applicable regulations, the estimated discounted future net
cash flows from proved reserves are based on prices and costs as of the date
of the estimate, whereas actual future prices and costs may be materially
higher or lower. Actual future net cash flows also will be affected by
factors such as the amount and timing of actual production, supply and demand
for oil and natural gas, curtailments or increases in consumption by and
changes in governmental regulations or taxation. The timing of actual future
net cash flows from proved reserves, and thus their actual present value will
be affected by the timing of both the production and the occurrence of
expenses in connection with development and production of oil and natural gas
properties. Oil and gas reserve estimates are necessarily inexact and involve
matters of subjective engineering judgment. In addition, any estimates of
future net revenues and the present value of such revenues are based on
production and cost assumptions provided by the Company as its best estimate.
These estimates may not prove to have been correct over time. The numerous
uncertainties inherent in estimating proved oil and natural gas reserves and
their values, including many factors beyond the Company's control, as
discussed above, may require the Company to write down the value and amount
of its oil and gas reserves.

VOLATILITY OF OIL AND GAS MARKETS. The Company's revenues,
profitability and future rate of growth are substantially dependent upon
prevailing market prices for natural gas and oil, which can be extremely
volatile and in recent years have been depressed by excess domestic and
imported supplies. In addition to market factors, actions of state and local
agencies, the United States and foreign governments, and international
cartels affect oil and gas prices. All of these factors are beyond the
control of the Company. These external factors and the volatile nature of the
energy markets make it difficult to estimate future prices of natural gas and
oil. There is no assurance that current price levels can be sustained or that
the Company will be able to produce oil or gas on an economic basis in light
of prevailing market prices. Any substantial or extended decline in the price
of natural gas would have a material adverse effect on the Company's
financial condition and results of operations, including reduced cash flow
and borrowing capacity and could reduce both the value and the amount of the
Company's oil and gas reserves.

ACQUISITION OF SUITABLE PROSPECTS OR PRODUCING PROPERTIES. Competition
for prospects and producing properties is intense. The Company will be
competing with a number of other potential purchasers of prospects and
producing properties, most of which will have greater financial resources
than the Company. The bidding for prospects has become particularly intense
with different bidders evaluating potential acquisitions with different
product pricing parameters and other criteria that result in widely divergent
bid prices. The presence in the market of bidders willing to pay prices
higher than are supported by the Company's evaluation criteria could further
limit the ability of the Company to acquire prospects and low or uncertain
prices for properties can cause potential sellers to withhold or withdraw
properties from the market. In this environment, there can be no assurance
that there will be a sufficient number of suitable prospects available for
acquisition by the Company or that the Company can sell prospects or obtain
financing for or participants to join in the development of prospects.

SHUT-IN WELLS, CURTAILED PRODUCTION, AND OTHER PRODUCTION INTERRUPTIONS.
Production from gas wells may be curtailed or shut-in for considerable periods
of time due to a lack of market demand, government regulation, pipeline and
processing interruptions, allocations, diminished pipeline capacity, force
majeure and such curtailments may continue for a considerable period of time.
There may be an excess supply of gas in areas where the Company's operations
will be conducted. In such an event, it is possible that there will be no
market or

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a very limited market for the Company's prospects. There is also the
possibility that drilling rigs may not be available when needed and there may
be shortages of crews, equipment and other manpower requirements.

UNINSURED RISKS. The Company may not be insured against losses or
liabilities which may arise from operations, either because such insurance is
unavailable or because the Company has elected not to purchase such insurance
due to high premium costs or other reasons.

FEDERAL AND STATE TAXATION. Federal and state income, severance,
franchise, excise, and other tax laws are of particular significance to the
oil and gas industry. Recent legislation has eroded previous benefits to oil
and gas producers, and any subsequent legislation may continue this trend.
The states in which the Company may conduct oil and gas activities also
impose taxes, including, without limitation, real and personal property
taxes, upon the ownership or production of oil and gas within such states.
There can be no assurance that the tax laws will not be changed or
interpreted in the future in a manner which adversely affects the Company.

GOVERNMENT REGULATION. The oil and gas business is subject to
substantial governmental regulation, including the power to limit the rates
at which oil and gas projects are permitted, drilled, produced and to fix the
prices at which oil and gas are sold. It cannot be accurately predicted
whether additional legislation or regulation will be enacted or become
effective.

NEED FOR ADDITIONAL KEY PERSONNEL. At present, the Company has 10 full
time employees. The success of the Company's proposed business will depend,
in part, upon the Company's ability to attract and retain additional
qualified employees, consultants, and third party service providers. The
Company believes that it will be able to attract competent employees, but no
assurance can be given that the Company will be successful in this regard. If
the Company is unable to engage and retain the necessary personnel, its
business would be materially and adversely affected.

RELIANCE UPON DIRECTORS AND OFFICERS. The Company is wholly dependent,
at the present, upon the personal efforts and abilities of its Officers who
will exercise control over the day to day affairs of the Company, and upon
its Directors, some of whom are engaged in other activities, and will devote
limited time to the Company's activities. Currently several employees of the
Company are not employed by the Company on a full time basis and are serving
in their respective capacities as consultants. This situation will continue
until the Company's business warrants and the Company is able to afford an
expanded staff. There can be no assurance given that the volume of business
necessary to employ all essential personnel on a full time basis will be
obtained nor that the Company's proposed operations will prove to be
profitable. The Company will continue to be highly dependent on the
continued services of its executive officers, and a limited number of other
senior management and technical personnel. Loss of the services of one or
more of these individuals could have a material adverse effect on the
Company's operations. The Company does have employment agreements with
several of its executive officers.

ISSUANCE OF ADDITIONAL SHARES. In order for the Company to achieve its
business plans, substantial additional capital will be required. The Company
plans to raise capital through placements of its equity securities and is
currently offering units consisting of shares of Common Stock and stock
purchase warrants. Approximately 28,161,429 shares of Common Stock will be
outstanding if all the shares are purchased and all warrants are exercised
pursuant to the terms of the current offering of common shares and share
purchase warrants. The Board of Directors has the power to issue additional
securities to raise additional capital. The Company may, in the future,
attempt to issue securities to acquire assets or for other corporate purposes.

NON-ARM'S LENGTH TRANSACTIONS AND RELATED PARTY TRANSACTIONS. The
number of shares of Common Stock or options to purchase shares of Common
Stock issued to present stockholders of the Company for cash and/or services
was arbitrarily determined and may not be considered the product of arm's
length transactions. It is anticipated that the Company may deal with related
parties when contracting for hydrocarbon projects. In said transactions the
fairness of the transactions will be reviewed only by members of the Board of
Directors that do not have interests in the transactions. It is anticipated
that there will not be any other review as to the fairness of the Company's
dealings with related parties. A Director of the Company, Mark A. Erickson,
is also the President of R.I.S. Resources (USA), Inc. ("RIS Resources"), a
wholly owned subsidiary of R.I.S. Resources International Corp. ("RIS
International"), and serves as a director of RIS International. RIS
International is

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engaged in the gathering, processing and marketing of natural gas, and may
purchase and provide gathering and transportation services for natural gas
produced by the Company. RIS International owns approximately 29% of the
outstanding shares of the Company.

INDEMNIFICATION OF OFFICERS AND DIRECTORS FOR SECURITIES LIABILITIES.
The Bylaws of the Company provide that the Company may indemnify any
director, officer, agent and/or employee as to those liabilities and on those
terms and conditions as are specified in the Nevada Business Corporation Act.
Further, the Company may purchase and maintain insurance on behalf of any
such persons whether or not the corporation would have the power to indemnify
such person against the liability insured against. The foregoing could result
in substantial expenditures by the Company and prevent any recovery from such
officers, directors, agents and employees for losses incurred by the Company
as a result of their actions. Further, the Company has been advised that in
the opinion of the Securities and Exchange Commission, indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable.

COMPETITION. The oil and gas exploration and production industry is an
intensely competitive industry. The Company will compete against established
companies with significantly greater financial, marketing, personnel, and
other resources than the Company. Such competition could have a material
adverse effect on the Company's ability to execute its business plan as well
as profitability.

LIMITED MARKET FOR SECURITIES. At present, a limited market exists for
the Company's Common Stock on the Nasdaq Over-the-Counter ("OTC") Bulletin
Board. There can be no assurance that the OTC Bulletin Board will provide
adequate liquidity or that a trading market will be sustained. A purchaser
of stock may, therefore, be unable to resell shares purchased should the
purchaser desire to do so. Furthermore, it is unlikely that a lending
institution will accept the Company's securities as pledged collateral for
loans unless a trading market develops providing necessary and adequate
liquidity for the trading of shares.

CUMULATIVE VOTING, PREEMPTIVE RIGHTS AND CONTROL. There are no
preemptive rights in connection with the Company's Common Stock. The
stockholders may be further diluted in their percentage ownership of the
Company in the event additional shares are issued by the Company in the
future. Cumulative voting in the election of Directors is not provided for in
the Company's Bylaws or under Nevada law. Accordingly, the holders of a
majority of the shares of Common Stock, present in person or by proxy, will
be able to elect all of the Company's Board of Directors.

NO DIVIDENDS ANTICIPATED. At the present time, the Company does not
anticipate paying dividends, cash or otherwise, on its Common Stock in the
foreseeable future. Future dividends will depend on earnings, if any, of the
Company, its financial requirements and other factors. Investors who
anticipate the need of an immediate income from their investment in the
Company's Common Stock should refrain from the purchase thereof.

SPECULATIVE NATURE OF OIL AND GAS EXPLORATION. The search for oil and
gas may result in unprofitable efforts resulting not only from the drilling
of dry holes, but also from wells which, though productive, will not produce
oil or gas in sufficient quantities to return a profit. Liabilities in excess
of insurance coverage could possibly be incurred by the Company as a result
of a blowout, fire, personal injury or other casualty. Pollution, which might
be caused by the Company's operations, could also result in liabilities and
restrictions on the Company's activities. If properties are proven
productive, there is no assurance such production can be sold at the most
favorable prices or in optimum quantities. To the extent the Company acts as
the operator of its oil and gas wells, it can be expected to make substantial
advancements to other working interest owners. There is no assurance that
such joint owner advancements will be collectible.

DEPENDENCE ON GATHERING, COMPRESSION AND TRANSPORTATION FACILITIES. The
marketability of any gas production depends in part upon the availability,
proximity and capacity of gas gathering and compression systems, pipelines
and processing facilities. Federal and state regulation of gas and oil
production and transportation, general economic conditions, changes in
supply and changes in demand all could adversely affect the Company's ability
to produce, gather and transport its natural gas and oil. If market factors
were to change materially, the financial impact on the Company could be
substantial. Most gas transportation contracts will require the Company to
transport minimum volumes. If the Company ships smaller volumes, it may be
liable for damages proportional to the shortfall. While the Company believes
that its production in the Powder River Basin

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will be more than adequate to meet volume requirements, unforeseen events,
including production problems or substantial decreases in the price for
natural gas, could cause the Company to ship less than the required volumes,
resulting in losses on the transportation contracts. Further, based upon
future production estimates for the Company and the Powder River Basin,
additional pipeline capacity will be needed as early as the beginning of 1999.

