PENNACO ENERGY INC, 10-12G/A, 1998-09-15

PENNACO ENERGY INC
10-12G/A, 1998-09-15
DRILLING OIL & GAS WELLS

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

FORM 10-SB/A
AMENDMENT NO.1

GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS

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

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

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

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

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

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

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

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

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

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

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

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

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

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BUSINESS STRATEGY

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

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

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

RECENT DEVELOPMENTS

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

RISK FACTORS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

BACKGROUND

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

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

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

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

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

<PAGE>

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

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

COMPANY HISTORY

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

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

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

CBM STRATEGY

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

STRATEGIC ALLIANCES AND PARTNERING

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

<PAGE>

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

BRIDGE LOAN

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

THE COMPANY'S DRILLING PROGRAM

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

GAS GATHERING IN THE POWDER RIVER BASIN

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

<PAGE>

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

MARKETING OF PRODUCTION

POWDER RIVER BASIN INFRASTRUCTURE

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

DEMAND FOR NATURAL GAS

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

OIL AND GAS MARKETS AND REGULATIONS

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

<PAGE>

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

TRANSPORTATION OF NATURAL GAS

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

GAS MARKETING

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

NET PRODUCTION

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

NET RESERVES

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

U.S. COAL RESERVATIONS

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

<PAGE>

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

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

COMPETITION

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

GOVERNMENTAL REGULATION AND TAXATION

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

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

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

<PAGE>

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

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

EMPLOYEES

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

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

PLAN OF OPERATIONS

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

RECENT DEVELOPMENTS

AFFILIATION WITH HIGH PLAINS AND RIS RESOURCES

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

<PAGE>

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

BRIDGE LOAN

PRIVATE PLACEMENT

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

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

ADDITIONS TO SENIOR MANAGEMENT TEAM

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

LIQUIDITY AND CAPITAL RESOURCES

<PAGE>

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

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

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

RESULTS OF OPERATIONS

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

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

ITEM 3. DESCRIPTION OF PROPERTY.

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

The Company's larger leases include the following:

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS.

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

OFFICERS AND DIRECTORS

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

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

RESUMES

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

<PAGE>

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

JEFFREY L. TAYLOR, CHAIRMAN OF THE BOARD

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

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

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

MARK A. ERICKSON, HYDROCARBON MARKETING CONSULTANT, DIRECTOR

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

<PAGE>

GREGORY V. GIBSON, VICE PRESIDENT, LEGAL AND DIRECTOR

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

DAVID LANZA, DIRECTOR

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

TERRELL A. DOBKINS, VICE PRESIDENT OF PRODUCTION

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

BRIAN A. KUHN, VICE PRESIDENT OF LAND

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

BRIAN HUGHES, EXPLORATION AND PRODUCTION MANAGER

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

<PAGE>

WILLIAM TRAVIS BROWN, JR., EXPLORATION MANAGER

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

GEORGE L. HAMPTON, III, PROJECT MANAGER

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

PAUL L. TROMP, PROJECT GEOLOGIST

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

DIRCK TROMP, PROJECT HYDROLOGIST

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

<PAGE>

TODD H. GILMER, PROJECT HYDROLOGIST

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

ANSON MARK, SENIOR GEOLOGIST

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

JOHN DOLLOFF, SENIOR GEOLOGIST

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

ITEM 6. EXECUTIVE COMPENSATION.

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

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

<PAGE>

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

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

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

ITEM 8. DESCRIPTION OF SECURITIES.

COMMON STOCK

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

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

SHARE PURCHASE WARRANTS

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

1998 STOCK OPTION AND INCENTIVE PLAN

<PAGE>

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

YORKTON WARRANTS

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

DIVIDENDS

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

TRANSFER AGENT

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

TRADING

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

RIGHTS OF SHAREHOLDERS

<PAGE>

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

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

PART II

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

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

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

ITEM 2. LEGAL PROCEEDINGS.

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

ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS.

None.

ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.

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

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

<PAGE>

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

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

ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

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

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

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

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

<PAGE>

PART F/S

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

APRIL 15, 1998

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

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

Total Liabilities 6,805,518

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

Total Stockholders' Equity 7,027,344

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

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

<PAGE>

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

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

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

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

Total Expenses 212,700

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

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

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

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

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

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

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

APRIL 15, 1998

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

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

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

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

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

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

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

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

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

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

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

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

NET CASH USED BY
OPERATING ACTIVITIES 6,343,366

CASH FLOWS USED BY INVESTING ACTIVITIES

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

NET CASH USED BY
INVESTING ACTIVITIES 8,930,476

CASH FLOWS FROM FINANCING ACTIVITIES

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

NET CASH USED BY
FINANCING ACTIVITIES 7,239,586

NET INCREASE IN CASH 4,652,476

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

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

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

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

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

APRIL 15, 1998

NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

NOTE B CASH AND CASH EQUIVALENTS

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

NOTE C OFFICE EQUIPMENT

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

NOTE D OIL AND GAS LEASE ACQUISITIONS

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

NOTE E STOCK OFFERINGS

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

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

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

NOTE F STOCK OPTION AND INCENTIVE PLAN

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

<PAGE>

NOTE G STOCK WARRANTS

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

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

NOTE H LEASES

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

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

NOTE I RELATED PARTY TRANSACTIONS - STOCK EXCHANGE

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

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

NOTE J SUBSEQUENT EVENTS - PROPOSED UNIT OFFERING

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

<PAGE>

PART III

ITEM 1. INDEX TO EXHIBITS.

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 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

23.1 Consent of David E. Coffey, C.P.A.

ITEM 2. DESCRIPTION OF EXHIBITS.

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

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

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

SIGNATURES

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

PENNACO ENERGY, INC.

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

<PAGE>

ARTICLES OF INCORPORATION
OF
PENNACO ENERGY, INC.

KNOW ALL MEN BY THESE PRESENTS:

That we, the undersigned, have this day voluntarily associated ourselves
together for the purpose of forming a Corporation under and pursuant to the
laws of the State of Nevada, and we do hereby certify that:

ARTICLE I NAME: The exact name of this Corporation is:

PENNACO ENERGY, INC.

ARTICLE II RESIDENT AGENT:
The Resident Agent of the Corporation is Bruce Thompson, 128 Fortune Drive,
Dayton, Nevada 89403.

ARTICLE III DURATION: The Corporation shall have perpetual existence.

ARTICLE IV PURPOSES: The purpose, object and nature of the business for which
this Corporation is organized are:

(a) To engage in any lawful activity;

(b) To carry on such business as may be necessary, convenient, or
desirable to accomplish the above purposes, and to do all other things
incidental thereto which are not forbidden by law or by these Articles
of Incorporation.

ARTICLE V POWERS: The powers of the Corporation shall be those powers granted
by 78.060 and 78.070 of the Nevada Revised Statutes under which this corporation
is formed. In addition, the Corporation shall have the following specific
powers:

(a) To elect or appoint officers and agents of the Corporation and to fix
their compensation;

(b) To act as an agent for any individual, association, partnership,
corporation or other legal entity;

(c) To receive, acquire, hold, exercise rights arising out of the
ownership or possession thereof, sell, or otherwise dispose of, shares
or other interests in, or

1
<PAGE>

obligations of, individuals, associations, partnerships, corporations,
or governments;

(d) To receive, acquire, hold, pledge, transfer, or otherwise dispose of
shares of the corporation, but such shares may only be purchased,
directly or indirectly, out of earned surplus;

(e) To make gifts or contributions for the public welfare or for
charitable, scientific or educational purposes, and in time of war, to
make donations in aid of war activities.

ARTICLE VI CAPITAL STOCK:

Section 1. AUTHORIZED SHARES. The total number of shares which this
Corporation is authorized to issue is 50,000,000 shares of Capital
Stock at $.001 par value per share.

Section 2. VOTING RIGHTS OF SHAREHOLDERS. Each holder of the Common Stock
shall be entitled to one vote for each share of stock standing in his name
on the books of the Corporation.

Section 3. CONSIDERATION FOR SHARES. The Common Stock shall be issued for
such consideration, as shall be fixed from time to time by the Board of
Directors. In the absence of fraud, the judgment of the Directors as to
the value of any property for shares shall be conclusive. When shares are
issued upon payment of the consideration fixed by the Board of Directors,
such shares shall be taken to be fully paid stock and shall be non-
assessable. The Articles shall not be amended in this particular.

Section 4. PRE-EMPTIVE RIGHTS. Except as may otherwise be provided by the
Board of Directors, no holder of any shares of the stock of the
Corporation, shall have any preemptive right to purchase, subscribe for, or
otherwise acquire any shares or stock of the Corporation of any class now
or hereafter authorized, or any securities exchangeable for or convertible
into such shares, or any warrants or other instruments evidencing rights or
options to subscribe for, purchase, or otherwise acquire such shares.

Section 5. STOCK RIGHTS AND OPTIONS. The Corporation shall have the power
to create and issue rights, warrants, or options entitling the holders
thereof to purchase from the corporation any shares of its capital stock of
any class or classes, upon such terms and conditions and at such times and
prices as the Board of Directors may provide, which terms and conditions
shall be incorporated in an instrument or instruments evidencing such
rights. In the absence of fraud, the judgment of the Directors as to the
adequacy of consideration for the issuance of such rights or options and
the sufficiency thereof shall be conclusive.

2
<PAGE>

ARTICLE VII ASSESSMENT OF STOCK: The capital stock of this Corporation, after
the amount of the subscription price has been fully paid in, shall not be
assessable for any purpose, and no stock issued as fully paid up shall ever be
assessable or assessed. The holders of such stock shall not be individually
responsible for the debts, contracts, or liabilities of the Corporation and
shall not be liable for assessments to restore impairments in the capital of the
Corporation.

ARTICLE VIII DIRECTORS: For the management of the business, and .for the conduct
of the affairs of the Corporation, and for the future definition, limitation,
and regulation of the powers of the Corporation and its directors and
shareholders, it is further provided:

Section 1. SIZE OF BOARD. The members of the governing board of the
Corporation shall be styled directors. The number of directors of the
Corporation, their qualifications, terms of office, manner of election,
time and place of meeting, and powers and duties shall be such as are
prescribed by statute and in the by-laws of the Corporation. The name and
post office address of the directors constituting the first board of
directors, which shall be One (1) in number are:

<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C>

</TABLE>

Section 2. POWERS OF BOARD. In furtherance and not in limitation of the
powers conferred by the laws of the State of Nevada, the Board of Directors
is expressly authorized and empowered:

(a) To make, alter, amend, and repeal the By-Laws subject to the power of
the shareholders to alter or repeal the By-Laws made by the Board of
Directors.

