PENNACO ENERGY INC, 10SB12G/A, 1998-12-22

PENNACO ENERGY INC
10SB12G/A, 1998-12-22
DRILLING OIL & GAS WELLS

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

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

FORM 10-SB
AMENDMENT NO. 3

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 88-0384598
(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
------------------- ------------------------------------
None

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

Common Stock, par value $.001

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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 energy company
primarily engaged in the acquisition, development and production of natural
gas from coal bed methane ("CBM") properties in the Rocky Mountain region of
the United States. As of October 23, 1998, the Company owned oil and gas
lease rights with respect to approximately 465,000 net acres and option
rights to acquire lease rights in approximately 27,000 net acres in the
Powder River Basin in northeastern Wyoming and southeastern Montana. The
Company acquired this acreage for approximately $16 million during fiscal
year 1998. The Company also possesses a management team that is experienced
in the development of CBM properties. The Company initiated its drilling
program on November 15, 1998 and had drilled approximately 27 net wells as of
December 18, 1998. The Company plans to drill approximately 40 net CBM wells
in the Powder River Basin by year-end 1998, and approximately 500 gross CBM
wells in 1999. The wells the Company has drilled to date have taken an
average of three days to drill and are in various stages of completion
awaiting construction of gathering and compression systems and connection to
a pipeline. The success of the Company's drilling program (including the
magnitude of any potential reserves) cannot be determined until the wells are
completed, connected to a gathering system and flow tested for a significant
period of time. The Company estimates that its capital expenditures will
total approximately $7.0 million for the fourth quarter of 1998, which will
be allocated approximately 30% to drilling and completion and 70% to lease
acquisition.

As of the date hereof, the Company has not produced any oil or gas nor
does it currently have the ability to produce any oil or gas. Certain of the
Company's undeveloped oil and gas properties have reserves classified as
proved undeveloped; however, such amounts are not significant. While the
Company believes that it has assembled an attractive acreage position, there
can be no assurance that such acreage contains significant amounts of natural
gas reserves nor that such reserves, if any can ever be economically
developed.

Some of the largest coal seams in the United States are found in the
Powder River Basin. A coal seam is a layer of coal of variable thickness
which is found below the surface of the ground but which may also outcrop at
the surface. The CBM wells in the Powder River Basin are 350 to 1,200 feet in
depth and typically take only one to two days to drill. Because of the
relatively short drill time, these wells have relatively low drilling and
completion costs (approximately $50,000 to $60,000 per well). The CBM gas
recovered from the wells in this region does not require treatment or
processing but does require dehydration and compression.

Drilling and production growth in the Powder River Basin is currently
impeded by two principal factors: (i) a natural gas pipeline bottleneck which
restricts the movement of natural gas out of the Powder River Basin, and (ii)
the completion of an environmental impact statement ("EIS") by the Bureau of
Land Management ("BLM") with respect to a portion of the federal lands in the
basin. The Company believes that currently there are over 600 producing wells
in the Powder River Basin. Without producing wells it is impossible to
estimate proved hydrocarbon reserves. Additionally, without a means of
transportation for production, it becomes economically unfeasible to produce
natural gas. The Company believes that this delay has provided the
opportunity for the Company to establish an acreage position at reasonable
cost. However, these same factors could adversely impact the Company's
ability to produce and market natural gas. Operators are currently competing
for the limited number of drilling permits allowed on federal lands by the
BLM until the EIS is complete and sufficient pipeline capacity has been
constructed to transport any additional production. The EIS was originally
scheduled for completion in May 1999, but has been delayed until July 1999.
Several pipeline construction and expansion projects have been proposed, two
of which are permitted and acquiring rights of way. It is currently
anticipated that the pipeline take-away capacity will increase significantly
in late 1999, although there can be no reassurance in this regard.

The Company is filing this Form 10-SB on a voluntary basis. Pursuant to
a private placement of its equity securities that was completed on September 4,
1998, the Company agreed with the purchasers that it would register its

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common stock under Section 12(g) of the Securities Exchange Act of 1934 (the
"Act"). It is the Company's intention, in the event that its obligation to
file reports under the Act is suspended, to continue to file such reports on
a voluntary basis.

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 an office at 3651 Lindell Road, Suite A, Las Vegas, Nevada 89103 and a
field office at 400 South Miller Avenue, Gillette, Wyoming 82716.

RECENT DEVELOPMENTS

CMS TRANSACTION

On October 23, 1998, the Company and CMS Energy Corporation's
exploration and production unit, CMS Oil and Gas Company, signed a definitive
purchase and sale agreement (the "CMS Agreement") relating to the development
of the Company's Powder River Basin acreage (the "CMS Transaction").
Pursuant to the terms of the CMS Agreement, CMS Oil and Gas Company will
acquire an undivided 50% working interest in approximately 490,500 net acres
of Pennaco's leasehold position in the Powder River Basin for $28.0 million.
The Company acquired the leasehold position which is being conveyed to CMS in
the CMS Transaction for approximately $7.0 million. The purchase price
provided for in the CMS Agreement was the result of arm's length negotiations
between the Company and CMS. The CMS Agreement provides for the development
of the Company's lease acreage, with Pennaco and CMS each operating
approximately 50% of the wells drilled in the area of mutual interest. As is
customary in oil and gas leasehold transactions, the agreement provides for
the adjustment of the purchase price for title defects discovered prior to
closing and for the opportunity for one party to participate in acquisitions
made by the other party in the area of mutual interest defined in the
agreement. The agreement also provides for a preferential purchase right to
the other party in the event either CMS or the Company attempts to sell all
or a portion of its interest in the acreage covered by the agreement. All of
the leases in the area of mutual interest are dedicated to CMS Gas
Transmission and Storage, an affiliate of CMS Oil and Gas, for gathering,
compression and transportation.

Pursuant to the terms of the CMS Transaction, CMS agreed to pay Pennaco
$5.6 million of earnest money in the form of a bridge loan (the "CMS Bridge
Loan") secured by substantially all of the Company's oil and gas leases.
Approximately $3.2 million of such amount was paid directly to existing
creditors of the Company. The Company intends to use the balance for general
corporate purposes. The CMS Transaction is structured such that the
conveyance of the working interests will occur at two separate closings. The
first closing occurred on November 20, 1998 and the second closing is
scheduled to occur on January 15, 1999. The Company received $7.6 million at
the first closing and will receive $14.8 million at the second closing
subject to customary closing adjustments. The CMS Bridge Loan will be
canceled if both closings occur or if the buyer wrongfully fails to close or
fails to meet the seller's conditions to closing. The CMS Transaction is
subject to cancellation if the title to greater than 20% of the lease acreage
subject to the CMS Agreement is deemed defective and incurable. Further, the
second closing is contingent upon the continued accuracy of the Company's
representations and warranties under the CMS agreement and other customary
conditions.

COMMENCEMENT OF DRILLING PROGRAM

On November 15, 1998 the Company initiated its drilling program with the
drilling of its first well in the Powder River Basin. As of December 18,
1998, the Company had drilled approximately 27 net wells. The Company plans
to drill 40 CBM wells by the end of the fourth quarter of 1998, most of which
will be drilled on a 100% working interest basis. In 1999, the Company plans
to drill as many as 500 gross wells, the majority of which will be part of
the CMS Agreement. To date, the Company's wells have taken an average of
three days to drill. The 1999 drilling program with CMS is subject to the
development of a mutually acceptable drilling plan. In the fourth quarter of
1998, the Company expects capital expenditures for drilling to be
approximately $2.0 million.

Pursuant to a drilling agreement with CBM Drilling, LLC ("CBMD"), the
Company prepaid $360,000 of drilling costs to ensure that drilling rigs
appropriate for Powder River Basin drilling are available for the Company's
planned drilling program. CBMD currently has four drilling rigs that are
primarily dedicated to the Company's drilling program.

CLOSING OF PENDING LEASE ACQUISITIONS

The Company closed a series of transactions in November and December of
1998 which resulted in the addition of approximately 10,000 net acres of
leasehold to the Company's acreage inventory for a total cost of
approximately $2.6 million. This acreage is not included in the CMS
Transaction but was included in the Company's September 30, 1998 financial
statements as pending acquisitions subject to various definitive agreements.

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RISK FACTORS

NO OPERATING HISTORY AND REVENUES. The Company is a development stage
company 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,
acquisition of leasehold interests and commencement of a drilling program, 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.

DEPENDENCE ON GATHERING, COMPRESSION AND TRANSPORTATION FACILITIES. If
the Company begins production of natural gas, the marketability of its
production will depend in part upon the availability, proximity and capacity
of gas gathering and compression systems, pipelines and processing
facilities. 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. Pipeline demand in the area is increasing as CBM
development activity continues to expand. The Company's core land position
is located in an area near the development activity. The terms of the CMS
Agreement provide that Pennaco and CMS Oil and Gas establish an Area of
Mutual Interest ("AMI") around the Company's acreage and that both Pennaco
and CMS Oil and Gas dedicate all of the acreage in the AMI to CMS Gas
Transmission and Storage Company ("CMSGT&S") for gathering, compression and
transportation, which shall be provided at competitive rates and tariffs.
CMSGT&S is currently involved in negotiations to either join other projects
or build its own infrastructure. Meanwhile, outside of the AMI, the Company
is engaged in negotiations with several pipeline companies to lay pipeline to
the Company's planned drillsites, and to gather, compress and transport gas.
However, 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, both within and
outside of the AMI, the Company may experience delays, possibly significant,
in connection with its efforts to generate revenues from the sale of gas.
Further, there is limited pipeline capacity outside of the Powder River Basin
which will require expansion and new construction to accommodate the
increasing 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 capacity in
existing pipelines. There can be no assurance that such capacity will be
completed on a timely basis or that the Company will be permitted to
transport any volumes thereon.

In addition, 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. 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 transports smaller volumes, it may be liable for
damages proportional to the shortfall.

RELIANCE ON CMS TRANSACTION. The Company entered into the CMS
Transaction in order to obtain the funds necessary to implement its business
plan. There is no assurance that the Company will close the CMS Transaction
or be able to obtain additional funding in the future if and when it is
needed.

BRIDGE LOAN. A foreclosure and forfeiture of the collateral pledged to
secure the CMS Bridge Loan would end the Company's development and drilling
activities in the Powder River Basin and threaten the viability of the
Company.

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 any
development, or incur substantial costs for curative title work. 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,

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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.
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.

VOLATILITY OF OIL AND GAS MARKETS. If the Company begins production,
the Company's revenues, profitability and future rate of growth will be
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 will be 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 the
Company will be able to produce oil or gas on an economic basis in light of
prevailing market prices. If the Company is able to produce natural gas, 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.

PROPERTY ACQUISITION AND COMPETITION. Competition for prospects and
producing properties is intense. The Company has been competing and will
continue to compete with a number of other potential purchasers of prospects
and producing properties, many of which will have greater financial resources
than the Company. The bidding for prospects has become particularly intense
in the Powder River Basin with different bidders evaluating potential
acquisitions with different product pricing parameters and other criteria
that result in widely divergent bid prices. The presence 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. In
addition, 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.

In addition to competition for leasehold acreage in the Powder River
Basin, the oil and gas exploration and production industry is intensely
competitive as a whole. 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.

SHUT-IN WELLS, CURTAILED PRODUCTION, AND OTHER PRODUCTION INTERRUPTIONS.
In the event that the Company manages to initiate production and generate
income from its CBM properties, such production 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 a very limited market if the Company
does generate production in the future. 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. The Company currently carries
well control insurance as well as property and general liability insurance.

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,

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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 if it begins commercial production. 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, once the Company begins development
activities, will 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.

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 conducts its 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.

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. The Company does not maintain key person
life insurance on any of its executive officers.

NON-ARM'S LENGTH TRANSACTIONS AND RELATED PARTY TRANSACTIONS. The
number of shares of common stock, par value $0.001 per share (the "Common
Stock"), of the Company or options to purchase shares of Common Stock

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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 acquisition and development projects. In
certain circumstances, the fairness of such transactions will be reviewed and
approved by members of the Board of Directors that do not have interests
therein. 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 USA"), a wholly owned subsidiary of R.I.S. Resources International
Corp. ("RIS"), and serves as a director of RIS. RIS is engaged in the
gathering, processing and marketing of natural gas. RIS owns approximately
26% 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.

LIMITED MARKET FOR SECURITIES. At present, a limited market exists for
the Company's Common Stock in the OTC Bulletin Board system. 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. The
Company has not been advised by any entity that it intends to make a market
in the Company's Common Stock, nor has the Company taken any affirmative
steps to encourage or market maker to begin trading in the Company's
securities. 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 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.

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BUSINESS

GENERAL

The Company was incorporated in January 1998 to engage in the business
of oil and gas exploration and production. To date, the Company's main focus
and primary objective has been the procurement of mineral leasehold interests
in the Powder River Basin of Wyoming and Montana and the commencement of its
CBM drilling program. Since its inception, the Company has issued common
stock and securities to raise capital, recruited and organized management,
and has developed a strategic plan for the development of its Powder River
Basin acreage. Other than the acquisition of leasehold interests, the
Company has conducted limited operations.

CBM production is similar to traditional natural gas production in terms
of the physical producing facilities and the product produced. However, the
subsurface mechanisms that allow the gas to move to the wellbore and the
producing characteristics of CBM wells are significantly different from
traditional natural gas production.

Coal is a black organic mineral formed from buried deposits of plant
material from ancient coastal swamps. Methane, or natural gas, is a common
component of coal, though coals vary in their methane content per ton.
Rather than being limited to open spaces in the coal structure, methane is
adsorbed within the inner coal surfaces. When the coal is fractured and
exposed to lower pressures (near a well or in a coal mine) the gas leaves
(desorbs from) the coal. Whether a coal bed will produce commercial
quantities of natural gas depends on its original content of gas per ton of
coal, the thickness of the coal beds, the reservoir pressure and the
existence of fractures through which the released gas can flow to the
wellhead (permeability). Frequently, coal beds are partly or completely
saturated with water. As the water is produced, space is created for gas to
leave the coal and flow to the well. Contrary to traditional gas wells, new
CBM wells often produce water for several months (dewatering) and then, as
the water production decreases because the coal seams are being drained, and
the pressure decreases, natural gas production increases.

The coal beds of the Powder River Basin 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. This 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 a number of different stratigraphic levels. Well
depths in the Powder River Basin are relatively shallow, between 350 and
1,200 feet.

Coal beds produce nearly pure methane gas while traditional gas wells
normally produce gas that contains small portions of ethane, propane, and
other, heavier, hydrocarbon gases. Methane normally constitutes more than
90% of the total gases in the production from traditional gas wells. The
Powder River Basin gas does not contain significant amounts of contaminants,
such as hydrogen sulfide, carbon dioxide or nitrogen, that are sometimes
present in traditional natural gas production. Therefore the properties of
the Powder River Basin gas, such as heat content per unit volume (Btu), are
very close to the average properties of pipeline gas from traditional gas
wells.

STRATEGY

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

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The Company intends to add production by creating and forming strategic
alliances with mid-stream companies (gathering and marketing) and down-stream
companies (pipeline companies and end users). If the Company establishes
significant production and cash flow in the Powder River Basin, it plans to
pursue other CBM projects as well as more conventional oil and gas projects.

DRILLING AND PRODUCTION STRATEGY

The Company has initiated its development program through the drilling
of its first well on November 15, 1998 and has completed approximately 27 net
wells as of December 18, 1998. Though no assurance of success can be given,
the Company's business plan includes the drilling of 40 net CBM wells by the
end of 1998, and an additional 500 gross CBM wells by the end of 1999,
assuming current economic and regulatory conditions. The wells the Company
has drilled to date have taken an average of three days to drill and are in
various stages of completion awaiting construction of gathering and
compression systems and connection to a pipeline. The success of the
Company's drilling program (including the magnitude of any potential
reserves) cannot be determined until the wells are completed, connected to a
gathering system and flow tested for a significant period of time. The
Company estimates that its capital expenditures will total approximately $7.0
million for the fourth quarter of 1998, which will be allocated approximately
30% to drilling and completion and 70% to lease acquisition.

The Company's ability to complete its drilling program is entirely
dependent upon the availability of sufficient capital, equipment and
personnel. The estimated cost per well is approximately $50,000 to $60,000 to
drill and complete. The estimated drilling portion of the well cost is
approximately $10,000. The Company has entered into a drilling agreement
with CBMD, pursuant to which it has prepaid drilling costs of $360,000.
Additionally, the Company has agreed to loan CBMD $90,000, which loan will be
secured by all the personal property and equipment of CBMD, and has agreed if
requested on or before June 30, 1999 to loan CBMD an additional $150,000
which would be similarly secured. Based on the agreement that every third
well shall be drilled at no cost to Pennaco, the prepaid drilling costs will
be recovered after approximately 75 wells are drilled for Pennaco by CBMD.
The prepayments were made to ensure that drilling rigs will be available and
dedicated to the Company's planned drilling program and that these rigs would
meet the specific requirements of the Company. CBMD currently has four CBM
drilling rigs that are primarily dedicated to the Company's drilling program.

STRATEGIC ALLIANCE AND PARTNERING

On October 23, 1998, the Company and CMS Energy Corporation's
exploration and production unit, CMS Oil and Gas Company signed the CMS
Agreement. Pursuant to the terms of the CMS Agreement, CMS Oil and Gas
Company will acquire an undivided 50% working interest in approximately
490,500 net acres of Pennaco's leasehold position in the Powder River Basin
for $28.0 million. The CMS Agreement provides for the development of the
Company's lease acreage, with Pennaco and CMS each operating approximately
50% of the wells drilled in the area of mutual interest. As is customary in
oil and gas leasehold transactions, the agreement provides for the adjustment
of the purchase price for title defects discovered prior to closing and for
the opportunity for one party to participate in acquisitions made by the
other party in the area of mutual interest defined in the agreement. The
agreement also provides for a preferential purchase right to the other party
in the event either CMS or the Company attempts to sell all or a portion of
its interests covered by the agreement. All of the leases in the area of
mutual interest are dedicated to CMS Gas Transmission and Storage, an
affiliate of CMS Oil and Gas Company, for gathering, compression and
transportation.

MARKETING OF PRODUCTION

If the Company successfully produces oil and/or natural gas, it does not
plan to refine or process its production, but plans to sell the production to
unaffiliated oil and natural gas purchasing companies in the area in which it
is produced. If the Company produces natural gas, it expects to sell it
under contracts to both interstate and intrastate natural gas pipeline
companies, as well as companies who transport natural gas overground.

TITLE TO PROPERTIES

The Company believes it has satisfactory title to all of its properties
in accordance with standards generally accepted in the oil and gas industry.
The Company's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which the Company believes do not materially interfere with the use of or
affect the value of such properties.

COMPETITION

Competition for prospects and producing properties is intense. The
Company has been competing and will continue to compete with a number of
other potential purchasers of prospects and producing properties, many of
which will have greater financial resources than the Company. The bidding for
prospects has become particularly intense in

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<PAGE>

the Powder River Basin with different bidders evaluating potential
acquisitions with different product pricing parameters and other criteria
that result in widely divergent bid prices. The presence 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. In
addition, 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.

REGULATION

The Company's operations will be subject to extensive and continually
changing regulation, as legislation affecting the oil and natural gas
industry is under constant review for amendment and expansion. Many
departments and agencies, both federal and state, are authorized by statute
to issue and have issued rules and regulations binding on the oil and natural
gas industry and its individual participants. The failure to comply with
such rules and regulations can result in substantial penalties. The
regulatory burden on the oil and natural gas industry will increase the
Company's cost of doing business and, consequently, affect its profitability.
However, the Company does not believe that it will be affected in a
significantly different manner by these regulations than its competitors in
the oil and natural gas industry.

TRANSPORTATION AND SALE OF NATURAL GAS. The FERC regulates interstate
natural gas pipeline transportation rates as well as the terms and conditions
of service. FERC's regulations will affect the marketing of any natural gas
produced by the Company, as well as any revenues received by the Company for
sales of such natural gas. In 1985, the FERC adopted policies that make
natural gas transportation accessible to natural gas buyers and sellers on an
open-access, nondiscriminatory basis. The FERC issued Order No. 636 on April
8, 1992, which, among other things, prohibits interstate pipelines from
making sales of gas tied to the provision of other services and requires
pipelines to "unbundle" the services they provide. This has enabled buyers
to obtain natural gas supplies from any source and secure independent
delivery service from the pipelines. All of the interstate pipelines subject
to FERC's jurisdiction are now operating under Order No. 636 open access
tariffs. On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking
regarding the regulation of short term natural gas transportation services.
FERC proposes to revise its regulations to require all available short term
capacity (including capacity released by shippers holding firm entitlements)
to be allocated through an auction process. FERC also proposes to require
pipelines to offer additional services under open access principles, such as
"park and loan" services. In a related initiative, FERC issued a Notice of
Inquiry on July 29, 1998 seeking input from natural gas industry players and
affected entities regarding virtually every aspect of the regulation of
interstate natural gas transportation services. Among other things, FERC is
seeking input on whether to retain cost-based rate regulation for long term
transportation services, potential changes in the manner in which rates are
designed, and the use of index driven or incentive rates for pipelines. The
July 29, 1998 Notice of Inquiry may lead to a subsequent Notice of Proposed
Rulemaking to further revise FERC's regulations.

Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any
such proposals might become effective or their effect, if any, on the
Company's operations. The natural gas industry historically has been closely
regulated; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.

REGULATION OF PRODUCTION. The production of oil and natural gas is subject
to regulation under a wide range of state and federal statutes, rules, orders
and regulations. State and federal statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. Wyoming
and Montana have regulations

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<PAGE>

governing conservation matters, including provisions for the unitization or
pooling of oil and natural gas properties, the establishment of maximum rates
of production from oil and natural gas wells and the regulation of the
spacing, plugging and abandonment of wells. The effect of these regulations
is to limit the amount of oil and natural gas the Company can produce from
its wells and to limit the number of wells or the locations at which the
Company can drill. Moreover, each state generally imposes a production or
severance tax with respect to production and sale of crude oil, natural gas
and gas liquids within its jurisdiction.

FEDERAL OR STATE LEASES. The Company's operations on federal or state
oil and gas leases will be subject to numerous restrictions, including
nondiscrimination statutes. Such operations must be conducted pursuant to
certain on-site security regulations and other permits and authorizations
issued by the Bureau of Land Management, Minerals Management Service and
other agencies. In order to drill wells on Wyoming state land, the Company
is required to file an Application for Permit to Drill with the Wyoming Oil
and Gas Commission. Drilling on acreage controlled by the federal government
requires the filing of a similar application with the Bureau of Land
Management. While the Company has been able to obtain required drilling
permits to date, there can be no assurance that permitting requirements will
not adversely effect the Company's ability to complete its drilling program
at the cost and in the time period currently anticipated.