OPERATING HAZARDS. The oil and natural gas business involves certain
operating hazards such as well blowouts, craterings, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations
with abnormal pressures, pipeline ruptures or spills, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company. In addition, the Company may be
liable for environmental damage caused by previous owners of property
purchased or leased by the Company. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in losses to the Company. In accordance with customary
industry practices, the Company maintains insurance against some, but not
all, of such risks and losses. The Company may elect to self-insure if
management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by insurance could have a material adverse
effect on the Company's financial condition and results of operations. In
addition, pollution and environmental risks generally are not fully insurable.

WATER DISPOSAL. The Company believes that the water produced from the
Powder River Basin coal seams will continue to be low in total dissolved
solids, allowing the Company to discharge the water with minimal
environmental impact. However, if non-potable water is discovered, it may be
necessary to install and operate evaporators or to drill disposal wells to
re-inject the produced water back into the underground rock formations
adjacent to the coal seams or to lower sandstone horizons. In the event the
Company is unable to obtain the appropriate permits, non-potable water is
discovered or if applicable laws or regulations require water to be disposed
of in an alternative manner, the costs to dispose of produced water will
increase and these costs could have a material adverse effect on the
Company's operations in this area and the profitability of such operations
including rendering future production and development uneconomic.

REGULATION. The oil and gas industry is extensively regulated by
federal, state and local authorities. Legislation and regulations affecting
the industry are under constant review for amendment or expansion, raising
the possibility of changes that may affect, among other things, the pricing
or marketing of oil and gas production. Substantial penalties may be assessed
for noncompliance with various applicable statutes and regulations, and the
overall regulatory burden on the industry increases its cost of doing
business and, in turn, decreases its profitability. State and local
authorities regulate various aspects of oil and gas drilling and production
activities, including the drilling of wells (through permit and bonding
requirements), the spacing of wells, the unitization or pooling of oil and
gas properties, environmental matters, safety standards, the sharing of
markets, production limitations, plugging and abandonment, and restoration.

COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. The Company's operations are
subject to complex and constantly changing environmental laws and regulations
adopted by federal, state and local governmental authorities. The
implementation of new, or the modification of existing laws or regulations,
could have a material adverse effect on the Company. The discharge of oil,
natural gas or other pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Company to the government and
third parties and may require the Company to incur substantial costs of
remediation. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations, will not materially adversely affect the
Company's results of operations and financial condition or that material
indemnity claims will not arise against the Company with respect to
properties acquired by or from the Company.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This document contains
forward-looking statements, including statements regarding, among other
items, the Company's business strategies, continued growth in the Company's
markets, projections, and anticipated trends in the Company's business and
the industry in which it operates. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions
identify forward-looking statements. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's

<PAGE>

control. Actual results could differ materially from these forward-looking
statements, as a result of the factors described under "Risk Factors" and
elsewhere herein, including among others, regulatory or economic influences.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this document will in fact transpire
or prove to be accurate. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this section.

BACKGROUND

CURRENT ACTIVITY IN THE POWDER RIVER BASIN. Commercial exploitation of
methane embedded in the coal beds in the Powder River Basin began in
September 1986 when Wyatt Petroleum completed its first well. Since that
time, the participants in the Powder River Basin natural gas play have
expanded from local ranchers to include a number of major industry
participants. According to the Wyoming state engineer's office, permits for
over 1,000 CBM wells have been issued, and at least 750 of those wells are
completed. Of the 750 completed wells, it is estimated that over 600 are
actually producing gas for sales. Most of the remaining wells are in various
stages of dewatering or waiting on compression and/or expansion of pipeline
capacity.

COAL BED METHANE. Coal bed methane ("CBM") is gas generated and stored
in coal beds. Methane from coal beds has been known to exist for hundreds of
years mostly as an explosive hazard associated with underground coal mining.
Beginning in the late 1970's, this gas resource has been produced
commercially by drilling conventional well-bores into coal beds. The first
commercial CBM fields were developed in high rank bituminous coals (hard
coals) of Alabama, the Appalachians of Pennsylvania, Virginia, and West
Virginia, and the San Juan Basin of Colorado and New Mexico. Commercial CBM
production in the Powder River Basin began in 1989. Coal beds of the Powder
River Basin are lower rank, subbituminous coal (soft coals). These coal beds
are among the thickest coals in the world (potentially containing extensive
recoverable coal bed gas reserves) and are located in the Tongue River Member
of the Paleocene Fort Union and lower Eocene Wasatch formations. The coal
seam contains 10 to 12 coal beds ranging in thickness from approximately five
feet to over 200 feet, with cumulative thicknesses of all coal seams ranging
up to 350 feet. In the Fort Union formation, where the Company intends to
drill, gas occurs in sandstones and coal beds at different stratigraphic
levels. Well depths in the Powder River Basin are relatively shallow,
between 350 and 1,200 feet. Drilling and completion costs have historically
ranged from approximately $40,000 to $60,000 per well.

Methane gas is a natural by-product of the coalification process, which
creates coal from peat accumulated in ancient swamps. Higher rank
(bituminous) coals contain gas that is thermally generated (created by heat
and pressure). The coals of the Powder River Basin are geologically younger
and are low rank (subbituminous). Gas in low rank coals is created by the
decomposition of organic matter (the carbon of the coal) by anaerobic
bacteria (bacteria living in oxygen free environments). This process is
similar to the gas created by bacteria from garbage in landfills. This gas
is known as bacterial or biogenic gas. Although much of the gas generated by
the bacteria has left the coal to the atmosphere or adjacent sandstones, a
large volume of gas remains stored in the coal in the fractures (cleats) or
dissolved in water stored in the cleats and in the micropores (molecular
structure) of the coal. Up to 90% of the gas in place is stored in the
micropore spaces of the coal by a phenomenon known as adsorption. The
methane held in the micropores is in pressure equilibrium with the remaining
10% of the gas in the unfilled pore spaces and in open fractures within the
coal matrix either in the form of free gas (dry coal bed) or solution gas
(gas in water bearing coal).

When the pressure within the coal bed is lowered, which occurs when
water is withdrawn through the well-bore, the gas contained in the fracture
systems is evacuated, thereby upsetting the pressure equilibrium between the
adsorbed and the free solution gas. The gas held in the micropores begins to
break out in response to the lower pressure (desorption) and migrate to the
fracture system in an attempt to equalize the pressure. The faster such
pressure reduction occurs, the more rapidly gas desorption takes place
resulting in greater gas production from the well-bore.

In the Powder River Basin, the typical CBM well produces significant
quantities of water initially. As the water is produced, natural gas
production also begins slowly. Typically, after a considerable amount of
water is produced over a three to six month period, gas production increases
and water production decreases. In some cases, wells do not produce any
water and begin producing gas immediately. This free gas is produced from

<PAGE>

fractures in the coal that are attributable to subtle structural folding
(anticline or dome shaped features) and post-depositional coal compaction
structures. As the development expands down dip and dewatering occurs, the
gas productive area expands with water production from these down dip areas
decreases. Water production can also be reduced near the edges of the Powder
River Basin, especially near massive open pit coal mines. These shallow coals
near the outcrops appear to be partially dewatered naturally on account of
extensive surface mining with its associated water production.

It is anticipated that the play will expand deeper into the Powder River
Basin further enlarging the productive area as dewatering occurs near the
edges of the Powder River Basin. The Company intends to employ the latest
hydrologic techniques and water production technology to facilitate
dewatering and meet the demands of mitigating the amount of surface water
discharge. The largest gas resources are usually found in the down dip or
deeper coals.

COMPANY HISTORY

Pennaco Energy, Inc. (the "Company") was incorporated under the laws of
Nevada on January 26, 1998 to engage in the business of oil and gas
exploration, contract drilling, production, marketing, selling, leasing, and
refining. The original predecessor of the Company was incorporated on March
12, 1985 as VCI Video Communications, Inc., in the Province of British
Columbia and subsequently changed its name to AKA Video Communications, Inc.
("AVCI"). On March 25, 1996 the stockholders of AVCI agreed to exchange all
AVCI shares for shares of International Metal Protection, Inc. ("IMP"), the
Company's immediate predecessor. After the exchange, AVCI became inactive at
that point, and the Board of Directors and stockholders approved the windup
and dissolution of AVCI. IMP was incorporated on March 5, 1996, in the State
of Wyoming. Following an exchange of all the outstanding shares of IMP in a
share-for-share exchange with the Company in January 1998, IMP was dissolved
in February 1998. The Company is the sole surviving entity of the
reorganization.

The Company maintains its principal executive offices at 1050 17th
Street, Suite 700, Denver, Colorado 80265. The Company's telephone number is
(303) 629-6700, and its facsimile number is (303) 629-6800. The Company also
maintains a Nevada office at 3651 Lindell Rd., Suite A, Las Vegas, Nevada
89103.

To date, the Company's main focus and primary objective has been the
procurement of mineral leasehold interests, primarily CBM development rights,
in the Powder River Basin of Wyoming and Montana. The Company has purchased
or entered into agreements to purchase or option over 400,000 net acres of
prospective CBM leasehold interests in the Powder River Basin. Since its
inception, the Company's other main activity has been organizational. The
Company has issued Common Stock to raise capital, recruited and organized
management, and has commenced corporate and developmental strategic planning
regarding the Powder River Basin and other potential oil and gas projects.
Other than the acquisition of leasehold interests, the Company has conducted
limited operations.

CBM STRATEGY

The Company plans to immediately begin implementing a development
program on its CBM properties. Though no assurance of success can be given,
the Company plans to drill and complete over 600 CBM wells by the end of
1999, assuming current economic and regulatory conditions. The Company
intends to add production by taking an aggressive approach to creating and
forming strategic alliances with mid-stream companies (gathering and
marketing) and down-stream companies (pipeline companies and end users). The
Company anticipates expending considerable time and effort with regards to
industry public relations and public policy formulation. Management believes
that participation in the public forum on these vital matters is a key
element in its strategic planning. Good relations with local landowners and
public agencies and complying with environmental concerns are a high priority
for the Company.

STRATEGIC ALLIANCES AND PARTNERING

HIGH PLAINS ASSOCIATES, INC. The Company has entered into a significant
lease purchase agreement and other strategic arrangements with High Plains
Associates, Inc. ("High Plains"). Pursuant to an agreement entered into in
February 1998 with High Plains (the "High Plains Agreement"), the Company has
secured rights to acquire

<PAGE>

at least 130,000 gross acres of CBM mineral rights in the Powder River Basin.
The Company also purchased from Taylor Oil, an unaffiliated company,
approximately 75,000 acres of Powder River CBM rights. High Plain's initially
made the agreement to purchase said rights form Taylor Oil and then assigned
said Taylor agreement to the Company. Pursuant to the High Plains
Agreement, the Company and High Plains will cooperate to locate and purchase
additional acreage in the Powder River Basin. The Company and High Plains
have designated all or portions of Powder River County, Rose Bud County, and
Big Horn County, Montana and Campbell County, Sheridan County, and Johnson
County, Wyoming as an area of mutual interest in which High Plains shall act
as the undisclosed agent of the Company with regard to the acquisition of CBM
leasehold interests. Though no assurance of success can be given, pursuant
to this lease and option acquisition program, the Company and High Plains
have allocated significant resources and manpower to obtain options and
acquire leases.