(b) Subject to the applicable provisions of the ByLaws then in effect, to
determine, from time to time, whether and to what extent, and at what
times and places, and under what conditions and regulations, the
accounts and books of the corporation, or any of them, shall be open
to shareholder inspection. No shareholder shall have any right to
inspect any of the accounts, books or documents of the Corporation,
except as permitted by law, unless and until authorized to do so by
resolution of the Board of Directors or of the Shareholders of the
Corporation;

(c) To issue stock of the Corporation for money, property, services
rendered, labor performed, cash advanced, acquisitions for other
corporations or for any other

3
<PAGE>

assets of value in accordance with the action of the board of
directors without vote or consent of the shareholders and the
judgment of the board of directors as to value received and in
return therefore shall be conclusive and said stock, when issued,
shall be fully-paid and non-assessable.

(d) To authorize and issue, without shareholder consent, obligations of
the Corporation, secured and unsecured, under such terms and
conditions as the Board, in its sole discretion, may determine, and to
pledge or mortgage, as security therefore, any real or personal
property of the Corporation, including after-acquired property;

(e) To determine whether any and, if so, what part, of the earned surplus
of the Corporation shall be paid in dividends to the shareholders, and
to direct and determine other use and disposition of any such earned
surplus;

(f) To fix, from time to time, the amount of the profits of the
Corporation to be reserved as working capital or for any other lawful
purpose;

(g) To establish bonus, profit-sharing, stock option, or other types of
incentive compensation plans for the employees, including officers and
directors, of the Corporation, and to fix the amount of profits to be
shared or distributed, and to determine the persons to participate in
any such plans and the amount of their respective participations.

(h) To designate, by resolution or resolutions passed by a majority of
the whole Board, one or more committees, which, to the extent
permitted by law and authorized by the resolution or the By-Laws,
shall have and may exercise the powers of the Board;

(i) To provide for the reasonable compensation of its own members by
By-Law, and to fix the terms and conditions upon which such
compensation will he paid;

(j) In addition to the powers and authority herein before, or by statute,
expressly conferred upon it, the Board of Directors may exercise all
such powers and do all such acts and things as may be exercised or
done by the corporation, subject, nevertheless, to the provisions of
the laws of the State of Nevada, of these Articles of Incorporation,
and of the By-Laws of the Corporation.

Section 3. INTERESTED DIRECTORS. No contract or transaction between this
Corporation and any of its directors, or between this Corporation and any
other corporation, firm, association, or other legal entity shall be
invalidated by reason of the fact that the director of the Corporation has
a direct or indirect interest, pecuniary or otherwise, in such corporation,
firm, association, or legal entity, or because the interested director was
present at the meeting of the Board of Directors which acted upon or in
reference to such

4
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contract or transaction, or because he participated in such action,
provided that: (1) the interest of each such director shall have been
disclosed to or known by the Board and a disinterested majority of the
Board shall have nonetheless ratified and approved such contract or
transaction (such interested director or directors may be counted in
determining whether a quorum is present for the meeting at which such
ratification or approval is given); or (2) the conditions of N.R.S.
78.140 are met.

ARTICLE IX LIMITATION OF LIABILITY OF OFFICERS OR DIRECTORS: The personal
liability of a director or officer of the corporation to the corporation or the
Shareholders for damages for breach of fiduciary duty as a director or officer
shall be limited to acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law.

ARTICLE X INDEMNIFICATION: Each director and each officer of the corporation
may be indemnified by the corporation as follows:

(a) The corporation may indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) ,
judgments, fines and amounts paid in settlement, actually and
reasonably incurred by him in connection with the action, suit or
proceeding, if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of
the corporation and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suite or proceeding, by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, does not of itself create a presumption that .the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and
that, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.

(b) The corporation may indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed
action or suit by or in the right of the corporation, to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses including amounts paid in
settlement and attorneys', fees actually and reasonably incurred by
him in connection with the defense or settlement of the action or
suit, if he acted in good faith and in a manner which he

5
<PAGE>

reasonably believed to be in or not opposed to the best interests
of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals
there from, to be liable to the corporation or for amounts paid in
settlement to the corporation, unless and only to the extent that
the court in which the action or suit was brought or other court of
competent Jurisdiction determines upon application that in view of
all the circumstances of the case the person is fairly and
reasonably entitled to indemnity for such expenses as the court
deems proper.

(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this Article, or in defense of any claim, issue or
matter therein, he must be indemnified by the corporation against
expenses, including attorney's fees, actually and reasonably incurred
by him in connection with the defense.

(d) Any indemnification under subsections (a) and (b) unless ordered by a
court or advanced pursuant to subsection (e), must be made by the
corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee
or agent is proper in the circumstances. The determination must be
made:

(i) By the stockholders;

(ii) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit
or proceeding;

(iii) if a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or

(iv) if a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.

(e) Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is
ultimately determined by a court of competent jurisdiction that he is
not entitled to be indemnified by the corporation. The provisions of
this subsection do not affect any rights to advancement of expenses to
which corporate personnel other than directors or officers may be
entitled under any contract or otherwise by law.

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<PAGE>

(f) The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:

(i) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under
the certificate or articles of incorporation or any bylaw,
agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his official capacity or an
action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to subsection
(b) or for the advancement of expenses made pursuant to
subsection (e) may not be made to or on behalf of any director or
officer if a final adjudication establishes that his acts or
omissions involved intentional misconduct, fraud or a knowing
violation of the law and was material to the cause of action.

(ii) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs,
executors and administrators of such a person.

ARTICLE XI PLACE OF MEETING; CORPORATE BOOKS: Subject to the laws of the
State of Nevada, the shareholders and the Directors shall have power to hold
their meetings, and the Directors shall have power to have an office or
offices and to maintain the books of the Corporation outside the State of
Nevada, at such place or places as may from time to time be designated in the
By-Laws or by appropriate resolution.

ARTICLE XII AMENDMENT OF ARTICLES: The provisions of these Articles of
Incorporation may be amended, altered or repealed from time to time to the
extent and in the manner prescribed by the laws of the State of Nevada, and
additional provisions authorized by such laws as are then in force may be
added. All rights herein conferred on the directors, officers and
shareholders are granted subject to this reservation.

ARTICLE XIII INCORPORATOR: The name and address of the sole incorporator
signing these Articles of Incorporation is as follows:

<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS
<S> <C>

</TABLE>

IN WITNESS WHEREOF, the undersigned incorporator has executed these Articles of
Incorporation this ___th day of____________, 19___.

_________________________________________________

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<PAGE>

STATE OF NEVADA )
) ss:
CARSON CITY )

On_______________, 19___, personally appeared before me, a Notary Public,
__________________, who acknowledged to me that he executed the foregoing
Articles of Incorporation for ____________________, a Nevada corporation.

_________________________________
Notary Public

<PAGE>

BY-LAWS OF

PENNACO ENERGY, INC.

ARTICLE I

SHAREHOLDERS

Section 1.01 ANNUAL MEETING. The annual meeting of the shareholders shall be
held at such date and time as shall be designated by the board of directors and
stated in the notice of the meeting or in a duly-executed waiver of notice
thereof. If the corporation shall fail to provide notice of the annual meeting
of the shareholders as set forth above, the annual meeting of the shareholders
of the corporation shall be held during the month of November or December of
each year as determined by the Board of Directors, for the purpose of electing,
directors of the corporation to serve during the ensuing year and for the
transaction of such other business as may properly come before the meeting. If
the election of the directors is not held on the day designated herein for any
annual meeting, of the shareholders, or at any adjournment thereof, the
president shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as is convenient.

Section 1.02 SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the president or the Board of Directors and shall be called by the
president at the written request of the holders of not less than 51 % of the
issued and outstanding shares of capital stock of the corporation.

All business lawfully to be transacted by the shareholders may be transacted
at any special meeting at any adjournment thereof. However, no business shall
be acted upon at a special meeting, except that referred to in the notice
calling the meeting, unless all of the outstanding capital stock of the
corporation is represented either in person or by proxy. Where all of the
capital stock is represented, any lawful business may be transacted and the
meeting shall be valid for all purposes.

Section 1.03 PLACE OF MEETINGS. Any meeting, of the shareholders of the
corporation may be held at its principal office in the State of Nevada or such
other place in or out of the United States as the Board of Directors may
designate. A waiver of notice signed by the shareholders entitled to vote may
designate any place for the holding of such meeting.

Section 1.04 NOTICE OF MEETINGS.

(a) The secretary shall sign and deliver to all shareholders of record
written or printed notice of any meeting at least ten (10) days, but not more
than sixty (60) days, before the date of such meeting; which notice shall state
the place, date and time of the meeting, the general nature of the business to
be transacted, and, in the case of any meeting at which directors are to be
elected, the names of nominees, if any, to be presented for election.

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(b) In the case of any meeting, any proper business may be presented for
action, except that the following items shall be valid only if the general
nature of the proposal is stated in the notice or written waiver of notice:

(1) Action with respect to any contract or transaction between the
corporation and one or more of its directors or another firm, association,
or corporation in which one or more of its directors has a material
financial interest;

(2) Adoption of amendments to the Articles of Incorporation; or

(3) Action with respect to the merger, consolidation, reorganization,
partial or complete liquidation, or dissolution of the corporation.

(c) The notice shall be personally delivered or mailed by first class mail
to each shareholder of record at the last known address thereof, as the same
appears on the books of the corporation, and the giving of such notice shall be
deemed delivered the date the same is deposited in the United States mail,
postage prepaid. If the address of any shareholder does not appear upon the
books of the corporation, it will be sufficient to address any notice to such
shareholder at the principal office of the corporation.

(d) The written certificate of the person calling any meeting, duly sworn,
setting forth the substance of the notice, the time and place the notice was
mailed or personally delivered to the several shareholders, and the addresses to
which the notice was mailed shall be prima facie evidence of the manner and fact
of giving such notice.

Section 1.05 WAIVER OF NOTICE. If all of the shareholders of the corporation
shall waive notice of a meeting, no notice shall be required, and, whenever all
of the shareholders shall meet in person or by proxy, such meeting shall be
valid for all purposes without call or notice, and at such meeting any corporate
action may be taken.

Section 1.06 DETERMINATION OF SHAREHOLDERS OF RECORD.

(a) The Board of Directors may at any time fix a future date as a record
date for the determination of the shareholders entitled to notice of any meeting
or to vote or entitled to receive payment of any dividend or other distribution
or allotment of any rights or entitled to exercise any rights in respect of any
other lawful action. The record date so fixed shall not be more than sixty (60)
days prior to the date of such meeting nor more than sixty (60) days prior to
any other action. When a record date is so fixed, only shareholders of record
on that date are entitled to notice of and to vote at the meeting or to receive
the dividend, distribution or allotment of rights, or to exercise their rights,
as the case may be, notwithstanding any transfer of any shares on the books of
the corporation after the record date.

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(b) If no record date is fixed by the Board of Directors, then (1) the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of business on the business day
next preceding the day on which notice is given or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which written consent is
given; and (3) the record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.

Section 1.07 QUORUM: ADJOURNED MEETINGS.