ENVIRONMENTAL REGULATIONS. Various federal, state and local laws and
regulations governing the discharge of materials into the environment, or
otherwise relating to the protection of the environment, will affect the
Company's operations and costs. In particular, the Company's exploration,
development and production operations, its activities in connection with
storage and transportation of crude oil and other liquid hydrocarbons and its
use of facilities for treating, processing or otherwise handling hydrocarbons
and wastes therefrom will be subject to stringent environmental regulation.
Because CBM wells typically produce significant amounts of water, the Company
is required to file applications with state and federal authorities, as
applicable, to enable it to dispose of water produced from its wells. While
the Company has been able to obtain required water disposal permits to date,
there can be no assurance that such permitting requirements will not
adversely effect the Company's ability to complete its drilling and
development program at the cost and in the time period currently anticipated.

As with the industry generally, compliance with existing regulations
will increase the Company's overall cost of business. Such areas affected
include unit production expenses primarily related to the control and
limitation of air emissions and the disposal of produced water, capital costs
to drill exploration and development wells resulting from expenses primarily
related to the management and disposal of drilling fluids and other oil and
gas exploration wastes and capital costs to construct, maintain and upgrade
equipment and facilities.

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the "owner" or "operator" of the site and companies
that disposed or arranged for the disposal of the hazardous substances found
at the site. CERCLA also authorizes the Environmental Protection Agency and,
in some instances, third parties to act in response to threats to the public
health or the environment and to seek to recover from the responsible classes
of persons the costs they incur. In the course of its ordinary operations,
the Company may generate waste that may fall within CERCLA's definition of a
"hazardous substance." The Company may be jointly and severally liable under
CERCLA for all or part of the costs required to clean up sites at which such
wastes have been disposed.

The Company may own or lease properties that have been used for the
exploration and production of hydrocarbons in the past. Many of these
properties will have been owned by third parties whose actions with respect
to the treatment and disposal or release of hydrocarbons or other wastes were
not under the Company's control. These properties and wastes disposed
thereon may be subject to CERCLA and analogous state laws. Under such laws,
the Company could be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or
operators), to clean up contaminated property (including contaminated
groundwater) or to perform remedial plugging operations to prevent future
contamination.

EMPLOYEES

The Company currently has 13 employees and approximately 10 consulting
geologists, engineers, and land acquisition professionals. The Company plans
to hire additional employees as needed. The Company has an outsourcing
arrangement with Trinity Petroleum Management, LLC which provides for
administrative services, specifically land administration, accounting and
production reporting. The Agreement is effective until March 1, 1999 when it
converts to a month-to-month arrangement. The Company believes that this
outsourcing arrangement allows the Company to hire fewer full-time employees
and more efficiently control administrative expenses.

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<PAGE>

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

RESULTS OF OPERATION

As a development stage company, the Company has no revenues from
operations. During the period from the Company's inception (January 26,
1998) through September 30, 1998, the Company reported a net loss of
$4,076,338. No revenues were realized during this period. Expenses incurred
from the Company's inception (January 26, 1998) through September 30, 1998
totaled $5,386,558, including general and administrative expenses of
$2,918,356 and exploration expenses of $1,784,069, including geologic
consulting fees, geologic data and lease rentals.

In the accompanying financial statements, in accordance with APB No. 25
"Accounting for Stock Issued to Employees," the Company has recognized a
non-cash charge to earnings for compensation expense of approximately
$1,790,000 for the period from inception (January 26, 1998) through September
30, 1998 for stock, warrants, and options issued to certain officers and
employees. Compensation expense was calculated based on the difference
between the closing price per share on the last trading day prior to the date
of employment with the Company and the $1.75 unit price for shares and
warrants purchased by an officer of the Company hired at the beginning of
July and the option price for options awarded to certain officers and key
employees hired in July and August 1998. The restricted securities were
offered as an incentive to attract a senior management team to the Company.
The Company believes that the offers made by the Board of Directors were at
fair market value due to the restricted nature of the securities to be issued
and the lack of a liquid trading market for the Company's Common Stock at the
time of the offer. However, APB No. 25 requires the measurement of
compensation expense at the date of employment rather than at the offer date.
Further, APB No. 25 requires that compensation be measured based on the
quoted market price of the stock once a company's stock is publicly traded.
While the Company was not yet a registrant, the Company's shares have been
quoted on the OTC Bulletin Board system since July 1, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The capital resources of the Company are limited. 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 approximately $1.3
million in cash as of September 30, 1998. All cash at present is being used
to fulfill certain leasehold purchase commitments that the Company has
entered into and to fund certain ongoing general and administrative expenses.
On October 23, 1998, the Company and CMS Oil and Gas Company announced the
CMS Transaction. See "Recent Developments -- CMS

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Transaction." Pursuant to the terms of the CMS Agreement, CMS paid
Pennaco $5.6 million in the form of the CMS Bridge Loan secured by
substantially all of the Company's oil and gas leases. Approximately $3.2
million of such amount was paid directly to existing creditors of the
Company. The Company intends to use the balance for general corporate
purposes. The Company received $7.6 million at the first closing on November
20, 1998 and the Company will receive $14.8 million at the second closing on
January 15, 1999. The CMS Bridge Loan will be canceled if both closings
occur or if CMS wrongfully fails to close or fails to meet the Company's
conditions to closing. Pro forma for the CMS Transaction as of September 30,
1998, the Company had no debt and approximately $23.0 million of cash. While
the proceeds of the CMS Transaction should allow the Company to pay its
current liabilities and fund its development activities for the first half of
1999, the Company will require further funding to meet its capital
expenditure plans. Should the Company's cash flow from operations continue
to be insufficient to satisfy its capital expenditure requirements, there can
be no assurance that additional debt or equity financing will be available to
meet these requirements. At present, there are no agreements or
understandings between the Company and its officers and directors or
affiliates and any lending institutions with respect to any debt or equity
financings.

Should the Company be able to obtain debt financing in the future, its
level will have several important effects on the Company's future operations,
including (i) a substantial portion of the Company's cash flow will be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes and (ii) the Company's ability to obtain
additional financing in the future may be impaired. 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 18 employees.
Currently, the Company has 13 employees.

ITEM 3. DESCRIPTION OF PROPERTY.

As of December 21, 1998, the Company had acquired oil and gas leases and
options covering approximately 502,000 net acres in the Powder River Basin of
Wyoming and Montana. Approximately 60% of the acreage is located on federal
and state land and approximately 40% of the acreage is located on private
land. The Company's leases generally have five to ten year primary terms.
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%.

Historically, oil and gas has been produced from a number of other
reservoirs in the Powder River Basin that are typically greater in depth than
CBM locations. Over 80% of the Company's leasehold acreage allow for
development of all depths. These leases cover both the shallow CBM 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. No production has been generated
from the Company's leases.

While the Company had drilled approximately 27 net wells as of December
18, 1998, the wells are in various stages of completion and are awaiting
construction of gathering and compression systems and connection to a
pipeline. The success of the Company's drilling program cannot be determined
until the wells are completed, connected to a gathering system and flow
tested for a significant period of time. As of the date hereof, the Company
has not produced any oil or gas nor does it currently have the ability to
produce any oil or gas. Certain of the Company's undeveloped oil and gas
properties have reserves classified as proved undeveloped; however, such
amounts are not significant.

The Company's office space is currently subleased pursuant to an
agreement in principle with Evansgroup, Inc. The term of the sublease
commenced on April 6, 1998 and expires on September 30, 2000. The sublease
concerns approximately 11,524 square feet at a yearly rent of approximately
$173,000.

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

The following table sets forth information concerning the beneficial
ownership of the Common Stock as of September 30, 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 Common Stock, and (iv) all officers and
directors of the Company as a group. Unless otherwise indicated in the
footnotes below, the address of each stockholder is 1050 17th Street, Suite
700, Denver, Colorado, 80265.

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Number of Percentage of
Name and Address(1) Shares Owned(2) Shares Owned(3)
- ------------------- --------------- ---------------
<S> <C> <C>
Paul M. Rady 857,144(4) 5.4%
Jeffrey L. Taylor 543,375(5) 3.5%
Glen C. Warren, Jr. 262,500(6) 1.7%
Gregory V. Gibson 100,000(7) *
David W. Lanza 50,000(8) *
Mark A. Erickson 41,250(9) *
R. I. S. Resources International
Corp. 4,000,000(10) 25.4%
All officers and directors as a group
(six persons) 1,854,269(11) 11.8%
</TABLE>

- ---------------
* Less than 1%

(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.

(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
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 14,795,179 shares outstanding plus, for each individual, any
securities that specific person has the right to acquire within 60 days.
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 285,715 shares issuable upon the exercise of currently
exercisable stock purchase warrants, exercisable at a price of $1.75 per
share.
(5) 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.
(6) Includes 87,500 shares issuable upon the exercise of presently
exercisable stock purchase warrants exercisable at a price of $1.75 per
share.
(7) Represents 100,000 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share. Mr.
Gibson's address is 2010 Main Street, Suite 400, Irvine, California
92614.
(8) Represents 50,000 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share. Mr.
Lanza's address is 710 3rd Street, Marysville, California 95901.
(9) Includes 31,250 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share.
(10) The address of RIS is 609 West Hastings Street, 11th Floor, Vancouver,
British Columbia V6B 4W4, Canada. According to the directors and
officers of RIS, the only person who owns more than 10% of the
outstanding voting rights of RIS is John Hislop, who owns 10.22% of the
outstanding RIS common stock.
(11) Includes 581,250 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share, and
373,215 shares issuable upon the exercise of stock purchase warrants
which are exercisable at a price of $1.75 per share.

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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS.

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

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
OFFICERS AND DIRECTORS

Jeffrey L. Taylor 30 Chairman of the Board, Director
Paul M. Rady 45 President, Chief Executive Officer, Director
Glen C. Warren, Jr. 42 Chief Financial Officer, Executive Vice President, Director
Mark A. Erickson 40 Hydrocarbon Marketing Consultant, Director
Gregory V. Gibson 48 Vice President, Legal, Secretary, Director
David W. Lanza 30 Director

ENGINEERING TEAM

Terrell A. Dobkins 46 Vice President of Production
Brian A. Kuhn 40 Vice President of Land
William Travis Brown, Jr. 53 Exploration Manager
George L. Hampton, III 46 Senior Geologist
Dirck Tromp 32 Staff Geologist
Todd H. Gilmer 46 Project Hydrology Consultant
John Dolloff 69 Senior Geology Consultant
Brian Hughes 43 Production and Engineering Consultant
</TABLE>

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

Mr. Rady joined the Company in June 1998 as its Chief Executive Officer,
President and Director. Mr. Rady has entered into an employment agreement
with an initial term of four years with automatic renewal provisions. Mr.
Rady was with Barrett Resources Corporation ("Barrett"), an 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 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, operations, financings,
representing the corporation to the investment community, and working with
the Board of Directors to set the direction of the Company. Other positions
held by Mr. Rady were Chief Operating Officer, Executive Vice President -
Exploration, and Chief Geologist - Exploration Manager. Prior to his
employment at Barrett, Mr. Rady was with Amoco Production Company ("Amoco")
based in Denver, Colorado for approximately 10 years. 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

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for International Art Commission of San Francisco, California. Mr. Taylor
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 joined the Company in July 1998 as its Chief Financial
Officer, Executive Vice President and Director. 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 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.

GREGORY V. GIBSON, 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, oil and gas real property
and 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 real estate and development 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 Permeability Gas Reservoirs 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. More recently, Mr. Dobkins served
eight years at Barrett Resources, most recently as Manager of Acquisitions,
and was involved in the development of several projects, including
completions, operations and reservoir engineering.

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<PAGE>

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 transactions. 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.

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, SENIOR GEOLOGIST

Mr. Hampton has recently been employed by the Company as Senior
Geologist. 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 Mr. Hampton supervised the geology and drilling
and/or completion of 100 shallow CBM wells. Mr. Hampton is a petroleum
geologist with 20 years experience in the oil and gas business. He has spent
the last 18 years specializing in CBM exploration, production and analysis.
His career began in 1978 as a geologist for Amoco. From 1979 to 1982 he
participated in the early 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 a number of 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 CBM wells. 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.

DIRCK TROMP, STAFF GEOLOGIST

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., an 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.

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<PAGE>

TODD H. GILMER, PROJECT HYDROLOGY CONSULTANT

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.

JOHN DOLLOFF, SENIOR GEOLOGY CONSULTANT

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 areas.
Beginning his career with Standard Oil of Texas, he was staff geologist with
the predecessor of Champlin Petroleum (Union Pacific Resources) where he
advanced to become District Manager. 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.
Mr. Dolloff earned his BS in Geology from Yale University and MSc Geology
from University of Minnesota.

BRIAN HUGHES, PRODUCTION AND ENGINEERING CONSULTANT

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 CBM and tight gas sandstone projects in
the western Rocky Mountains. 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.

Directors' terms are one year.

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. If Mr. Rady's employment
with the Company is terminated without cause after June 1, 1999, Mr. Rady is
entitled to termination compensation of $3,000,000. Mr. Rady's employment
agreement automatically renews on each anniversary of the effective date
after June 1, 2001 for an additional two years unless the

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<PAGE>

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 $3.25 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 Mr.
Warren's employment with the Company is terminated without cause after July 1,
1999 but before July 1, 2000, Mr. Warren is entitled to termination
compensation of $750,000. If Mr. Warren's employment with the Company is
terminated without cause after July 1, 2000, Mr. Warren is entitled to
termination compensation of $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.

The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and Chief
Financial Officer (the "Named Executive Officers") during the period ended
September 30, 1998.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------------------------- Awards
------
Other Securities All
Annual Underlying Other
Name and Principal Position Salary(1) Bonus Comp. Options (#) Comp.
- --------------------------- --------- ----- ----- ------------ ------
<S> <C> <C> <C> <C>
Paul M. Rady .............................. $ 35,000 $ -- -- 800,000 $ --
President and Chief Executive Officer
Glen C. Warren, Jr. ....................... $ 25,000 $ -- -- 512,150 $ --
Chief Financial Officer and
Executive Vice President
</TABLE>

- --------------
(1) Reflects compensation paid from date of employment through September 30,
1998. Mr. Rady began employment with the Company on June 16, 1998.
Mr. Warren began employment with the Company on July 2, 1998.

1998 STOCK OPTION AND INCENTIVE PLAN

On March 24, 1998, the Board of Directors adopted the 1998 Stock Option
and Incentive Plan (the "Plan") which was subsequently approved by the
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 Act, 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

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<PAGE>

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 September 30, 1998, Non-statutory Stock
Options to purchase 2,960,150 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 currently 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 Securities Act of 1933 (the "Securities Act"), any state
securities authority, nor any foreign securities authority, and will be
subject to the limitations of Rule 144.

The following table reflects certain information regarding stock options
granted to the Named Executive Officers during the period ended September 30,
1998.
<TABLE>
<CAPTION>

OPTION GRANTS AS OF THE PERIOD ENDED SEPTEMBER 30, 1998

INDIVIDUAL GRANTS

NUMBER OF PERCENTAGE OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES AS OF EXERCISE
OPTIONS THE PERIOD ENDED PRICE PER EXPIRATION
NAME GRANTED SEPTEMBER 30, 1998 SHARE DATE
---- ---------- ------------------- --------- -----------------
<S> <C> <C> <C> <C>
Paul M. Rady 400,000 13.5% $ 2.50 June 15, 2008
400,000 13.5% $ 5.00 June 15, 2008

Glen C. Warren, Jr. 200,000 6.8% $ 2.50 July 1, 2008
100,000 3.4% $ 3.25 July 1, 2008
200,000 6.8% $ 5.00 July 1, 2008
12,150 0.4% $ 5.00 September 4, 2008
</TABLE>

The following table reflects certain information concerning the number
of unexercised options held by the Named Executive Officers and the value of
such officers' unexercised options as of September 30, 1998. No options were
exercised by the Named Executive Officers during the period ended September
30, 1998.

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<PAGE>

AGGREGATED OPTION EXERCISED IN 1998
AND OPTION VALUES AS OF THE PERIOD ENDED SEPTEMBER 30, 1998

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
SHARES OPTIONS HELD AT OPTIONS HELD AT
ACQUIRED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998(1)
ON VALUE ------------------ ---------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
Paul M. Rady -- $ -- -- 800,000 $ -- $ 250,000

Glen C. Warren, Jr. -- $ -- -- 512,150 $ -- $ 125,000
</TABLE>

- --------------
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price
of the options granted to the Named Executive Officers is $2.50 per share.
The value of unexercised options for each of the Named Executive Officers
represents the difference between the exercise price of such options and
the closing price of the Company's Common Stock on September 30, 1998
($3.125 per share).

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

A Director of the Company, Mark A. Erickson is also the President of RIS
USA, a wholly owned subsidiary of RIS, and serves as a director of RIS USA.
RIS USA 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 owns approximately 26% 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.

During the period from inception to September 30, 1998, a company, of
which Jeffrey L. Taylor, the Company's Chairman, serves as a director,
provided administrative services for the Company and was paid compensation of
approximately $16,000.

Gregory V. Gibson, a Director of the Company, provided legal services
to the Company during the period from inception to September 30, 1998. The
Director's firm Gibson, Haglund & Johnson, was paid approximately $148,000
and Mr. Gibson was paid approximately $15,000 for the period from
inception to September 30, 1998.

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<PAGE>

ITEM 8. DESCRIPTION OF SECURITIES.

GENERAL

The authorized Common Stock of the Company consists of 50,000,000 shares
of $0.001 par value common stock. The following summary of the terms and
provisions of the Company's capital stock does not purport to be complete and
is qualified in its entirety by reference to the Company's Articles of
Incorporation and By-laws, which have been filed as exhibits to the Company's
registration statement, of which this prospectus is a part, and applicable
law.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
Such holders are not entitled to vote cumulatively for the election of
directors. Holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of directors standing for
election.

Holders of Common Stock are entitled to participate pro rata in such
dividends as may be declared in the discretion of the Board of Directors out
of funds legally available therefor. Holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities. Holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock
are not subject to any redemption provisions and are not convertible into any
other securities of the Company. All outstanding shares of Common Stock are
fully paid and non-assessable.

The Common Stock is quoted on the OTC Bulletin Board system under the
symbol "PNEG."

As of November 15, 1998, 14,795,179 shares are issued and outstanding.

SHARE PURCHASE WARRANTS

The Company has 607,500 warrants outstanding with an exercise price of
$5.00 per share issued September 4, 1998, via a private placement exempt from
the registration requirements of the Securities Act. These warrants may be
exercised any time within six months of the date of issuance.

The Company has 398,215 warrants outstanding with an exercise price of
$1.75 per share for the first year of exercisability and $1.96 per share for
the second year of exercisability. 310,715 of these warrants were issued
July 1, 1998 and 87,500 were issued September 4, 1998, via private placements
exempt from the registration requirements of the Securities Act and may be
exercised within two years from the date of issuance.

The Company has 75,200 warrants outstanding with an exercise price of
$3.58 per share issued September 4, 1998, via a private placement exempt from
the registration requirements of the Securities Act. These warrants may be
exercised any time within two years from the date of issuance.

None of the shares underlying the above-referenced warrant have been
registered under the Securities Act.

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

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<PAGE>

and before April 15, 2000. Shares issued pursuant to exercise of the Yorkton
Warrants have not been registered under the Securities Act.

TRANSFER AGENT

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

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 Common Stock commenced on the OTC
Bulletin Board system. During the period from July 1, 1998 to September 30,
1998, the closing prices ranged from $3.125 to $6.16 per share.

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
September 30, 1998, the approximate number of record holders of the Common
Stock was 120.

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 IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

David E. Coffey C.P.A. was previously the principal accountant for
Pennaco Energy, Inc. On October 30, 1998, his appointment as principal
accountant was terminated and KPMG Peat Marwick LLP was engaged as principal
accountants. The decision to change accountants was approved by the board of
directors.

In connection with the audit of the period from January 26, 1998 (date
of inception) to April 15, 1998, and the subsequent interim period through
October 30, 1998, there were no disagreements with David E. Coffey, C.P.A. on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to his satisfaction would have caused him to make reference in
connection with his opinion to the subject matter of the disagreement.

The audit report of David E. Coffey, C.P.A. on the financial statements
of Pennaco Energy, Inc. as of April 15, 1998 and for the period from January 26,
1998 (date of inception) to April 15, 1998, did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles.

ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.

Set forth below is certain information concerning all sales of
securities by the Company during the past three years that were not
registered under the Securities Act:

(a) The Company issued 995,000 shares in January 1998 pursuant to a
share-for-share exchange with the stockholders of International Metal
Protection, Inc. in a transaction conducted solely to reincorporate the
Company in a new jurisdiction. This transaction was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act. There was no change in ownership and the stockholders
made no significant investment decision.

(b) The Company issued 500,000 shares in February 1998 for the purchase
price of $.10 per share pursuant to a private placement exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act. At that time, the Company had only a business plan and
no assets. There were eleven offerees in this offering, all of whom made
purchases and all of whom were sophisticated investors. The Company fully
apprised each of the offerees of the Company's start-up nature and gave them
full details regarding the Company's business plan. There was no general
solicitation or advertising used in connection with the offer to sell or sale
of these securities. The purchasers were advised that the securities, once
purchased, could not be resold or otherwise transferred without subsequent
registration under the Securities Act. Each purchaser represented to the
Company that they were purchasing the securities for their own account for
investment purposes only.

(c) The Company issued 4,530,000 shares in February 1998 for a purchase
price of $.22 per share pursuant to a Regulation D, Rule 504 offering.
Offerees were provided with a private placement memorandum containing
detailed information about the Company and its plan. The Company required
each prospective investor to represent in writing that (i) they had adequate
means of providing for their current needs and personal contingencies and had
no need to sell the securities in the foreseeable future and (ii) they, either
alone or with their duly designated purchaser representative, had such
knowledge and experience in business and financial matters that they were
capable of evaluating the risks and merits of an investment in the securities.

(d) The Company issued 5,000,000 shares in April 1998 for a purchase
price of $1.25 per share pursuant to a Regulation D, Rule 506 offering. The
Company accepted subscriptions only from accredited investors. Offerees were
provided with a private placement memorandum containing detailed information
about the Company and its plan. The Company required each prospective
investor to represent in writing that (i) they had received and reviewed the
private placement memorandum and understood the risks of an investment in the
Company; (ii) they had the experience and knowledge with respect to similar
investments which enabled them to evaluate the merits and risks of such
investment, or they had obtained and relied upon an experienced independent
adviser with respect to such evaluation; (iii) they had adequate means to
bear the economic risk of such investment, including the loss of the entire
investment; (iv) they had adequate means to provide for their current needs
and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered
or qualified under applicable state securities laws and, therefore, that they
could not sell or transfer the securities unless the securities were
subsequently registered or an exemption therefrom was available to them;
(vii) they were acquiring the securities for investment solely for their own
account and without any intention of reselling or distributing them; and
(viii) they understood that the securities would bear a restrictive legend
prohibiting transfers except in compliance with the provisions of the
securities, the subscription agreement executed by the purchaser and the
applicable federal and state securities laws.

(e) The Company issued 128,000 share purchase warrants with an exercise
price of $1.25 per share, exercisable after April 15, 1999, to Yorkton, an
accredited investor, in April 1998 pursuant to a private placement exemption
from the registration requirements of the Securities Act under Section 4(2)
of the Securities Act. These warrants were issued pursuant to a negotiated
transaction between the Company and Yorkton, whereby Yorkton agreed to
provide corporate finance services to the Company for one year in return for
these warrants.