BRIDGE LOAN

To allow the Company to meet its obligations with regards to mineral
leases purchased pursuant to an agreement entered into with High Plains on
February 23, 1998 (the "High Plains Agreement") and an assignment agreement
entered into March 6, 1998 regarding the Taylor Group Properties (the "Taylor
Group Agreement"), the Company on May 15, 1998 entered into a loan and
security agreement with Venture Capital Sourcing, S.A. ("VCS"). Pursuant to
the terms of a secured promissory note with VCS as the payee (the "Note"),
the Company agreed to repay $4,000,000 in principal and $100,000 in interest
by July 14, 1998; this agreement has since been extended to September 4, 1998
for an additional $103,746 in interest. In conjunction with the Note, the
Company pledged the mineral interests represented by both the High Plains
Agreement and the Taylor Group Agreement as collateral for the repayment of
the Note. Said mineral lease interests represent a significant percent of the
Company's total mineral interests in the Powder River Basin. If the Company
is unable to pay the $4,000,000 principal plus $203,743 in interest to said
lender by September 4, 1998, then said lender is entitled to foreclose on the
pledged collateral within an additional 30 days and dispose of it in an
effort to recover the funds which were lent to the Company. At present the
Company is unable to repay this bridge loan and is relying upon the further
raising of funds by either the sale of Common Stock or further borrowing to
meet this obligation. The Company paid a finders fee of 10% of the principal
value of the Note for procurement of the loan which is also due and payable
September 4, 1998. Since this bridge loan occurred subsequent to the
preparation of the Company's Audited Financial Statements dated April 15,
1998, this bridge loan is not reflected in said financial statements.

THE COMPANY'S DRILLING PROGRAM

Though no assurances can be given, the Company's business plan includes
the drilling of 50 to 100 net wells by the end of 1998, and an additional 600
wells by year end 1999. Achieving this objective is entirely dependent upon
the availability of funds, including necessary additional funding and the
availability of equipment and personnel. The estimated cost per well is
approximately $40,000 to $60,000 to drill and complete. The Company has
entered into a drilling arrangement with a coal bed methane drilling company,
CBM Drilling, LLC ("CBMD"), whose members possess recognized industry and
drilling expertise. Pursuant to this arrangement, the Company has prepaid
drilling expenses of $200,000. The prepayments are to ensure that drilling
rigs will be available and dedicated to the Company's planned drilling
program and that the rigs will meet the specific requirements of the Company.
CBMD currently has four CBM drilling rigs that will be primarily dedicated
to the Company's drilling program. Drilling rig availability may affect the
Company's budgeted drilling expenses and the extent of drilling activity. If
there is a shortage of rigs, crews or related personnel, the Company may not
achieve its drilling targets or the actual cost may exceed the budgeted cost
of drilling. The Company's budget assumes that the expense of drilling and
well completion will not increase significantly during 1998 and 1999.

GAS GATHERING IN THE POWDER RIVER BASIN

Pipeline demand in the area is increasing as the development activity
continues to expand. The Company's core land position is located in an area
near the development activity. Although the Company is engaged in
negotiations with several pipeline companies to lay pipeline to the Company's
planned drill sites, and to gather, transport, and assist with the marketing
of natural gas, as of yet no agreements have been entered into with any of
these companies. Unless and until the Company is able to obtain satisfactory
arrangements for the transport and marketing of its gas, the Company may
experience delays, possibly significant, in connection with

<PAGE>

its efforts to generate revenues from the sale of CBM. Further, there is
limited pipeline capacity out of the Powder River Basin which will require
expansion to accommodate the increasing CBM production. The expansion of the
pipeline capacity is likely to require significant capital outlays by the
pipeline companies and the related plans and specifications are subject to
government regulatory review, permits and approvals. This approval process
may result in delays in the commencement and completion of any pipeline
construction project. No assurance can be given by the Company that certain
of its wells will not be shut in for significant periods of time due to the
lack of pipeline or capacity in existing pipelines. "See RISK FACTORS."

MARKETING OF PRODUCTION

POWDER RIVER BASIN INFRASTRUCTURE

The Company's CBM properties are capable of accessing key east-west and
north-south interstate pipelines via Williston Basin Interstate Company's
interconnections with Northern Border Pipeline Company to the north, and
MIGC, Inc.'s interconnections with Colorado Interstate Gas Company (Wyoming
Interstate Gas Company) and KN Interstate Gas Transmission Company, to the
south. Both Colorado Interstate Gas Company (Wyoming Interstate Gas Company)
and KN Interstate Gas Transmission Company provide direct access through the
Cheyenne (Chalk Bluffs/Rockport) Hub to existing interstate pipelines serving
the Denver and Midwestern/Eastern markets. These interstate pipelines
include Williams Natural Gas Company, WestGas InterState, and Trailblazer
Pipeline Company. In addition, Public Service Co. of Colorado (now known as
New Century Energies, Inc.) has proposed the Front Range Pipeline project and
KN Energy has proposed Front Runner Pipeline project. Colorado Interstate
Gas Company (Wyoming Interstate Gas Company) also provides direct access in
southwest Wyoming to Northwest Pipeline Company, Questar Pipeline Company and
Kern River Pipeline Company, which serves the West Coast and the Pacific
Northwest markets.

DEMAND FOR NATURAL GAS

Rocky Mountain natural gas price differentials to higher Mid-Continent
gas prices have generally narrowed over the past two years due to increasing
demand and increasing pipeline transportation alternatives out of the Rocky
Mountain region. It is expected that even modest demand increases for natural
gas should support price improvement based on economic supply and demand
fundamentals resulting in improved development economics and improved
infrastructure. The emerging restructuring of the electricity industry also
presents growth opportunities for the natural gas business. The enactment of
the Clean Air Act and establishment of Air Quality Control Districts are part
of the continued legislative trend that is increasing the status of natural
gas as the preferred fuel for industry.

OIL AND GAS MARKETS AND REGULATIONS

Natural gas and oil markets are subject to substantial federal, state and
foreign government regulation and oversight. Major gas marketing companies
typically purchase all gas offered for sale at posted spot prices determined at
specific delivery points into major interstate transmission systems. The spot
price is subject to economic forces including supply and demand that may change
dramatically either seasonally or due to an unforeseen or unanticipated change
in the supply and demand balance. There are price adjustments for quality
differences and heating value differences from the spot price specifications.
Gas sales are normally contracted at a specified delivery point with custody
transfer occurring at that point. There are typically deductions for
transportation from the well head to the sales point, conditioning the gas for
sale along with associated marketing fees. Major oil companies and crude oil
refiners typically purchase all crude oil offered for sale at posted field
prices. The posted price is subject to economic forces including supply and
demand that may change dramatically either seasonally or due to an unforeseen or
unanticipated change in the supply and demand balance. There are price
adjustments for quality difference from a benchmark price. Oil sales are
normally contracted with a gatherer who will pick up the oil at the well site.
In some instances there may be deductions for transportation from the well head
to the sales point. The gas marketer or crude oil purchaser will usually handle
all check disbursements to both the working interest and royalty owners. The
Company will be a working interest owner. As a working interest owner, the
Company is responsible for the payment of its proportionate share of the
operating expenses of the well. Royalty owners and over-riding royalty owners
receive a percentage of gross oil or gas production for the particular lease and
are not obligated in any manner whatsoever to pay for the cost of operating the
lease.

<PAGE>

Recently, disputes have arisen between royalty owners and the working
interest owners regarding the exact fair market value for the product being
sold and the amount of the fees paid for gathering, compression, processing,
and marketing. The amount received for product sold and the amount of the
fees and other expenses deducted from the sales price have been challenged by
royalty owners.

TRANSPORTATION OF NATURAL GAS

Although the Company is engaged in negotiations with several pipeline
companies to lay pipeline required for transporting natural gas to markets,
as of yet no agreements have been entered into with any of these companies
and no assurance can be given that the Company will enter into any such
agreements. Unless and until the Company is able to obtain satisfactory
arrangements for the transportation and marketing of its gas, the Company may
experience delays, possibly significant, in connection with its efforts to
generate revenues from the sale of CBM gas. Further, the existing pipeline
structure is limited in capacity and will require expansion of capacity to
accommodate the increase from CBM development and production. The expansion
of the pipeline is likely to require significant capital outlays by the
pipeline companies and the related plans and specifications are subject to
government regulatory review, permits and approvals. This approval process
may result in delays in the commencement and completion of any pipeline
construction project. No assurance can be given by the Company that certain
of its wells will not be shut in for significant periods of time due to the
lack of pipeline or capacity in existing pipelines.

GAS MARKETING

The gas purchaser will pay the well operator 100% of the sales proceeds
monthly for the previous month's sales. The operator is typically
responsible for all checks and distributions to the working interest and
royalty owners. Natural gas prices are subject to market conditions. Prices
will fluctuate with weather and the general market conditions.

NET PRODUCTION

As of the date of this registration statement, the Company has not
produced any oil or gas nor does it currently have the ability to produce
any oil or gas.

NET RESERVES

As of the date of this registration statement, the Company does not have
any proven oil and gas reserves associated with its lease interests or from
any other source.

U.S. COAL RESERVATIONS

Some of the leases acquired by the Company encompass lands that are
owned, or were subject to patents issued, by the federal government. In 1909
and 1910, the U.S. Congress enacted statutes reserving the coal to the United
States under lands owned by the United States (Coal Lands Act of March 3,
1909, 35 Stat. 844, codified at 30 U.S.C. Section 81 and Act of June 22,
1910, 36 Stat. 583, codified at 30 U.S.C. Section 85). Until recently, in
reliance upon an opinion published by the Solicitor of the Department of the
Interior, producers of CBM extracted from lands currently or formerly owned
by the federal government were not concerned with this reservation. In July,
1997, the U.S. Court of Appeals, Tenth Circuit, issued an opinion (SOUTHERN
UTE TRIBE V. AMOCO PRODUCTION CO., 119 F.3d 816 (10th Cir. 1997)) that held
that CBM gas is reserved by the United States in patents issued subject to a
reservation of coal. As successor in interest to the statutory reservation
of coal, the Southern Ute Tribe asserted claims based on trespass,
conversion, and violation of certain federal civil rights statutes. The
Plaintiff sought remedies of declaratory judgment regarding CBM ownership,
quiet title, injunction and damages. The producers in the SOUTHERN UTE case
filed a motion requesting that all of the Judges sitting on the 10th Circuit
appellate court hear their arguments. On March 17, 1998, the court heard
arguments and issued an opinion on July 20, 1998 which affirmed the earlier
10th Circuit decision. (The U.S. 10th Circuit includes Wyoming; Montana is
included in the 9th Circuit Court of Appeals). The court stated that the
Coal Lands Act of 1909 and 1910 did not unambiguously include or exclude the
coal bed methane. The court relied on the principal that ambiguity regarding
land grants and mineral reservations should be resolved in the favor of the
government. Amoco is expected to appeal to the

<PAGE>

U.S. Supreme Court. The Company has committed to purchase fee leasehold
interests pursuant to the Taylor Oil Agreement and the High Plains Agreement
and the Company has and will continue to purchase certain fee leasehold
interests that could possibly be effected by an adverse decision in the
SOUTHERN UTE case. Management has decided to purchase these leases after a
careful weighing of the risks and rewards presented by such purchases. There
can be no assurance given whatsoever that these leases will not become of
little or no value if an adverse decision against certain fee holders is
rendered by a court of competent jurisdiction in the SOUTHERN UTE case and
the U.S. Government vigorously asserts claim to CBM ownership. The Company
estimates that approximately 31% of its lease acreage is held by fee leases
where the fee owner does not hold the coal rights and which could be
adversely affected by such a decision. The Company believes that planned
legislation action may preclude a judicial decision as to leases executed
prior to July 20, 1998.