(a) At any meeting of the shareholders, a majority of the issued and
outstanding shares of the corporation represented in person or by proxy, shall
constitute a quorum.

(b) If less than a majority of the issued and outstanding shares are
represented, a majority of shares so represented may adjourn from time to time
at the meeting, until holders of the amount of stock required to constitute a
quorum shall be in attendance. At any such adjourned meeting at which a quorum
shall be present, any business may be transacted which might have been
transacted as originally called. When a shareholders' meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless the adjournment is for more than ten (10) days in which event
notice thereof shall be given.

Section 1.08 VOTING.

(a) Each shareholder of record, such shareholder's duly authorized proxy
or attorney-in-fact shall be entitled to one (1) vote for each share of stock
standing registered in such shareholder's name on the books of the corporation
on the record date.

(b) Except as otherwise provided herein, all votes with respect to
shares standing, in the name of an individual on the record date (included
pledged shares) shall be cast only by that individual or such individual's
duly authorized proxy or attorney-in-fact. With respect to shares held by a
representative of the estate of a deceased shareholder, guardian,
conservator, custodian or trustee, votes may be cast by such holder upon
proof of capacity, even though the shares do not stand in the name of such
holder. In the case of shares under the control of a receiver, the receiver
may cast votes carried by such shares even though the shares do not stand in
the name of the receiver provided that the order of the court of competent
jurisdiction which appoints the receiver contains the authority to cast votes
carried by such shares. If shares stand in the name of a minor, votes may be
cast only by the duly-appointed guardian of the estate of such minor if such
guardian has provided the

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corporation with written notice and proof of such appointment.

(c) With respect to shares standing in the name of a corporation on the
record date, votes may be cast by such officer or agents as the by-laws of such
corporation prescribe or, in the absence of an applicable by-law provision, by
such person as may be appointed by resolution of the Board of Directors of such
corporation. In the event no person is so appointed, such votes of the
corporation may be cast by any person (including the officer making the
authorization) authorized to do so by the Chairman of the Board of Directors,
President or any Vice President of such corporation.

(d) Notwithstanding anything to the contrary herein contained, no votes
may be cast by shares owned by this corporation or its subsidiaries, if any. If
shares are held by this corporation or its subsidiaries, if any, in a fiduciary
capacity, no votes shall be cast with respect thereto on any matter except to
the extent that the beneficial owner thereof possesses and exercises either a
right to vote or to give the corporation holding the same binding instructions
on how to vote.

(e) With respect to shares standing in the name of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
husband and wife as community property, tenants by the entirety, voting
trustees, persons entitled to vote under a shareholder voting agreement or
otherwise and shares held by two or more persons (including proxy holders)
having the same fiduciary relationship respect in the same shares, votes may be
cast in the following manner:

(1) If only one such person votes, the votes of such person binds
all.

(2) If more than one person casts votes, the act of the majority so
voting binds all.

(3) If more than one person casts votes, but the vote is evenly split
on a particular matter, the votes shall be deemed cast
proportionately as split.

(f) Any holder of shares entitled to vote on any matter may cast a portion
of the votes in favor of such matter and refrain from casting the remaining,
votes or cast the same against the proposal, except in the case of elections of
directors. if such holder entitled to vote fails to specify the number of
affirmative votes, it will be conclusively presumed that the holder is casting
affirmative votes with respect to all shares held.

(g) If a quorum is present, the affirmative vote of holders of a majority
of the shares represented at the meeting and entitled to vote on any matter
shall be the act of the shareholders, unless a vote of greater number or voting
by classes is required by the laws of the State of Nevada, the Articles of
Incorporation and these By-Laws.

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Section 1.09 PROXIES. At any meeting of shareholders, any holder of shares
entitled to vote may authorize another person or persons to vote by proxy with
respect to the shares held by an instrument in writing and subscribed to by the
holder of such shares entitled to vote. No proxy shall be valid after the
expiration of six (6) months from the date of execution thereof, unless coupled
with an interest or unless otherwise specified in the proxy. In no event shall
the term of a proxy exceed seven (7) years from the date of its execution.
Every proxy shall continue in full force and effect until its expiration or
revocation. Revocation may be effected by filing an instrument revoking the
same or a duly-executed proxy bearing a later date with the secretary of the
corporation.

Section 1.10 ORDER OF BUSINESS. At the annual shareholders meeting, the
regular order of business shall be as follows:

(1) Determination of shareholders present and existence of quorum;

(2) Reading and approval of the minutes of the previous meeting or
meetings;

(3) Reports of the Board of Directors, the president, treasurer and
secretary of the corporation, in the order named;

(4) Reports of committee;

(5) Election of directors;

(6) Unfinished business;

(7) New business;

(8) Adjournment.

Section 1.11 ABSENTEES CONSENT TO MEETINGS. Transactions of any meeting of
the shareholders are as valid as though had at a meeting duly-held after regular
call and notice if a quorum is present, either in person or by proxy, and if,
either before or after the meeting, each of the persons entitled to vote, not
present in person or by proxy (and those who, although present, either object at
the beginning of the meeting to the transaction of any business because the
meeting has not been lawfully called or convened or expressly object at the
meeting to the consideration of matters not included in the notice which are
legally required to be included therein), signs a written waiver of notice
and/or consent to the holding of the meeting or an approval of the minutes
thereof All such waivers, consents, and approvals shall be filed with the
corporate records and made a part of the minutes of the meeting. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person objects at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters not included in the

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notice if such objection is expressly made at the beginning. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of shareholders need be specified in any written waiver of notice, except as
otherwise provided in Section 1.04(b) of these By-Laws.

Section 1.12 ACTION WITHOUT MEETING. Any action which may be taken by the
vote of the shareholders at a meeting may be taken without a meeting if
consented to by the holders of a majority of the shares entitled to vote or such
greater proportion as may be required by the laws of the State of Nevada, the
Articles of Incorporation, or these By-Laws. Whenever action is taken by
written consent, a meeting of shareholders needs not be called or noticed.

ARTICLE II

DIRECTORS

Section 2.01 NUMBER, TENURE AND QUALIFICATION. Except as otherwise provided
herein, the Board of Directors of the corporation shall consist of at least one
(1) but no more than nine (9) persons, who shall be elected at the annual
meeting of the shareholders of the corporation and who shall hold office for one
(1) year or until their successors are elected and qualify.

Section 2.02 RESIGNATION. Any director may resign effective upon giving
written notice to the chairman of the Board of Directors, the president, or the
secretary of the corporation, unless the notice specifies a later time for
effectiveness of such resignation. If the Board of Directors accepts the
resignation of a director tendered to take effect at a future date, the Board or
the shareholders may elect a successor to take office when the resignation
becomes effective.

Section 2.03 ) REDUCTION IN NUMBER. No reduction of the number of directors
shall have the effect of removing any director prior to the expiration of his
term of office.

Section 2.04 REMOVAL.

(a) The Board of Directors or the shareholders of the corporation, by
a majority vote, may declare vacant the office of a director who has
been declared incompetent by an order of a court of competent
jurisdiction or convicted of a felony.

Section 2.05 VACANCIES.

(a) A vacancy in the Board of Directors because of death,
resignation, removal, change in number of directors, or otherwise may
be filled by the shareholders at any regular or special meeting or any
adjourned meeting thereof or the remaining director(s) by the
affirmative vote of a majority thereof. A Board of Directors
consisting of less than the maximum number authorized in Section 2.01
of ARTICLE II constitutes vacancies on the Board of Directors for
purposes of this paragraph and may be filled as set forth above

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including by the election of a majority of the remaining directors.
Each successor so elected shall hold office until the next annual
meeting of shareholders or until a successor shall have been
duly-elected and qualified.

(b) If, after the filling of any vacancy by the directors, the
directors then in office who have been elected by the shareholders
shall constitute less than a majority of the directors then in office,
any holder or holders of an aggregate of five percent (5%) or more of
the total number of shares entitled to vote may call a special meeting
of shareholders to be held to elect the entire Board of Directors.
The term of office of any director shall terminate upon such election
of a successor.

Section 2.06 REGULAR MEETINGS. Immediately following the adjournment of, and
at the same place as, the annual meeting of the shareholders, the Board of
Directors, including directors newly elected, shall hold its annual meeting
without notice, other than this provision, to elect officers of the corporation
and to transact such further business as may be necessary or appropriate. The
Board of Directors may provide by resolution the place, date and hour for
holding additional regular meetings.

Section 2.07 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the chairman and shall be called by the chairman upon the
request of any two (2) directors or the president of the corporation.

Section 2.08 PLACE OF MEETINGS. Any meeting of the directors of the
corporation may be held at its principal office in the State of Nevada, or at
such other place in or out of the United States as the Board of Directors may
designate. A waiver or notice signed by the directors may designate any place
for the holding of such meeting.

Section 2.09 NOTICE OF MEETINGS. Except as otherwise provided in Section
2.06, the chairman shall deliver to all directors written or printed notice of
any special meeting, at least three (3) days before the date of such meeting, by
delivery of such notice personally or mailing such notice first class mail, or
by telegram. If mailed, the notice shall be deemed delivered two (2) business
days following the date the same is deposited in the United States mail, postage
prepaid. Any director may waive notice of any meeting, and the attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
unless such attendance is for the express purpose of objecting to the
transaction of business threat because the meeting is not properly called or
convened.

Section 2.10 QUORUM:ADJOURNED MEETINGS.

(a) A majority of the Board of Directors in office shall constitute a
quorum.

(b) At any meeting of the Board of Directors where a quorum is not
present, a majority of those present may adjourn, from time to time,
until a quorum is present, and no notice of such adjournment shall be
required. At any adjourned meeting where a quorum is present, any
business may be transacted which could have been transacted at the
meeting originally called.

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Section 2.11 ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a meeting if a written consent thereto is signed by all of the
members of the Board of Directors or of such committee. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors or committee. Such action by written consent shall have the same
force and effect as the unanimous vote of the Board of Directors or committee.

Section 2.12 TELEPHONIC MEETINGS. Meetings of the Board of Directors may be
held through the use of a conference telephone or similar communications
equipment so long as all members participating in such meeting can hear one
another at the time of such meeting. Participation in such a meeting
constitutes presence in person at such meeting.

Section 2.13 BOARD DECISIONS. The affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.

Section 2.14 POWERS AND DUTIES.

(a) Except as otherwise provided in the Articles of Incorporation
or the laws of the State of Nevada, the Board of Directors is
invested with the complete and unrestrained authority to manage
the affairs of the corporation, and is authorized to exercise for
such purpose as the general agent of the corporation, its entire
corporate authority in such manner as it sees fit. The Board of
Directors may delegate any of its authority to menace, control or
conduct the current business of the corporation to any standing or
special committee or to any officer or agent and to appoint any
persons to be agents of the corporation with such powers, including
the power to sub-delegate, and upon such terms as may be deemed fit.