(f) The Company issued 2,000,000 shares in June 1998 to RIS pursuant to a
Regulation D, Rule 506 offering for a purchase price of $1.75 per share. The
Company accepted subscriptions only from accredited investors. Offerees

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<PAGE>

were provided with a private placement memorandum containing detailed
information about the Company and its plan. The Company required each
prospective investor to represent in writing that (i) they had received and
reviewed the private placement memorandum and understood the risks of an
investment in the Company; (ii) they had the experience and knowledge with
respect to similar investments which enabled them to evaluate the merits and
risks of such investment, or they had obtained and relied upon an experienced
independent adviser with respect to such evaluation; (iii) they had adequate
means to bear the economic risk of such investment, including the loss of the
entire investment; (iv) they had adequate means to provide for their current
needs and possible personal contingencies; (v) they had no need for liquidity
of their investment in the Company; (vi) they understood that the securities
had not been registered under the Securities Act and may have not been
registered or qualified under applicable state securities laws and,
therefore, that they could not sell or transfer the securities unless the
securities were subsequently registered or an exemption therefrom was
available to them; (vii) they were acquiring the securities for investment
solely for their own account and without any intention of reselling or
distributing them; and (viii) they understood that the securities would bear
a restrictive legend prohibiting transfers except in compliance with the
provisions of the securities, the subscription agreement executed by the
purchaser and the applicable federal and state securities laws.

(g) The Company issued 796,429 units were purchased in June, July and
September 1998 pursuant to a Regulation D, Rule 506 offering by three 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. All units were purchased by three members of
the management team of the Company. Offerees were provided with a private
placement memorandum containing detailed information about the Company and
its plan. The Company required each prospective investor to represent in
writing that (i) they had received and reviewed the private placement
memorandum and understood the risks of an investment in the Company; (ii)
they had the experience and knowledge with respect to similar investments
which enabled them to evaluate the merits and risks of such investment, or
they had obtained and relied upon an experienced independent adviser with
respect to such evaluation; (iii) they had adequate means to bear the
economic risk of such investment, including the loss of the entire
investment; (iv) they had adequate means to provide for their current needs
and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered
or qualified under applicable state securities laws and, therefore, that they
could not sell or transfer the securities unless the securities were
subsequently registered or an exemption therefrom was available to them;
(vii) they were acquiring the securities for investment solely for their own
account and without any intention of reselling or distributing them; and
(viii) they understood that the securities would bear a restrictive legend
prohibiting transfers except in compliance with the provisions of the
securities, the subscription agreement executed by the purchaser and the
applicable federal and state securities laws.

(h) The Company issued 1,215,000 units on September 4, 1998 pursuant to
a Regulation D, Rule 506 offering for a purchase price of $3.25 per unit,
each unit consisting of one share and a one share purchase warrant for every
two shares purchased. The Company accepted subscriptions only from
accredited investors. Offerees were provided with a private placement
memorandum containing detailed information about the Company and its plan.
The Company required each prospective investor to represent in writing that
(i) they had received and reviewed the private placement memorandum and
understood the risks of an investment in the Company; (ii) they had the
experience and knowledge with respect to similar investments which enabled
them to evaluate the merits and risks of such investment, or they had
obtained and relied upon an experienced independent adviser with respect to
such evaluation; (iii) they had adequate means to bear the economic risk of
such investment, including the loss of the entire investment; (iv) they had
adequate means to provide for their current needs and possible personal
contingencies; (v) they had no need for liquidity of their investment in the
Company; (vi) they understood that the securities had not been registered
under the Securities Act and may have not been registered or qualified under
applicable state securities laws and, therefore, that they could not sell or
transfer the securities unless the securities were subsequently registered or
an exemption therefrom was available to them; (vii) they were acquiring the
securities for investment solely for their own account and without any
intention of reselling or distributing them; and (viii) they understood that
the securities would bear a restrictive legend prohibiting transfers except
in compliance with the provisions of the securities, the subscription
agreement executed by the purchaser and the applicable federal and state
securities laws. Yorkton served as placement agent for this private
placement. As compensation, Yorkton received share purchase warrants to
purchase 75,200 shares at an exercise price of $3.58.

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.

-23-

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

SEPTEMBER 30, 1998

(WITH INDEPENDENT AUDITORS' REPORT THEREON)

F-1

<PAGE>

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Directors
Pennaco Energy, Inc.:

We have audited the accompanying balance sheet of Pennaco Energy, Inc. (a
development stage company) as of September 30, 1998, and the related
statements of operations, stockholders' deficit and cash flows for the period
from January 26, 1998 (inception) to September 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pennaco Energy, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for
the period from January 26, 1998 (inception) to September 30, 1998, in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Denver, Colorado
November 20, 1998

F-2

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Balance Sheet

September 30, 1998

PRO FORMA
ASSETS HISTORICAL (NOTE 2)
------------ -----------
(unaudited)

<S> <C> <C>
Current assets:
Cash $ 1,358,125 22,966,124
Drilling deposit 250,000 250,000
Prepaid expenses and other current assets 78,753 78,753
------------ ----------

Total current assets 1,686,878 23,294,877
------------ ----------

Property and equipment:
Undeveloped oil and gas properties, at cost (using the
successful efforts method of accounting)
(note 9) 16,054,802 9,054,802
Computer software and equipment 176,993 176,993
Furniture and fixtures 69,092 69,092
------------ ----------

16,300,887 9,300,887
Less accumulated depreciation (34,217) (34,217)
------------ ----------

Net property and equipment 16,266,670 9,266,670
------------ ----------

Deferred income tax asset 1,280,000 1,280,000

Other assets 64,415 64,415
------------ ----------

$ 19,297,963 33,905,962
------------ ----------
------------ ----------
</TABLE>

(Continued)

F-3

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Balance Sheet

PRO FORMA
LIABILITIES AND STOCKHOLDERS' EQUITY HISTORICAL (NOTE 2)
------------ -----------
(unaudited)
<S> <C> <C>
Current liabilities:
Bridge loan payable, including accrued interest (note 3) $ 3,241,867 --
Note payable to shareholder, including accrued interest
(note 3) 504,583 --
Lease acquisitions payable 2,645,551 --
Accounts payable and accrued liabilities 286,006 286,006
Income tax payable -- 7,560,000
------------ ----------

Total current liabilities 6,678,007 7,846,006

Stockholders' equity (note 6):
Common stock, $.001 par value. Authorized 50,000,000
shares; 14,795,179 shares issued and outstanding 14,795 14,795
Additional paid-in capital 16,681,499 16,681,499
Retained earnings (deficit) accumulated during the
development stage (4,076,338) 9,363,662
------------ ----------

Total stockholders' equity 12,619,956 26,059,956
------------ ----------
------------ ----------
Commitments (note 8)

$ 19,297,963 33,905,962
------------ ----------
------------ ----------
</TABLE>

See accompanying notes to financial statements.

F-4

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Operations

Period from January 26, 1998 (inception) to September 30, 1998
<TABLE>
<S> <C>
Interest income $ 30,250
-------------
Expenses:
Exploration 1,784,069
Depreciation and amortization 34,217
General and administrative (note 6) 2,918,356
Interest expense, including $4,583 payable to shareholder 649,946
-------------

Total expenses 5,386,588
-------------

Loss before income taxes (5,356,338)

Income tax benefit 1,280,000
-------------

Net loss and deficit accumulated during the
development stage $ (4,076,338)
-------------
-------------

Loss per share $ (.38)
-------------
-------------

Weighted average common shares outstanding 10,615,560
-------------
-------------
</TABLE>

See accompanying notes to financial statements.

F-5

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Stockholders' Equity

Period from January 26, 1998 (inception) to September 30, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 26, 1998 (INCEPTION) -- $ -- -- -- --

Common stock issued in connection with share
exchange (note 1) 995,000 995 (995) -- --
Common stock issued, net of offering costs of
$178,014 (note 6) 12,030,000 12,030 10,607,551 -- 10,619,581
Compensation relating to common stock and
warrants issued (note 6) -- -- 1,340,000 -- 1,340,000
Stock option compensation (note 6) -- -- 450,000 -- 450,000
Units issued, net of offering costs of $288,225
(note 6) 1,770,179 1,770 4,268,443 -- 4,270,213
Warrants issued for services (note 6) -- -- 16,500 -- 16,500
Net loss for the period -- -- -- (4,076,338) (4,076,338)
---------- --------- ---------- ---------- ----------
BALANCES AT SEPTEMBER 30, 1998 14,795,179 $ 14,795 16,681,499 (4,076,338) 12,619,956
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-6

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Cash Flows

Period from January 26, 1998 (inception) to September 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (4,076,338)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 34,217
Compensation relating to common stock and warrants issued 1,340,000
Stock option compensation 450,000
Warrants issued for services 16,500
Increase in accrued interest on bridge loan and note payable 46,450
Deferred income tax benefit (1,280,000)
Increases in operating assets and liabilities:
Prepaid expenses and other current assets (78,753)
Other assets (64,415)
Accounts payable and accrued liabilities 286,006
-------------

Net cash used in operating activities (3,326,333)
-------------

Cash flows from investing activities:
Capital expenditures (16,300,887)
Drilling deposit (250,000)
Increase in lease acquisitions payable 2,645,551
-------------

Net cash used by investing activities (13,905,336)
-------------

Cash flows from financing activities:
Proceeds from issuance of bridge loan 3,200,000
Proceeds from issuance of note payable 500,000
Proceeds from issuance of common stock, net of offering costs 14,889,794
-------------

Net cash provided by financing activities 18,589,794
-------------
Net increase in cash 1,358,125

Cash at beginning of period --
-------------

Cash at end of period $ 1,358,125
-------------
-------------

Supplemental disclosures of cash flow information:
Cash paid for interest $ 603,496
-------------
-------------

Cash paid for income taxes $ --
-------------
-------------
</TABLE>

See accompanying notes to financial statements.

F-7

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

September 30, 1998

Notes to Financial Statements

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION AND BASIS OF PRESENTATION

Pennaco Energy, Inc. (the "Company") is an independent, energy
company primarily engaged in the acquisition and development of
natural gas production from coal bed methane properties in the
Rocky Mountain region of the United States. The Company was
incorporated on January 26, 1998 under the laws of the state of
Nevada and its headquarters are in Denver, Colorado.

The Company's activities to date have been limited to
organizational activities, prospect development activities, and
acquisition of leases and option rights. The Company currently has
oil and gas lease rights in the Powder River Basin in northeastern
Wyoming and southeastern Montana. Currently the Company has no
revenue producing operations. Accordingly, the Company is
considered to be in the development stage.

The Company was incorporated as a wholly-owned subsidiary of
International Metal Protection Inc. (International Metal).
Subsequently, all of the outstanding shares of International Metal
were exchanged for shares of the Company and International Metal
was merged into the Company. The 995,000 shares issued in the
exchange were recorded at their par value of $.001 per share as
International Metal had no assets or liabilities at the date of the
merger. International Metal and its predecessor, AKA Video
Communications Inc., had been inactive for the two years ended
December 31, 1997 and prior thereto.

The Company's year end is December 31.

(B) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.

The Company is subject to a number of risks and uncertainties
inherent in the oil and gas industry. Among these are risks
related to fluctuating oil and gas prices, uncertainties related to
the estimation of oil and gas reserves and the value of such
reserves, effects of competition and extensive environmental
regulation, risks associated with the search for and the
development of oil and gas reserves, and many other factors, many
of which are necessarily beyond the Company's control. The
Company's financial condition and results of operations will depend

(Continued)
F-8

<PAGE>

significantly upon the Company's ability to find and develop natural
gas and oil reserves and upon the prices received for natural gas and
oil produced, if any. These prices are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of
additional factors that are beyond the control of the Company.

(D) CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with
an initial maturity of three months or less to be cash equivalents.

(E) OIL AND GAS ACTIVITIES

The Company follows the successful efforts method of accounting for
its oil and gas activities. Accordingly, costs associated with the
acquisition, drilling and equipping of successful exploratory wells
are capitalized. Geological and geophysical costs, delay and
surface rentals and drilling costs of unsuccessful exploratory
wells are charged to expense as incurred. Costs of drilling
development wells, both successful and unsuccessful, are
capitalized. Upon the sale or retirement of oil and gas
properties, the cost thereof and the accumulated depreciation and
depletion are removed from the accounts and any gain or loss is
credited or charged to operations. Depletion of capitalized
acquisition, exploration and development costs is computed on the
units-of-production method by individual fields as the related
proved reserves are produced.

Capitalized costs of unproved properties are assessed periodically
and a provision for impairment is recorded, if necessary, through a
charge to operations.

Proved oil and gas properties are assessed for impairment on a
field-by-field basis. If the net capitalized costs of proved oil
and gas properties exceeds the estimated undiscounted future net
cash flows from the property a provision for impairment is recorded
to reduce the carrying value of the property to its estimated fair
value.

(F) OTHER PROPERTY AND EQUIPMENT

Other property and equipment is recorded at cost. Depreciation and
amortization is provided using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 15 years.

F-9

<PAGE>

(G) INCOME TAXES

The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS
109). SFAS No. 109 requires the use of the asset and liability
method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
net operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted income tax rates expected to
apply to taxable income in the years in which those differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in income tax rates
is recognized in the results of operations in the period that
includes the enactment date.

(h) STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). This statement defines a fair
value method of accounting for its stock compensation plans. SFAS
123 allows an entity to measure compensation costs for these plans
using the intrinsic value based method of accounting as prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25). The pro forma disclosures of net loss
and loss per share required by SFAS 123 are included in note 5.

(i) LOSS PER SHARE

Loss per share is based on the weighted average number of common
shares outstanding during the period. Outstanding stock options
and warrants were excluded from the computation as their effect was
antidilutive.

(2) CMS TRANSACTION

On October 23, 1998, the Company and CMS Oil and Gas Company signed a
definitive agreement (the "CMS Agreement") relating to the development
of the Company's Powder River Basin acreage (the "CMS Transaction").
Pursuant to the terms of the CMS Agreement, CMS Oil and Gas Company will
acquire an undivided 50% working interest in approximately 490,500 net
acres of Pennaco's leasehold position in the Powder River Basin for
$28,000,000. The Company acquired the leasehold position which is being
conveyed to CMS in the CMS Transaction for approximately $7,000,000. The
purchase price provided for in the CMS Agreement was the result of arm's
length negotiations between the Company and CMS. The CMS Agreement provides
for the development of the Company's lease acreage, with Pennaco and CMS
each operating approximately 50% of the wells drilled in the are of mutual
interest. As is customary in oil and gas leasehold transactions, the
agreement provides for the adjustment of the purchase price for title
defects discovered prior to closing and for the opportunity for one
party to participate in acquisitions made by the other party in the area of
mutual interest defined in the agreement. The agreement also provides for a
preferential purchase right to the other party in the event either CMS or
the Company attempted to sell all or a portion of its interest in the
acreage covered by the agreement. All of the leases in the area of mutual
interest are dedicated to CMS Gas Transmission and Storage, an affiliate of
CMS Oil and Gas Company, for gathering, compression and transportation.

Pursuant to the terms of the CMS Transaction, CMS agreed to pay Pennaco
$5,600,000 of earnest money in the form of a bridge loan (the "CMS Bridge
Loan") which is secured by substantially all of the Company's oil and gas
leases. Approximately $3,200,000 of such amount was paid directly to
existing creditors of the Company. The CMS Transaction is
structured such that the conveyance of the working interests will occur
at two separate closings. The first closing occurred on November 20,
1998, and the second closing is scheduled to occur on January 15, 1999.
The Company received $7,600,000 at the first closing and will receive
$14,800,000 at the second closing, subject to customary closing
adjustments. The CMS Bridge Loan will be canceled if both closings occur
or if the buyer wrongfully fails to close or fails to meet the seller's
conditions to closing. The CMS Transaction is subject to cancellation if
the title to greater than 20% of the lease acreage subject to the CMS
Agreement is deemed defective and incurable.

The unaudited pro forma balance sheet of the Company as of September 30,
1998 gives effect to the sale of the interest in the properties and the
use of a portion of the proceeds to repay the note payable to
shareholders and lease acquisitions payable, all as if the transactions
had occurred on that date.

F-10

<PAGE>

(3) BRIDGE LOAN

The Company borrowed $3,200,000 under the CMS Bridge Loan. The bridge
loan is payable on October 23, 1998 with interest at 18%. The CMS Bridge
Loan is secured by undeveloped oil and gas properties with a carrying
value of approximately $2,668,000. The CMS Bridge Loan was repaid in
full and the note was canceled on October 23, 1998.

(4) NOTE PAYABLE TO SHAREHOLDER

The unsecured note payable to shareholder bears interest at the prime
rate (8.25% at September 30, 1998) and matures on December 31, 1998.
Under the terms of the note, all interest will be forgiven if the loan
is repaid in full prior to November 30, 1998. Interest payable on the
note for the period from inception to September 30, 1998 was $4,583.
The note payable was repaid in full on November 23, 1998, therefore
no interest was due.

(5) INCOME TAXES

The income tax benefit of $1,280,000 includes a deferred federal income
tax benefit of $1,210,000 and a deferred state income tax benefit of
$70,000. The income tax benefit recorded for the period from inception
to September 30, 1998 differs from the expected income tax benefit
(based on the statutory rate of 34%) primarily as a result of state
income taxes and stock and stock option compensation which is not
deductible for tax purposes.

At September 30, 1998, the Company has a net operating loss carryforward
for federal income tax purposes of approximately $(3,560,000) which is
available to offset future federal taxable income, if any, through 2018.
The tax effects of temporary differences that give rise to the deferred
tax assets at September 30, 1998 are a result of the net operating loss
carryforward.

F-11

<PAGE>

(6) STOCKHOLDERS' EQUITY

(a) COMMON STOCK

Since it's formation in January 1998, the Company completed four
private placement offerings of common stock. In February 1998,
500,000 shares were issued at $.10 per share. Proceeds to the
Company were approximately $50,000. Also in February 1998,
4,530,000 shares were issued at $.22 per share. Proceeds to the
Company were approximately $997,000. In April 1998, 5,000,000
shares were issued at $1.25 per share. The proceeds to the
Company were $6,250,000. In June 1998, 2,000,000 shares were
issued at $1.75 per share. Proceeds to the Company were
approximately $3,500,000. The Company incurred approximately
$723,000 in offering costs relating to these offerings, which have
been charged to additional paid-in capital.

In June 1998, the Company offered certain individuals the right to
acquire common stock at $1.75 per share along with a share purchase
warrant for every two shares purchased, conditioned upon their
acceptance of employment as officers of the Company.

No compensation cost was recorded for the individuals who commenced
employment with the Company prior to July 1, 1998 (the date the
Company's common stock commenced trading) as the estimated fair
value of common stock approximated the common stock issuance price
and the warrant exercise price. Compensation expense of $450,000
was recorded for the shares and warrants issued subsequent to July
1, 1998 based on the difference between the closing price per share
on the last trading day prior to the date of employment with the
Company and the common stock issuance price and the warrant exercise
price.

During the period from inception to September 30, 1998 a total of
796,429 units were issued at $1.75 per unit to officers and key
employees of the Company. The units consist of one share of common
stock and one warrant for each two shares issued. The warrants
have an exercise price of $1.75 per share in the first year and
$1.96 per share in the second year and are exercisable at any time.
Proceeds to the Company were approximately $1,394,000.

In September 1998, the Company issued 1,215,000 Units at $3.25 per
unit, consisting of one share of common stock and one warrant for
each two shares issued. The warrants have an exercise price of
$5.00 per share and may be exercised any time prior to March 4,
1999. Under the terms of the stock subscription agreement 25% of
the proceeds from a certain party, or $763,750, are subject to an
Escrow Arrangement, which provides that the shares and the shares
of common stock underlying the warrants are to be registered for
resale under the Securities Act of 1993 (the "Act") with the U.S.
Securities and Exchange Commission, which the Company has
undertaken to have accomplished by December 31, 1998. The Company
has also undertaken to have the shares qualified by way of an
exemption order provided by the respective Securities Commissions
in Canada. Proceeds to the Company were approximately $3,165,000
exclusive of the proceeds placed in escrow. Offering costs of
$288,225 were charged to additional paid in capital.

F-12

<PAGE>

The escrow proceeds of $763,750 were deposited into an interest
bearing escrow account together with certificates representing the
Units to be purchased. In the event the registration statement is
not declared effective or the Canadian exemption orders are not
obtained on or before the December 31, 1998, the subscribers to the
Offering are entitled to receive either (a) an additional Unit for
each 10 Units purchased in the Offering, or (b) a refund from the
escrow of 25% of the amount paid with their subscription, plus
interest thereon. The subscribers are also entitled to receive an
additional Unit for each 10 Units previously acquired in the
Offering in the event that the Company does not maintain an
effective registration statement effective until such time as the
registered securities may be resold pursuant to Rule 144
promulgated under the Act. The cash in escrow and the related
units are not reflected in the accompanying financial statements.

(b) WARRANTS

The Company issued warrants to purchase 128,000 shares of common
stock to a company for corporate finance services for a period of
one year commencing April 15, 1998. The warrants are exercisable
at $1.25 per share anytime after April 15, 1999 and expire April
15, 2000. The estimated fair value of the warrants issued of
$16,500 was charged to expense during the period from January 26,
1998 to September 30, 1998. In September 1998, the Company agreed
to issue warrants to purchase 75,200 shares of common stock to the
same company in connection with the placement of units in the
September 1998 unit offering. The warrants are exercisable at a
price of $3.58 per share and expire September 4, 2000.

On March 24, 1998, the Company adopted the 1998 Stock Option and
Incentive Plan (the Plan). The aggregate number of shares which
may be issued as awards under the Plan is 4,500,000 shares. As of
September 1998, options to purchase common stock have been granted
to key employees and directors at exercise prices ranging from
$1.25 to $5.00 per share.

Stock option activity for the Plan for the period from inception to
September 30 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
OPTIONS PER SHARE
--------- ---------
<S> <C> <C>
BALANCE, JANUARY 26, 1998 (INCEPTION) -- $ --
Granted 2,960,150 2.70
Canceled (200,000) 1.25
---------
BALANCE, SEPTEMBER 30, 1998 2,760,150 2.81
---------
---------

</TABLE>

F-13

<PAGE>

A summary of the range of exercise prices and the weighted-average
contractual life of outstanding stock options at September 30, 1998, is
as follows:
<TABLE>
<CAPTION>

NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
SEPTEMBER 30, EXERCISE REMAINING SEPTEMBER 30, EXERCISE
1998 PRICE LIFE (YEARS) 1998 PRICE
------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.25 800,000 $ 1.25 9.6 612,500 $ 1.25
2.50 918,000 2.50 8.7 -- --
3.25 430,000 3.25 4.8 -- --
5.00 612,150 5.00 4.4 -- --
--------- -------
$ 1.25 - 5.00 2,760,150 2.81 7.4 612,500 1.25
--------- ------- --- ------- -------
--------- ------- --- ------- -------
</TABLE>

The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. No compensation expense has
been recognized for options granted at or above market value at
date of grant. Compensation expense of $1,340,000 has been
recorded for the period from inception to September 30, 1998 for
options granted below the market value, based upon the difference
between the option price and the quoted market price at the date of
grant.