In an effort to minimize the risk associated with the possible competing
claims of CBM ownership, the Company attempted to negotiate with High Plains
to minimize the risk related to possible failure of title. Management
succeeded in securing a limited concession with regard to leases acquired
pursuant to the provisions of the High Plains Agreement. Under the
provisions of the High Plains Agreement, the Company was able to negotiate
limited return rights if title fails on account of a competing claim.
However, the risk remains with the Company with regard to leases where title
fails after May 19, 1998.

COMPETITION

The oil and gas industry is intensely competitive. Competition for
prospects and producing properties is formidable. The Company will be
competing with a number of other potential purchasers of prospects and
producing properties, most of which will have greater financial resources
than the Company. The bidding for prospects has become particularly intense
since different bidders evaluating potential acquisitions will employ
different product pricing parameters and other criteria resulting in widely
divergent bid prices. The presence in the market of bidders willing to pay
prices higher than values supported by the Company's evaluation criteria
could further limit the ability of the Company to acquire prospects. On the
other hand, low or uncertain prices for properties can cause potential
sellers to withhold or withdraw properties from the market. In this
environment, there can be no assurance that there will be a sufficient number
of suitable prospects available for acquisition by the Company or that the
Company can sell prospects or obtain financing for or participants to join in
the development of prospects. The Company's competitors and potential
competitors include major oil companies and independent producers of varying
sizes which are engaged in the acquisition of producing properties and the
exploration and development of prospects. Most of the Company's competitors
have greater financial, personnel and other resources than does the Company
and therefore have a greater leverage to use in acquiring prospects, hiring
personnel and marketing oil and gas. Accordingly, a high degree of
competition in these areas is expected to continue.

GOVERNMENTAL REGULATION AND TAXATION

The production and sale of oil and gas is subject to regulation by
state, federal, local authorities, and foreign governments. In most areas
there are statutory provisions regulating the production of oil and natural
gas under which administrative agencies may set allowable rates of production
and promulgate rules in connection with the operation and production of such
wells, ascertain and determine the reasonable market demand of oil and gas,
and adjust allowable rates with respect thereto.

The sale of liquid hydrocarbons was subject to federal regulation under
the Energy Policy and Conservation Act of 1975 that amended various acts,
including the Emergency Petroleum Allocation Act of 1973. These regulations
and controls included mandatory restrictions upon the prices at which most
domestic crude oil and various petroleum products could be sold. All price
controls and restrictions on the sale of crude oil at the wellhead have been
withdrawn. It is possible, however, that such controls may be re-imposed in
the future but when, if ever, such re-imposition might occur and the effect
thereof on the Company cannot be predicted.

The sale of certain categories of natural gas in interstate commerce is
subject to regulation under the Natural Gas Act and the Natural Gas Policy
Act of 1978 ("NGPA"). Under the NGPA, a comprehensive set of statutory
ceiling prices applies to all first sales of natural gas unless the gas is
specifically exempt from regulation (i.e., unless the gas is "deregulated").
Administration and enforcement of the NGPA ceiling prices are delegated

<PAGE>

to the Federal Energy Regulatory Commission ("FERC"). In June 1986, the FERC
issued Order No.451, which, in general, is designed to provide a higher NGPA
ceiling price for certain vintages of old gas. It is possible, though
unlikely, that the Company may in the future acquire significant amounts of
natural gas subject to NGPA price regulations and/or FERC Order No.451. The
Natural Gas Wellhead Decontrol Act of 1989 provides for the phasing out of
all price regulations under the NGPA by January 1, 1993.

Federal and state income, severance, franchise, excise, and other tax
laws are of particular significance to the oil and gas industry. Recent
legislation has eroded previous benefits to oil and gas producers, and any
subsequent legislation may continue this trend. The states in which the
Company may conduct oil and gas activities also impose taxes, including,
without limitation, real and personal property taxes, upon the ownership or
production of oil and gas interests within such states. There can be no
assurance that the tax laws will not be changed or interpreted in the future
in a manner which adversely affects the Company.

EMPLOYEES

The Company currently has 10 employees and 18 consulting geologists,
engineers, and land acquisition professionals. The Company plans to hire
additional employees as needed.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

PLAN OF OPERATIONS

As a newly formed company, the Company has no revenues from operations.
However, the Company plans to begin development of its properties by
implementing a drilling program along with continuing its lease acquisition
program. Though no assurance can be given, this development program
contemplates the drilling of over 600 net wells and the leasing of up to an
additional 150,000 net acres by the end of 1999. Management believes that
the general and administrative expenses, capital, and operating expenditures
related to the implementation of the development program for the next twelve
months, and the anticipated costs of the lease acquisition program can be
funded with the proceeds from the sale of its securities. To address the
operational and administrative requirements of the Company's ongoing
development activities, it is anticipated that during the next twelve months
employee requirements will increase to approximately 40 employees.
Currently, the Company has 10 employees. It is possible that the Company may
encounter opportunities to acquire strategic producing properties, leases and
assets for the purpose of consolidation or expansion of its current
operations. Any such acquisition would be outside of the scope of
Management's current anticipated level of business activity and may require
additional funding and further additions to the Company's staffing plans.

RECENT DEVELOPMENTS

AFFILIATION WITH HIGH PLAINS AND RIS RESOURCES

To date, the Company's main focus and primary objective has been the
procurement of mineral leasehold interests, primarily CBM exploitation
rights, in the Powder River Basin of Wyoming and Montana. To achieve this
objective the Company has secured a strategic position in this play by
entering into agreements to lease approximately 440,000 net acres of
prospective CBM leasehold interests in the Powder River Basin. To further
its CBM acquisition objectives, the Company has entered into a strategic
lease acquisition agreement with High Plains Associates, Inc. ("High
Plains"), a land title and lease acquisition firm specializing in the Powder
River Basin play. Pursuant to the agreement, the Company and High Plains
have designated all or selected portions of counties of the Powder River
Basin in Wyoming and Montana as an area of mutual interest ("AMI"). Within
the AMI, High Plains acts as the agent of the Company with regard to the
acquisition of CBM leasehold interests. A major shareholder of the Company,
RIS Resources (USA), Inc. has also been retained to assist management with
the development of a strategic plan for transmission and marketing of the
Company's gas production. RIS Resources is a gas gathering, processing and
marketing company possessing considerable expertise in matters relating to
gas transmission, related infrastructure, natural gas liquids production and
marketing.

<PAGE>

RIS International has purchased 4,000,000 shares of the common stock of
the Company (approximately 29% of the shares outstanding). A member of the
Board of Directors of the Company also serves as the President and as a
member of the Board of Directors of RIS International.

BRIDGE LOAN

PRIVATE PLACEMENT

In June 1998, in order to assist the Company in attracting quality
executive personnel, the Company offered a private placement of securities
units pursuant to an exemption in the Act whereby 621,429 units were
purchased by executives of the Company for a purchase price of $1.75 per
unit. Each unit consisted of one Share and a one share purchase warrant for
every two Shares purchased. Since its last financial audit the Company has
continued to aggressively purchase mineral leasehold interests in the Powder
River Basin substantially depleting the funds obtained by capital raising
activities. Since the Company is not producing any revenues, the Company will
need to raise additional capital to meet its current leasehold purchase
commitments and its bridge loan and overhead obligations.

Since its inception, the Company's other main activity has been
organizational. The Company has issued Common Stock to raise capital,
recruited and organized management, and has commenced corporate and
developmental strategic planning regarding the Powder River Basin and other
potential oil and gas projects. Other than the acquisition of leasehold
interests, the Company has conducted limited operations.

ADDITIONS TO SENIOR MANAGEMENT TEAM

The Company recently announced that Paul M. Rady, former President and
Chief Executive Officer of Barrett Resources Corporation, has joined Pennaco
as its President and Chief Executive Officer and a member of the Board of
Directors. Mr. Rady, a geologist by education, has over 18 years of
experience in oil and gas exploration and development with Barrett Resources
and Amoco Production Company both domestic and international. Glen C.
Warren, Jr. also recently joined Pennaco as Chief Financial Officer and
Executive Vice President. Mr. Warren has nine years of investment banking
experience focused on mergers and acquisitions and financing of energy
companies as well as six years of exploration and production experience with
Amoco Production Company.

LIQUIDITY AND CAPITAL RESOURCES

<PAGE>

At present, the Company is not producing revenues and its main source of
funds has been the sale of the Company's equity securities. The Company had
$4,652,476 in cash as of the date of its last audit. All cash is at present
being used to fulfill certain leasehold purchase commitments that the Company
has entered into and to fund certain ongoing general and administrative
expense, plus consulting expense, with the total of such expenses estimated
by management to be in excess of $300,000 per month. The Company will need
to raise additional capital to meet its current leasehold purchase
commitments and its bridge loan and overhead obligations. To proceed with the
contemplated development and acquisition of oil and gas leases, significant
funding will be necessary. Such funding may be obtained through the sale of
additional shares which will dilute the ownership interests of present
stockholders. If the Company is unable to obtain sufficient funds to develop
the leasehold interests that it has purchased, then the Company may seek to
find development partners and increase available funds to the Company through
sales of leasehold interests and/or producing properties and/or the farm-out
prospects. The ability of the Company to sell interests in leases and/or
producing properties and/or farm-out prospects is not a certainty and the
proceeds derived from such sales will be subject to the ongoing economic
viability of the project.

The capital resources of the Company are limited. At present the
Company is not producing revenues and is not expected to produce revenues
until after November 1998. These revenues, if realized, are projected to be
insufficient to fund the aggressive, on-going development and lease
acquisition strategy contemplated, and additional funds will be required.
Further, if production from the properties is realized there may be delays,
economic factors, legal issues and regulatory or governmental issues that
result in little or no cash flow realized from the properties. The main
source of funds for working capital at the present is the sale of the
Company's equity securities. Other possible sources of funding include loans
by financial institutions with the Company's leasehold interests as
collateral. However, the collateral value of such leasehold interests is
limited. Proved producing oil and gas reserves are viewed as better forms of
collateral but are still subject to large variations in the interpretation of
value.