(b) The Board of Directors shall present to the shareholders at
annual meetings of the shareholders, and when called for by a majority
vote of the shareholders at a special meeting of the shareholders, a
full and clear statement of the condition of the corporation, and
shall, at request, furnish each of the shareholders with a true copy
thereof.

(c) The Board of Directors, in its discretion, may submit any
contract or act for approval or ratification at any annual meeting of
the shareholders or any special meeting, properly called for the
purpose of considering any such contract or act, provided a quorum is
present. The contract or act shall be valid and binding upon the
corporation and upon all the shareholders thereof, if approved and
ratified by the affirmative vote of a majority of the shareholders at
such meeting.

(d) In furtherance and not in limitation of the powers conferred by
the laws of the State of Nevada, the Board of Directors is expressly
authorized and empowered to issue

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stock of the Corporation for money, property, services rendered, labor
performed, cash advanced, acquisitions for other corporations or for
any other assets of value in accordance with the action of the Board
of Directors without vote or consent of the shareholders and the
judgment of the Board of Directors as to the value received and in
return therefore shall be conclusive and said stock, when issued,
shall be fully-paid and non-assessable.

Section 2.15 COMPENSATION. The directors shall be allowed and paid all
necessary expenses incurred in attending any meetings of the Board.

Section 2.16 BOARD OFFICERS.

(a) At its annual meeting, the Board of Directors shall elect, from
among its members, a chairman to preside at the meetings of the Board
of Directors. The Board of Directors may also elect such other board
officers and for such term as it may, from time to time, determine
advisable.

(b) Any vacancy in any board office because of death, resignation,
removal or otherwise may be filled by the Board of Directors for the
unexpired portion of the term of such office.

Section 2.17 ORDER OF Business. The order of business at any meeting, of the
Board of Directors shall be as follows:

(1) Determination of members present and existence of quorum;

(2) Reading- and approval of the minutes of any previous meeting
or meetings;

(3) Reports of officers and committeemen;

(4) Election of officers;

(5) Unfinished business;

(6) New business;

(7) Adjournment.

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ARTICLE III

OFFICERS

Section 3.01 Election. The Board of Directors, at its first meeting
following the annual meeting of shareholders, shall elect a president, a
secretary and a treasurer to hold office for one (1) year next coming and until
their successors are elected and qualify. Any person may hold two or more
offices. The Board of Directors may, from time to time, by resolution, appoint
one or more vice presidents, assistant secretaries, assistant treasurers and
transfer agents of the corporation as it may deem advisable; prescribe their
duties; and fix their compensation.

Section 3.02 REMOVAL; RESIGNATION. Any officer or agent elected or appointed
by the Board of Directors may be removed by it whenever, in its judgment, the
best interest of the corporation would be served thereby. Any officer may
resign at any time upon written notice to the corporation without prejudice to
the rights, if any, of the corporation under any contract to which the resigning
officer is a party.

Section 3.03 VACANCIES. Any vacancy in any office because of death,
resignation, removal, or otherwise may be filled by the Board of Directors for
the unexpired portion of the term of such office.

Section 3.04 PRESIDENT. The president shall be the general manager and
executive officer of the corporation, subject to the supervision and control of
the Board of Directors, and shall direct the corporate affairs, with full power
to execute all resolutions and orders of the Board of Directors not especially
entrusted to some other officer of the corporation. The president shall preside
at all meetings of the shareholders and shall sign the certificates of stock
issued by the corporation, and shall perform such other duties as shall be
prescribed by the Board of Directors.

Unless otherwise ordered by the Board of Directors, the president shall have
full power and authority on behalf of the corporation to attend and to act and
to vote at any meetings of the shareholders of any corporation in which the
corporation may hold stock and, at any such meetings, shall possess and may
exercise any and all rights and powers incident to the ownership of such stock.
The Board of Directors, by resolution from time to time, may confer like powers
on any person or persons in place of the president to represent the corporation
for these purposes.

Section 3.05 VICE PRESIDENT. The Board of Directors may elect one or more
vice presidents who shall be vested with all the powers and perform all the
duties of the president whenever the president is absent or unable to act,
including the signing of the certificates of stock issued by the corporation,
and the vice president shall perform such other duties as shall be prescribed by
the Board of Directors.

Section 3.06 SECRETARY. The secretary shall keep the minutes of all meetings
of the shareholders and the Board of Directors in books provided for that
purpose. The secretary shall

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attend to the giving and service of all notices of the corporation, may sign
with the president in the name of the corporation all contracts authorized by
the Board of Directors or appropriate committee, shall have the custody of the
corporate seal, shall affix the corporate seal to all certificates of stock duly
issued by the corporation, shall have charge of stock certificate books,
transfer books and stock ledgers, and such other books and papers as the Board
of Directors or appropriate committee may direct, and shall, in general perform
all duties incident to the office of the secretary. All corporate books kept by
the secretary shall be open for examination by any director at any reasonable
time.

Section 3.07 ASSISTANT SECRETARY. The Board of Directors may appoint an
assistant secretary who shall have such powers and perform such duties as may be
prescribed for him by the secretary of the corporation or by the Board of
Directors.

Section 3.08 CHIEF FINANCIAL OFFICER. The chief financial officer shall
be the chief financial officer of the corporation, subject to the supervision
and control of the Board of Directors, and shall have custody of all the
funds and securities of the corporation. When necessary or proper, the chief
financial officer shall endorse on behalf of the corporation for collection
checks, notes and other obligations, and shall deposit all monies to the
credit of the corporation in such bank or banks or other depository as the
Board of Directors may designate, and shall sign all receipts and vouchers
for payments made by the corporation. Unless otherwise specified by the
Board of Directors, the chief financial officer shall sign with the president
all bills of exchange and promissory notes of the corporation, shall also
have the care and custody of the stocks, bonds, certificates, vouchers,
evidence of debts, securities and such other property belonging to the
corporation as the Board of Directors shall designate, and shall sign all
papers required by law, by these By-laws or by the Board of Directors to be
signed by the chief financial officer. The chief financial officer shall
enter regularly in the books of the corporation, to be kept for that purpose,
full and accurate accounts of all monies received and paid on account of the
corporation and whenever required by the Board of Directors, the chief
financial officer shall render a statement of any or all accounts. The chief
financial officer shall at all reasonable times exhibit the books of account
to any directors of the corporation and shall perform all acts incident to
the position of chief financial officer subject to the control of the Board
of Directors. The chief financial officer shall, if required by the Board of
Directors,give a bond to the corporation in such sum and with such security
as shall be approved by the Board of Directors for the faithful performance
of all the duties of the chief financial officer and for restoration to the
corporation in the event of the chief financial officer's death, resignation,
retirement, or removal from office, of all books, records, papers, vouchers,
money and other property belonging to the corporation. The expense of such
bond shall be borne by the corporation.

Section 3.09 ASSISTANT TREASURER. The Board of Directors may appoint an
assistant treasurer who shall have such powers and perform such duties as may be
prescribed by the treasurer of the corporation or by the Board of Directors, and
the Board of Directors may require the assistant treasurer to give a bond to the
corporation in such sum and with such security as it may approve, for the
faithful performance of the duties of assistant treasurer, and for the
restoration to the corporation, in the event of the assistant treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property belonging to the corporation. The expense of
such bond shall be borne by the corporation.

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ARTICLE IV

CAPITAL STOCK

Section 4.01 ISSUANCE. Shares of capital stock of the corporation shall be
issued in such manner and at such times and upon such conditions as shall be
prescribed by the Board of Directors.

Section 4.02 CERTIFICATES. Ownership in the corporation shall be evidenced
by certificates for shares of stock in such form as shall be prescribed by the
Board of Directors, shall be under the seal of the corporation and shall be
signed by the president or the vice president and also by the secretary or an
assistant secretary. Each certificate shall contain the name of the record
holder, the number, designation, if any, class or series of shares represented,
a statement of summary of any applicable rights, preferences, privileges, or
restrictions thereon, and a statement that the shares are assessable, if
applicable. All certificates shall be consecutively numbered. The name and
address of the shareholder, the number of shares, and the date of issue shall be
entered on the stock transfer books of the corporation.

Section 4.03 SURRENDER: LOST OR DESTROYED CERTIFICATES. All certificates
surrendered to the corporation, except those representing shares of treasury
stock, shall be canceled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been canceled, except
that in case of a lost, stolen, destroyed or mutilated certificate, a new one
may be issued therefor. However, any shareholder applying for the issuance of a
stock certificate in lieu of one alleged to have been lost, stolen, destroyed or
mutilated shall, prior to the issuance of a replacement, provide the corporation
with his, her or its affidavit of the facts surrounding the loss, theft,
destruction or mutilation and an indemnity bond in an amount and upon such terms
as the treasurer, or the Board of Directors, shall require. In no case shall
the bond be in amount less than twice the current market value of the stock and
it shall indemnify the corporation against any loss, damage, cost or
inconvenience arising as a consequence of the issuance of a replacement
certificate.

Section 4.04 REPLACEMENT CERTIFICATE. When the Articles of Incorporation are
amended in any way affecting, the statements contained in the certificates for
outstanding shares of capital stock of the corporation or it becomes desirable
for any reason, including, without limitation, the merger or consolidation of
the corporation with another corporation or the reorganization of the
corporation, to cancel any outstanding certificate for shares and issue a new
certificate therefor conforming to the rights of the holder, the Board of
Directors may order any holders of outstanding certificates for shares to
surrender and exchange the same for new certificates within a reasonable time to
be fixed by the Board of Directors. The order may provide that a holder of any
certificate(s) ordered to be surrendered shall not be entitled to vote, receive
dividends or exercise any other rights of shareholders until the holder has
complied with the order provided that such order operates to suspend such rights
only after notice and until compliance.

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Section 4.05 TRANSFER OF SHARES. No transfer of stock shall be valid as
against the corporation except on surrender and cancellation by the certificate
therefor, accompanied by an assignment or transfer by the registered owner made
either in person or under assignment. Whenever any transfer shall be expressly
made for collateral security and not absolutely, the collateral nature of the
transfer shall be reflected in the entry of transfer on the books of the
corporation.

Section 4.06 TRANSFER AGENT. The Board of Directors may appoint one or more
transfer agents and registrars of transfer and may require all certificates for
shares of stock to bear the signature of such transfer agent and such registrar
of transfer.

Section 4.07 STOCK TRANSFER BOOKS. The stock transfer books shall be closed
for a period of ten (10) days prior to all meetings of the shareholders and
shall be closed for the payment of dividends as provided in Article V hereof and
during such periods as, from time to time, may be fixed by the Board of
Directors, and, during such periods, no stock shall be transferable.

Section 4.08 MISCELLANEOUS. The Board of Directors shall have the power and
authority to make such rules and regulations not inconsistent herewith as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of the capital stock of the corporation.