Had compensation cost for the Company's stock-based compensation
plans been determined based upon the fair value of options on the
grant dates, consistent with the provisions of SFAS 123, the
Company's pro forma net loss and loss per share for the period from
January 26, 1998 to September 30, 1998 would have been $(6,682,454)
and $(.63), respectively.

The weighted average fair value of options granted during 1998 was
$1.33 per share. The weighted average remaining contractual life
of all options outstanding at September 30, 1998 was approximately
6.2 years. The fair value of each option grant was estimated at
the date of grant using the Black-Scholes option-pricing model with
the following assumptions: no expected dividends, expected life of
the options of 1 to 10 years, volatility of 72%, and a risk-free
interest rate of 5.5%.

(7) RELATED PARTY TRANSACTIONS

RIS Resources International Corporation (RIS International) owns
4,000,000 shares of the Company's common stock. 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. From April 1, 1998
through June 22, 1998 he served as an officer of the Company. Since
that time he has consulted with the Company and has received approximately
$5,700 as compensation for his services.

F-14

<PAGE>

During the period from inception to September 30, 1998, a company for
which the Company's Chairman serves as a director provided
administrative services for the Company for which it received
compensation of approximately $16,000.

One of the Company's Directors provided legal services to the Company
during the period from inception to September 30, 1998. The Director's
firm was paid approximately $148,000 and the Director was paid
approximately $15,000 for the period from inception to September 30,
1998.

(8) COMMITMENTS

(a) EMPLOYMENT AGREEMENTS

The Company has entered into four-year employment agreements with
two officers, its President and its Chief Financial Officer and
Executive Vice President. Under the terms of the agreement with
the President, if employment is terminated without cause prior to
June 1, 1999, the President is entitled to termination compensation
of $2,000,000, or $3,000,000 if he is terminated without cause
after June 1, 1999 but before the expiration of his employment
agreement in June 2002. Under terms of the agreement with the
Executive Vice President and Chief Financial Officer, if employment
is terminated without cause prior to July 1, 1999, the chief
Financial Officer and Executive Vice President is entitled to
termination compensation of $400,000, $750,000 if he is terminated
without cause after July 1, 1999 but before July 1, 2000 and
$1,250,000 if he is terminated without cause thereafter but prior
to the expiration of his employment agreement.

(b) LEASE COMMITMENTS

The Company entered into an amendment to its office lease agreement
in Denver, Colorado effective June 1, 1998. The amended lease
covers 11,524 square feet for a term of two years and four months.
During the term of the lease, rent is payable in the amount of
$172,860 base rent per year. During the four months of the lease
from June 1, 1998 through September 30, 1998, the Company paid
$57,620 in rent.

(9) DISCLOSURES ABOUT CAPITALIZED COSTS, COST INCURRED AND RESERVES

Costs incurred in oil and gas producing activities for the period from
January 26, 1998 to September 30, 1998 are as follows:
<TABLE>
<S> <C>
Unproved property acquisition costs $ 16,054,802
--------------
--------------
</TABLE>

Certain of the Company's undeveloped oil and gas properties have
reserves classified as proved undeveloped; however, such amounts are not
significant.

F-15

<PAGE>

PART III

ITEM 1. INDEX TO EXHIBITS.
<TABLE>
<S> <C>
+3.1 Articles of Incorporation

+3.2 By-laws

+10.1 Mineral Lease Purchase Agreement dated February 23, 1998 between
High Plains Associates, Inc. and Pennaco Energy, Inc.

+10.2 Letter Agreement dated January 23, 1998 between High Plains
Associates, Inc. and Taylor Oil Properties

+10.3 Assignment of Option and Exercise of Option dated March 6, 1998
between High Plains Associates, Inc. and Pennaco Energy, Inc.

+10.4 Agreement dated March 6, 1998 between High Plains Associates,
Inc. and Pennaco Energy, Inc.

+10.5 Pennaco Energy, Inc. 1998 Stock Option and Incentive Plan

+10.6 Form of Pennaco Energy, Inc. Incentive Stock Option Agreement

+10.7 Form of Pennaco Energy, Inc. Non-Statutory Stock Option Agreement

+10.8 Employment Agreement dated June 10, 1998 between Pennaco Energy,
Inc. and Paul M. Rady

+10.9 Employment Agreement dated July 2, 1998 between Pennaco Energy,
Inc. and Glen C. Warren

+10.10 Secured Promissory Note dated August 13, 1998 from Pennaco
Energy, Inc. to Venture Capital Sourcing, SA

+10.11 Second Amendment to Security Agreement dated August 13, 1998
between Pennaco Energy, Inc. and Venture Capital Sourcing, SA

+10.12 Purchase and Sale Agreement between Pennaco Energy, Inc., as
Seller and CMS Oil and Gas Company, as Buyer, dated October 23,
1998

+10.13 Secured Promissory Note dated October 23, 1998 from Pennaco
Energy, Inc. to CMS Oil and Gas Company

*10.14 Sublease Agreement dated October 23, 1998 between Pennaco
Energy, Inc. and Evansgroup, Inc.

*10.15 Agreement Regarding The Drilling of Coal Bed Methane Wells

*16 Letter of David E. Coffey, C.P.A. dated December 18, 1998.

*27 Financial Data Schedule
</TABLE>
- --------------
+ Previously filed
* Filed herewith

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.

<PAGE>

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

<PAGE>
EXHIBIT 10.14

SUBLEASE

1. PARTIES

This Sublease is entered into by and between EVANSGROUP, INC. Sublessor, and
PENNACO ENERGY, INC., Sublessee, as a Sublease under the Master Lease dated
October 1, 1994, as amended by First Amendment to Lease dated October 10,
1995, entered into by AMSTAR DENVER, LTD as lessor, and Sublessor under this
Sublease as Lessee: a copy of the Master Lease is the First Amendment to
Lease attached hereto as Exhibit A.

2. PROVISIONS CONSTITUTING SUBLEASE

(a) This Sublease is subject to all of the terms and conditions of the
Master Lease (dated October 1, 1994 and First Amendment dated October 10,
1995) in Exhibit A and Sublessee shall assume and perform the obligations of
Sublessor and Lessee in said Master Lease, to the extent said terms and
conditions are applicable to the Premises subleased pursuant to this
Sublease. Sublessee shall not commit or permit to be committed on the
Premises any act or omission which shall violate any term or condition of the
Master Lease. In the event of the termination of Sublessor's interest as
Lessee under the Master Lease for any reason, then this Sublease shall
terminate coincidentally therewith without any liability of Sublessor to
Sublessee.

(b) All of the terms and conditions contained in the Exhibit A Master
Lease and First Amendment to Lease are incorporated herein, except for those
terms and conditions in this Sublease which supersede the Master Lease and
first Amendment to Lease, as terms and conditions of this Sublease (with each
reference therein to Lessor and Lessee to be deemed to refer to Sublessor and
Sublessee) and, along with all of the following Sections set out in this
Sublease, shall be the complete terms and conditions of this Sublease.

3. PREMISES

Sublessor leases to Sublessee and Sublessee hires from Sublessor the
following described Premises together with the appurtenances, situated in the
City of Denver, County of Denver, State of Colorado, approximately 11,524
rentable square feet, 1050 17th St., Suite 700, Denver, Co. 80265.

4. RENTAL

Sublessee shall pay to Sublessor as rent for the Premises in advance on the
first day of each calendar month of the term of this Sublease without
deduction, offset, prior notice or demand, in lawful money of the United
States, the sum of Fourteen Thousand Four Hundred Five Dollars and Zero Cents
($14,405.00). If the commencement date is not the first day of the month, or
if the Sublease termination date is not the first day of the month, or if the
Sublease termination date is not the last day of the month, a prorated
monthly installment shall be paid at the then current rate for the fractional
month during which the Sublease commences and/or terminated.

Receipt of Twenty Eight Thousand Eight Hundred Ten Dollars and Zero Cents is
hereby acknowledged for rental for the first and second month and the
additional amount of Fourteen Thousand Four Hundred Five Dollars as
non-interest bearing security for performance under this Sublease. In the
event Sublessee has performed all of the terms and conditions of this
Sublease throughout the term, upon Sublessee vacating the Premises, the
amount paid as a security deposit shall be returned to Sublessee after first
deducting any sums owing to Sublessor.

5. TERM

(a) The term of this Sublease shall be for a period of Twenty Eight
Months commencing on _______, 1998 and ending on September 30, 2000.

<PAGE>

(b) In the event Sublessor is unable to deliver possession of the
Premises at the commencement of the term, Sublessor shall not be liable for
any damage caused thereby, nor shall this Sublease be void or voidable but
Sublessee shall not be liable for rent until such time as Sublessor offers to
deliver possession of the Premises to Sublessee, but the term hereof shall
not be extended by such delay. If Sublessee, with Sublessor's consent, takes
possession prior to the commencement of the term, Sublessee shall do so
subject to all of the covenants and conditions hereof and shall pay rent for
the period ending with the commencement of the term at the same rental as
that prescribed for the first month of the term, prorated at the rate of
1/30th thereof per day, to be adjusted upon Lessor's approval of this
agreement forty-five (45) days from approval of this document by Lessor.

6. USE

Sublessee shall use the Premises for General Office and for no other purpose
without the prior written consent of Sublessor.

Sublessee's business shall be established and conducted throughout the term
hereof in a first class manner. Sublessee shall not use the Premises for, or
carry on, or permit to be carried on, any offensive, noisy or dangerous trade
business, manufacture or occupation nor permit any auction sale to be held or
conducted on or about the Premises. Sublessee shall not do or suffer
anything to be done upon the Premises which will cause structural injury to
the Premises or the building of which the Premises form a part. The Premises
shall not be overloaded and no machinery, apparatus or other appliance shall
be used or operated in or upon the Premises which will in any manner injure,
vibrate or shake the Premises or the building of which it is a part. No use
shall be made of the Premises which will in any way impair the efficient
operation of the sprinkler system (if any) within the building containing the
Premises. Sublessee shall not leave the Premises unoccupied or vacant during
their term. No musical instrument of any sort, or any noise making device
will be operated or allowed upon the Premises for the purpose of attracting
trade or otherwise. Sublessee shall not use or permit the use of the Premises
or any part thereof for any purpose which will increase the existing rate of
insurance upon the building in which the Premises are located, or cause a
cancellation of any insurance policy covering the building or any part
thereof. If any act on the part of Sublessee or use of the Premises by
Sublessee shall cause, directly or indirectly, any increase of Sublessor's
insurance expense, said additional expense shall be paid by Sublessee to
Sublessor upon demand. No such payment by Sublessee shall limit Sublessor in
the exercise of any other rights or remedies, or constitute a waiver of
Sublessor's right to require Sublessee to discontinue such act or use.

7. NOTICES

All notices or demands of any kind required or desired to be given by
Sublessor or Sublessee hereunder shall be in writing and shall be deemed
delivered forty-eight (48) hours after depositing the notice or demand in the
United States mail, certified or registered, postage prepaid, addressed to
the Lessor, Sublessor or Sublessee respectively at the addresses set forth
after their signatures at the end of the Sublease. All rent and other
payments due under this Sublease or the Master lease with the exception of
operating expense pass throughs which Sublessor shall remain liable for shall
be made by Sublessee to Sublessor at the same address.

8. ADDITIONAL PROVISIONS

1. The Monthly rental indicated in paragraph 4 of this Sublease shall be
full service. Sublessor shall remain responsible for all operating expense
pass throughs as provided in the Master Lease.

2. The reception desk shall remain part of the Premises.

3. Commencing with full execution of this Sublease and Landlord's approval
of same, Sublessor shall provide Sublessee with six (6) offices, free of
charge.

4. In the event Sublessor is unable to deliver possession of the Premises
as stated in paragraph 5, then Sublessor shall provide Sublessee with four
(4) additional offices, free of charge. In the event Sublessor is unable to
deliver the

<PAGE>

Premises by June 15, 1998, Sublessor shall provide Sublessee with four (4)
days free rent for every day subsequent to June 15, 1998, that Sublessor
fails to deliver the Premises.

5. Commencing with occupancy of the Premises by Sublessee, Sublessee's
notice address shall become the Premises.

6. Any agreement, if any, to purchase all or part of the furniture, audio
and telephone systems located in the Premises shall be separate from this
Sublease agreement.

<PAGE>

Dated: June, 10, 1998
--------------
SUBLESSOR: EVANSGROUP, INC. SUBLESSEE: PENNACO ENERGY, INC.
Mark A. Erickson

By /s/ DAVID G. THOMAS By /s/ MARK A. ERICKSON
------------------------------- -------------------------------
David G. Thomas, Mark A. Erickson,
President Senior Vice President

By By

Address 1050 7th St., #700 Address 304 Inverness Wy. S. #290
------------------------ -------------------------

City Denver State CO 80265 City Englewood State CO 80112
------ --------- --------------------------

The undersigned, Lessor under the Master Lease attached as Exhibit A, hereby
consents to the subletting of the Premises described herein on the terms and
conditions contained in this Sublease. This consent shall apply only to this
Sublease and shall not be deemed to be a consent to any other Sublease.

Dated: , 19 LESSOR: AMSTAR DENVER, LTD,
------------ ----- ------------------------------
a Colorado limited partnership

By: ADCBD, LTD.,
----------------------------------
a Colorado limited partnership,
its General Partner

By AMSTAR CAPITAL MANAGEMENT
CORPORATION,
----------------------------------
a Colorado corporation,
its General Partner

By /s/ JOE D. CRAWFORD
----------------------------------
Joe J. Crawford, Vice President

Address 1050 17th st., #1220
--------------------------

City Denver State CO
----------- -----------

Telephone 303-534-6322
--------------------------
<PAGE>

LEASE AGREEMENT
INDEPENDENCE PLAZA
DENVER COLORADO

THIS LEASE AGREEMENT ("Lease") is entered into as of the Date, and by and
between the Landlord and Tenant, identified in Section 1.1 below.

1. BASIC LEASE DEFINITIONS, EXHIBITS AND ADDITIONAL DEFINITIONS.

1.1 BASIC LEASE DEFINITIONS. In this Lease, the following defined terms
have the meanings indicated:

(a) "Date" means October 1, 1994.

(b) "Landlord" means Amstar Denver, Ltd., a Colorado limited
partnership.

(d) "Premises" means those premises known as Suite 700, located on
the 7th floor of the Building and identified on EXHIBIT A, which contain
approximately 10,105 rentable square feet. The Premises do not include any
areas above the finished ceiling or below the finished floor covering
installed in the Premises or any other areas not shown on EXHIBIT A as
being part of the Premises. Landlord reserves, for Landlord's exclusive
use, any of the following (other than those installed for Tenant's
exclusive use) that may be located in the Premises: janitor closets,
stairways and stairwells; fan, mechanical, electrical, telephone and
similar rooms; and elevator, pipe and other vertical shafts, flues and
ducts.

(e) "Use" means general office use only.

(f) "Term" means the duration of this Lease, which will be
approximately seventy-two (72) months, beginning on the "Commencement Date"
(as defined in EXHIBIT B) and ending on the "Expiration Date" (as defined
below), unless terminated earlier or extended further as provided in this
Lease. The "Expiration Date" means (i) if the Commencement Date is the
first day of a month, the date which is seventy-two (72) months from the
date preceding the Commencement Date; or (ii) if the Commencement Date is
not the first day of a month, the date which is seventy-two (72) months
from the last day of the month in which the Commencement Date occurs.

(g) "Base Rent" means the Rent payable according to Section 3.1,
which will be in an amount per month or portion thereof during the Term as
follows:

-1-
<PAGE>

<TABLE>
<CAPTION>
MONTHS AMOUNT OF BASE RENT PAYABLE PER MONTH
------ -------------------------------------
<S> <C>
1 $4,252.52
2-12 $9,473.43
13-24 $10,105.00
25-36 $10,526.04
37-48 $10,947.09
49-60 $11,368.13
61-72 $11,789.16
</TABLE>

(h) "Tenant's Share" means, with respect to the calculation of
Additional Rent according to Section 3.2, 1.765%.

(i) "Base Year" means the calendar year ending December 31, 1994.

(j) "Security Deposit" means $0.00.

(k) "Landlord's Building Address" means:

Suite 1000 Independence Plaza
1050 17th Street
Denver, Colorado 80265
Attention: Property Manager

(l) "Landlord's General Address" means:

Suite 1220 Independence Plaza
1050 17th Street
Denver, Colorado 80265
Attention: General Counsel

(m) "Tenant's Notice Address" means:

for notices given before the Commencement Date:

Evansgroup, Inc.
1050 Seventeenth Street, Suite 700
Denver, CO 80265
Attention: Kelli McDonald, President

-2-
<PAGE>

and for notices given after the Commencement Date:

Evansgroup, Inc.
1050 Seventeenth Street, Suite 700
Denver, CO 80265
Attention: Kelli McDonald, President

(n) "Tenant's Invoice Address" means:

Evansgroup, Inc.
1050 Seventeenth Street, Suite 700
Denver, CO 80265
Attention: Kelli McDonald, President

(o) "Brokers" means the following brokers who will be paid by
Landlord: CB Commercial, Fuller and Company and Spectrum Real Estate
Advisors, LLC; and the following brokers who will be paid by Tenant:
________________________________________________________________________.

(p) "Liability Insurance Amount" means $1,000,000.

1.2 EXHIBITS AND RIDERS. The Exhibits and Riders listed below are
attached to and incorporated in this Lease. In the event of any inconsistency
between such Exhibits or Riders and the terms and provisions of this Lease, the
terms and provisions of the Exhibits and Riders will control. The Exhibits to
this Lease are:

Exhibit A -- Plan Delineating the Premises
Exhibit B -- Possession and Leasehold Improvements Agreement
Exhibit C -- Occupancy Estoppel Certificate
Exhibit D -- Rules and Regulations
Exhibit E -- Lease Addendum

1.3 ADDITIONAL DEFINITIONS. In addition to those terms defined in
Section 1.1 and other sections of this Lease, the following defined terms when
used in this Lease have the meanings indicated:

(a) "Additional Rent" means the Rent payable according to
Section 3.2.

(b) "Affiliates" of a party means that party's parent, subsidiary and
affiliated corporations and its and their partners, venturers, directors,
officers, shareholders, agents, servants and employees.

-3-
<PAGE>

(c) "Building" means the office and retail building, parking garage
and other improvements commonly known as Independence Plaza, located on
the Land and in which the Premises are located.

(d) "Building Standard" means the scope and quality of leasehold
improvements, Building systems or Building services, as the context may
require, generally offered from time to time to all office tenants of the
Building.

(e) "Business Hours" means the hours from 7:00 a.m. to 6:00 p.m. on
Monday through Friday and from 9:00 a.m. to 12:00 noon on Saturday,
excluding statutory or legal holidays.

(f) "Common Areas" means certain interior and exterior common and
public areas located on the Land and in the Building as may be designated
by Landlord for the nonexclusive use in common by Tenant, Landlord and
other tenants, and their employees, guests, customers, agents and invitees.
If the Building is connected to other buildings by underground tunnels or
elevated bridges over public streets, Common Areas will include such
bridges and tunnels; provided, however, that Landlord and owners of such
other buildings will have the right in their sole discretion to adopt rules
and regulations relating to bridge and tunnel use.

(g) "Expenses" means the aggregate of any and all costs (other than
those expressly excluded below) incurred or accrued during each calendar
year according to generally accepted accounting principles for operating,
managing, administering, equipping, securing, protecting, insuring,
heating, cooling, ventilating, lighting, repairing, replacing, renewing,
cleaning, maintaining, decorating, inspecting, and providing water, sewer
and other energy and utilities to, the Land, Building and Common Areas;
management fees calculated according to the management agreement between
Landlord and its managing agents; fees and expenses (including reasonable
attorneys' fees) incurred in contesting the validity of any Laws that would
cause an increase in Expenses; depreciation on personal property and
moveable equipment which is or should be capitalized on Landlord's books;
and costs (whether capital or not) that are incurred in order to conform to
changes subsequent to the Date in any Laws, or that are intended to reduce
Expenses or the rate of increase in Expenses (such costs will not be
included in Expenses for the Base Year and will otherwise be charged to
Expenses in annual installments over the useful life of the items for which
such costs are incurred [in the case of items required by changes in Laws]
or over the period Landlord reasonably estimated that it will take for the
savings in Expenses achieved by such items to equal their cost [in the case
of items intended to reduce Expenses or their rate of increase], and in
either case together with interest, each calendar year such costs are
charged to Expenses, on the unamortized balance at the average Prime Rate
in effect during such calendar year). Expenses will not include
(1) mortgage principal or interest; (2) ground lease payments; (3) leasing
commissions; (4) costs of advertising space for lease in the Building;
(5) costs for which Landlord is reimbursed by insurance proceeds or from
tenants of the

-4-
<PAGE>

Building (other than such tenants' regular contributions to
Expenses); (6) any depreciation or capital expenditures (except as
expressly provided above); (7) legal fees incurred for negotiating leases
or collecting rents; and (8) costs directly and solely related to the
maintenance and operation of the entity that constitutes the Landlord, such
as accounting fees incurred solely for the purpose of reporting Landlord's
financial condition. For each calendar year during the Term, the amount by
which those Expenses that vary with occupancy (such as cleaning costs and
utilities) would have increased had the Building been 95% occupied and
operational and had all Building services been provided to all tenants will
be reasonably determined and the amount of such increase will be included
in Expenses for such calendar year.

(h) "Land" means the real property located at 1050 17th Street,
Denver, Colorado, less any portions that may be conveyed separately from
the Building by Landlord from time to time.

(i) "Laws" means any and all present or future federal, state or
local laws, statutes, ordinances, rules, regulations or orders of any and
all governmental or quasi-governmental authorities having jurisdiction.

(j) "Prime Rate" means the rate of interest announced from time to
time by Norwest Bank Colorado, N.A., Denver, or any successor to it, as its
prime rate. If Norwest Bank Colorado, N.A., Denver or any successor to it
ceases to announce a prime rate, Landlord will designate a reasonably
comparable financial institution for purposes of determining the Prime
Rate.

(k) "Rent" means the Base Rent, Additional Rent and all other amounts
required to be paid by Tenant under this Lease.

(l) "Taxes" means the amount incurred or accrued during each calendar
year according to generally accepted accounting principles for: all ad
valorem real and personal property taxes and assessments, special or
otherwise, levied upon or with respect to the Land or Building, the
personal property used in operating the Building, and the rents and
additional charges payable by tenants of the Building, and imposed by any
taxing authority having jurisdiction; all taxes, levies and charges which
may be assessed, levied or imposed in replacement of, or in addition to,
all or any part of ad valorem real or personal property taxes or
assessments as revenue sources, and which in whole or in part are measured
or calculated by or based upon the Land or Building, the leasehold estate
of Landlord or the tenants of the Building, or the rents and other charges
payable by such tenants; capital and place-of-business taxes, and other
similar taxes assessed relating to the Common Areas; and any reasonable
expenses incurred by Landlord in attempting to reduce or avoid an increase
in Taxes, including, without limitation, reasonable legal fees and costs.
Taxes will not include any net income taxes of Landlord.