If the Company finds itself in a position where it is unable to meet its
current obligations for any reason including those described above, the
ability of the Company to sell interests in leases and/or producing
properties and/or farm-out prospects could be severely constrained making it
difficult to realize a fair market value from these assets and there is a
possibility that no value can be realized. This may result in a complete loss
of the Company's investment in the properties.

RESULTS OF OPERATIONS

During the period from the Company's inception through April 24, 1998,
net loss for the Company was $213,237 with no revenues being realized from
the sale of assets, production or from any other source. Expenses incurred,
as of April 15, 1998, from general and administrative expenses were $30,233
and geologic consulting fees and maps expenses were $75,755. Field lease
expenses were $85,000 and professional fees were $21,712.

The Company currently has no oil or gas production, reserves or
revenues. The Company has not paid any dividends on its Shares since
inception. Currently, and until the Company is profitable and has sufficient
revenues to fund its plan of business, management of the Company has no
plans to declare or pay any dividends.

ITEM 3. DESCRIPTION OF PROPERTY.

The Company has acquired oil and gas leases and options covering more
than 400,000 net acres in the Powder River Basin of Wyoming and Montana.
This prospective CBM acreage is in the fairway of this shallow, low cost,
development play; with approximately 67% of the acreage located on federal
and state land and approximately 33% of the acreage located on private land.
The Company's leases are generally five to ten year leases. The federal
leases are generally ten year term leases and newly acquired fee and state
leases are generally five-year term leases. Leasehold net revenue interests
average greater than 80%.

The Company's larger leases include the following:

<PAGE>

Gillette North Project - This substantial core holding of
approximately 150,000 net acres includes offsets to drilling activity in the
Fort Union Formation. This area is currently being developed by Redstone
Resources and MCNIC who have drilled or permitted over 200 wells.

Border Project - This area is characterized by several thick coals
in an area that has not been previously explored for CBM; the Company's
leasehold position is comprised of approximately 190,000 net acres. In this
project area a number of water wells flow gas which is used for local
agriculture and ranching purposes.

Sheridan Project - The Company controls approximately 60,000 net acres
in this area, which is known for its "super-beds" of coal, where several
seams coalesce to form a massive seam. Management believes this project area
has potential for coal bed methane production.

Deep Rights - The Powder River Basin has historically been a prolific
producer of oil and gas from a number of other reservoirs that are typically
greater in depth. Approximately 80% of the Company's leasehold acreage allow
for development of all depths. These leases cover both the shallow CBM play
and exploration potential for oil and gas from the deeper horizons. Past
exploration of the sedimentary section below the Paleocene coal section has
resulted in production from sandstone reservoirs in twenty-five formations
from upper Cretaceous to Pennsylvanian age. Generally, with regards to these
horizons, all but the northwest quadrant of the Powder River Basin have been
intensively explored and extensively developed. The last frontier for
exploration is the area from Gillette, Wyoming to the east flank of the
Bighorn Mountains where the Company's significant leasehold is positioned.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information concerning the beneficial
ownership of the Company's Shares as of July 31, 1998 for (i) each current
director who owns shares, (ii) each officer of the Company who owns shares,
(iii) all persons known by the Company to beneficially own more than 5% of
the outstanding Shares of the Company's Shares, and (iv) all officers and
directors of the Company as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS (1) SHARES OWNED (2) SHARES OWNED (3)
- - -------------------- ---------------- ----------------
<S> <C> <C>
Paul M. Rady 857,144 (5) 5.91%

Jeffrey L. Taylor 543,375 (4) 3.74%

Gregory V. Gibson 100,000 (6) 0.69%

David W. Lanza 50,000 (7) 0.34%

Mark A. Erickson 41,250 (8) 0.28%

Glen C. Warren, Jr. -0- 0.00%

R.I.S. Resources International Corp. 4,000,000 (9) 27.56%

All officers and directors as a group 1,591,769 (10) 10.97%
(six persons)
</TABLE>
- - -------------------------
(1) Unless otherwise noted, the Company believes that all Shares are
beneficially owned and that all persons named in the table or family
members have sole voting and investment power with respect to all Shares
owned by them. Unless otherwise indicated in the footnotes below, the
address of each Stockholder is 1050 17th Street, Suite 700, Denver,
Colorado, 89265.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options. Each beneficial owner's percentage

<PAGE>

ownership is determined by assuming that options or warrants that are
held by such person (but not those held by any other person) and which
are exercisable within 60 days from the date hereof have been exercised.
(3) Assumes 13,646,429 shares outstanding plus, for each individual, any
securities that specific person has the right to acquire upon exercise of
presently exercisable stock options. Options and warrants held by persons
other than the specific individual for whom an ownership interest
percentage is being calculated are not considered in calculating that
specific individual's ownership interest percentage.
(4) Includes 400,000 shares issuable to Mr. Taylor upon the exercise of
currently vested stock options, exercisable at a price of $1.25 per share.
Mr. Taylor's address is 7220 Avenida Encinas, Suite 204, Carlsbad,
California 92009.
(5) Includes 285,715 shares issuable upon the exercise of presently exercisable
stock purchase warrants, exercisable at a price of $1.75 per share.
(6) Represents 100,000 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share. Mr. Gibson's
address is 2010 Main Street, Suite 400, Irvine, California 92614.
(7) Represents 50,000 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share. Mr. Lanza's
address is 710 3rd Street, Marysville, California 95901.
(8) Includes 31,250 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share.
(9) The address of R.I.S. Resources International Corp. is 609 West Hastings
Street, 11th Floor, Vancouver, British Columbia V6B 4W4, Canada.
(10) Includes 581,250 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share, and 285,715
shares issuable upon the exercise of presently exercisable stock purchase
warrants, exercisable at a price of $1.75 per share.

ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS.

The following individuals are the officers, directors, and key employees
and consultants of the Company:

OFFICERS AND DIRECTORS

NAME POSITION
---- --------
Jeffrey L. Taylor Chairman of the Board, Director
Paul M. Rady President, Chief Executive Officer, Director
Glen C. Warren, Jr. Chief Financial Officer, Executive
Vice President, Director
Mark A. Erickson Hydrocarbon Marketing Consultant, Director
Gregory V. Gibson Vice President, Legal, Secretary, Director
David W. Lanza Director

TECHNICAL TEAM
Terrell A. Dobkins Vice President of Production
Brian A. Kuhn Vice President of Land
Brian Hughes Exploration and Production Manager
William Travis Brown, Jr. Chief Geologist
George L. Hampton, III Project Manager
Paul L. Tromp Project Geologist
Dirck Tromp Project Hydrologist
Todd H. Gilmer Project Hydrologist
Louis A. Oswald Lease Acquisitions
John Dolloff Senior Geologist

RESUMES

PAUL M. RADY, CHIEF EXECUTIVE OFFICER, PRESIDENT, MEMBER BOARD
OF DIRECTORS

<PAGE>

Mr. Rady recently joined the Company as its Chief Executive Officer,
President and as a Director. Mr. Rady was with Barrett Resources Corporation
("Barrett"), a prominent oil and gas exploration and production company
listed on the New York Stock Exchange, for approximately eight years. During
his tenure at Barrett, Mr. Rady held various high-ranking executive positions
including his most recent position as Chief Executive Officer, President and
Director. As Chief Executive Officer he was responsible for all aspects of
the Company including, all operations, financings, representing the
corporation to the investment community, and working with the Board of
Directors to set the direction of the Company. Other executive positions
held by Mr. Rady prior to the Board electing him as Chief Executive Officer
and President, were Chief Operating Officer, Executive Vice President -
Exploration, and Chief Geologist - Exploration Manager. While at Barrett,
Mr. Rady was a leading executive in the management team that grew Barrett
from a Nasdaq-listed firm with a $20 million market capitalization and which
was active in one geological basin (the Piceance Basin), to a $1.2 billion
market capitalization NYSE firm with 963 BCFE of proved reserves at year end
1997, actively participating in 11 basins in the Rockies, Mid-Continent,
Permian Basin, Gulf of Mexico, and Peru. Prior to his employment at Barrett,
Mr. Rady was with Amoco Production Company ("Amoco") based in Denver,
Colorado for approximately 10 years where he was recognized as one of the
leading geologists and geophysicists within Amoco and where he received
credit for finding significant gas fields in the Arkoma Basin of Oklahoma.
Mr. Rady received a Bachelor of Arts degree in Geology from Western State
College of Colorado in 1978 and a Master of Science Degree in Geology from
Western Washington University in 1980.

JEFFREY L. TAYLOR, CHAIRMAN OF THE BOARD

Currently Mr. Taylor is the President and Director of Foreign
Investments for the London Taylor Group. The London Taylor Group is a
southern California-based financial service provider acting as venture
capitalist and investment banker to private and small cap public companies.
During the last five years, Mr. Taylor has been a Member of the Board of
Directors of various public companies including, TransAmerica Industries,
Yuma Gold Mines, and Cornucopia Resources. He has also served during the
last five years as Vice President of Metallica Resources, Vice President of
Goldbelt Resources, Vice President of Arrowhead Minerals Corporation, and
Executive Vice President of Corporate Finance of Ultra Petroleum. Prior to
founding the London Taylor Group, Mr. Taylor was an analyst and financial
service provider for Global Resource Investments, Inc. of Carlsbad,
California and the Chief Financial Officer for International Art Commission
of San Francisco, California. Mr. Taylor, a prominent professional in
resource investing, holds a Master of Business Administration, Finance degree
from the University of San Diego.

GLEN C. WARREN, JR., CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT,
DIRECTOR

Mr. Warren recently joined the Company as its Chief Financial Officer,
Executive Vice President and will serve as a Director, as well. Mr. Warren
has entered into an employment contract with an initial term of four years
with automatic renewal provisions. Prior to assuming his duties as the
Company's Chief Financial Officer, Mr. Warren was an investment banker with
Lehman Brothers Inc. in New York and focused on equity and debt financing, as
well as mergers and acquisitions for energy and natural resource companies.
Prior to Lehman Brothers, Mr. Warren was also an investment banker with
Dillon, Read & Co., Inc. and Kidder, Peabody & Co. Incorporated with a total
of nine years of investment banking experience. Mr. Warren also has six
years of exploration and production experience with Amoco Production Company
in New Orleans. Mr. Warren received an MBA degree from the Anderson Graduate
School of Management at U.C.L.A. in 1989 and a Juris Doctorate degree in 1981
and a Bachelor of Arts degree in Interdisciplinary Science in 1978, both from
the University of Mississippi.

MARK A. ERICKSON, HYDROCARBON MARKETING CONSULTANT, DIRECTOR

Mr. Erickson is a registered petroleum engineer with fifteen years
experience in project financial modeling and management. He is currently
President of RIS Resources (USA). Prior to that, Mr. Erickson worked as an
asset manager for North American Resources Company, a $200 million subsidiary
of Montana Power. He received his BS in Petroleum Engineering at Montana
Tech and Masters in Mineral Economics from the Colorado School of Mines.