ARTICLE V

DIVIDENDS

Section 5.01 Dividends may be declared, subject to the provisions of the laws
of the State of Nevada and the Articles of Incorporation, by the Board of
Directors at any regular or special meeting and may be paid in cash, property,
shares of corporate stock, or any other medium. The Board of Directors may fix
in advance a record date, as provided in Section 1.06 of these By-laws, prior to
the dividend payment for the purpose of determining shareholders entitled to
receive payment of any dividend. The Board of Directors may close the stock
transfer books for such purpose for a period of not more than ten (10) days
prior to the payment date of such dividend.

ARTICLE VI

OFFICES; RECORDS; REPORTS; SEAL AND FINANCIAL MATTERS

Section 6.01 PRINCIPAL OFFICE. The principal office of the corporation in
the State of Nevada shall be as designated by the Board of Directors and so
filed with the State of Nevada, and the corporation may also have an office in
any other state or territory as the Board of Directors may designate.

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Section 6.02 RECORDS. The stock transfer books and a certified copy of the
By-laws, Articles of Incorporation, any amendments thereto, and the minutes of
the proceedings of the shareholders, the Board of Directors, and committees of
the Board of Directors shall be kept at the principal office of the corporation
for the inspection of all who have the right to see the same and for the
transfer of stock. All other books of the corporation shall be kept at such
places as may be prescribed by the Board of Directors.

Section 6.03 FINANCIAL REPORT ON REQUEST. Any shareholder or shareholders
holding at least five percent (5%) of the outstanding shares of any class of
stock may make a written request for an income statement of the corporation for
the three (3) month, six (6) month, or nine (9) month period of the current
fiscal year ended more than thirty (30) days prior to the date of the request
and a balance sheet of the corporation as of the end of such period. In
addition, if no annual report for the last fiscal year has been sent to
shareholders, such shareholder or shareholders may make a request for a balance
sheet as of the end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year. The statement shall be
delivered or mailed to the person making the request within thirty (30) days
thereafter. A copy of the statements shall be kept on file in the principal
office of the corporation for twelve (12) months, and such copies shall be
exhibited at all reasonable times to any shareholder demanding an examination of
them or a copy shall be mailed to each shareholder. Upon request by any
shareholder, there shall be mailed to the shareholder a copy of the last annual,
semiannual or quarterly income statement which it has prepared and a balance
sheet as of the end of the period. The financial statements referred to in this
Section 6.03 shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that such financial statements were
prepared without audit from the books and records of the corporation.

Section 6.04 RIGHT OF INSPECTION.

(a) The accounting books and records and minutes of proceedings of
the shareholders and the Board of Directors and committees of the
Board of Directors shall be open to inspection upon the written demand
of any shareholder or holder of a voting trust certificate at any
reasonable time during usual business hours for a purpose reasonably
related to such holder's interest as a shareholder or as the holder of
such voting trust certificate. This right of inspection shall extend
to the records of the subsidiaries, if any, of the corporation. Such
inspection may be made in person or by agent or attorney, and the
right of inspection includes the right to copy and make extracts.

(b) Every director shall have the absolute right at any reasonable
time to inspect and copy all books, records and documents of every
kind and to inspect the physical properties of the corporation
and/or its subsidiary corporations. Such inspection may be made in
person or by agent or attorney, and the right of inspection
includes the right to copy and make extracts.

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Section 6.05 CORPORATE SEAL. The Board of Directors may, by resolution,
authorize a seal, and the seal may be used by causing it, or a facsimile, to be
impressed or affixed or reproduced or otherwise. Except when otherwise
specifically provided herein, any officer of the corporation shall have the
authority to affix the seal to any document requiring it.

Section 6.06 FISCAL YEAR. The fiscal year-end of the corporation shall be
the calendar year or such other term as may be fixed by resolution of the Board
of Directors.

Section 6.07 RESERVES. The Board of Directors may create, by resolution, out
of the earned surplus of the corporation such reserves as the directors may,
from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends or to repair or maintain any property of
the corporation, or for such other purpose as the Board of Directors may deem
beneficial to the corporation, and the directors may modify or abolish any such
reserves in the manner in which they were created.

ARTICLE VII

INDEMNIFICATION

Section 7.01 INDEMNIFICATION. The corporation shall, unless prohibited by
Nevada Law, indemnify any person (an "Indemnitee") who is or was involved in any
manner (including, without limitation, as a party or a witness) or is threatened
to be so involved in any threatened, pending or completed action suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, including without limitation, any action, suit or proceeding
brought by or in the right of the corporation to procure a judgement in its
favor (collectively, a "Proceeding") by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity or enterprise, against all Expenses and Liabilities actually and
reasonably incurred by him in connection with such Proceeding. The right to
indemnification conferred in this Article shall be presumed to have been relied
upon by the directors, officers, employees and agents of the corporation and
shall be enforceable as a contract right and inure to the benefit of heirs,
executors and administrators of such individuals.

Section 7.02 INDEMNIFICATION CONTRACTS. The Board of Directors is authorized
on behalf of the corporation, to enter into, deliver and perform agreements or
other arrangements to provide any Indemnitee with specific rights of
indemnification in addition to the rights provided hereunder to the fullest
extent permitted by Nevada Law. Such agreements or arrangements may provide (i)
that the Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding, must be paid by the corporation as they are
incurred and in advance of the final disposition of any such action, suit or
proceeding provided that, if required by Nevada Law at the time of such advance,
the officer or director provides an undertaking, to repay such amounts if it is
ultimately determined

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by a court of competent jurisdiction that such individual is not entitled to be
indemnified against such expenses, (iii) that the Indemnitee shall be presumed
to be entitled to indemnification under this Article or such agreement or
arrangement and the corporation shall have the burden of proof to overcome that
presumption, (iii) for procedures to be followed by the corporation and the
Indemnitee in making any determination of entitlement to indemnification or for
appeals therefrom and (iv) for insurance or such other Financial Arrangements
described in Paragraph 7.02 of this Article, all as may be deemed appropriate by
the Board of Directors at the time of execution of such agreement or
arrangement.

Section 7.03 INSURANCE AND FINANCIAL ARRANGEMENTS. The corporation may,
unless prohibited by Nevada Law, purchase and maintain insurance or make other
financial arrangements ("Financial Arrangements") on behalf of any Indemnity for
any liability asserted against him and liability and expenses incurred by him in
his capacity as a director, officer, employee or agent, or arising out of his
status as such, whether or not the corporation has the authority to indemnify
him against such liability and expenses. Such other Financial Arrangements may
include (i) the creation of a trust fund, (ii) the establishment of a program of
self-insurance, (iii) the securing of the corporation's obligation of
indemnification by granting a security interest or other lien on any assets of
the corporation, or (iv) the establishment of a letter of credit, guaranty or
surety.

Section 7.04 DEFINITIONS. For purposes of this Article: Expenses. The word
"EXPENSES" shall be broadly construed and, without limitation, means (i) all
direct and indirect costs incurred, paid or accrued, (ii) all attorneys' fees,
retainers, court costs, transcripts, fees of experts, witness fees, travel
expenses, food and lodging, expenses while traveling, duplicating costs,
printing, and binding costs, telephone charges, postage, delivery service,
freight or other transportation fees and expenses, (iii) all other disbursements
and out-of-pocket expenses, (iv) amounts paid in settlement, to the extent
permitted by Nevada Law, and (v) reasonable compensation for time spent by the
Indemnitee for which he is otherwise not compensated by the corporation or any
third party, actually and reasonably incurred in connection with either the
appearance at or investigation, defense, settlement or appeal of a Proceeding or
establishing or enforcing a right to indemnification under any agreement or
arrangement, this Article, the Nevada Law or otherwise; provided, however, that
"Expenses" shall not include any judgments or fines or excise taxes or penalties
imposed under the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or other excise taxes or penalties.

Liabilities. "Liabilities"means liabilities of any type whatsoever,
including, but not limited to, judgments or fines, ERISA or other excise
taxes and penalties, and amounts paid in settlement.

Nevada Law. "NEVADA LAW" means Chapter 78 of the Nevada Revised
Statutes as amended and in effect from time to time or any successor or
other statutes of Nevada having, similar import and effect.

This Article. "THIS ARTICLE" means Paragraphs 7.01 through 7.04 of these
By-Laws or any portion of them.

Power of Stockholders. Paragraphs 7.01 through 7.04, including this
Paragraph, of these By-Laws may be amended by the stockholders only by vote of
the holders of sixty-six and two-thirds percent (66 2/3%) of the entire number
of shares of each class, voting separately, of the outstanding capital stock of
the corporation (even though the right of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this Article
shall adversely affect any right of any Indemnitee existing at the time such
amendment or repeal becomes effective.

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Power of Directors. Paragraphs 7.01 through 7.04 and this Paragraph of
these By-Laws may be amended or repealed by the Board of Directors only by
vote of eighty percent (80%) of the total number of Directors and the holders
of sixty-six and two-thirds percent (66 2/3) of the entire number of shares
of each class, voting separately, of the outstanding capital stock of the
corporation (even though the night of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this
Article shall adversely affect any right of any Indemnitee existing, at the
time such amendment or repeal becomes effective.

ARTICLE VIII

BY-LAWS

Section 8.01 AMENDMENT. Amendments and changes of these By-Laws may be made
at any regular or special meeting of the Board of Directors by a vote of not
less than all of the entire Board, or may be made by a vote of, or a consent in
writing signed by the holders of a majority of the issued and outstanding
capital stock.

Section 8.02 ADDITIONAL BY-LAWS. Additional by-laws not inconsistent
herewith may be adopted by the Board of Directors at any meeting of the Board of
Directors at which a quorum is present by an affirmative vote of a majority of
the directors present or by the unanimous consent of the Board of Directors in
accordance with Section 2.11 of these By-laws.

CERTIFICATION

I, the undersigned, being the duly elected secretary of the Corporation, do
hereby certify that the foregoing By-laws were adopted by the Board of
Directors on THE TH DAY OF , 19

___________________________________
Secretary

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MINERAL LEASE PURCHASE AGREEMENT

This Mineral Lease Purchase Agreement ("Agreement") is entered into as of
this 23rd day of February, 1998, by and between High Plain Associates, Inc.,
for itself and its participants ("High Plains") and Pennaco Energy, Inc.
("Pennaco").

RECITALS

WHEREAS, High Plains is generally familiar with the oil and gas and mineral
development underway in Powder River County, Rose Bud County and Big Horn
County, Montana and Campbell County, Sheridan County and Johnson County,
Wyoming, and owns and desires to secure leases of the property described
below as the AMI for sale to Pennaco on the terms and conditions set forth
below; and

WHEREAS, subject to the terms and conditions set forth herein, Pennaco is
willing to purchase and acquire leases tendered to it by High Plains.