-5-
<PAGE>

2. GRANT OF LEASE.

2.1 DEMISE. Subject to the terms, covenants, conditions and provisions of
this Lease, Landlord leases to Tenant and Tenant leases from Landlord the
Premises, together with the nonexclusive right to use the Common Areas, for the
Term.

2.2 QUIET ENJOYMENT. Landlord covenants that during the Term, Tenant will
have quiet and peaceable possession of the Premises by, through and under
Landlord, subject to the terms, covenants, conditions and provisions of this
Lease, and Landlord will not disturb such possession except as expressly
provided in this Lease.

2.3 LANDLORD AND TENANT COVENANTS. Landlord covenants to observe and
perform all of the terms, covenants and conditions applicable to Landlord in
this Lease. Tenant covenants to pay the Rent when due, and to observe and
perform all of the terms, covenants and conditions applicable to Tenant in this
Lease.

3. RENT.

3.1 BASE RENT. Commencing on the Commencement Date and then throughout
the Term, Tenant agrees to pay Landlord Base Rent according to the following
provisions. Base Rent during each month (or portion of a month) described in
Section 1.1(g) will be payable in equal monthly installments for such month (or
portion), in advance, on or before the first day of each and every month during
the Term. However, if the Term commences on other than the first day of a month
or ends on other than the last day of a month, Base Rent for such month will be
appropriately adjusted on a prorated basis.

3.2 ADDITIONAL RENT. Tenant agrees to pay Landlord, as Additional Rent,
in the manner provided below for each calendar year subsequent to the Base Year
that contains any part of the Term, Tenant's Share of (i) the amount by which
Expenses for such calendar year exceed Expenses for the Base Year ("Additional
Expenses"); and (ii) the amount by which Taxes for such calendar year exceed
Taxes for the Base Year ("Additional Taxes").

(a) ESTIMATED PAYMENTS. Prior to or as soon as practicable after the
beginning of each calendar year subsequent to the Base Year, Landlord will
notify Tenant of Landlord's estimate of Tenant's Share of Additional
Expenses and Additional Taxes for the ensuing calendar year. On or before
the first day of each month during the ensuing calendar year, Tenant will
pay to Landlord, in advance, 1/12 of such estimated amounts, provided that
until such notice is given with respect to the ensuing calendar year,
Tenant will continue to pay on the basis of the prior calendar year's
estimate until the month after the month in which such notice is given. In
the month Tenant first pays based on Landlord's new estimate, Tenant will
pay to Landlord 1/12 of the difference between the new estimate and the
prior year's estimate for each month which has elapsed since the beginning
of the current calendar year. If at any time or times it appears to
Landlord that Tenant's Share of Additional

-6-
<PAGE>

Expenses or Tenant's Share of Additional Taxes for the then-current
calendar year will vary from Landlord's estimate by more than 5%, Landlord
may, by notice to Tenant, revise its estimate for such year and subsequent
payments by Tenant for such year will be based upon the revised estimate.

(b) ANNUAL SETTLEMENT. As soon as practicable after the close of
each calendar year subsequent to the Base Year, Landlord will deliver to
Tenant its statement of Tenant's Share of Additional Expenses and
Additional Taxes for such calendar year. If on the basis of such statement
Tenant owes an amount that is less than the estimated payments previously
made by Tenant for such calendar year, Landlord will either refund such
excess amount to Tenant or credit such excess amount against the next
payment(s), if any, due from Tenant to Landlord. If on the basis of such
statement Tenant owes an amount that is more than the estimated payments
previously made by Tenant for such calendar year, Tenant will pay the
deficiency to Landlord within 30 days after the delivery of such statement.
If this Lease commences on a day other than the first day of a calendar
year or terminates on a day other than the last day of a calendar year,
Tenant's Share of Additional Expenses and Additional Taxes applicable to
the calendar year in which such commencement or termination occurs will be
prorated on the basis of the number of days within such calendar year that
are within the Term.

(c) FINAL PAYMENT. Tenant's obligation to pay the Additional Rent
provided for in this Section 3.2 which is accrued but not paid for periods
prior to the expiration or early termination of the Term will survive such
expiration or early termination. Prior to or as soon as practicable after
the expiration or early termination of the Term, Landlord may submit an
invoice to Tenant stating Landlord's estimate of the amount by which
Tenant's Share of Additional Expenses and Additional Taxes through the date
of such expiration or early termination will exceed Tenant's estimated
payments of Additional Rent for the calendar year in which such expiration
or termination has occurred or will occur. Tenant will pay the amount of
any such excess to Landlord within 30 days after the date of Landlord's
invoice. In the event that Tenant is entitled to a refund pursuant to this
Section 3.2, Landlord's obligation to refund any such amounts shall survive
termination or expiration of the Term.

3.3 OTHER TAXES. Tenant will reimburse Landlord upon demand for any and
all taxes payable by Landlord (other than net income taxes and taxes included in
Taxes) whether or not now customary or within the contemplation of Landlord and
Tenant: (a) upon, measured by or reasonably attributable to the cost or value
of Tenant's equipment, furniture, fixtures and other personal property located
in the Premises; (b) upon or measured by Rent; (c) upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any portion of the Premises; and
(d) upon this transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises. If it is not lawful for
Tenant to reimburse Landlord, the Base Rent payable to Landlord under this Lease
will be revised to yield to Landlord the same net rental after the imposition of
any such tax upon Landlord as would have been payable to Landlord prior to the
imposition of any such tax.

-7-
<PAGE>

3.4 TERMS OF PAYMENT. All Base Rent, Additional Rent and other Rent will
be paid to Landlord in lawful money of the United States of America, at
Landlord's Building Address or to such other person or at such other place as
Landlord may from time to time designate in writing, without notice or demand
and without right of deduction, abatement or set-off, except as otherwise
expressly provided in this Lease.

3.5 INTEREST ON LATE PAYMENTS; LATE CHARGE. All amounts payable under
this Lease by Tenant to Landlord, if not paid when due, will bear interest from
the due date until paid at the lesser of the highest interest rate permitted by
law or 5% in excess of the then-current Prime Rate. Landlord, at Landlord's
option, in addition to past due interest, may charge Tenant a late charge for
all payments more than five (5) days past due, equal to the greater of 5% of the
amount of said late payment or the maximum amount permitted by law.

3.6 RIGHT TO ACCEPT PAYMENTS. No receipt by Landlord of an amount less
than Tenant's full amount due will be deemed to be other than payment "on
account," nor will any endorsement or statement on any check or any accompanying
letter effect or evidence an accord and satisfaction. Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance or
pursue any right of Landlord. No payments by Tenant to Landlord after the
expiration or other termination of the Term, or after the giving of any notice
(other than a demand for payment of money) by Landlord to Tenant, will
reinstate, continue or extend the Term or make ineffective any notice given to
Tenant prior to such payment. After notice or commencement of a suit, or after
final judgment granting Landlord possession of the Premises, Landlord may
receive and collect any sums of Rent due under this Lease, and such receipt will
not void any notice or in any manner affect any pending suit or any judgment
obtained.

4. USE AND OCCUPANCY.

4.1 USE. Tenant agrees to use and occupy the Premises only for the Use
described in Section 1.1(e), or for such other purpose as Landlord expressly
authorizes in writing.

4.2 COMPLIANCE.

(a) Tenant agrees to use the Premises in a safe, careful and proper
manner, and to comply with all Laws applicable to Tenant's use, occupancy
or alteration of the Premises or the condition of the Premises resulting
from such use, occupancy or alteration, at Tenant's sole cost and expense.

(b) Landlord and Tenant agree that, during the Term, each will comply
with all Laws governing, and all procedures established by Landlord for,
the use, abatement, removal, storage, disposal or transport of any
substances, chemicals or materials declared to be, or regulated as,
hazardous or toxic under any applicable Laws ("Hazardous Substances") and
any required or permitted alteration, repair, maintenance, restoration,
removal or other work in or about the Premises, Building or Land that
involves or affects any Hazardous

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Substances. Except as may be expressly permitted by Landlord in writing,
Tenant will not store, use, release, produce, process or dispose in, on
or about, or transport to or from, the Premises, Building or Land any
Hazardous Substances. Each party will indemnify and hold the other and
the other's Affiliates harmless from and against any and all claims,
costs and liabilities (including reasonable attorneys' fees) arising out
of or in connection with any breach by such party of its covenants under
this Section 4.2(b). The parties' obligations under this Section 4.2(b)
will survive the expiration or early termination of the Term.

4.3 OCCUPANCY. Tenant will not do or permit anything which obstructs or
interferes with other tenants' rights or with Landlord's providing Building
services, or which injures or annoys other tenants. Tenant will not cause,
maintain or permit any nuisance in or about the Premises and will keep the
Premises free of debris, and anything of a dangerous, noxious, toxic or
offensive nature or which could create a fire hazard or undue vibration, heat or
noise. If any item of equipment, building material or other property brought
into the Building by Tenant or on Tenant's request causes a dangerous, noxious,
toxic or offensive effect (including an environmental effect) and in Landlord's
reasonable opinion such effect will not be permanent but will only be temporary
and is able to be eliminated, then Tenant will not be required to remove such
item, provided that Tenant promptly and diligently causes such effect to be
eliminated, pays for all costs of elimination and indemnifies Landlord against
all liabilities arising from such effect. Tenant will not make or permit any
use of the Premises which may jeopardize any insurance coverage, increase the
cost of insurance or require additional insurance coverage. If by reason of
Tenant's failure to comply with the provisions of this Section 4.3, (a) any
insurance coverage is jeopardized, then Landlord will have the option to
terminate this Lease; or (b) insurance premiums are increased, then Landlord may
require Tenant to immediately pay Landlord as Rent the amount of the increase in
insurance premiums.

5. SERVICES AND UTILITIES.

5.1 LANDLORD'S STANDARD SERVICES. During the Term, Landlord will operate
and maintain the Building in compliance with all applicable Laws and according
to those standards from time to time prevailing for comparable office buildings
in the Central Business District of Denver, Colorado. Landlord will provide the
following services according to such standards, the costs of which will be
included in Expenses to the extent provided in Section 1.3(g):

(a) repair, maintenance and replacement of the Common Areas, all
structural elements of the Building and all general mechanical, plumbing
and electrical systems installed in the Building, but excluding those
portions of any mechanical, plumbing or electrical systems that exceed
Building Standard and exclusively serve the Premises;

(b) heating, ventilating and air conditioning for the Premises and
interior Common Areas during Business Hours, at temperatures and in amounts
as may be reasonably required for comfortable use and occupancy under
normal business office operations with "Customary Office Equipment" (as
used in this Lease, "Customary Office

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Equipment" includes typewriters, calculators, dictation recorders, desk
top personal computers and printers and similar devices and equipment;
but will not include any machines, devices or equipment that adversely
affect the temperature otherwise maintained in the Premises or that
require a voltage other than 120 volts, single phase, such as, e.g.,
data processing or heavy-duty computer or reproduction equipment);

(c) electricity for lighting and operating Customary Office Equipment
in the Premises during Business Hours in an amount not to exceed 3.5
kilowatts per square foot of the Premises per Business Hour;

(d) water for small kitchens, washrooms and drinking fountains;

(e) janitorial services to the Premises and Common Areas;

(f) passenger elevators for access to and from the floor(s) on which
the Premises are located;

(g) toilet facilities, including necessary washroom supplies
sufficient for Tenant's normal use;

(h) electric lighting for all Common Areas that require electric
light during the day or are open at night, including replacement of tubes
and ballasts in lighting fixtures; and

(i) replacement of tubes and ballasts in those Building Standard
lighting fixtures installed in the Premises.

5.2 ADDITIONAL SERVICES.

(a) If Tenant requires heating, ventilating or air conditioning for
the Premises during hours other than Business Hours, Landlord will furnish
the same for the hours specified in a request from Tenant, provided the
request is made in the manner reasonably designated by Landlord for such
requests from time to time and at least 48 hours prior to the time the
additional service is required. Tenant will pay for such additional
services at the standard hourly rate reasonably determined by Landlord from
time to time.

(b) If Tenant requires electric current, water or any other energy at
times or in amounts in excess of those provided by Landlord according to
Section 5.1, such excess electric, water or other energy requirements will
be supplied only with Landlord's consent, which consent will not be
unreasonably withheld. If Landlord grants such consent, Tenant will pay
all costs of meter service and installation of facilities or professional
services necessary to measure and/or furnish the excess requirements and
the entire cost of such additional electricity, water or other energy so
required, which costs will be determined and charged to Tenant (i) by
metering at applicable rates, where meters exist or are installed at

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Landlord's direction, including all service and meter installation and/or
reading charges; and/or (ii) by use and engineering surveys identifying all
costs relating to consumption of such additional electricity, water or
other energy (including, without limitation, survey costs, labor, utility
rates and Landlord's administrative fees to the extent allowed by
applicable Laws). For purposes of this Section 5.2(b), from time to time
during the Term, Landlord may enter the Premises to install, maintain,
replace or read meters for such excess requirements and/or to evaluate
Tenant's consumption of and demand for them.

(c) If Tenant installs any machines, equipment or devices in the
Premises that do not constitute Customary Office Equipment and such
machines, equipment or devices cause the temperature in any part of the
Premises to exceed the temperature the Building's mechanical system would
be able to maintain in the Premises were it not for such machines,
equipment or devices, then Landlord reserves the right to install
supplementary air conditioning units in the Premises, and Tenant will pay
Landlord all costs of installing, operating and maintaining such
supplementary units.

(d) If Tenant requires any janitorial or cleaning services in excess
of the amounts provided by Landlord according to Section 5.1 (such as
cleaning services beyond normal office janitorial services for kitchens,
computer rooms or other special use areas), Landlord will provide such
excess services to Tenant within a reasonable period after Tenant's request
made to Landlord's Building manager ("Property Manager"), provided that
such excess services are available from Landlord's regular janitorial or
cleaning contractor. Tenant will pay the cost of such excess services.
Landlord will also provide, within a reasonable period after Tenant's
request made to the Property Manager, at Tenant's cost and to the extent
available to Landlord, replacement of bulbs, tubes or ballasts in any
non-Building Standard lighting fixtures in the Premises.

(e) Tenant will pay as Rent, within 10 days after the date of
Landlord's invoice, all costs which may become payable by Tenant to
Landlord under this Section 5.2.

5.3 INTERRUPTION OF SERVICES. If any of the services provided for in this
Section 5 are interrupted or stopped, Landlord will use due diligence to resume
the service; provided, however, no irregularity or stoppage of any of these
services will create any liability for Landlord (including, without limitation,
any liability for damages to Tenant's personal property caused by any such
irregularity or stoppage), constitute an actual or constructive eviction or,
except as expressly provided below, cause any abatement of the Rent payable
under this Lease or in any manner or for any purpose relieve Tenant from any of
its obligations under this Lease. If, due to reasons within Landlord's
reasonable control, any of the services required to be provided by Landlord
under this Section 5 should become unavailable and should remain unavailable for
a period in excess of 60 hours after notice of such unavailability from Tenant
to Landlord, and if such unavailability should render all or any portion of the
Premises untenantable, then commencing upon the expiration of such 60-hour
period, Tenant's Rent will equitably abate in proportion to the portion of the
Premises so rendered untenantable for so long as such services remain
unavailable for such reasons.

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Without limiting those reasons for an irregularity or stoppage of services
that may be beyond Landlord's control, any such irregularity or stoppage that
is required in order to comply with any Laws will be deemed caused by a
reason beyond Landlord's control.

6. REPAIRS.

6.1 REPAIRS WITHIN THE PREMISES. Subject to the terms of Sections 4,
5.1(a), 5.1(i), 10 and 12, and except to the extent Landlord is required or
elects to perform or pay for certain maintenance or repairs according to those
sections, Tenant will, at Tenant's own expense: (a) at all times during the
Term, maintain the Premises, all fixtures and equipment in the Premises and
those portions of any mechanical, plumbing or electrical systems that exceed
Building Standard and exclusively service the Premises in good order and repair
and in a condition that complies with all applicable Laws; and (b) promptly and
adequately repair all damage to the Premises and replace or repair all of such
fixtures, equipment and portions of the mechanical, plumbing or electrical
systems that are damaged or broken, all under the supervision and subject to the
prior reasonable approval of Landlord. All work done by Tenant or its
contractors (which contractors will be subject to Landlord's reasonable
approval) will be done in a first-class workmanlike manner using only grades of
materials at least equal in quality to Building Standard materials and will
comply with all insurance requirements and all applicable Laws.

6.2 FAILURE TO MAINTAIN PREMISES. If Tenant fails to perform any of its
obligations under Section 6.1, then Landlord may perform such obligations and
Tenant will pay as Rent to Landlord the cost of such performance, including an
amount sufficient to reimburse Landlord for overhead and supervision, within 10
days after the date of Landlord's invoice. For purposes of performing such
obligations, or to inspect the Premises, Landlord may enter the Premises upon
not less than 24 hours' prior notice to Tenant (except in cases of actual or
suspected emergency, in which case no prior notice will be required) without
liability to Tenant for any loss or damage incurred as a result of such entry,
provided that Landlord will take reasonable steps in connection with such entry
to minimize any disruption to Tenant's business or its use of the Premises.

6.3 NOTICE OF DAMAGE. Tenant will notify Landlord promptly after Tenant
learns of (a) any fire or other casualty in the Premises; (b) any damage to or
defect in the Premises, including the fixtures and equipment in the Premises,
for the repair of which Landlord might be responsible; and (c) any damage to or
defect in any parts or appurtenances of the Building's sanitary, electrical,
heating, air conditioning, elevator or other systems located in or passing
through the Premises.

7. ALTERATIONS.

7.1 ALTERATIONS BY TENANT. Tenant may, from time to time, at its own
expense make changes, additions and improvements to the Premises to better adapt
the same to its business, provided that any such change, addition or improvement
will (a) comply with all applicable Laws; (b) be made only with the prior
written consent of Landlord, which consent will not be unreasonably withheld;
(c) equal or exceed Building Standard; and (d) be carried out only by persons
selected by

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Tenant and approved in writing by Landlord, who will if required by Landlord
deliver to Landlord before commencement of the work performance and payment
bonds. Tenant will maintain, or will cause the persons performing any such
work to maintain, worker's compensation insurance and public liability and
property damage insurance (with Landlord named as an additional insured), in
amounts, with companies and in a form reasonably satisfactory to Landlord,
which insurance will remain in effect during the entire period in which the
work will be carried out. If requested by Landlord, Tenant will deliver to
Landlord proof of all such insurance. Tenant will promptly pay, when due,
the cost of all such work and, upon completion, Tenant will deliver to
Landlord, to the extent not previously received by Landlord, evidence of
payment, contractors' affidavits and full and final waivers of all liens for
labor, services or materials. Tenant will also pay any increase in property
taxes on, or fire or casualty insurance premiums for, the Building
attributable to such change, addition or improvement and the cost of any
modifications to the Building outside the Premises that are required to be
made in order to make the change, addition or improvement to the Premises.
Tenant, at its expense, will have promptly prepared and submitted to Landlord
reproducible as-built plans of any such change, addition or improvement upon
its completion. All changes, additions and improvements to the Premises,
whether temporary or permanent in character, made or paid for by Landlord or
Tenant will, without compensation to Tenant, become Landlord's property upon
installation. If at the time Landlord consents to their installation,
Landlord requests or approves the removal by Tenant of any such changes,
additions or improvements upon termination of this Lease, Tenant will remove
the same upon termination of this Lease as provided in Section 15.1. All
other changes, additions and improvements will remain Landlord's property
upon termination of this Lease and will be relinquished to Landlord in good
condition, ordinary wear and tear excepted.

7.2 ALTERATIONS BY LANDLORD. Landlord may from time to time make repairs,
changes, additions and improvements to the Building, Common Areas and those
Building systems necessary to provide the services described in Section 5, and
for such purposes, Landlord may enter the Premises upon not less than 24 hours'
prior notice to Tenant (except in cases of actual or suspected emergency, in
which case no prior notice will be required) without liability to Tenant for any
loss or damage incurred as a result of such entry, provided that in doing so
Landlord will not disturb or interfere with Tenant's use of the Premises and
operation of its business any more than is reasonably necessary in the
circumstances and will repair any damage to the Premises caused by such entry.
No permanent change, addition or improvement made by Landlord will materially
impair access to the Premises.

8. LIENS. Tenant agrees to pay before delinquency all costs for work,
services or materials furnished to Tenant for the Premises, the nonpayment of
which could result in any lien against the Land or Building. Tenant will keep
title to the Land and Building free and clear of any such lien. Tenant will
immediately notify Landlord of the filing of any such lien or any pending claims
or proceedings relating to any such lien and will indemnify and hold Landlord
harmless from and against all loss, damages and expenses (including reasonable
attorneys' fees) suffered or incurred by Landlord as a result of such lien,
claims and proceedings. In case any such lien attaches, Tenant agrees to cause
it to be immediately released and removed of record (failing which Landlord

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may do so at Tenant's sole expense), unless Tenant has a good faith dispute
as to such lien in which case Tenant may contest such lien by appropriate
proceedings so long as Tenant deposits with Landlord a bond or other security
in an amount reasonably acceptable to Landlord which may be used by Landlord
to release such lien if Tenant's contest is abandoned or is unsuccessful.
Upon final determination of any permitted contest, Tenant will immediately
pay any judgment rendered and cause the lien to be released.

9. INSURANCE.

9.1 LANDLORD'S INSURANCE. During the Term, Landlord will provide and keep
in force the following insurance:

(a) comprehensive or commercial general liability insurance relating
to Landlord's operation of the Building, including coverage for personal
and bodily injury and death, and damage to others' property;

(b) "all risk" property insurance relating to the Building (but
excluding Tenant's fixtures, furnishings, equipment, personal property,
documents, files and work products and all leasehold improvements in the
Premises that were paid for by Tenant; for purposes of this Section 9.1(b)
and Section 9.2(b) below, any leasehold improvements paid for with an
allowance provided by Landlord, regardless of whether a portion of the Base
Rent is intended to reimburse Landlord for such allowance, will be deemed
paid for by Landlord);

(c) loss of rental income insurance or loss of insurable gross
profits commonly insured against by prudent landlords; and

(d) such other insurance (including boiler and machinery insurance)
as Landlord reasonably elects to obtain or any Building mortgagee requires.

Insurance effected by Landlord under this Section 9.1 will be in amounts which
Landlord from time to time reasonably determines sufficient or any Building
mortgagee requires; will be subject to such deductibles and exclusions as
Landlord reasonably determines; and will otherwise be on such terms and
conditions as Landlord from time to time reasonably determines sufficient.