<PAGE>

GREGORY V. GIBSON, VICE PRESIDENT, LEGAL AND DIRECTOR

Mr. Gibson has been an attorney specializing in securities and
securities broker dealerships for over 15 years. Mr. Gibson is a southern
California-based practicing attorney with the law firm of Gibson, Haglund &
Johnson. Prior to his present affiliations, Mr. Gibson was corporate counsel
for three years to Global Resource Investment Limited, a Southern
California-based broker-dealer specializing in resource and foreign publicly
traded securities. Prior to working at Global, Mr. Gibson was practicing
securities and international law with the law firms of Gibson & Haglund and
Gibson, Ogden & Johnson. Mr. Gibson attended Claremont Men's College and
Brigham Young University for undergraduate studies and received his Juris
Doctorate degree from Pepperdine University School of Law.

DAVID LANZA, DIRECTOR

Mr. Lanza has been a real estate developer, ONG real property & lease
developer, and business owner in California, Nevada, Colorado, Texas and
Wyoming for the past ten years. He is currently the President of Hust
Brothers, a commercial and development real estate company, Vice President
and principal of Hust Brothers Inc., a national automotive wholesale company,
and President and principal of Colusa Motor Sales. Mr. Lanza has majority
interest in Marysville Auto Parts which owns and operates 13 automotive chain
stores. Mr. Lanza graduated from the University of Southern California
receiving his Bachelor of Science in Business Administration.

TERRELL A. DOBKINS, VICE PRESIDENT OF PRODUCTION

Mr. Dobkins has over 20 years experience in the petroleum industry. Mr.
Dobkins started his career at Amoco Production Company where he had extensive
experience in Rocky Mountain Low Perm Gas and worked in operations,
completions and reservoir engineering. Mr. Dobkins worked as a Manager for
three years at American Hunter Exploration where he was involved in all U.S.
operations and engineering. Mr. Dobkins has also been a consultant. Most
recently, Mr. Dobkins served eight years at Barrett Resources and was
involved in all significant plays, including completions, operations and
reservoir engineering.

BRIAN A. KUHN, VICE PRESIDENT OF LAND

Mr. Kuhn has 18 years experience in the oil and gas industry as a
landman. Mr. Kuhn worked as a landman for thirteen years at Amoco Production
Company from June 1980 to April 1993. While at Amoco, Mr. Kuhn spent three
years in the Powder River Basin and other basins of the Rocky Mountain
region. Most recently, Mr. Kuhn was employed as a Division Landman for five
years at Barrett Resources Corporation where he worked in the Rocky Mountain
region and numerous other basins. Mr. Kuhn has extensive experience in the
acquisition of producing properties, testifying as expert witness before
state regulatory agencies, management of lease acquisition and negotiation of
both large and small exploration deals. Mr. Kuhn earned a BBA in Petroleum
Land Management from the University of Oklahoma in May 1980. Mr. Kuhn is
also a member of the American Association of Petroleum Landmen, Oklahoma City
Association of Petroleum Landmen and the Tulsa Association of Petroleum
Landmen.

BRIAN HUGHES, EXPLORATION AND PRODUCTION MANAGER

Mr. Hughes is a petroleum engineer with more than twenty years of
supervisory and management experience in nearly all aspects of the natural
gas business. He has been a consulting, drilling, and production engineer
for completion operations in several coal bed methane and tight gas sandstone
projects in the western Rocky Mountains. He has been instrumental in
developing procedures and techniques that have substantially increased
economic results in gas production in the Rockies, Denmark, and Russia,
including significant contributions to Ultra Petroleum's achievement in the
Green River/Pinedale anticline area as VP Exploration & Production of that
firm. Prior to 1988, Mr. Hughes was a petroleum engineer with Shell Oil
where he was responsible for all Shell-operated units in west Texas. Mr.
Hughes received his B.S. in Mechanical Engineering from the U.S. Military
Academy and a Masters degree in Petroleum Engineering from the University of
Texas.

<PAGE>

WILLIAM TRAVIS BROWN, JR., EXPLORATION MANAGER

Mr. Brown is a Chief Geologist for the Company. He began his career
with Amoco in 1969 as an operations and production geologist in the Rocky
Mountain Region. He has extensive experience in the Green River and Powder
River Basins. From 1969 to present, Mr. Brown has conducted extensive work in
3-D seismic & stratigraphic analysis, geological mapping, well site analysis,
and strategic land acquisition for several companies including Amoco
Production, Lear Petroleum, Davis Oil, and Coastal Oil and Gas where he
initiated the coal degassification CBM project in the Powder River Basin.
Mr. Brown received his B.S. in Geology at Columbia University and his Master
of Science and Ph.D. candidacy in Geology at the University of New Mexico.

GEORGE L. HAMPTON, III, PROJECT MANAGER

Mr. Hampton has recently been employed by the Company as Project
Manager. Prior to his employment by the Company, Mr. Hampton served as Chief
Geologist of Thermal Energy Corporation (TEC) a joint venture with Torch
Operating. While at TEC he supervised the geology and drilling and/or
completion of 100 shallow CBM wells, which are now producing more than 3.6
MMCFD. Mr. Hampton is a petroleum geologist with 20 years experience in the
oil and gas business. He has spent the better part of the last 18 years
specializing in Coalbed Methane exploration, production and analysis. His
career began in 1978 as a geologist for one of the foremost CBM companies,
Amoco Production Company. From 1979 to 1982 he was an integral part of the
early Coalbed Methane (CBM) projects in the San Juan, Piceance, Uinta and
Green River basins. He left Amoco in 1986 to form Hampton & Associates, Inc.,
a consulting company specializing in CBM. While there, he and a team of CBM
experts consulted for many major and independent petroleum companies
including: Conoco, British Petroleum, Chevron, Amoco, Helmerich & Payne,
Devon Energy (Blackwood & Nichols), Celsius, Torch, MarkWest, Meridian and
Evergreen. Mr. Hampton was responsible for generation and evaluation of CBM
prospects worldwide. He has also supervised over 100 coal bed methane wells
as wellsite geologist and is a recognized industry gas desorption (gas
content) expert. He is the author of several articles and numerous in-house
CBM reports and CBM Short Courses. As a founding partner of Cairn Point
Publishing, he worked on and supervised the creation and publishing of THE
INTERNATIONAL COAL SEAM GAS REPORT, 1997. Mr. Hampton received his BS and MSC
in Geology at Brigham Young University.

PAUL L. TROMP, PROJECT GEOLOGIST

Mr. Tromp is a consulting project geologist for the Company. He is a
certified petroleum geologist with a varied background in exploration and
prospect generation over the last 17 years. He began his career at Tennaco as
a petroleum geologist where he was active in prospect generation in the
Powder River Basin. He spent several years with Mitchell Energy where he was
active in prospect generation in the Powder River, Williston and Green River
basins and development in the Alberta Basin. In 1987 he accepted a
lectureship at the University of Zimbabwe, Africa where he taught petroleum
geology and many other geology subjects. He was founder and technical
director of Shangani Energy Exploration. Shangani, along with partner Union
Carbide Zimbabwe, generated a significant CBM prospect and drilled the first
CBM wells in Africa. Mr. Tromp is skilled in all aspects of field operations
in challenging environments. He is also the author of many geological
publications and reports including a CBM Special Publication for the
Geological Society of Zimbabwe. Mr. Tromp received his BS in Geology at
Oregon State University and MSc Geology from the University of Wyoming, where
he completed a thesis on the Minnelusa Formation in the Powder River Basin.

DIRCK TROMP, PROJECT HYDROLOGIST

Mr. Tromp has recently been employed by the Company as a Hydrologist.
Mr. Tromp is a certified professional geologist with nine years of varied
geologic and hydrogeologic experience in the petroleum, mining, and
environmental fields. He began his career as a research geologist with the
U.S. Geological Survey. The majority of his experience has been as a
hydrogeologist and geochemist with Roy F. Weston, Inc., a prominent
international environmental consulting firm. Mr. Tromp has extensive
experience with digital mapping, 3-D computer hydrologic conceptual modeling
and groundwater flow modeling. He has designed and installed groundwater
systems and hydrocarbon recovery wells. He has a strong working knowledge of
environmental compliance requirements. Mr. Tromp holds a BS in Geological
Engineering and MSc in Geology/Geochemistry both from the Colorado School of
Mines.

<PAGE>

TODD H. GILMER, PROJECT HYDROLOGIST

Mr. Gilmer is a consulting Project Hydrologist for the Company.
Recently Mr. Gilmer was one of the principal hydrologists for Amoco's Pine
River (Los Pinos) CBM water project in the San Juan Basin and has conducted a
CBM hydrologic study for Western Gas Resources in the Powder River Basin. He
is a hydrogeologist with 25 years of experience in hydro-geological
investigation and water production problems in the petroleum and mineral
industries. He is skilled in water resource exploration, development and
evaluation and has vast experience working with government and environmental
regulatory agencies. Mr. Gilmer began his career as a hydrogeologist with
Wright Water Engineers of Denver in 1973. From 1974-1986 he worked for
several water resource companies where he managed several coal mine baseline
studies and ground water flow modeling projects. From 1986 to present he has
been owner/senior hydrogeologist for Gilmer Geophysics, Inc. where he has
continued his work on hydrology projects for major coal mining and petroleum
companies. He is the author of many publications on hydrology. Mr. Gilmer
earned his BS degree in Geophysics from the University of Minnesota and
attended graduate school for two years at the same institution where he
studied geophysics and hydrogeology.

ANSON MARK, SENIOR GEOLOGIST

Mr. Mark is a consulting senior geologist to the Company. Mr. Mark has
been an active petroleum geologist since 1953. He has been engaged in all
aspects of geology consulting including prospect evaluation and regional and
basin studies in Colorado, Wyoming, Montana, New Mexico, Michigan, and Ohio
resulting in multiple prospect generation. He is highly experienced in lease
acquisition and running drilling programs. Mr. Mark is credited with five
field discoveries and four field extensions, six in Colorado, one in
Saskatchewan, and two in the Powder River Basin. He received his BA from
Dartmouth College and his Masters in Geology from the University of Colorado.

JOHN DOLLOFF, SENIOR GEOLOGIST

Mr. Dollof is a consulting senior geologist to the Company. Mr. Dolloff
has over 40 years of exploration and production geology and management
experience in the Rocky Mountain, Mid-Continent and west Texas. Beginning his
career with Standard Oil of Texas, he was soon staff geologist with the
predecessor of Champlin Petroleum (Union Pacific Resources) where he advanced
to become District Manager. After a successful 20 years, he became Regional
Manager for Helmerich & Payne and for nine years he managed an 11-state oil
and gas exploration program. He has also served as exploration manager and
Senior Vice-President for several petroleum companies in the Rocky Mountain
Region. His skills as an exploration geologist, manager and consultant have
resulted in the discovery of significant petroleum reserves in the Rocky
Mountain Region. Mr. Dolloff earned his BS in Geology from Yale University
and MSc Geology from University of Minnesota.

ITEM 6. EXECUTIVE COMPENSATION.

The Company has recently entered into four-year employment agreements
with Paul M. Rady, who was hired by the Company in June 1998, and Glen C.
Warren, Jr., who was hired in July 1998.