NOW, THEREFORE, High Plains and Pennaco agree as follows:

I. DEFINED TERMS AND PRINCIPLES OF CONSTRUCTION.

1. CERTAIN DEFINED TERMS. Each of the capitalized terms shall
have the meanings assigned to them as follows:

(a) "Area of Mutual Interest," or "AMI," shall have
the meaning assigned to the term in Article II.
(b) "Presently-Owned Leases" shall mean oil and
gas and mineral leases of land in the AMI that were
fully executed, owned by High Plains and ready for
assignment and transfer to Pennaco on or before the
Effective Date. Presently-Owned Leases shall
include the leases identified on the attached
Exhibit "A," incorporated herein by this reference.
(c) "Acquired Leases" shall mean oil and gas and
mineral leases of land dated on or after the
Effective Date, containing no limitations with
regard to the rights of lessee or drilling depths,
that is, all rights and all depths, and describing
land located in the AMI. Acquired Leases shall mean
such leases acquired by High Plains, absolutely
owned by High Plains, fully executed and ready for
assignment and transfer to Pennaco.
(d) "Effective Date" shall mean 7:00 a.m., Mountain
Standard Time, January 9, 1998.
(e) "Lease" shall mean an oil and gas and mineral lease of
land located in the AMI whose remaining term as of the
Effective Date, in the case of a Presently-Owned Lease, and
as of the date purchased by Pennaco, in the case of an
Acquired Lease, is five (5) years or longer. Also, any such
Lease shall not contain a drilling condition, other
stipulations or provisions that require lessee to drill and
develop the subject property on terms and conditions not
consistent with the usual and customary practice of the
area. Except as provided in Article VII, no Lease with less
than an 80.00% NRI will be acquired by High Plains without
the prior written consent of Pennaco.
(f) "Private Mineral Leases" shall mean oil and gas
and mineral leases of land located in the AMI whose
lessors and/or lessees are identified on the
attached Exhibit "B," incorporated herein by this
reference.

<PAGE>

1. SINGULAR, PLURAL CONSTRUCTION. All terms defined in this
Article I, Section 1 or in other provisions of this Agreement that are used in
the singular are to have the same meanings when used in the plural and
vice versa.

II. AREA OF MUTUAL INTEREST.

1. "AREA OF MUTUAL INTEREST." shall mean land legally
described in leases that identify real property located in Powder River
County, Rose Bud County and Big Horn County, Montana and Campbell County,
Sheridan County and Johnson County, Wyoming, except that in the State of
Wyoming to be within the Area of Mutual Interest such land shall be located
in the following area: Township 41 North through Township 58 North and Ridge
71 West through Range 85 West.

2. AMI TERM. The term of the AMI shall be co-extensive with
the term of this Agreement. Within the AMI, High Plains shall act as the
undisclosed agent of Pennaco and shall not become or act as an agent of any
other person with regard to (a) the acquisition of coalbed methane leasehold
interests and (b) the subject matter of this Agreement without the prior
express written consent of Pennaco, which consent shall not be unreasonably
withheld.

3. PENNACO LIMITATION. Within the AMI, Pennaco may acquire a
lease from another source, but on its sole behalf, Pennaco shall not contract
with any other lease broker.

4. NO HIGH PLAINS' ORRI. In the event that Pennaco does
acquire a lease from a source other than High Plains, High Plains will not
receive an overriding royalty interest ("ORRI") or other interest unless
agreed by the parties in writing.

III. ACQUIRED LEASES.

1. ASSIGNMENT AND TRANSFER OF ACQUIRED LEASES. Subject to
the terms and conditions hereof, High Plains has agreed to sell, assign,
transfer and convey, and Pennaco has agreed to purchase and receive, the
Acquired Leases.

2. PRICE/ACRE; CLOSING. With regard to Acquired Leases, the
purchase price shall equal the price High Plains paid for the Acquired Lease
plus related out-of-pocket expenses and properly substantiated pass-through
costs of contract support incurred at the standard rate. High Plains shall
furnish proper substantiating documentation consisting of copies of lease(s),
lease report, draft (regarding the price High Plains paid) and invoice (the
"Lease Documentation"). Such purchase and sale shall close upon submission
to Pennaco of a complete set of copies of the Lease Documentation with
assignment and conveyancing instruments to follow, fully executed and ready
for recording. The aggregate purchase price shall be paid to High Plains
within ten (10) days of confirmation from Pennaco that all documentation is
proper and complete.

3. PENNACO COMMITMENT. Unless Pennaco notifies High Plains
that Pennaco elects to increase its commitment, Pennaco will not be required
to purchase any Acquired Leases after Pennaco has committed to purchase
Acquired Leases with an aggregate purchase price of One Million Dollars
($1,000,000.00). Upon notification from High Plains that High Plains has
purchased, or committed to the purchase of, Acquired Leases whose value not
to exceed $1,000,000.00, Pennaco may notify High Plains that Pennaco has
elected to increase its commitment, for an amount specified in such notice,
and the provisions of this Agreement shall be applicable with regard to such
additional Acquired Leases.

IV. PRESENTLY-OWNED LEASES.

1. OPTION -- CONSIDERATION. Pennaco will tender to High
Plains, by wire transfer, the sum of $125,000.00 on or before 2:00 p.m.,
Friday, January 30, 1998. With the execution of this Agreement, such sum
shall become a firm obligation and debt owed to High Plains as consideration
for the

<PAGE>

option. Such $125,000.00 sum will be wire transferred to Colorado State Bank
of Denver (telephone number: 303-863-4428) ABA number 102000607 for credit
to the account of High Plains Associates, Inc., account number 4058795.

2. OPTION TO PURCHASE. Upon tendering such $125,000.00 sum
to High Plains, Pennaco will then own the sole and exclusive option to
purchase the Presently-Owned Leases, on or before May 19, 1998, under the
following terms:

a. Pennaco will have the option to elect to purchase
the Presently-Owned Leases until 10:00 a.m., Mountain
Standard Time, March 6, 1998. Once the election to
purchase is made, Pennaco shall become liable for the
purchase price and must complete the transaction.
b. Pennaco will notify High Plains of its election
to purchase the Presently-Owned Leases in writing by
certified letter, courier to the address of High Plains
or via fax on or before 10:00 a.m. Mountain Standard
Time, March 6, 1998, with the final closing set for
10:00 a.m., Mountain Standard Time, May 19, 1998,
in Pennaco's office.
c. Time is of the essence for all times and dates
described above.
d. The $125,000.00 sum as consideration is to be
credited towards the final purchase price for the
Presently-Owned Leases. Such $125,000.00 is
non-refundable, unless High Plains breaches or fails
to satisfy the covenants, representations and warranties
described in Article IV, Paragraph 3.b. i and ii, below,
or in Article VII, or High Plains fails to fulfill all
commitments set forth herein prior to closing,
including, but not limited to, Article IV,
Paragraph 3.b.
e. In the event Pennaco fails, refuses or is unable
for any reason, except as provided in Article 4,
Paragraph 2.d. above, to close the sale in accordance
with the terms hereof, High Plains may retain the
$125,000.00 option consideration and seek specific
performance and any other remedies at law or in equity
for breach of this Agreement.

1. PURCHASE TERMS. If Pennaco makes the election to purchase
the Presently-Owned Leases in accordance with the provisions hereof, the
purchase and sale shall be as follows:

a. Pennaco will purchase 100% of an undivided
interest in all of the Presently-Owned Leases and
Private Mineral Leases subject to the applicable terms
and reservations set out herein. Assignments shall be
made to Pennaco Energy Inc., 3651 Lydell Road, Suite A,
Las Vegas, NV 89103.
b. Pennaco shall pay High Plains $35.00/net acre for
all leasehold interests insofar and only insofar as to
depths from the surface of the earth down to 2500 feet
or 100 feet below the stratigraphic equivalent of the
base of the tertiary age coal, whichever is deeper,
delivered by High Plains, subject to the following
reservation of an ORRI and the following provisions:

i) High Plains will arrange for its participants
to execute any requested assignment documents,
including, but not limited to, any participant
releases, to Pennaco and present such documents to
Pennaco at closing.

<PAGE>

ii) Such assignments will contain: a 60 day
reassignment clause in the event Pennaco desires
to drop, terminate or relinquish any leasehold;
only warrant title by, through or under High
Plains, but not otherwise; and any reserved ORRI
shall apply to all substitute, extended or renewal
leases taken or acquired by Pennaco or its
successor or assigns.

1. CLOSING DATE. Closing is set for 10:00 a.m., Mountain
Standard Time, May 19, 1998, (or at an earlier date designated by Pennaco) at
Pennaco's office.

2. OPTION TO PURCHASE PRESENTLY-OWNED LEASES (DEEP RIGHTS).
For a period of one (1) year from the closing date of Pennaco's purchase of
the Presently-Owned Leases, Pennaco will have the sole and exclusive option
to purchase the "deep rights" of a Presently-Owned Lease for $40.00/ net
acre. With regard to any such Presently-Owned Lease so assigned and
transferred by High Plains, "deep rights" shall mean those unlimited drilling
rights below 2,500 feet from the surface of the earth or 100 feet below the
base of the stratigraphic equivalent of the base of the tertiary age coal
formation, whichever is deeper. Such option shall be exercisable with thirty
(30) days advance written notice and shall close on the date identified in
such written notice or other mutually agreed upon date at which time the
leases shall be tendered, ready for recording and the total purchase price
shall be due and payable. If such leases ("Presently-Owned Leases - Deep
Rights") otherwise conform to the terms, conditions and other provisions of
this Agreement, Pennaco shall purchase at least 60% of such Presently-Owned
Leases - Deep Rights tendered to Pennaco. For purposes of this paragraph,
"60% of such Presently-Owned Leases" shall mean a 100% of an undivided
interest in 60% times the total number of acres described in such
Presently-Owned Leases tendered to Pennaco. For example, if 20,000 acres are
otherwise properly tendered Pennaco shall purchase 12,000 acres.

3. PRIVATE MINERAL LIMITATION. To the extent that a
Presently-Owned Lease is a Private Mineral Lease, the purchase option
described in this Article IV shall not be available.