9.2 TENANT'S INSURANCE. During the Term, Tenant will provide and keep in
force the following insurance:

(a) comprehensive or commercial general liability insurance relating
to Tenant's business (carried on, in or from the Premises) and Tenant's use
and occupancy, for personal and bodily injury and death, and damage to
others' property, with limits of not less than the Liability Insurance
Amount for any one accident or occurrence;

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(b) "all risk" property insurance (including standard extended
endorsement perils, leakage from fire protective devices and other water
damage) relating to Tenant's fixtures, furnishings, equipment, inventory,
stock-in-trade and all leasehold improvements in the Premises that were
paid for by Tenant on a full replacement cost basis in amounts sufficient
to prevent Tenant from becoming a coinsurer and subject only to such
deductibles and exclusions as Landlord may reasonably approve; and

Landlord will be named as an additional insured in the policy described in
Section 9.2(a), which will include cross liability and severability of
interests clauses and will be on an "occurrence" (and not a "claims made")
form. Landlord will be named as a loss payee, as its interest may appear, in
the policies described in Sections 9.2(b) and (c),, and such policies will
permit the release of Landlord from certain liability under Section 11.1.
Tenant's insurance policies will otherwise be upon such terms and conditions
as Landlord from time to time reasonably requires. Tenant will provide
Landlord, on or before the Commencement Date and at least ten (10) days
before the expiration date of expiring policies, with such copies of either
current policies or certificates, or other proofs, as may be reasonably
required to establish Tenant's insurance coverage in effect, and each
certificate shall provide that Landlord shall receive ten (10) days' prior
written notice for cancellation for non-payment of premium and thirty (30)
days' prior written notice for cancellation for non-renewal. If Tenant fails
to insure or pay premiums, or to file satisfactory proof as required,
Landlord may, upon a minimum of two (2) business days' notice, effect such
insurance and recover from Tenant on demand any premiums paid.

10. DAMAGE OR DESTRUCTION.

10.1 TERMINATION OPTIONS. If the Premises or the Building are damaged by
fire or other casualty Landlord will, promptly after learning of such damage,
notify Tenant in writing of the time necessary to repair or restore such damage,
as estimated by Landlord's architect, engineer or contractor. If such estimate
states that repair or restoration of all of such damage that was caused to the
Premises or to any other portion of the Building necessary for Tenant's
occupancy cannot be completed within 180 days from the date of such damage (or
within 30 days from the date of such damage if such damage occurred within the
last 12 months of the Term), then Tenant will have the option to terminate this
Lease. If such estimate states that repair or restoration of all of such damage
that was caused to the Building cannot be completed within 180 days from the
date of such damage, or if such damage occurred within the last 12 months of the
Term), then Tenant will have the option to terminate this Lease. If such
estimate states that repair or restoration of all of such damage that was caused
to the Building cannot be completed within 30 days from the date of such damage,
or if such damage occurred within the last 12 months of the Term and such
estimate states that repair or restoration of all such damage that was caused to
the Premises or to any other portion of the Building necessary for Tenant's
occupancy cannot be completed within 30 days from the date of such damage, or if
such damage is not insured against by the insurance policies required to be

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maintained by Landlord according to Section 9.1, then Landlord will have the
option to terminate this Lease. Any option to terminate granted above must be
exercised by written notice to the other party given within 10 days after
Landlord delivers to Tenant the notice of estimated repair time. If either
party exercises its option to terminate this Lease, the Term will expire and
this Lease will terminate 10 days after notice of termination is delivered;
provided, however, that Rent for the period commencing on the date of such
damage until the date this Lease terminates will be reduced to the reasonable
value of any use or occupation of the Premises by Tenant during such period and
Landlord will be entitled to all proceeds of the insurance policy described in
Section 9.2(b) applicable to any damaged leasehold improvements in the Premises.

10.2 REPAIR OBLIGATIONS. If the Premises or the Building are damaged by
fire or other casualty and neither party terminates this Lease according to
Section 10.1, then Landlord will repair and restore such damage with reasonable
promptness, subject to delays for insurance adjustments and delays caused by
matters beyond Landlord's control. Landlord will have no liability to Tenant
and Tenant will not be entitled to terminate this Lease if such repairs and
restoration are not in fact completed within the estimated time period, provided
that Landlord promptly commences and diligently pursues such repairs and
restoration to completion. In no event will Landlord be obligated to repair,
restore or replace any of the property required to be insured by Tenant
according to Section 9.2. Tenant agrees to repair, restore or replace, at its
expense, all leasehold improvements required to be insured by Tenant according
to Section 9.2(b) as soon as possible after the date of damage, to at least the
condition existing prior to their damage, using materials at least equal to
Building Standard. However, in connection with its repair and restoration of
such damage, Landlord may, at its option, elect to repair and restore the
damage, if any, caused to any or all of such leasehold improvements required to
be insured by Tenant. If Landlord makes such election, Landlord will be
entitled to all proceeds of the insurance policy described in Section 9.2(b)
applicable to the leasehold improvements Landlord so elects to repair or restore
and may limit its repair or restoration of such leasehold improvements to that
which may be paid for in full by such proceeds.

10.3 RENT ABATEMENT. If any fire or casualty damage renders the Premises
untenantable and if this Lease is not terminated according to Section 10.1, then
Rent will abate beginning on the date of such damage. Such abatement will end
on the date Landlord has substantially completed the repairs and restoration
Landlord is required to perform according to Section 10.2 and Tenant has had a
reasonable period of time to substantially complete any repairs and restoration
Tenant is required to perform according to Section 10.2. Such abatement will be
in an amount bearing the same ratio to the total amount of Rent for such period
as the untenantable portion of the Premises bears to the entire Premises. In no
event will Landlord be liable for any inconvenience or annoyance to Tenant or
injury to the business of Tenant resulting in any way from damage caused by fire
or other casualty or the repair of such damage, provided however that, to the
extent Tenant remains in possession of a portion of the Premises, Landlord will
take all reasonable steps to minimize the disruption to Tenant's business and
use of such portion of the Premises during the period of repair.

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11. WAIVERS AND INDEMNITIES.

11.1 TENANT'S WAIVERS. Except to the extent caused by the willful or
negligent act or omission or breach of this Lease by Landlord or anyone for whom
Landlord is legally responsible, Landlord and its Affiliates will not be liable
or in any way responsible for, and Tenant waives all claims against Landlord and
its Affiliates for, any loss, injury or damage suffered by Tenant or others
relating to (a) loss or theft of, or damage to, property of Tenant or others;
(b) injury or damage to persons or property resulting from fire, explosion,
falling plaster, escaping steam or gas, electricity, water, rain or snow, or
leaks from any part of the Building or from any pipes, appliances or plumbing,
or from dampness; or (c) damage caused by other tenants, occupants or persons in
the Premises or other premises in the Building, or caused by the public or by
construction of any private or public work. Landlord and its Affiliates will
not be liable or in any way responsible to Tenant for, and Tenant waives all
claims against Landlord and its Affiliates for, any loss, injury or damage that
is insured or required to be insured by Tenant under Sections 9.2(b) or (c), so
long as such loss, injury or damage results from or in connection with this
Lease or Landlord's operation of the Building.

11.2 LANDLORD'S INDEMNITY. Subject to Sections 5.3 and 11.1 and except to
the extent caused by the willful or negligent act or omission or breach of this
Lease by Tenant or anyone for whom Tenant is legally responsible, Landlord will
indemnify and hold Tenant harmless from and against any and all liability, loss,
claims, demands, damages or expenses (including reasonable attorneys' fees) due
to or arising out of any willful or negligent act or omission or breach of this
Lease by Landlord or anyone for whom Landlord is legally responsible.
Landlord's obligations under this Section 11.2 will survive the expiration or
early termination of the Term.

11.3 TENANT'S INDEMNITY. Except to the extent caused by the willful or
negligent act or omission or breach of this Lease by Landlord or anyone for whom
Landlord is legally responsible, Tenant will indemnify and hold Landlord
harmless from and against any and all liability, loss, claims, demands, damages
or expenses (including reasonable attorneys' fees) due to or arising out of any
accident or occurrence on or about the Premises (including, without limitation,
accidents or occurrences resulting in injury, death, property damage or theft)
or any willful or negligent act or omission of or breach of this Lease by Tenant
or anyone for whom Tenant is legally responsible. Tenant's obligations under
this Section 11.3 will survive the expiration or early termination of the Term.

12. CONDEMNATION.

12.1 FULL TAKING. If all or substantially all of the Building or Premises
are taken for any public or quasi-public use under any applicable Laws or by
right of eminent domain, or are sold to the condemning authority in lieu of
condemnation, then this Lease will terminate as of the date when the condemning
authority takes physical possession of the Building or Premises.

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12.2 PARTIAL TAKING.

(a) LANDLORD'S TERMINATION OF LEASE. If only part of the Building or
Premises is thus taken or sold, and if after such partial taking, in
Landlord's reasonable judgment, alteration or reconstruction is not
economically justified, then Landlord (whether or not the Premises are
affected) may terminate this Lease by giving written notice to Tenant
within sixty (60) days after the taking.

(b) TENANT'S TERMINATION OF LEASE. If over 20% of the Premises is
thus taken or sold and Landlord is unable to provide Tenant with comparable
replacement premises in the Building, Tenant may terminate this Lease if in
Tenant's reasonable judgment the Premises cannot be operated by Tenant in
an economically viable fashion because of such partial taking. Such
termination by Tenant must be exercised by written notice to Landlord given
not later than sixty (60) days after Tenant is notified of the taking of
the Premises.

(c) EFFECTIVE DATE OF TERMINATION. Termination by Landlord or Tenant
will be effective as of the date when physical possession of the applicable
portion of the Building or Premises is taken by the condemning authority.

(d) ELECTION TO CONTINUE LEASE. If neither Landlord nor Tenant
elects to terminate this Lease upon a partial taking of a portion of the
Premises, the Rent payable under this Lease will be diminished by an amount
allocable to the portion of the Premises which was so taken or sold. If
this Lease is not terminated upon a partial taking of the Building or
Premises, Landlord will, at Landlord's sole expense, promptly restore and
reconstruct the Building and Premises to substantially their former
condition to the extent the same is feasible. However, Landlord will not
be required to spend for such restoration or reconstruction an amount in
excess of the net amount received by Landlord as compensation or damages
for the part of the Building or Premises so taken.

12.3 AWARDS. As between the parties to this Lease, Landlord will be
entitled to receive, and Tenant assigns to Landlord, all of the compensation
awarded upon taking of any part or all of the Building or Premises, including
any award for the value of the unexpired Term. However, Tenant may assert a
claim in a separate proceeding against the condemning authority for any damages
resulting from the taking of Tenant's trade fixtures or personal property, or
for moving expenses, business relocation expenses or damages to Tenant's
business incurred as a result of such condemnation.

13. ASSIGNMENT AND SUBLETTING.

13.1 LIMITATION. Without Landlord's prior written consent, Tenant will not
assign all or any of its interest under this Lease, sublet all or any part of
the Premises or permit the Premises to be used by any parties other than Tenant
and its employees.

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13.2 NOTICE OF PROPOSED TRANSFER; LANDLORD'S OPTIONS. If Tenant desires to
enter into any assignment of this Lease or a sublease of all or any part of the
Premises, Tenant will first give Landlord written notice of the proposed
assignment or sublease, which notice will contain the name and address of the
proposed transferee, the proposed use of the Premises, statements reflecting the
proposed transferee's current financial condition and income and expenses for
the past two (2) years, and the principal terms of the proposed assignment or
sublease. Landlord will have the following options, which must be exercised, if
at all, by notice given to Tenant within ten (10) business days after Landlord's
receipt of Tenant's notice of the proposed transfer:

(a) if Tenant's notice relates to a subletting, to sublet from Tenant
such space as is described in the notice for such portion of the Term as is
described in the notice, upon the same terms and conditions and for the
same Rent (apportioned, as appropriate, to the amount of such space) as
provided in this Lease;

(b) if Tenant's notice relates to an assignment, to become Tenant's
assignee; or

(c) if Tenant's notice relates to either an assignment or subletting,
to cancel and terminate the Lease. If Landlord exercises its option to
terminate this Lease, this Lease shall cancel and terminate on the last day
of the month following said 10-day period and Tenant shall be released from
any further liability under this Lease.

Except in the event of termination of this Lease by Landlord as provided in this
Section 13.2, no provision of this Section shall be construed to relieve Tenant
of the obligations as set forth in this Lease.

13.3 CONSENT NOT TO BE UNREASONABLY WITHHELD. If Landlord does not
exercise any of its applicable options under Section 13.2, the Landlord will not
unreasonably withhold or delay its consent to the proposed assignment or
subletting.

13.4 FORM OF TRANSFER. If Landlord consents to a proposed assignment or
sublease Landlord's consent will not be effective unless and until Tenant
delivers to Landlord an original duly executed assignment or sublease, as the
case may be, that provides, in the case of a sublease, that the sublease is
subject and subordinate to this Lease and the subtenant will comply with all
applicable terms and conditions of this Lease and, in the case of an assignment,
an assumption by the assignee of all of the obligations which this Lease
requires Tenant to perform and acknowledgment by Tenant that it remains liable
for the performance of all of such obligations.

13.5 PAYMENTS TO LANDLORD. If Landlord does not exercise its applicable
option under Section 13.2 and Tenant effects an assignment or sublease, then
Landlord will be entitled to receive and collect, either from Tenant or directly
from the transferee, 100% of the amount by which the consideration required to
be paid by the transferee for the use and enjoyment of the Tenant's rights under
this Lease (after deducting from such consideration Tenant's reasonable costs
incurred in effecting the assignment or sublease) exceeds the Rent payable by
Tenant to Landlord allocable to

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the transferred space. Such percentage of such amount will be payable to
Landlord at the time(s) Tenant receives the same from its transferee (whether
in monthly installments, in a lump sum, or otherwise).

13.6 CHANGE OF OWNERSHIP. Any change by Tenant in the form of its legal
organization (such as, for example, a change from a general to a limited
partnership), any transfer of 51% or more of Tenant's assets, and any other
transfer of interest effecting a change in identity of persons exercising
effective control of Tenant will be deemed an "assignment" of this Lease
requiring Landlord's prior written consent. The transfer of any outstanding
capital stock of a corporation whose stock is publicly-traded will not, however,
be deemed a "transfer of interest" under this Section 13.6.

13.7 EFFECT OF TRANSFERS. Unless Landlord agrees to the contrary in
writing, no subletting or assignment will release Tenant from any of its
obligations under this Lease and such obligations of Tenant will continue in
full force and effect as if no subletting or assignment had been made,
regardless of any action taken by or on behalf of a subtenant or assignee, or
limitations imposed on remedies against a subtenant or assignee, in any
bankruptcy, insolvency, receivership, reorganization or dissolution proceeding
instituted by or against such subtenant or assignee. Acceptance of Rent by
Landlord from any person other than Tenant will not be deemed a waiver by
Landlord of any provision of this Section 13. Consent to one assignment or
subletting will not be deemed a consent to any subsequent assignment or
subletting. In the event of any default by any assignee or subtenant or any
successor of Tenant in the performance of any Lease obligation, Landlord may
proceed directly against Tenant without exhausting remedies against such
assignee, subtenant or successor. The voluntary or other surrender of this
Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant
and Landlord will not work a merger and will, at Landlord's option, terminate
all or any subleases or operate as an assignment to the Landlord of all or any
subleases; such option will be exercised by notice to Tenant and all known
subtenants in the Premises.

14. PERSONAL PROPERTY

14.1 INSTALLATION AND REMOVAL. Tenant may install in the Premises its
personal property (including Tenant's usual trade fixtures) in a proper manner,
provided that no such installation will interfere with or damage the mechanical,
plumbing or electrical systems or the structure of the Building, and provided
further, that if such installation would require any change, addition or
improvement to the Premises, such installation will be subject to Section 7.1.
If no Default then exists, any such personal property installed in the Premises
by Tenant (a) may be removed from the Premises from time to time in the ordinary
course of Tenant's business or in the course of making any changes, additions or
improvements to the Premises permitted under Section 7.1, and (b) will be
removed by Tenant at the end of the Term according to Section 15.1. Tenant will
promptly repair at its expense any damage to the Building resulting from such
installation or removal.

14.2 RESPONSIBILITY. Tenant will be solely responsible for all costs and
expenses related to personal property used or stored in the Premises. Tenant
will pay any taxes or other governmental

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impositions levied upon or assessed against such personal property, or upon
Tenant for the ownership or use of such personal property, on or before the
due date for payment. Such personal property taxes or impositions are not
included in Taxes.

14.3 LANDLORD'S LIEN. In addition to any statutory Landlord's lien and in
order to secure payment of all Rent becoming due from Tenant, and to secure
payment of any damages or loss which Landlord may suffer by reason of Tenant's
failure to perform any of its obligations under this Lease, Tenant grants to
Landlord a security interest in and an express contractual lien upon all goods,
wares, equipment, fixtures, furniture, improvements and other personal property
of Tenant now or later situated on the Premises and all proceeds thereof.
Tenant's personal property may not be removed from the Premises without
Landlord's consent at any time a default exists or, except as provided in
Section 14.1, until all of Tenant's obligations under this Lease have been fully
complied with and performed. Upon the occurrence of a Default, in addition to
any other available remedies, Landlord will have all the rights of a secured
party under the Colorado Uniform Commercial Code with respect to the property
covered by such security interest. Upon Landlord's request, Tenant agrees to
execute and deliver to Landlord such financing statements as may be required to
perfect such security interest.

15. END OF TERM.

15.1 SURRENDER. Upon the expiration or other termination of the Term,
Tenant will immediately vacate and surrender possession of the Premises in good
order, repair and condition, except for ordinary wear and tear. Upon the
expiration or other termination of the Term, Tenant agrees to remove (a) all
changes, additions and improvements to the Premises the removal of which
Landlord requested or approved according to Section 7.1 at the time Landlord
consented to their installation, and (b) all of Tenant's trade fixtures, office
furniture, office equipment and other personal property. Tenant will pay
Landlord on demand the cost of repairing any damage to the Premises or Building
caused by the installation or removal of any such items. Any of Tenant's
property remaining in the Premises will be conclusively deemed to have been
abandoned by Tenant and may be appropriated, stored, sold, destroyed or
otherwise disposed of by Landlord without notice or obligation to account to or
compensate Tenant, and Tenant will pay Landlord on demand all costs incurred by
Landlord relating to such abandoned property. Tenant's obligations under this
Section 15.1 will survive the expiration of early termination of this Lease.

15.2 HOLDING OVER. Tenant understands that it does not have the right to
hold over at any time and Landlord may exercise any and all remedies at law or
in equity to recover possession of the Premises, as well as any damages incurred
by Landlord, due to Tenant's failure to vacate the Premises and deliver
possession to Landlord as required by this Lease. If Tenant holds over after
the Expiration Date with Landlord's prior written consent, Tenant will be deemed
to be a Tenant from month-to-month, at a monthly Base Rent, payable in advance,
equal to 150% of monthly Base Rent payable during the last year of the Term, and
Tenant will be bound by all of the other terms, covenants and agreements of this
Lease as the same may apply to a month-to-month tenancy. If Tenant holds over
after the Expiration Date without Landlord's prior written consent, Tenant will

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be deemed a Tenant at sufferance, at a daily Base Rent, payable in advance,
equal to 200% of the Base Rent per day payable during the last year of the Term,
and Tenant will be bound by all of the other terms, covenants and agreements of
this Lease as the same may apply to a tenancy at sufferance.

16. ESTOPPEL CERTIFICATES. Promptly upon Landlord's request after Tenant has
occupied the Premises, Tenant will execute and deliver to Landlord an Occupancy
Estoppel Certificate in the form of EXHIBIT C. In addition, Tenant agrees that
at any time and from time to time (but on not less than ten (10) days' prior
request by Landlord), Tenant will execute, acknowledge and deliver to Landlord a
certificate indicating any or all of the following: (a) the Commencement Date
and Expiration Date; (b) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full force
and effect, as modified, and stating the date and nature of each modification);
(c) the date, if any, through which Base Rent, Additional Rent and any other
Rent payable have been paid; (d) that no default by Landlord or Tenant exists
which has not been cured, except as to defaults stated in such certificate; (e)
that Tenant has no existing defenses or set-offs to enforcement of this Lease,
except as specifically stated in such certificate; (f) provided such events have
occurred, that tenants has accepted the Premises and that all improvements
required to be made to the Premises by Landlord have been completed according to
this Lease; (g) that, except as specifically stated in such certificate, Tenant,
and only Tenant, currently occupies the Premises; and (h) such other matters as
may be reasonably requested by Landlord. Any such certificate may be relied
upon by Landlord and any prospective purchaser or present or prospective
mortgagee, deed of trust beneficiary or ground lessor of all or a portion of the
Building.

17. TRANSFERS OF LANDLORD'S INTEREST

17.1 SALE, CONVEYANCE AND ASSIGNMENT. Subject only to Tenant's rights
under this Lease, nothing in this Lease will restrict Landlord's right to sell,
convey, assign or otherwise deal with the Land, Building or Landlord's interest
under this Lease.

17.2 EFFECT OF SALE, CONVEYANCE OR ASSIGNMENT. A sale, conveyance or
assignment of the Building will automatically release Landlord from liability
under this Lease from and after the effective date of the transfer, except for
any liability relating to the period prior to such effective date; and Tenant
will look solely to Landlord's transferee for performance of Landlord's
obligations relating to the period after such effective date. This Lease will
not be affected by any such sale, conveyance or assignment and Tenant will
attorn to Landlord's transferee.

17.3 SUBORDINATION AND NONDISTURBANCE. This Lease is and will be subject
and subordinate in all respects to any ground Lease, first mortgage or first
deed of trust now or later encumbering the Building or Land, and to all their
renewals, modifications, supplements, consolidations and replacements (an
"Encumbrance"). With respect to any Encumbrance first encumbering the Building
or Land subsequent to the Date of this Lease, Landlord will use its good faith
efforts to cause the holder of such Encumbrance to agree (either in the
Encumbrance or in a

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separate agreement with Tenant) that so long as Tenant is not in default of
its obligations under this Lease, this Lease will not be terminated and
Tenant's possession of the Premises will not be disturbed by the termination
or foreclosure, or proceedings for enforcement, of such Encumbrance. While
such subordination will occur automatically, Tenant agrees, upon request by
and without cost to Landlord or any successor in interest, to promptly
execute and deliver to Landlord or the holder of an Encumbrance such
instrument(s) as may be reasonably required to evidence such subordination.
In the alternative, however, the holder of an Encumbrance may unilaterally
elect to subordinate such Encumbrance to this Lease.

17.4 ATTORNMENT. If the interest of Landlord is transferred to any person
(a "Transferee") by reason of the termination or foreclosure, or proceeding for
enforcement, of any Encumbrance, or by delivery of a deed in lieu of such
foreclosure or proceedings, Tenant will immediately and automatically attorn to
the Transferee. Upon attornment this Lease will continue in full force and
effect as a direct Lease between the Transferee and Tenant, upon all of the same
terms, conditions and covenants as stated in this Lease, except the Transferee
will not be subject to any set-offs or claims which Tenant might have against
any prior Landlord and will not be liable for any act or omission of any prior
Landlord. Tenant agrees, upon request by and without cost to the Transferee, to
promptly execute and deliver to the Transferee such instrument(s) as may be
reasonably required to evidence such attornment.