The employment agreement with Mr. Rady provides for a salary of $120,000
per year, bonus compensation equal to 2% of the Company's net cash flow,
participation in the Company's standard insurance plans for its executives,
and participation in the Company's other incentive compensation programs at
the discretion of the Board of Directors. Mr. Rady was granted 400,000 stock
options exercisable at $2.50 per share and 400,000 stock options exercisable
at $5.00 per share which vest ratably over a four-year period commencing in
June 1999. Mr. Rady's stock options are subject to accelerated vesting in
the event of his termination without cause or in the event of a change of
control of the Company. The stock options expire in 2008, subject to earlier
termination if the employment is terminated. If Mr. Rady's employment with
the Company is terminated without cause prior to June 1, 1999, Mr. Rady is
entitled to termination compensation of $2,000,000 and $3,000,000 if
terminated without cause after June 1, 1999 but before the termination of the
employment agreement. Mr. Rady's

<PAGE>

employment agreement automatically renews on each anniversary of the
effective date after June 1, 2001 for an additional two years unless the
Company notifies Mr. Rady in writing 90 days prior to such anniversary that
it will not be renewing his employment agreement.

The employment agreement with Mr. Warren provides for a salary of
$100,000 per year, bonus compensation equal to 1% of the Company's net cash
flow, participation in the Company's standard insurance plans for its
executives, and participation in the Company's other incentive compensation
programs at the discretion of the Board of Directors. Mr. Warren was granted
200,000 stock options exercisable at $2.50 per share, 100,000 stock options
exercisable at $3.50 per share, and 200,000 stock options exercisable at
$5.00 per share which vest ratably over a four-year period commencing in July
1999. The stock options expire in 2008. Mr. Warren's stock options are
subject to accelerated vesting in the event of his termination without cause
or in the event of a change of control of the Company. If Mr. Warren's
employment with the Company is terminated without cause prior to July 1,
1999, Mr. Warren is entitled to termination compensation of $400,000, if
terminated without cause after July 1, 1999, but before July 1, 2000
$750,000, and if terminated without cause thereafter but prior to the
termination of the employment agreement $1,250,000. Mr. Warren's employment
agreement automatically renews on each anniversary of the effective date
after June 1, 2002 for an additional year, unless the Company notifies Mr.
Warren in writing 90 days prior to such anniversary that it will not be
renewing his employment agreement.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

A Director of the Company, Mark A. Erickson is also the President of
R.I.S. Resources (USA), Inc., ("RIS") a wholly owned subsidiary of R.I.S.
Resources International Corp and serves as a director of RIS. RIS is
engaged in the downstream gathering, processing and marketing gas business,
and may purchase and provide infrastructure gathering and transportation of
CBM produced by the Company. RIS Resources International Corp owns
approximately 29.3% of the issued and outstanding shares of the Company. If
the Company deals with related parties the fairness of the transactions will
be reviewed only by members of the Board of Directors that do not have
interests in the transactions.

ITEM 8. DESCRIPTION OF SECURITIES.

COMMON STOCK

The authorized Common Stock of the Company consists of 50,000,000 shares
of $0.001 Par Value Common Stock ("Common Shares"). As of June 2, 1998,
13,025,000 Common Shares are issued and outstanding. All shares have equal
voting rights and are not assessable. Voting rights are not cumulative and,
therefore, the holders of more than 50% of the Common Stock could, if they
chose to do so, elect all of the directors of the Company.

Upon liquidation, dissolution or winding up of the assets of the
Company, after the payment of liabilities, will be distributed pro rata to
the holders of the Common Stock. The holders of the Common Stock do not have
preemptive rights to subscribe for any securities of the Company and have no
right to require the Company to redeem or purchase their shares. The shares
of Common Stock presently outstanding are fully paid and non-assessable.

SHARE PURCHASE WARRANTS

The Company in its current private placement is offering Common Stock
Purchase Warrants with an exercise price of $5.00 per share. The Warrant may
be exercised any time within six months of the date of issuance. The Common
Shares issued pursuant to exercise of the Warrants have not been registered
under the Act, any state securities authority, nor any foreign securities
authority, and will be subject to the limitations of Rule 144.

1998 STOCK OPTION AND INCENTIVE PLAN

<PAGE>

On March 24, 1998, the Board of Directors adopted the 1998 Stock Option
and Incentive Plan (the "Plan") which was subsequently approved by over 50%
of the shares of Common Stock held by stockholders of the Company. The
stockholders of the Company approved an amendment to the Plan on June 29,
1998. The Plan is intended to provide incentive to key employees and
directors of, and key consultants, vendors, customers, and others expected to
provide significant services to, the Company, to encourage proprietary
interest in the Company, to encourage such key employees to remain in the
employ of the Company and its Subsidiaries, to attract new employees with
outstanding qualifications, and to afford additional incentive to
consultants, vendors, customers, and others to increase their efforts in
providing significant services to the Company. The Plan is administered by
the Board of Directors or can be administered by a Committee appointed by the
Board of Directors, which Committee shall be constituted to permit the Plan
to comply with Rule 16b-3 of the Securities Exchange Act of 1934, and which
shall consist of not less than two members. The Board of Directors, or the
Committee if there be one, at its discretion, can select the eligible
employees and consultants to be granted awards, determine the number of
Shares to be applicable to such award, and designate any Options as Incentive
Stock Options or Nonstatutory Stock Options (except that no Incentive Stock
Option may be granted to a non-employee director or a non-employee
consultant). The stock subject to awards granted under the Plan are Shares
of the Company's authorized but unissued or reacquired Common Stock. The
aggregate number of Shares which may be issued as awards or upon exercise of
awards under the Plan is 4,500,000 shares. As of July 31, 1998,
Non-statutory Stock Options to purchase 2,493,000 have been granted to key
employees and directors for exercise prices ranging from $1.25 to $5.00 per
share pursuant to the vesting schedules of the respective agreements. Options
in the amount of 612,500 are presently vested while the balance of the
options vest over the passage of time or are tied to certain benchmarks being
achieved with regards to the drilling of wells or obtaining certain annual
gross production revenues. No Incentive Stock Option Agreements have been
entered into by the Company as of July 31, 1998. The Shares that may
presently be issued pursuant to the exercise of an option awarded by the Plan
have not been registered under the Act, any state securities authority, nor
any foreign securities authority, and will be subject to the limitations of
Rule 144.

YORKTON WARRANTS

The Company entered into a Fiscal Agency Agreement with Yorkton
Securities, Inc., an Ontario, Canada Corporation ("Yorkton") for a period of
one year, whereby Yorkton will provide to the Company corporate finance
services and market consultation. In consideration for said fiscal agency
services, the Company contracted to pay Yorkton a fee in the amount of
128,000 warrants (the "Yorkton Warrants"). The Yorkton Warrants consist of
warrants to purchase up to 128,000 shares of Common Stock at an exercise
price of $1.25 per share any time after April 15, 1999 up until April 15,
2000. Shares issued pursuant to exercise of the Yorkton Warrants have not
been registered under the Act.

DIVIDENDS

Holders of the Common Stock are entitled to share equally in dividends
when, as and if declared by the Board of Directors of the Company, out of
funds legally available therefore. No dividend has been paid on the Common
Shares since inception, and none is contemplated in the foreseeable future.

TRANSFER AGENT

The Company's transfer Agent is: Pacific Stock Transfer Company, 3690
South Eastern, Las Vegas, Nevada 89109.

TRADING

There is currently a limited market for non-legended shares of the
Company's Common Stock. Shares of the Company's Common Stock are traded on
the OTC Bulletin Board under the trading symbol "PNEG." Since trading
commenced on July 1, 1998, the high bid and asked prices were $6 1/16 and
$6 1/4, respectively, and the low bid and asked prices were $3 7/16 and $3
3/4, respectively.

RIGHTS OF SHAREHOLDERS

<PAGE>

Shareholders of the Company have no preemptive rights to acquire
additional shares of Common Stock or other securities. The Common Stock is
not subject to redemption and carries no subscription or conversion rights.
In the event of liquidation of the Company, the shares of Common Stock are
entitled to share fgequally in corporate assets after satisfaction of all
liabilities. The shares of Common Stock, when issued will be fully paid and
non-assessable.

There are no outstanding options, warrants or rights to purchase shares
of the Company's Common Stock, other than as offered herein.

PART II

ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.

Effective July 1, 1998, trading in the Company's Common Stock commenced
on the Nasdaq Over-the-Counter Bulletin Board ("OTC/BB"). During the period
from July 1, 1998 to July 31, 1998, the high and low bid prices ranged from
$3.47 to $6.125. The prices represent quotations between dealers, without
adjustment for retail markup, mark down or commission, and do not necessarily
represent actual transactions.

The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future, earnings,
if any, will continue to be retained for use in its business. As of July 31,
1997, the approximate number of record holders of the Company's Common Stock
was 200.

ITEM 2. LEGAL PROCEEDINGS.

No material legal proceedings to which the Company is a party are
pending nor are any known to be contemplated and the Company knows of no
legal proceedings pending or threatened, or judgments entered against any
Director or Officer of the Company in his capacity as such.

ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS.

None.

ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.

As of July 31, 1998, 13,646,429 shares of Common Stock, par value $.001,
are outstanding. Of the 13,646,429, Common Shares that are outstanding, (i)
995,000 shares were issued in January 1998 pursuant to a share-for-share
exchange with the stockholders of IMP, (ii) 500,000 shares were issued in
February 1998 for the purchase price of $.10 per share pursuant to a private
placement, (iii) 4,530,000 shares were issued in February 1998 for a
purchase price of $.22 per share pursuant to a Regulation D, Rule 504
offering, (iii) 5,000,000 shares were issued in April 1998 for a purchase
price of $1.25 per share pursuant to a Regulation D, Rule 506 offering, (iv)
2,000,000 shares were purchased in June 1998 by RIS International pursuant to
a Regulation D, Rule 506 offering for a purchase price of $1.75 per share,
and (v) 621,429 units were purchased in July 1998 pursuant to a Regulation D,
Rule 506 offering by two members of the management team of the Company, for a
purchase price of $1.75 per unit, each unit consisting of one share and a one
share purchase warrant for every two shares purchased. The two most recent
offerings placed with RIS International and the members of the management
team of the Company were completed after the audited financial statements of
the Company dated April 15, 1998 (the "Financial Statements") were completed,
therefore these additional shares are not reflected in the Financial
Statements.

Additionally, the Company has issued common stock purchase warrants to
purchase up to (i) 128,000 shares at an exercise price of $1.25 per share,
exercisable after April 15, 1999, (ii) 310,715 shares exercisable at an

<PAGE>

exercise price ranging from $1.75 to $1.96 per share for a period of two
years from the closing date of a June 1998 private placement (discussed
below) are outstanding.

Pursuant to its Stock Option and Incentive Plan, the Company has
authorized the granting of non-statutory stock options to purchase 2,493,000
shares to key employees and directors for exercise prices ranging from $1.25
to $5.00 per share pursuant to the vesting schedules of the respective
agreements.

ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Nevada Revised Statutes and certain provisions of the Company's
Bylaws under certain circumstances provide for indemnification of the
Company's Officers, Directors and controlling persons against liabilities
that they may incur in such capacities. A summary of the circumstances in
which such indemnification is provided for is contained herein, but this
description is qualified in its entirety by reference to the Company's Bylaws
and to the statutory provisions.

In general, any Officer, Director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with
a legal proceeding to which such person is a party, if that person's actions
were in good faith, were believed to be in the Company's best interest, and
were not unlawful. Unless such person is successful upon the merits in such
an action, indemnification may be awarded only after a determination by
independent decision of the Board of Directors, by legal counsel, or by a
vote of the stockholders, that the applicable standard of conduct was met by
the person to be indemnified.

The circumstances under which indemnification is granted in connection
with an action brought on behalf of the Company is generally the same as
those set forth above; however, with respect to such actions, indemnification
is granted only with respect to expenses actually incurred in connection with
the defense or settlement of the action. In such actions, the person to be
indemnified must have acted in good faith and in a manner believed to have
been in the Company's best interest, and must not have been adjudged liable
for negligence or misconduct.

Indemnification may also be granted pursuant to the terms of agreements
that may be entered in the future or pursuant to a vote of stockholders or
Directors. The statutory provision cited above also grants the power to the
Company to purchase and maintain insurance which protects its Officers and
Directors against any liabilities incurred in connection with their service
in such a position, and such a policy may be obtained by the Company.

<PAGE>

PART F/S

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET

APRIL 15, 1998

<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash . . . . . . . . . . . . . . . . . . . . $ 4,652,476
Subscriptions receivable . . . . . . . . . . 221,100
Deposits . . . . . . . . . . . . . . . . . . 45,405
Prepaid Expenses . . . . . . . . . . . . . . 28,810
Office Equipment . . . . . . . . . . . . . . 31,113
Payments for purchase of oil and gas leases.
8,853,958
------------

Total Assets $13,832,862
------------
------------
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C>
Accounts payable:
Trade. . . . . . . . . . . . . . . . . . . . $ 139,836
Subscriptions refundable . . . . . . . . . . 82,500
Oil and gas lease payments . . . . . . . . . 6,583,182
------------

Total Liabilities 6,805,518

Stockholders' Equity:
Common stock, authorized 50,000,000 shares
at $.001 par value, issued and outstanding
11,025,000 shares. . . . . . . . . . . . . . 11,025
Additional paid-in capital . . . . . . . . . 7,229,556
Deficit accumulated during the development stage (213,237)
------------

Total Stockholders' Equity 7,027,344

Total Liabilities and Stockholders' Equity $ 13,832,862
------------
------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
27

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT

FROM JANUARY 26, 1998 (INCEPTION) TO APRIL 15, 1998

<TABLE>
<S> <C>
Interest income . . . . . . . . . . . . . . . . $ 458

Expenses
Consulting . . . . . . . . . . . . . . . . . $ 70,896
Field lease expenses . . . . . . . . . . . . 85,000
Maps . . . . . . . . . . . . . . . . . . . . 4,859
Meals and entertainment. . . . . . . . . . . 481
Office expenses. . . . . . . . . . . . . . . 4,359
Professional fees. . . . . . . . . . . . . . 21,712
Rents. . . . . . . . . . . . . . . . . . . . 4,090
Travel and lodging . . . . . . . . . . . . . 21,303
------------

Total Expenses 212,700

Loss before extraordinary item. . . . . . . . . . (212,242)

Extraordinary item - Liquidation and dissolution
of wholly-owned subsidiary . . . . . . . . . . (995)
------------

Net loss. . . . . . . . . . . . . . . . . . . . . (213,237)

Retained earnings, beginning of period. . . . . .

Deficit accumulated during the development stage $ (213,237)
------------
------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

APRIL 15, 1998

FROM JANUARY 26, 1998 (INCEPTION) TO APRIL 15, 1998

<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
Balance,
January 26, 1998 -0- $ -0- $ -0- $ -0-

Issuance of common
stock for cash 10,030,000 10,030 7,286,570 7,296,600

Issuance of common
stock for stock 995,000 995 -0- 995

Less net loss -0- -0- -0- (213,237)

Less offering costs -0- -0- (57,014) (57,014)
---------- ---------- ------------ ------------

Balance,
April 15, 1998 11,025,000 $ 11,025 $ 7,229,556 $ 7,027,344
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS

FROM JANUARY 26, 1998 (INCEPTION) To April 15, 1998

<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES

Net Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (213,237)
Noncash expenses included in net loss:
Liquidation of subsidiary . . . . . . . . . . . . . . . 995
Increase in accounts payable . . . . . . . . . . . . . . . . 6,805,518
Increase in subscriptions receivable. . . . . . . . . . . . . (221,200)
Increase in prepaid expenses . . . . . . . . . . . . . . . (28,810)
-----------

NET CASH USED BY
OPERATING ACTIVITIES 6,343,366

CASH FLOWS USED BY INVESTING ACTIVITIES

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 45,405
Office equipment . . . . . . . . . . . . . . . . . . . . . 31,113
Payments for purchase of oil and gas leases . . . . . . . 8,853,958
-----------

NET CASH USED BY
INVESTING ACTIVITIES 8,930,476

CASH FLOWS FROM FINANCING ACTIVITIES

Sale of common stock. . . . . . . . . . . . . . . . . . . . . 10,030
Additional paid-in capital. . . . . . . . . . . . . . . . . . 7,286,570
Less offering costs . . . . . . . . . . . . . . . . . . . . . (57,014)
-----------

NET CASH USED BY
FINANCING ACTIVITIES 7,239,586

NET INCREASE IN CASH 4,652,476

CASH AT BEGINNING OF PERIOD -0-
-----------

CASH AT END OF PERIOD $ 4,652,476
-----------
-----------

Supplemental disclosure of cash flow information:
Issuance of 995,000 shares of common stock in exchange for
common stock in the parent company $ 995
-----------
-----------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS

APRIL 15, 1998

NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company was incorporated on January 26, 1998, under the laws of
the State of Nevada. The business purpose of the Company is the
exploration, development and extraction of proven and unproven oil
and/or gas reserves.

The Company will adapt accounting policies and procedure based upon
the nature of future transactions.

NOTE B CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents for purposes of
determining cash flows.

NOTE C OFFICE EQUIPMENT

Office equipment is stated at cost. Maintenance and repairs are
expensed in the period incurred and major renewals and betterments are
capitalized. Depreciation is computed using the straight line method
over a five year life. The equipment was acquired immediately prior
to the date of these financial statements and no depreciation has been
provided for in these statements.

NOTE D OIL AND GAS LEASE ACQUISITIONS

The Company has the right to acquire oil and gas leases and options on
oil and gas leases covering more than 235,000 net acres in the Powder
River Basin of Wyoming and Montana. As of April 15, 1998, the Company
had made payments of $2,270,776 for the purchase of the leases and
options on leases and owes an additional $6,583,182 for the
acquisition of the leases.

NOTE E STOCK OFFERINGS

The Company completed in February of 1998, a stock offering. The
offering consisted of selling 500,000 shares of its common stock at
$.10 per share. In March of 1998, the Company completed another stock
offering. The offering consisted of selling 4,530,000 shares of its
common stock at $.22 per share. In April of 1998, the Company
completed a third stock offering. The offering consisted of selling
5,000,000 shares of its common stock at $1.25 per share.

The net proceeds of these offerings will be used for the purpose of
exploration, development and extraction of proven and unproven oil
and/or gas reserves.

The stock offerings were oversubscribed by $82,500 which will be
returned to the subscribers.

NOTE F STOCK OPTION AND INCENTIVE PLAN

On March 24, 1998, the Board of Directors adopted the "1998 Stock
Option and Incentive Plan." The aggregate number of shares which may
be issued as awards under the plan is 2,500,000 shares. As of April
15, 1998, non-statutory stock options to purchase 1,145,000 shares
have been granted to key employees and directors for exercise prices
ranging from $1.25 to $2.50 per share pursuant to vesting schedules or
the respective agreements.

<PAGE>

NOTE G STOCK WARRANTS

The Company has agreed to grant placement warrants to purchase up to
480,000 shares of common stock at a price of $5.00 per share for a
period of two years from the close of the proposed unit offering. The
actual number of warrants issued will depend on the total amount of
units sold in the offering.

The Company has agreed to pay 180,000 warrants to a company for
corporate finance services and market consultation for a period of one
year commencing August 15, 1998. The warrant can be exercised at a
price of $1.25 at any time after April 15, 1998 up until April 15,
2000.

NOTE H LEASES

The Company leases its office facilities under a lease commencing June
1, 1998 through September of 2000. The lease provides for monthly
payments of $14,405. At April 15, 1998, future annual rents under the
lease is as follows:

<TABLE>
<S> <C>
Year ended December 31, 1998 $ 100,835
Year ended December 31, 1999 172,860
Year ended December 31, 2000 127,625
---------
Total lease payments $ 403,340
---------
---------
</TABLE>

NOTE I RELATED PARTY TRANSACTIONS - STOCK EXCHANGE

In January of 1998, the Company was formed by International Metal
Protection, Inc. Therefore, Pennaco Energy, Inc. was its wholly-owned
subsidiary. In January of 1998, the stockholders of International
Metal Protection, Inc. for stock in Pennaco Energy, Inc. on a share
for share basis. At the time of the exchange, there were 995,000
shares of stock outstanding of International Metal Protection, Inc.
for which the stockholders received 995,000 shares of stock in Pennaco
Energy, Inc. There were no tangible assets of International Metal
Protection, Inc. The excess of par value of the common stock issued
over the assets acquired upon the acquisition of the parent was $995.
This transaction has been accounted for as a reverse merger.

Upon the completion of the stock exchange, International Metal
Protection, Inc. became a wholly-owned subsidiary of Pennaco Energy,
Inc. and it was dissolved and liquidated in February of 1998. The
$995 was written off as an extraordinary loss upon the liquidation.

NOTE J SUBSEQUENT EVENTS - PROPOSED UNIT OFFERING

The Company intends to offer a minimum of 1,000,000 up to a maximum
of 6,000,000 units of common stock and warrants. The units will
consist of one share of common stock and a warrant to purchase an
additional share of stock for every two units purchased. The unit
price will be $3.25 and the warrants may be exercised within six
months of the close of the offering at a price of $5.00 per share.
The units will be offered in increments of 1,000 units with a minimum
purchase of 10,000 units.

<PAGE>

PART III

ITEM 1. INDEX TO EXHIBITS.

ITEM 2. DESCRIPTION OF EXHIBITS.

As appropriate, the issuer should file those documents required to be filed
as Exhibit Number 2, 3, 5, 6, and 7 in Part III of Form 1-A. The registrant
also shall file:

(12) ADDITIONAL EXHIBITS - Any additional exhibits which the issuer may
wish to file, which shall be so marked as to indicate clearly the subject
matters to which they refer.

13. FORM F-X - Canadian issuers shall file a written irrevocable consent
and power of attorney on Form F-X.

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.

PENNACO ENERGY, INC.

By: /s/ Paul M. Rady
-------------------------------------
Paul M. Rady, President and Chief
Executive Officer