V. HIGH PLAINS' OVERRIDING ROYALTY.

1. ACQUIRED LEASES. Except as provided for in Article V.
Paragraph 3, below, with regard to Acquired Leases that Pennaco purchases
from High Plains, Pennaco will receive a net revenue interest ("NRI") of .8
and each of Pennaco and High Plains will retain an overriding royalty
interest ("ORRI") equal to .500000 times the difference between .2 minus the
royalty and existing or committed ORRI's (expressed as decimal). For
purposes of illustration the parties set forth the following table (all
interests reflect 100% of 8/8 working interest):

<TABLE>
<CAPTION>
ROYALTY PENNACO HIGH PLAINS PENNACO
NRI ORRI ORRI
<S> <C> <C> <C>
0.1250 0.80000 0.02500 0.05000
0.1875 0.80000 0.00625 0.00625
0.2000 0.80000 0.00000 0.00000
</TABLE>

1. PRESENTLY-OWNED LEASES. With regard to Presently-Owned
Leases that Pennaco purchases from High Plains, Pennaco will receive a NRI of
.8 and each of Pennaco and High Plains will retain an ORRI equal to .33333
and .66667, respectively, times the difference between .2 minus the royalty
and existing or committed ORRI's (expressed as decimal). For purposes of
illustration the parties set forth the following table (all interests reflect
100% of 8/8 working interest):

<PAGE>

<TABLE>
<CAPTION>
ROYALTY PENNACO HIGH PLAINS PENNACO
NRI ORRI ORRI
<S> <C> <C> <C>
0.1250 0.80000 0.05000 0.025000
0.1875 0.80000 0.00833 0.004170
0.2000 0.80000 0.00000 0.000000
</TABLE>

1. LIMITATION. Notwithstanding anything to the contrary
appearing herein and except as provided in paragraph 4 of this Article, the
NRI purchased by Pennaco under any Acquired Lease or Presently-Owned Lease
shall not be less than 80% of 8/8's working interests proportionately reduced
to the actual working interest acquired. Further, notwithstanding anything
to the contrary appearing herein, with regard to Acquired Leases, the ORRI
retained by High Plains shall in no event exceed 2.5%, except with regard to
the Acquired Leases located in Montana (excluding the Randall-Taylor acreage)
the ORRI shall not exceed 1.5%.

2. ONE-HALF PERCENT TO SUB-BROKERS. In connection with the
acquisition of Presently-Owned Leases and Acquired Leases, High Plains was
required to convey a one-half percent (.5%) to a one percent (1.0%)
overriding royalty interest to induce a sub-broker (Schlenker, Ken & Morris,
Stephen) to convey the Leases to High Plains. With regard to the sub-brokers
identified in this Article V, Paragraph 4, the minimum NRI permitted under
this Agreement shall be 79.00% to 79.50%, not 80.00%.

VI. TERM AND TERMINATION.

1. TERM. This Agreement shall be for primary term commencing
on the Effective Date and,t unless earlier terminated as provided herein,
shall continue until, and without further notice end on, December 31, 1999.

2. EXTENSION OF TERM. Within thirty (30) days prior to the
end of the primary term, either party may propose to extend the term of this
Agreement by sending notice to that effect and propose the length of any
extension of the term. The other party shall timely respond and, upon
written agreement regarding the length of any such extension, the provisions
of this Agreement, to the extent not otherwise amended, shall continue in
full force and effect.

3. TERMINATION. In the event that (i) either High Plains or
Pennaco violates any provision of this Agreement; (ii) in the reasonable
discretion of Pennaco or High Plains, as the case may be, the other party
fails to satisfactorily perform its obligations; (iii) Pennaco is sued on
account of the conduct of High Plains, or (iv) High Plains is sued on account
of Pennaco; then, at the option of the aggrieved party ("Non-Breaching
Party"), and without prejudice to its other rights and remedies, this
Agreement may be terminated upon notice to that effect sent to the party that
is in breach of this Agreement (the "Breaching Party"). Upon termination,
the Non-Breaching Party shall be under no further obligation to the Breaching
Party, except to pay amounts owing for services, unless the Non-Breaching
Party shall believe in good faith that payment of such amounts should be
suspended, withheld or such amounts should be set-off against any amounts
owing to the Non-Breaching Party.

VII. SPECIAL MATTERS.

1. MCMAHON BULLINGTON GROUP. Notwithstanding any other term,
covenant or provision contained herein, McMahon-Bullington, L.P., will assign
its "held by production" ("HBP") "Morse Ranch Lease," dated August 18, 1967,
recorded in Book 132, Page 68, of the Photo Records of Campbell County,
Wyoming, to Pennaco, on the following terms:
a. Four (4) year subassignment from January 15, 1998;
b. Rights and interests granted are from the surface of the earth
down to 2,000 feet;
c. McMahon-Bullington L.P., will reserve and retain the difference
between existing burden and twenty percent of eight/eighths (20%
of 8/8ths) as an overriding royalty

<PAGE>

interest;
d. In the event any tract or parcel of the "Morse Ranch Lease" at
the effective date of the assignment is burdened with royalty,
overriding royalty and/or production payments in excess of twenty
percent of eight/eighths (20% of 8/8ths); McMahon-Bullington L.P.
(assignor), shall retain and reserve NO overriding royalty as to
that particular tract or parcel;
e. The four (4) year subassignment will contain a "pugh" clause and
a one hundred eighty (180) day continuous drilling clause; and
f. Other terms and conditions of the subassignment affecting this
acreage/lease will be consistent with those "private minerals"
being leased and assigned hereunder to Pennaco.

1. LEASE TERM LESS THAN 5 YEARS, NOT HBP. In those cases
where the lease acquired by High Plains does not qualify as a Presently-Owned
Lease or an Acquired Lease because the remaining term is less than five (5)
years, High Plains shall make such leases available for inspection by Pennaco
and, if Pennaco notifies High Plains that Pennaco elects to purchase any such
lease, Pennaco and High Plains shall determine the purchase price subject to
the following table:

<TABLE>
<CAPTION>
REMAINING TERM PURCHASE PRICE/ACRE
<S> <C>
GREATER THAN 4 years $35.00
GREATER THAN 3 years but LESS THAN 4 $30.00
GREATER THAN 2 years but LESS THAN 3 $25.00
GREATER THAN 2 years $20.00
</TABLE>

1. TITLE FAILURE; CUMULATIVE TITLE FAILURES. In the event
that a Lease is rejected on the ground of Title Failure, High Plains shall
have a reasonable time period, not to exceed thirty (30) days, to cure the
title; provided, however, that if Pennaco received notice from High Plains
that High Plains is in good faith diligently undertaking to cure such defect,
the period for curing such defect shall be extended an additional thirty (30)
days from the date that such cure period would have otherwise expired. If
the title cannot be cured in the reasonable opinion of Pennaco, then Pennaco
shall re-tender the lease to High Plains, and shall be reimbursed for the
related purchase price. The right to such reimbursement shall be effective
for a period of six (6) months, and thereafter shall be null and void,
measured from the date that the close of the purchase of the Lease (that is,
a Presently-Owned lease). Except with regard to any Presently-Owed Lease
whose title fails after May 19th, 1998 on account of U.S. Public Law No. 323,
30 U.S.C. Section 81 or U.S. Public Law No. 227, 30 U.S.C. Section 85, if
during the term of this Agreement, uncured Title Failure shall occur with
regard to twenty percent (20%), as measured by the aggregate purchase price,
of such Presently-Owned Leases, then, at the option of Pennaco, Pennaco may
rescind this Agreement and shall be entitled to recover all consideration
paid or obligation incurred with regard, or related, to such Leases (that is,
Presently-Owned Leases). For the purpose of this paragraph "Title Failure"
shall mean a material defect in the ownership interest assigned and
transferred to Pennaco. For these purposes "Title Failure" shall not mean an
immaterial defect in the designation of a prior holder of an interest, such
as a defect requiring an Affidavit of Identity.

2. HIGH PLAINS PARTNERS. High Plains fully assumes all
duties, obligations and liabilities regarding accounting, distributing and
otherwise assuring that each of the persons or entities constituting a
participant represented by High Plains receives anything owing to such
participants under this Agreement. High Plains shall indemnify and hold
Pennaco harmless from any losses, claims and damages (and reasonable
attorney's fees) that may be asserted against Pennaco on account of or in any
way related to this Agreement.

3. TITLE, OWNERSHIP, AUTHORITY. High Plains represents and
warrants to Pennaco that (a) High Plains owns, or at the time of assignment
and transfer, will own, or be authorized in its name

<PAGE>

to assign, transfer and convey the entire 100% right, title and interest in
and to each Lease (subject to such restrictions and to depths as described
herein); (b) that each such Lease is free and clear of liens, security
interests or encumbrances; and (c) High Plains is duly authorized and
empowered to execute and deliver any assignments, deeds and related
instruments to transfer and fully vest title and all interests and rights of
ownership in Pennaco.

4. FIRST RIGHT OF REFUSAL; OPTION AND PREFERENTIAL RIGHT.
Subject to the provisions of this Paragraph 6 and with regard to federal,
state and tribal leases offered by competitive bid, High Plains may in good
faith acquire a Lease for its own account if High Plains (a) purchases such
Lease for an amount in excess of the purchase price authorized in advance by
Pennaco; (b) offers such Lease to Pennaco for the purchase price High Plains
agreed to pay for such Lease, and (c) within forty-eight (48) hours of
receipt of such offer, Pennaco rejects the Lease. If Pennaco accepts the
offer and acquires such Lease for the amount paid by High Plains, such Lease
will be considered an Acquired Lease. If Pennaco rejects the Lease then
Pennaco shall retain an option to purchase or a preferential right of
purchase with regard to such Lease during the term of this Agreement. In the
event Pennaco elects to exercise its option to purchase, Pennaco shall give
High Plains ten (10) days prior notice. Within ten (10) days of receipt from
High Plains of its actual purchase price for such Lease, Pennaco shall remit
to High Plains, as the purchase price an amount equal to the purchase price
plus rentals, plus interest at a rate of 1% compounded monthly and the Lease
shall be considered Presently-Owned Leases. In the event that High Plains
receives a good a faith offer to purchase such Lease from an unrelated third
party, High Plains shall give prompt notice to Pennaco including with such
notice all supporting documentation, and Pennaco shall have ten (10) days to
accept or reject the offer. In the event that Pennaco accepts such offer it
shall pay High Plains an amount equal to the amount offered by such third
party.

5. AFTER-ACQUIRED INTERESTS. The provisions of this
Agreement shall not apply to the any and all mineral and/or royalty interests
which High Plains may hereafter acquire; provided, however, that with regard
to the lease, exploitation or development of such interests, Pennaco is
hereby granted a first right of refusal. In the event that High Plains
receives a good faith offer to lease from an unrelated third party, or, for
its own account, decides to exploit or develop such interests, High Plains
shall give prompt notice to Pennaco including with such notice all supporting
documentation, and Pennaco shall have ten (10) days to match such terms. In
the event that Pennaco matches such offer it shall pay High Plains an amount
equal to the amount offered by such third party on terms no less favorable
than the terms contained in such offer.

VIII. MISCELLANEOUS.

1. HIGH PLAINS' CONSIDERATION. (a) PRESENTLY-OWNED LEASE.
High Plains acknowledges that payment of the purchase price by Pennaco --
$35.00 + $40.00 + corresponding High Plains' ORRI shall be High Plains'
consideration. Pennaco acknowledges that High Plains has contributed the
time of its salaried staff to this arrangement. (b) ACQUIRED LEASES. High
Plains acknowledges that payment of High Plains' purchase price of the
Acquired Lease + its out-of-pocket expenses + properly substantiated
pass-through costs of contract support incurred at the standard rate + the
corresponding High Plains' ORRI shall be High Plains' consideration.

2. RECORDATION. Either party may record this Agreement or a
memorandum thereof upon the earlier of the commencement of production under a
lease or one (1) year from the date hereof.