18. RULES AND REGULATIONS. Tenant agrees to observe and comply with the Rules
and Regulations set forth on EXHIBIT D and with all reasonable modifications and
additions to such Rules and Regulations (which will be applicable to all
Building tenants) from time to time adopted by Landlord and of which Tenant is
notified in writing. No such modification or addition will contradict or
abrogate any right expressly granted to Tenant under this Lease. Landlord's
enforcement of the Rules and Regulations will be uniform and nondiscriminatory,
but Landlord will not be responsible to Tenant for the failure of any person to
comply with the Rules and Regulations.

19. PARKING. Tenant may elect to Lease up to ___________ assigned parking
spaces and/or unassigned parking spaces in the parking garage at the Building
for the parking of vehicles. Tenant will notify Landlord at least thirty (30)
days prior to the Commencement Date of how many of such assigned and/or
unassigned spaces Tenant elects to Lease, and Landlord will make that number of
assigned and/or unassigned spaces available for Lease by Tenant within thirty
(30) days after the Commencement Date. Tenant will pay monthly parking rent for
each space Tenant so elects to Lease at the monthly rate established by Landlord
from time to time for the use of that type of parking space by tenants of the
Building. Landlord will give Tenant at least thirty (30) days notice before
increasing the parking rates. All monthly parking rent will be payable in
advance on the first day of each month during the Term to the same place as Base
Rent (or to such other place as Landlord may direct in writing) and will be
considered Rent under this Lease. Tenant may relinquish any parking space it
previously elected to Lease as of the last day of any calender month by notice
to Landlord given at least thirty (30) days prior to such last day. Any parking
space so relinquished and any of the total available spaces described above that
Tenant does not elect to Lease at least thirty (30) days prior to the
Commencement Date will be forfeited for the remainder of the

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Term and Landlord will have no obligation to subsequently make any of such
spaces available for Lease to Tenant. Tenant's rights to use the Building's
parking garage are nonexclusive (except Landlord will not grant any other
party the right to use Tenant's assigned spaces), will be deemed a license
only and are conditioned upon this Lease being in full force and effect and
there being no Default. Tenant will not abuse its privileges with respect to
such parking garage and will use the same in accordance with Landlord's
reasonable directions. Landlord's inability to make any of the parking spaces
leased by Tenant available at any dime during the Term for reasons beyond the
Landlord's reasonable control will not be deemed a default by Landlord giving
rise to any claim by Tenant, except that tenant will be entitled to an
abatement of monthly parking rent for any such spaces during the period of
unavailability and such abatement will be in full settlement of any claims
that Tenant might otherwise have had for such unavailability. If at any time
during the Term Tenant fails to make timely payment of any monthly parking
rent due, in addition to any other remedies available to Landlord under
Section 20.2, Landlord may terminate Tenant's license under this Section 19
and Tenant will then have no further right to use any parking spaces in the
Building's parking garage.

20. TENANT'S DEFAULT AND LANDLORD'S REMEDIES.

20.1 DEFAULT. Each of the following events will constitute a material
breach by Tenant and a "Default" under this Lease:

(a) FAILURE TO PAY RENT. Tenant fails to pay Base Rent, Additional
Rent or any Rent payable by Tenant under the terms of this Lease when due,
and such failure continues for five (5) days after written notice from
Landlord to Tenant of such failure; provided that with respect to Base Rent
and Additional Rent, Tenant will be entitled to only three (3) notices of
such failure during any twelve (12) month period and if, after three (3)
such notices are given in any twelve (12) month period, Tenant fails,
during such twelve (12) month period, to pay any such amounts when due,
such failure will constitute a Default without further notice by Landlord
or additional cure period.

(b) FAILURE TO PERFORM OTHER OBLIGATIONS. Tenant breaches or fails
to comply with any other provision of this Lease applicable to Tenant, and
such breach or noncompliance continues for a period of twenty (20) days
after notice by Landlord to Tenant; or, if such breach or noncompliance
cannot be reasonably cured within such twenty (20) day period, Tenant does
not in good faith commence to cure such breach or noncompliance within such
twenty (20) day period or does not diligently complete such cure within
sixty (60) days after such notice from Landlord. However, if such breach
or noncompliance causes or results in (i) a dangerous condition on the
Premises or Building, (ii) any insurance coverage carried by Landlord or
Tenant with respect to the Premises or Building being jeopardized, or (iii)
a material disturbance to another Tenant, then a Default will exist if such
breach or noncompliance is not cured as soon as reasonably possible after
notice by Landlord to Tenant, and in any event is not cured within thirty
(30) days after such notice. For purposes of this Section 20.1(b),
financial inability will not be deemed a reasonable ground

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for failure to immediately cure any breach of, or failure to comply with,
the provisions of this Lease.

(c) NONOCCUPANCY OF PREMISES. Tenant fails to occupy and use the
Premises within fifteen (15) days after the Commencement Date or leaves
substantially all of the Premises unoccupied for fifteen (15) consecutive
days or vacates and abandons substantially all of the Premises.

(d) TRANSFER OF INTEREST WITHOUT CONSENT. Tenant's interest under
this Lease or in the Premises is transferred or passes to, or devolves
upon, any other party in violation of Section 13.

(e) EXECUTION AND ATTACHMENT AGAINST TENANT. Tenant's interest under
this Lease or in the Premises is taken upon execution or by other process
of law directed against Tenant, or is subject to any attachment by any
creditor or claimant against Tenant and such attachment is not discharged
or disposed of within fifteen (15) days after levy.

(f) BANKRUPTCY OR RELATED PROCEEDINGS. Tenant files a petition in
bankruptcy or insolvency, or for reorganization or arrangement under any
bankruptcy or insolvency Laws, or voluntarily takes advantage of any such
Laws by answer or otherwise, or dissolves or makes an assignment for the
benefit of creditors, or involuntary proceedings under any such Laws or for
the dissolution of Tenant are instituted against Tenant, or a receiver or
trustee is appointed for the Premises or for all or substantially all of
Tenant's property, and such proceedings are not dismissed or such
receivership or trusteeship vacated within sixty (60) days after such
institution or appointment.

20.2 REMEDIES. Time is of the essence. If any Default occurs, Landlord
will have the right, at Landlord's election then or at any later time, to
exercise any one or more of the remedies described below. Exercise of any of
such remedies will not prevent the concurrent or subsequent exercise of any
other remedy provided for in this Lease or otherwise available to Landlord at
law or in equity.

(a) CURE BY LANDLORD. Landlord may, at Landlord's option but without
obligation to do so, and without releasing Tenant from any obligations
under this Lease, make any payment or take any action as Landlord deems
necessary or desirable to cure any Default in such manner and to such
extent as Landlord deems necessary or desirable. Landlord may do so
without additional demand on, or additional written notice to, Tenant and
without giving Tenant an additional opportunity to cure such Default.
Tenant covenants and agrees to pay Landlord, upon demand, all advances,
costs and expenses of Landlord in connection with making any such payment
or taking any such action, including reasonable attorneys' fees, together
with interest at the rate described in Section 3.5, from the date of any
such advances, costs and expenses by Landlord.

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(b) TERMINATION OF LEASE AND DAMAGES. Landlord may terminate this
Lease, effective at such time as may be specified by written notice to
Tenant, and demand (and, if such demand is refused, recover) possession of
the Premises from Tenant. Tenant will remain liable to Landlord for
damages in an amount equal to the Base Rent, Additional Rent and other Rent
which would have been owing by Tenant for the balance of the Term had this
Lease not been terminated, less the net proceeds, if any, of any reletting
of the Premises by Landlord subsequent to such termination, after deducting
all Landlord's expenses in connection with such recovery of possession or
reletting. Landlord will be entitled to collect and receive such damages
from Tenant on the days on which the Base Rent, Additional Rent, and other
Rent could have been payable if this Lease had not been terminated.
Alternatively, at Landlord's option, Landlord will be entitled to recover
from Tenant, as damages for loss of the bargain and not as a penalty, an
aggregate sum equal to (i) all unpaid Base Rent, Additional Rent and other
Rent for any period prior to the termination date of this Lease (including
interest from the due date to the date of the award at the rate described
in Section 3.5), plus any other sum of money and damages owed by Tenant to
Landlord for events or actions occurring prior to the termination date;
plus (ii) the present value at the time of termination (calculated at the
rate commonly called the discount rate in effect at the Federal Reserve
Bank of New York on the termination date) of the amount, if any, by which
(A) the aggregate of the Base Rent, Additional Rent and all other Rent
payable by Tenant under this Lease that would have accrued for the balance
of the Term after termination (with respect to Additional Rent, such
aggregate will be calculated by assuming that Expenses and Taxes for the
calendar year in which termination occurs and for each subsequent calendar
year remaining in the Term if this Lease had not been terminated will
increase by 8% per year over the amount of Expenses and Taxes for the prior
calendar year), exceeds (B) the amount of such Base Rent, Additional Rent
and other Rent which Landlord will receive for the remainder of the Term
from any reletting of the Premises occurring prior to the date of the
award, or if the Premises have not been relet prior to the date of the
award, the amount, if any, of such Base Rent, Additional Rent and other
Rent which could reasonably be recovered by reletting the Premises for the
remainder of the Term of the then-current fair rental value, in either case
taking into consideration loss of Rent while finding a new Tenant, Tenant
improvements and Rent abatements necessary to secure a new Tenant, leasing
brokers' commissions and other costs which Landlord has incurred or might
incur in leasing the Premises to a new Tenant; plus (iii) interest on the
amount described in (ii) above from the termination date to the date of the
award at the rate described in Section 3.5.

(c) REPOSSESSION AND RELETTING. Landlord may reenter and take
possession of all or any part of the Premises, without additional demand or
notice, and repossess the same and expel Tenant and any party claiming by,
through or under Tenant, and remove the effects of both using such force
for such purposes as may be necessary, without being liable for prosecution
for such action or being deemed guilty of any manner of trespass, and
without prejudice to any remedies for arrears of Rent or right to bring any
proceeding for breach of covenants or conditions. No such reentry or
taking possession of the Premises by Landlord will be construed as an
election by Landlord to terminate this Lease unless a written notice

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of such intention is given to Tenant. No notice from Landlord or notice
given under a forcible entry and detainer statute or similar Laws will
constitute an election by Landlord to terminate this Lease unless such
notice specifically so states. Landlord reserves the right, following
any reentry or reletting, to exercise its right to terminate this Lease
by giving Tenant such written notice, in which event the Lease will
terminate as specified in such notice. After recovering possession of
the Premises, Landlord shall use reasonable efforts to relet all or any
part of the Premises for Tenant's account, for such term or terms and on
such conditions and other terms as Landlord, in its discretion, determines.
Landlord may make such repairs, alterations or improvements as Landlord
considers appropriate to accomplish such reletting, and Tenant will
reimburse Landlord upon demand for all costs and expenses, including
attorneys' fees, which Landlord may incur in connection with such
reletting. Landlord may collect and receive the rents for such reletting
but Landlord will in no way be responsible or liable for any failure to
relet the Premises or for any inability to collect any rent due upon such
reletting. Regardless of Landlord's recovery of possession of the
Premises, Tenant will continue to pay on the dates specified in this Lease,
the Base Rent, Additional Rent and other Rent which would be payable if
such repossession had not occurred, less a credit for the net amounts, if
any, actually received by Landlord through any reletting of the Premises.
Alternatively, at Landlord's option, Landlord will be entitled to recover
from Tenant, as damages for loss of the bargain and not as a penalty, an
aggregate sum equal to (i) all unpaid Base Rent, Additional Rent and other
Rent for any period prior to the repossession date (including interest from
the due date to the date of the award at the rate described in
Section 3.5), plus any other sum of money and damages owed by Tenant to
Landlord for events or actions occurring prior to the repossession date;
plus (ii) the present value at the time of repossession (calculated at the
rate commonly called the discount rate in effect at the Federal Reserve
Bank of New York on the repossession date) of the amount, if any, by which
(A) the aggregate of the Base Rent, Additional Rent and all other Rent
payable by Tenant under this Lease that would have accrued for the balance
of the Term after repossession (with respect to Additional Rent, such
aggregate will be calculated by assuming that Expenses and Taxes for the
calendar year in which repossession occurs and for each subsequent calendar
year remaining in the Term if Landlord had not repossessed the Premises
will increase by 8% per year over the amount of Expenses and Taxes for the
prior calendar year), exceeds (B) the amount of such Base Rent, Additional
Rent and other Rent which Landlord will receive for the remainder of the
Term from any reletting of the Premises occurring prior to the date of the
award, or if the Premises have not been relet prior to the date of the
award, the amount, if any, of such Base Rent, Additional Rent and other
Rent which could reasonably be recovered by reletting the Premises for the
remainder of the Term at the then-current fair rental value, in either case
taking into consideration loss of rent while finding a new tenant, tenant
improvements and rent abatements necessary to secure a new tenant, leasing
brokers' commissions and other costs which Landlord has incurred or might
incur in leasing the Premises to a new tenant; plus (iii) interest on the
amount described in (ii) above from the repossession date to the date of
the award at the rate described in Section 3.5.

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(d) BANKRUPTCY RELIEF. Nothing contained in this Lease will limit or
prejudice Landlord's right to prove and obtain as liquidated damages in any
bankruptcy, insolvency, receivership, reorganization or dissolution
proceeding, an amount equal to the maximum allowable by any Laws governing
such proceeding in effect at the time when such damages are to be proved,
whether or not such amount be greater, equal or less than the amounts
recoverable, either as damages or Rent, under this Lease.

21. LANDLORD'S DEFAULT AND TENANT'S REMEDIES.

21.1 DEFAULT. If Tenant believes that Landlord has breached or failed to
comply with any provision of this Lease applicable to Landlord, Tenant will
given written notice to Landlord describing the alleged breach or noncompliance.
Landlord will not be deemed in default under this Lease if Landlord cures the
breach or noncompliance within twenty (20) days after receipt of Tenant's notice
or, if the same cannot reasonably be cured within such 20-day period, if
Landlord in good faith commences to cure such breach or noncompliance within
such period and then diligently pursues the cure to completion. Tenant will
also send a copy of such notice to the holder of any Encumbrance of whom Tenant
has been notified in writing, and such holder will also have the right to cure
the breach or noncompliance within the period of time described above.

21.2 REMEDIES. If Landlord breaches or fails to comply with any provision
of this Lease applicable to Landlord, and such breach or noncompliance is not
cured within the period of time described in Section 21.1, then Tenant may
exercise any right or remedy available to Tenant at law or in equity, except to
the extent expressly waived or limited by the terms of this Lease.

22. SECURITY DEPOSIT.

22.1 AMOUNT. Upon execution of this Lease, Tenant will deposit the
Security Deposit with Landlord in the amount described in Section 1.1(j). At
any time during the Term, subsequent to an increase in Base Rent pursuant to the
terms of this Lease, Tenant will, within thirty (30) days after Landlord's
written request, further deposit with Landlord, as additional Security Deposit,
the amount, if any, required to cause the total Security Deposit held by
Landlord to be equal to one month's installment of the then-current Base Rent
plus one month's installment of the then-estimated Additional Rent. Landlord
and Tenant intend the Security Deposit to be used solely as security for
Tenant's faithful and diligent performance of all of Tenant's obligations under
this Lease. The Security Deposit will remain in Landlord's possession for the
entire Term, and Landlord will not be required to segregate it from Landlord's
general funds. Tenant will not be entitled to any interest on the Security
Deposit.

22.2 USE AND RESTORATION. If Tenant fails to perform any of its
obligations under this Lease, Landlord may, at its option, use, apply or retain
all or any part of the Security Deposit for the payment of (1) any Rent in
arrears; (2) any expenses Landlord may incur as a direct or indirect result of
Tenant's failure to perform; and (3) any other losses or damages Landlord may
suffer as a direct or indirect result of Tenant's failure to perform. If
Landlord so uses or applies all or any portion of

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<PAGE>

the Security Deposit, Landlord will notify Tenant of such use or application
and Tenant will, within ten (10) days after the date of Landlord's notice,
deposit with Landlord a sum sufficient to restore the Security Deposit to the
amount held by Landlord immediately prior to such use or application.
Tenant's failure to so restore the Security Deposit will constitute a Default.

22.3 TRANSFERS. Tenant will not assign or encumber the Security Deposit
without Landlord's express written consent. Neither Landlord nor its successors
or assigns will be bound by any assignment or encumbrance unless Landlord has
given its consent. Landlord will have the right, at any time and from time to
time, to transfer the Security Deposit to any purchaser or lessee of the entire
Building. Upon any such transfer, Tenant agrees to look solely to the new owner
or lessee for the return of the Security Deposit.

22.4 REFUND. Provided that Tenant has fully and faithfully performed all
of its obligations under this Lease, Landlord will refund the Security Deposit,
or any balance remaining, to Tenant or, at Landlord's option, to the latest
assignee of Tenant's interest under this Lease, within sixty (60) days after the
expiration or early termination of the Term and Tenant's vacation and surrender
of the Premises to Landlord in the condition required by Section 15.1. If
Tenant fails to make any final estimated payment of Additional Rent required by
Landlord according to Section 3.2(c), Landlord may withhold such final payment
from the amount of the Security Deposit refund.

23. BROKERS. Landlord and Tenant represent and warrant that no broker or agent
negotiated or was instrumental in negotiating or consummating this Lease except
the Brokers. Neither party knows of any other real estate broker or agent who
is or might be entitled to a commission or compensation in connection with this
Lease. Landlord will pay all fees, commissions or other compensation payable to
the Brokers to be paid by Landlord according to Section 1.1(o) and Tenant will
pay all fees, commissions or other compensation payable to the Brokers to be
paid by Tenant according to Section 1.1(o). Tenant and landlord will indemnify
and hold each other harmless from all damages paid or incurred by the other
resulting from any claims asserted against either party by brokers or agents
claiming through the other party.

24. LIMITATIONS ON LANDLORD'S LIABILITY. Any liability for damages, breach or
nonperformance by Landlord, or arising out of the subject matter of, or the
relationship created by, this Lease, will be collectible only out of Landlord's
interest in the Building and no personal liability is assumed by, or will at any
time be asserted against, Landlord, its parent and affiliated corporations, its
and their partners, venturers, directors, officers, agents, servants and
employees, or any of its or their successors or assigns; all such liability, if
any, being expressly waived and released by Tenant. Landlord's review,
supervision, commenting on or approval of any aspect of work to be done by or
for Tenant (under Section 7, EXHIBIT B or otherwise) are solely for Landlord's
protection and, except as expressly provided, create no warranties or duties to
Tenant or to third parties.

25. NOTICES. All notices required or permitted under this Lease must be in
writing and will only be deemed properly given and received (a) when actually
given and received, if delivered in person to a party who acknowledges receipt
in writing; or (b) one business day after deposit with a

-29-
<PAGE>

private courier or overnight delivery service, if such courier or service
obtains a written acknowledgment of receipt; or (c) two (2) business days
after deposit in the United States mails, certified or registered mail with
return receipt requested and postage prepaid. All such notices must be
transmitted by one of the methods described above to the party to receive the
notice at, in the case of notices to Landlord, both Landlord's Building
Address and Landlord's General Address, and in the case of notices to Tenant,
the applicable Tenant's Notice Address, or, in either case, at such other
address(es) as either party may notify the other of according to this Section
25.

26. MISCELLANEOUS.

26.1 BINDING EFFECT. Each of the provisions of this Lease will extend to
bind or inure to the benefit of, as the case may be, Landlord and Tenant, and
their respective heirs, successors and assigns, provided this clause will not
permit any transfer by Tenant contrary to the provisions of Section 13.

26.2 COMPLETE AGREEMENT; MODIFICATION. All of the representations and
obligations of the parties are contained in this Lease and no modification,
waiver or amendment of this Lease or of any of its conditions or provisions will
be binding upon a party unless in writing signed by such party.

26.3 DELIVERY FOR EXAMINATION. Submission of the form of the Lease for
examination will not bind Landlord in any manner, and no obligations will arise
under this Lease until it is signed by both Landlord and Tenant and delivery is
made to each.

26.4 NO AIR RIGHTS. This Lease does not grant any easements or rights for
light, air or view. Any diminution or blockage of light, air or view by any
structure or condition now or later erected will not affect this Lease or
impose any liability on Landlord.

26.5 ENFORCEMENT EXPENSES. Each party agrees to pay, upon demand, all
of the other party's costs, charges and expenses, including the fees and
out-of-pocket expenses of counsel, agents, and others retained, incurred in
successfully enforcing the other party's obligations under this Lease.

26.6 RELOCATION OF TENANT. At any time after the Date, Landlord may, upon
at least forty-five (45) days' prior notice, substitute for the Premises other
premises in the Building ("New Premises") provided that the New Premises will be
similar to the Premises in area and usable for Tenant's purpose. If Tenant is
already occupying the Premises, then Landlord will also pay the reasonable
expenses of Tenant's moving from the Premises to the New Premises and for
improving the New Premises so that the leasehold improvements in the New
Premises are substantially similar to those in the Premises. Such move will be
made during evenings, weekends or otherwise so as to incur the least
inconvenience to Tenant.

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<PAGE>

26.7 BUILDING NAME. Tenant will not, without Landlord's consent, use
Landlord's or the Building's name, or any facsimile or reproduction of the
Building, for any purpose; except that Tenant may use the Building's name in the
address of the business to be conducted by Tenant in the Premises. Landlord
reserves the right, upon reasonable prior notice to Tenant, to change the name
or address of the Building.

26.8 NO WAIVER. No waiver of any provision of this Lease will be implied
by any failure of either party to enforce any remedy upon the violation of such
provision, even if such violation is continued or repeated subsequently. No
express waiver will affect any provision other than the one specified in such
waiver, and that only for the time and in the manner specifically stated.

26.9 RECORDING; CONFIDENTIALITY. Tenant will not record this Lease, or a
short form memorandum, without Landlord's written consent and any such recording
without Landlord's written consent will be a Default. Tenant agrees to keep the
Lease terms, provisions and conditions confidential and will not disclose them
to any other person without Landlord's prior written consent. However, Tenant
may disclose Lease terms, provisions and conditions to Tenant's accountants,
attorneys, managing employees and others in privity with Tenant, as reasonably
necessary for Tenant's business purposes, without such prior consent.

26.10 CAPTIONS. The captions of sections are for convenience only and
will not be deemed to limit, construe, affect or alter the meaning of such
sections.

26.11 INVOICES. All bills or invoices to be given by Landlord to
Tenant will be sent to Tenant's Invoice Address. Tenant may change Tenant's
Invoice Address by notice to Landlord given according to Section 25. If Tenant
fails to give Landlord specific written notice of its objections within sixty
(60) days after receipt of any bill or invoice from Landlord, such bill or
invoice will be deemed true and correct and Tenant may not later question the
validity of such bill or invoice or the underlying information or computations
used to determine the amount stated.

26.12 SEVERABILITY. If any provision of this Lease is declared void or
unenforceable by a final judicial or administrative order, this Lease will
continue in full force and effect, except that the void or unenforceable
provision will be deemed deleted and replaced with a provision as similar in
terms to such void or unenforceable provision as may be possible and be valid
and enforceable.

26.13 JURY TRIAL. Landlord and Tenant waive trial by jury in any
action, proceeding or counterclaim brought by Landlord or Tenant against the
other with respect to any matter arising out of or in connection with this
Lease, Tenant's use and occupancy of the Premises or the relationship of
Landlord and Tenant. However, such waiver of jury trial will not apply to any
claims for personal injury.

26.14 AUTHORITY TO BIND. The individuals signing this Lease on behalf
of Landlord and Tenant represent and warrant that they are empowered and duly
authorized to bind Landlord or Tenant, as the case may be, to this Lease
according to its terms.

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<PAGE>

26.15 ONLY LANDLORD/TENANT RELATIONSHIP. Landlord and Tenant agree
that neither any provision of this Lease nor any act of the parties will be
deemed to create any relationship between Landlord and Tenant other than the
relationship of landlord and tenant.

26.16 COVENANTS INDEPENDENT. The parties intend that this Lease be
construed as if the covenants between Landlord and Tenant are independent and
not dependent and that the Rent will be payable without offset, reduction or
abatement for any cause except as otherwise specifically provided in this Lease.

26.17 GOVERNING LAW. This Lease will be governed by and construed
according to the laws of the State of Colorado.

27. CONSENT RIGHTS OF LANDLORD'S LENDER. Landlord has granted to General
Electric Capital Corporation ("GECC"), as Beneficiary, that First Deed of Trust
and Security Agreement dated as of August 8, 1994 ("Deed of Trust") and in
connection therewith has additionally executed an Assignment of Rents and Leases
dated as of August 8, 1994 in favor of GECC ("Assignment") to secure a loan from
GECC to Landlord ("Loan"). Any cancellation, abridgment, surrender,
modification or amendment of this Lease during the term of the Loan without the
prior written consent of GECC, except as permitted by the provisions of the
Assignment or the Deed of Trust, shall be voidable as against GECC, at its
option.

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<PAGE>

Having read and intending to be bound by the terms and provisions of this
Lease, Landlord and Tenant have signed it as of the Date.

TENANT: LANDLORD:

EVANSGROUP, INC., a Utah AMSTAR DENVER, LTD., a Colorado
limited partnership corporation

By: Jon Johnson /ss By: ADCBD, Ltd., a Colorado limited
------------------------------ partnership, general partner

Printed Name: Jon L. Johnson By: Amstar Capital Management
-------------------- Corporation, a Colorado
corporation, general partner

Title: President & C.E.O. By: David B. Agnew /ss
------------------------ ----------------------------
David B. Agnew, President

And By: Bradley J. Nordgren /ss
--------------------------

Printed Name: Bradley J. Nordgren Approved by Counsel: Donna Kuhn
--------------------- -------------

Title: Senior V.P. - C.E.O.
-------------------------

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<PAGE>

STATE OF UTAH Section
Section ss.
COUNTY OF SALT LAKE Section

This Lease Agreement was acknowledged before me this 31 day of October,
1994 by Jon L. Johnson as President & CEO and Bradley J. Nordgren as Sr. VP &
CFO of Evansgroup, Inc., a Utah corporation.

WITNESS my hand and official seal.

Donna L. Starbuck /ss
---------------------------------
Notary Public

My Commission Expires: Sept. 8, 1995.
---------------

STATE OF COLORADO Section
CITY AND Section ss.
COUNTY OF DENVER Section

This Lease Agreement was acknowledged before me this 10th day of November,
1994 by David B. Agnew as President of Amstar Capital Management Corporation, a
Colorado corporation, as general partner of ADCBD, Ltd., a Colorado limited
partnership, as general partner of Amstar Denver, Ltd., a Colorado limited
partnership.

WITNESS my hand and official seal.

Edith C. Aldinger /ss
--------------------------------
Notary Public

My Commission Expires: August 5, 1995
--------------

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<PAGE>

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (this "First Amendment") is entered into this
10th day of October, 1995, by and between AMSTAR DENVER, LTD., a Colorado
limited partnership ("Landlord"), and EVANSGROUP, INC., a Utah corporation
("Tenant").

W I T N E S S E T H:

WHEREAS, Landlord and Tenant did enter into a Lease Agreement dated October
1, 1994 (the "Lease"), for approximately 10,105 rentable square feet (the
"Original Premises"), in that certain building commonly known as Independence
Plaza located at 1050 Seventeenth Street, Denver, Colorado 80265; and

WHEREAS, in addition to the Original Premises, Tenant wishes to lease from
Landlord and Landlord wishes to lease to Tenant approximately 1,419 net rentable
square feet on the seventh floor of Independence Plaza (the "Expansion Space");
and

WHEREAS, Tenant and Landlord desire to amend the Lease and enter into such
other agreements as are hereinafter set forth.

NOW, THEREFORE, in consideration of the premises, the mutual promises
contained here, and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree that said
Lease shall be and the same is hereby amended as of the 10th day of October,
1995 as follows:

1. DEMISE. The following paragraph is hereby added at the end of Section
1.1(d) of the Lease:

"Landlord does hereby lease to Tenant and Tenant hereby leases from
Landlord approximately 1,419 net rentable square feet (the "Expansion Space") as
depicted on Exhibit A - 1, which letting is upon and subject to the terms of the
Lease as amended by this First Amendment. Except as specifically set forth
herein, any reference to the Premises shall, as of the "Expansion Space
Effective Date" (as hereinafter defined), be deemed to include the Original
Premises and the Expansion Space, for an aggregate of approximately 11,524
rentable square feet."

2. TERM. The Section 1.1(f) of the Lease is hereby deleted and is
replaced with the following:

"Term" means the duration of this Lease, which will be approximately
seventy-two months, beginning October 1, 1994 ("Commencement Date") and ending
on September 30, 2000 ("Expiration Date"). Notwithstanding the foregoing, the
term of this Lease with respect to the Expansion Space shall commence on
November 1, 1995 (the "Expansion Space Effective Date"), and shall end on the
Expiration Date."

<PAGE>

3. COMPLETION OF THE EXPANSION SPACE. Exhibit B-1 attached hereto is
hereby added to the Lease.

4. BASE RENT. The following paragraph is hereby added to Section 1.1(g)
of the Lease:

"Effective as of the Expansion Space Effective Date, Base Rent shall
be increased as set forth below:

<TABLE>
<CAPTION>
MONTHS AMOUNT OF BASE RENT PAYABLE PER MONTH
------ -------------------------------------
<S> <C>
13-24 $11,642.25
25-36 $12,122.42
37-48 $12,602.64
49-60 $13,082.76
61-72 $13,562.91
</TABLE>

5. TENANT'S SHARE. Section 1.1(h) of the Lease is amended to add the
following after the first sentence of said Section:

"Notwithstanding the foregoing, from and after the Expansion Space
Effective Date, "Tenant's Share" shall mean with respect to the calculation of
Additional Rent according to Section 3.2, 1.985%."

6. PARKING. The first sentence of Section 19 of the Lease is hereby
deleted and hereby replaced with the following:

"Tenant may elect to lease up to 12 unassigned spaces in the parking
garage at the Building for the parking of vehicles."

7. TERMINATION OPTION. Subsection (ii)(a) of the first sentence of
Section 28 is hereby amended by deleting the number "$26,576.00" and replacing
the same with the number "$30,308.12".

8. CREDIT OF UNUSED BALANCE OF LANDLORD'S EXPANSION ALLOWANCE.

The following Section 30 is hereby added to the Lease:

"30. CREDIT OF UNUSED BALANCE OF LANDLORD'S EXPANSION ALLOWANCE.
Notwithstanding anything contained in this Lease to the contrary and
subject to the following conditions. Tenant shall have the right to
elect to utilize any unused portion of Landlord's Expansion Allowance
as a credit against Rent for

<PAGE>

the months of February and March, 1996, provided (i) Tenant is not
in default under this Lease at the time of such election and (ii)
Tenant gives Landlord written notice of such election no later than
January 15, 1996. In the event Tenant fails to comply with both of
the immediately foregoing conditions, Tenant shall be deemed to
have waived its right to utilize said any unused portion of
Landlord's Expansion Allowance as a credit against Rent."

9. BROKERS. Landlord and Tenant hereby represent and warrant to each
other that they have not dealt with any broker, agent or finder other than
BetaWest, Inc. and CB Commercial, and Fuller and Company for whose commission
Landlord shall be responsible under separate agreements, in connection with this
First Amendment, and Landlord and Tenant hereby agree to indemnify and hold the
other party harmless from all damages, liabilities and expenses, including
reasonable attorneys' fees, arising from any claims or demands of any other
broker, agent or finder for any commission alleged to be due to such broker,
agent or finder in connection with this Lease.

10. CONTINGENT ON GECC APPROVAL. Landlord has granted to General Electric
Capital Corporation ("GECC"), as Beneficiary, that First Deed of Trust and
Security Agreement dated as of August 8, 1994 ("Deed of Trust") and in
connection therewith has additionally executed an Assignment of Rents and Leases
dated as of August 8, 1994 in favor of GECC ("Assignment") to secure a loan from
GECC to Landlord ("Loan"). Any cancellation abridgment, surrender, modification
or amendment of the Lease during the term of the Loan without the prior, written
consent of GECC, except as permitted by the provisions of the Assignment or the
Deed of Trust, shall be voidable as against GECC, at its option. Tenant and
Landlord hereby acknowledge that this First Amendment shall be contingent upon
GECC's approval of this First Amendment.

11. MISCELLANEOUS.

A. Except as expressly modified herein, the Lease remains in full
force and effect and is hereby ratified by the parties hereto.

B. Capitalized terms not defined herein shall have the same meaning
as set forth in the Lease.

C. In the event of any conflict between the Lease and this First
Amendment, the terms and provisions of this First Amendment shall control.

D. In the event of any litigation arising out of or in connection
with this First Amendment, the prevailing party shall be awarded reasonable
attorneys' fees, costs and expenses.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Lease as of the day and year first above written.

LANDLORD:

AMSTAR DENVER, LTD., a Colorado limited partnership
By: ADCBD, LTD., a Colorado limited partnership,
its General Partner
By: AMSTAR CAPITAL MANAGEMENT CORPORATION,
a Colorado corporation, its General Partner

By: /s/ DAVID B. AGNEW
--------------------------------------------
David B. Agnew, President

TENANT:

EVANSGROUP, INC., a Utah corporation

By:
--------------------------------------------

Title: Vice Chairman
------------------------------------------

<PAGE>

AGREEMENT REGARDING THE
DRILLING OF COALBED METHANE WELLS

This Agreement Regarding the Drilling of Coalbed Methane Wells
("Agreement") is effective the 1st day of October, 1998 ("Effective Date") and
is by and between CBM Drilling LLC, a Wyoming limited liability company ("CBM")
whose address is P.O. Box 353, Evansville, WY 82636 and Pennaco Energy, Inc
("Pennaco") whose address is 1050 17th Street, Suite 700, Denver, Colorado
80265.

RECITALS

A. Pennaco owns and operates certain undeveloped oil and gas interests
located in the Powder River Basin in Montana and Wyoming and is interested in
developing those interests by drilling coalbed methane wells into the Fort Union
Formation.

B. CBM has the equipment and expertise to drill coalbed methane wells to
Pennaco's. specifications (with such CBM drilled wells being the "Wells").

C. To facilitate CBM's drilling of such Wells for Pennaco, Pennaco has
heretofore paid CBM $250,000 as a prepayment for such drilling and agrees to pay
CBM an additional prepayment of $110,000 upon the execution of this Agreement
(collectively, the "Prepayment" as more fully described in Section 1 below).

D. To further facilitate the drilling of such Wells for Pennaco, Pennaco
has agreed to loan CBM $90,000 (the "Loan"), to be secured with a first and
prior security interest in all of CBM's personal property and equipment pursuant
to a "Security Agreement."

E. To memorialize their agreement with respect to the drilling of the
Wells, the Prepayment, the Loan and Security Agreement, the parties wish to
enter into this Agreement.

<PAGE>

AGREEMENT

NOW THERETOFORE, for and in consideration of the foregoing, $100 and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:

1. PREPAYMENT FOR DRILLING. Prior to the execution of this Agreement,
Pennaco has paid CBM the sum of $250,000 as a prepayment for the drilling of
certain of the Wells. Contemporaneously with the execution of this Agreement,
Pennaco shall pay CBM the additional sum of $110,000 as a prepayment for the
drilling of Wells as hereinafter provided. The $250,000 prepayment and the
$110,000 prepayment are herein collectively referred to as the "Prepayment." The
Prepayment will be credited to every third Well drilled by CBM, i.e. for every
three Wells CBM drills, CBM agrees to invoice Pennaco for two of such Wells upon
the completion of each Well and apply a portion of the Prepayment to pay the
invoice for the third Well. Pennaco agrees to pay the CBM invoices within then
(10) days of receipt. Upon expiration or termination of this Agreement, any
unused portion of the Prepayment shall be refunded, without interest, to Pennaco
within five (5) days after such termination. Such refund obligation shall be
secured by the Security Agreement hereinafter described.

2. DRILLING OF THE WELLS.

a. CBM will not be obligated to use more than three (3) rigs to
drill the Wells unless Pennaco, with CBM's consent, elects to make an additional
$90,000 prepayment for each additional rig which Pennaco requests CBM to provide
for the drilling of the Wells. Such $90,000

-2-

<PAGE>

prepayment will enable CBM to purchase a rig and such rig shall automatically
become subject to the Security Agreement hereinafter described.

b. It is the intent of the parties that as of the termination of
this Agreement (except for breach), CBM shall have been offered the right to
drill 75% of the coalbed methane wells drilled on leases operated by Pennaco in
Campbell, Sheridan and Johnson Counties, Wyoming, and in Big Horn, Rosebud and
Powder River Counties, Montana. This right shall terminate upon the earlier of
(i) when CBM has been offered 1,000 wells under the terms of this Agreement to
drill on acreage operated by Pennaco or (ii) upon termination of this Agreement
as hereinafter provided. However, it is recognized that at any particular time
during the term of this Agreement, CBM may be drilling more or less than 75% of
the wells then being drilled. In the event Pennaco offers a well to CBM for
drilling while CBM is using fewer than 3 rigs on Pennaco wells (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2.a.
above if Pennaco has made additional prepayments) and CBM is unable to drill
such well within the drilling schedule for such well or elects not to drill such
well, such well shall count toward the 1,000 well maximum. Only those wells
offered to and undrilled by CBM while CBM has fewer than 3 rigs (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2. a.
above) will be included in the 1,000 well maximum. CBM also will have the right
to sub-contract with one or more third-party drillers (the "Driller(s)") to meet
its drilling obligations under this Agreement. Pennaco will have the right to
accept or reject any Driller proposed for use by CBM under this Agreement. Such
Drillers must agree in writing with Pennaco to look solely to CBM for payment
and to waive any rights to file liens against the Wells drilled under this
Agreement. Notwithstanding

-3-
<PAGE>

the foregoing, nothing in this Agreement is intended to obligate Pennaco to
drill any minimum number of wells during the term hereof.

b. In the event of a slow-down in or cessation of drilling
activities on Pennaco-operated wells, Pennaco shall release third-party drilling
rigs first so that CBM is the last to be released.

c. Wells shall be drilled by CBM or third-party Drillers pursuant to
the Drilling Contract (including Exhibit A thereto) attached hereto as EXHIBIT
1. Upon Pennaco's payment to CBM for work performed by third-party Drillers
under the Drilling Contract, CBM shall indemnify and hold Pennaco harmless from
any claims for payments by such Drillers. In the event of any claims for
payment by such Drillers, Pennaco shall have the right, but not the obligation,
in addition to all of its other remedies at law or in equity, to suspend
payments hereunder to CBM until such claims have been resolved.

e. All wells shall be drilled in a good and workmanlike manner to
industry standards and to the specifications provided by Pennaco at any time and
from time to time. The Parties shall work diligently together in order to
attempt to resolve operational problems and performance problems as they arise.

f. Pennaco shall enter into a separate agreement with Powder River
Cementers giving Powder River the same rights as to the cementing of wells as
CBM has for drilling hereunder', provided, however, that the rates for such
cementing work must be competitive; provided, however, that such agreement shall
not require any prepayments or obligation to loan.

g. To facilitate the timely drilling of the Wells, Pennaco agrees to
forward to CBM reasonable advance notice of Pennaco's proposed drilling
schedule. The parties agree to work

-4-
<PAGE>

together in good faith to schedule and meet such schedule for the drilling of
the Wells, as the same may be amended at any time and from time to time by
Pennaco.

h. Pennaco, at its cost and expense, agrees to obtain and comply
with all permits necessary to drill the Wells. Pennaco will be responsible for
the negotiating of and payment of surface owner agreements and will provide
copies of same to CBM.

3 . LOAN/PROMISSORY NOTE. As soon as a Note and Security Agreement have
been mutually agreed to by Pennaco and CBM, Pennaco agrees to lend CBM $90,000
to be evidenced by a Term Promissory Note (the "Note") which shall heave a term
of 3 years and shall provide that the principal and interest, accrued on a
semi-annual basis at the rate of ten percent (10%) per annum for the first two
years and thirteen percent (13%) per annum for the third year, shall be paid at
maturity. There shall be no prepayment penalty.

4. ADDITIONAL LOANS. Similarly, Pennaco agrees, if requested by CBM on
or before June 30, 1999, to loan CBM, promptly after such request, an additional
$150,000.00, in $75,000.00 increments, for a three year term from the date of
each loan, with principal and accrued interest, accrued on a semi-annual basis
at the rate of 2.25% over the Prime Rate of Chase Manhattan Bank on the date of
each loan for the first two years and 5.25% over such Prime Rate on the date of
each loan for the third year, to be paid on the maturity date or earlier with no
prepayment penalty. Such additional loans shall be evidenced by Secured
Promissory Notes in the same form as the Note negotiated in connection with
paragraph 4 above and shall be secured by the Security Agreement.

5. SECURITY AGREEMENT. To secure any refund obligation under this
Agreement and CBM's obligations under the Note and any additional loans pursuant
to paragraph 4 above, CBM agrees to grant Pennaco a first and prior security
interest in all of CBM's personal property and

-5-
<PAGE>

equipment including, but not limited to, the personal property and equipment
described on EXHIBIT 2 (the "Collateral"). To grant the security interest to
Pennaco, CBM, as debtor, agrees to execute a Security Agreement and such other
documentation as reasonably deemed necessary in Pennaco's discretion to perfect
Pennaco's security interest in the Collateral, including without limitation,
local UCC filings in the appropriate counties and state central recording
offices.

6. INDEPENDENT CONTRACTOR STATUS. The parties intend that CBM provide
the services under this Agreement as an independent contractor. This Agreement
is not intended to create, and shall not create a joint venture, partnership or
any other type of business association.

7. TERM. This Agreement shall terminate upon the earlier of (i)
completion of the drilling of the last well by CBM which constitutes the 1,000th
well offered by Pennaco to CBM for drilling, or (ii) five years after the
Effective Date hereof. If the 1,000 well number has not been reached by
December 31, 2000, either Party may request renegotiation of the terms of the
Drilling Contract based on prevailing market conditions at the time. If the
parties are unable to agree on renegotiation of such terms within sixty (60)
days after a request for renegotiation is made, either Party may terminate this
Agreement on thirty (30) days notice to the other Party. Notwithstanding the
foregoing, this Agreement may be terminated earlier by Pennaco in the event of a
breach of this Agreement by CBM which is not cured within ten (10) days after
notice by Pennaco of such breach. Upon expiration of the term of this Agreement
(except for termination due to the breach of this Agreement by CBM), the Parties
shall meet to attempt to negotiate a new Agreement for services on other wells
to be drilled by Pennaco.

-6-
<PAGE>

8. MISCELLANEOUS.

a. GOVERNING LAW. The parties agree that this Agreement is governed
by and shall be construed pursuant to the laws of the State of Colorado.

b. NOTICES. All notices and communications required or permitted
under this Agreement shall be in writing and addressed to the parties at the
addresses set forth above. Any communication or delivery hereunder shall be
deemed to have been duly made when received by the receiving party and may be
personally delivered, sent by certified mail, return receipt requested,
overnight courier or facsimile transmission. Any party may, by written notice
so delivered to the other parties, change the address or individual to which
delivery shall thereafter be made.

c. AMENDMENTS. This Agreement may not be amended except by an
instrument in writing signed by the party to be charged with such amendment and
delivered by such party to the party claiming the benefit of such amendment.

d. NO WAIVER. A waiver by either Party of any breach of this
Agreement shall not be deemed to be a waiver of any subsequent breach, whether
of the same type or otherwise.

e. ASSIGNMENT. This Agreement may not be assigned without the
express written consent of the other Party, which consent shall not be
unreasonably withheld. CBM hereby consents to the assignment of this Agreement
to CMS Oil and Gas Company ("CMS"), at the election of CMS, as to wells to be
drilled by CMS on acreage operated by CMS in Campbell, Sheridan and Johnson
Counties, Wyoming, and in Big Horn, Rosebud and Powder River Counties, Montana.
If CMS elects to accept such assignment it shall execute a ratification of this
Agreement and, thereafter, this Agreement shall apply in the same manner as if
CMS had been an original signatory hereto so that the wells drilled by CBM for
CMS shall count toward the 1,000 well maximum and

-7-
<PAGE>

CBM shall drill for CMS on the same terms as for Pennaco; provided, however,
that the Prepayment shall be credited only against wells drilled for Pennaco,
CMS shall not be obligated to make any prepayments, and CMS shall not be
obligated to make any of the loans.

f. HEADINGS. Headings used in this Agreement are for guidance and
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions of this Agreement.

g. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding among the parties, superseding all negotiations, prior discussion
and prior agreements.

h. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns.

Executed on the dates set forth below but effective as of the Effective
Date.

-8-
<PAGE>

Pennaco Energy, Inc.

By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------

CBM Drilling, LLC

BY:
---------------------------
its Manager

By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------

-9-

<PAGE>

EXHIBIT 16

[Letterhead of David E. Coffey]

Securities and Exchange Commission
Washington, D.C. 20549

December 18, 1998

Ladies and Gentlemen:

I was previously the principal accountant for Pennaco Energy, Inc. and under
the date of April 30, 1998, I reported on the financial statement of Pennaco
Energy, Inc. as of April 15, 1998 and for the period from January 26, 1998
(date of inception) to April 15, 1998. On October 30, 1998, my appointment as
principal accountant was terminated. I have read Pennaco Energy, Inc.'s
statements included under Item 3 of its Form 10 SB dated December 22, 1998,
and I agree with such statements.

Very truly yours,

/s/ DAVID E. COFFEY
- -----------------------
David E. Coffey, C.P.A.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PENNACO
ENERGY, INC.'S SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-26-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,358,125
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,686,878
<PP&E> 16,300,887
<DEPRECIATION> (34,217)
<TOTAL-ASSETS> 19,297,963
<CURRENT-LIABILITIES> 6,678,007
<BONDS> 0
0
0
<COMMON> 14,795
<OTHER-SE> 12,605,161
<TOTAL-LIABILITY-AND-EQUITY> 19,297,963
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,736,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 649,946
<INCOME-PRETAX> (5,356,338)
<INCOME-TAX> (1,280,000)
<INCOME-CONTINUING> (4,076,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,076,338)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)

</TABLE>