3. NOTICES. Any and all notices, request, demands and written
communications allowed or required hereunder shall be delivered in person, faxed
or sent by United States mail, postage prepaid, addressed as follows:

Lou Oswald Pennaco Energy, Inc.
High Plains Associates, Inc. Attention: President
1557 Ogden Street #300 3651 Lydell Road, Suite A

<PAGE>

Denver, CO 80218 Las Vegas, NV 89103
Fax: 303-830-2818 Fax: 619-350-0647
Phone: 303-830-0888 Phone: 800-485-0108

Any notice sent by fax shall be deposited in the mail on the same
day. All such notices, requests, demands and other communications
shall be deemed given and effective, when personally delivered, upon
receipt and, when mailed, three business days after such
communication was deposited in the mail. Each party may change its
address at any time, and from time to time, by giving written notice
to the other party.

1. PRIOR NOTIFICATION, APPROVAL, CONSENT. Any provision of
this Agreement requiring notification, approval or consent from Pennaco shall
mean approval that is requested and obtained prior to the required deadline
or expiration date and shall only be effective if evidenced by a written
instrument executed by an officer of Pennaco.

2. CHOICE OF LAW; HEADINGS; COUNTERPARTS. This Agreement
shall be governed by and construed in accordance with the laws of the State
of Colorado with respect to agreements wholly executed and performed within
such state. The headings in this Agreement are inserted for convenience of
reference only and shall not affect the meaning, interpretation or
construction of this Agreement. This Agreement may be executed in
counterparts by the parties hereto and if so executed by all parties shall be
of the same force and effect as if all parties had executed the same
instrument. All counterparts shall constitute one in the same instrument.

3. COMPLETE AGREEMENT; MODIFICATIONS. This Agreement
supersedes all prior agreements or understandings, written or oral, with
regard to the subject matter hereto, and constitutes the express and entire
agreement of the parties with regard to the subject matter hereof. This
Agreement may not be changed, amended or modified orally, but only by an
agreement in writing signed by both parties.

4. FORCE MAJEURE. Each of the parties hereto shall perform
its obligations in good faith and shall carry out its obligations to the best
of its ability. In the event that either party is rendered unable to carry
out its obligations under this Agreement on account of any cause or condition
not reasonably within the control of the party claiming suspension and which
by exercise of due diligence such party is unable to prevent or overcome such
party's obligation hereunder shall be suspended during the continuance of the
inability to perform such obligation, but shall be remedied with all
reasonable dispatch. Either party shall have the right to terminate this
Agreement if such suspension shall continue for a period in excess of sixty
(60) days. Notwithstanding anything to contrary appearing herein, the
provisions of this Article VIII, Paragraph 7 shall not apply to the ability
of either Pennaco or High Plains, as the case may be, to pay cash
consideration to the other party then due and owing.

<PAGE>

5. WAIVERS. No failure on the part of Pennaco to exercise,
and no delay in exercising, any power or right hereunder, shall operate as a
waiver thereof; nor shall any single or partial exercise of any power or
right preclude any other or further exercise thereof or the exercise of any
other power or right.

6. ASSIGNMENT; BINDING EFFECT. Subject to the following
sentence, this Agreement shall be binding upon High Plains and Pennaco and
inure to the benefit of their respective heirs, successors and assigns;
without limiting the generality of the forgoing, the obligations of High
Plains are personal and may not be assigned or transferred. Notwithstanding
anything contrary appearing herein, in the event that Pennaco assigns this
Agreement, Pennaco shall notify High Plains at least thirty (30) days prior
to the effective date of the assignment and High Plains shall have thirty
days to either consent to the assignment or terminate this Agreement. In the
event that High Plains fails to timely respond, High Plains will be deemed to
have terminated this Agreement.

IN WITNESS WHEREOF, the parties, or their authorized representatives,
have signed this Agreement effective the date first appearing above.

"High Plains" "Pennaco"
High Plains Associates, Inc., for itself Pennaco Energy, Inc.
and any Partners

By: By or on behalf of:
--------------------------------- ----------------

Typed/Printed Name: Typed/Printed Name:
------------------ ----------------

Its: Its:
-------------------------------- -------------------------------

<PAGE>

[LOGO] [LETTERHEAD]

January 23, 1998

Taylor Oil Properties
1550 West Dry Creek Road
Littleton, Colorado 80120

Re: North Powder Prospect
Sheridan County, Wyoming
Powder River County, Montana

Gentlemen:

High Plains Associates, Inc., and Louis A. Oswald, III, and Crystal H. Oswald,
husband and wife, (hereinafter referred to as HPAI et al) has expressed a
desire to purchase an option to purchase 100% interest in the above described
"North Powder Prospect" from Randall Taylor individually and dba Taylor Oil
Properties (collectively Taylor). This letter is to set forth the terms under
which Taylor will sell the option to HPAI et al.

The leases described on Exhibit A are Federal Leases currently owned by
Randall Taylor lying within Montana. The leases described in Exhibit B are
Fee Leases owned by Taylor Oil Properties. The leases described in Exhibit C
are Federal Leases in Wyoming owned by Kenneth Schlenker, as agent for
Randall Taylor. The leases identified in these exhibits constitute the
entire "North Powder Prospect".

OPTION TO PURCHASE TERMS:

1. HPAI et al will tender to Taylor, by wire transfer, the sum of $125,000.00
on or before 2:00 PM, February 22, 1998. With the execution of this
document, the aforementioned $125,000.00 becomes a firm obligation and
debt owed to Randall Taylor as consideration for the option,
notwithstanding the fact that it is not due to be paid until February 20,
1998. The $125,000.00 will be wired to 1(st) Bank of Colorado, 10403 West
Colfax Avenue, Lakewood, Colorado 80215, ABA number 107005047, for further
credit to 1(st) Bank Denver, account of Taylor Oil Properties, account
number 5025003857.

2. By tendering said $125,000.00 to Taylor, HPAI et al will then own an
option to purchase North Powder Prospect under the following terms. HPAI
et al will have the option to elect to purchase the North Powder Prospect
leases until 10:00 AM, Mountain Standard Time, March 7, 1998 with the
final closing set for 10:00 AM, Mountain Standard time, May 20, 1998, in
HPAI et al's office at the above address. The $125,000.00 as consideration
is to be credited towards the final purchase price. Said $125,000.00 is
non-refundable.

3. HPAI et al will notify Taylor, at the above address, of its election to
purchase in writing by certified letter, courier to the above address or
via fax to (303) 798-1373 on or before 10:00 AM, Mountain Standard Time,
March 7, 1998. Once the election to purchase is made HPAI et al becomes
liable for the purchase price and must complete the transaction.

<PAGE>
Taylor Oil Properties
January 22, 1998
Page Two

4. Time is of the essence for all times and dates described above.

If HPAI et al makes the election to purchase North Powder Prospect in
compliance with the above described terms, the purchase will be made under
the following terms.

END OF OPTION TERMS

PURCHASE TERMS:

1. HPAI et al will purchase an undivided 100% interest in the prospect leases
described in Exhibits A, B and C. Assignments will be made to High Plains
Associates, Inc., 1557 Ogden, Suite 300, Denver, Colorado 80218.

2. HPAI et al shall pay $35.00 per net acre received (all depths) for all
leasehold delivered by Taylor and his agent, Kenneth A. Schlenker, from
Exhibits A, B and C, subject to the provisions listed below.

3. Title to the coal bed methane gas beneath the fee leases described in
Exhibit B is clouded by virtue of the ruling of the Tenth Circuit Court of
Appeals ruling in the SOUTHERN UTE INDIAN TRIBE VS. AMOCO case. HPAI et al
shall pay $5.00 per net acre received for all fee leasehold received from
Taylor listed on Exhibit B. HPAI et al will tender an additional $30.00
per net fee leasehold mineral acre received within thirty (30) days of
receiving notice of a ruling from the Tenth Circuit Court of Appeals in
which the court has ruled that title to the coal bed methane gas lies with
the owners of the gas estate and not with the owners of the coal estate or
in any other manner issues a ruling that allows the owner of these leases
to produce coal bed methane gas from the lands subject to these leases and
enjoy the benefits and rewards of said production. If the Tenth Circuit
Court of Appeals fails to rule in this manner, HPAI et al will tender an
additional $30.00 per net fee leasehold mineral acre received within
thirty (30) days of receiving notice of a ruling from the United States
Supreme Court in which the court has ruled that title to the coal bed
methane gas lies with the owners of the gas estate and not with the owners
of the coal estate or if the Supreme Court or other Federal agency in any
other manner issues a ruling that allows the owner of these leases to
produce coal bed methane gas from the lands subject to these leases and
enjoy the benefits and reward of said production. The additional $30.00
consideration will be due on any fee lease which has a minimum of two
years primary term remaining at the time of the ruling.

4. Taylor will arrange for Kenneth A. Schlenker to execute any requested
assignment documents to HPAI et al and present those documents to HPAI et
al at closing.

5. Taylor will deliver an 82.00% NRI on all federal leasehold (Exhibits A and
C) purchased by HPAI et al. Taylor will deliver an 82.00% NRI on all fee
leases (Exhibit B) purchased by HPAI et al.

6. During the period commencing on the date of this agreement and ending ten
(10) days prior to Closing (the "Review Period"), at HPAI et al's expense
and with the full cooperation and assistance of Taylor, HPAI et al, its
employees, agents and contractors shall have the right to inspect all of
Taylor's lease files and title reports concerning the subject leases.

<PAGE>
Taylor Oil Properties
January 22, 1998
Page Three

During the Review Period, HPAI et al may give Taylor written notice of
the leasehold interests included in the sale which have ownership title
defects. A title defect letter, if any, shall be submitted no later than
ten (10) days prior to closing. If the defect cannot be or is not cured
by Taylor before Closing, HPAI et al shall have the right to delete those
leases from the sale. Nonetheless, should HPAI et al proceed with the
purchase of those leases after having identified ownership title
defect(s) or ownership title failure(s), Taylor shall, in good faith, use
reasonable efforts after Closing to assist HPAI et al in curing the
defect(s).

7. The assignment forms attached hereto as Exhibit D will be utilized as the
conveyance documents together with the required federal assignment forms.

8. Closing is set for 10:00 AM, Mountain Standard time, May 20, 1998 at
HPAI's office. Full payment will be tendered at closing. Payment may be
made by certified check or wire transfer.

Full payment will be for net acre received at closing. Payment for any
federal leases not issued at the time of closing will be made at the time
of assignment to HPAI.

9. Failure of any party to insist in any one or more instances upon strict
performance of any of the terms or conditions of this agreement will not
be construed as a waiver or a relinquishment of any right granted
hereunder or of the future performance of any such term, covenant or
condition, but the obligations of the parties with respect thereto will
continue in full force and effect.

10. Time is of the essence for all times and dates described above.

END OF PURCHASE TERMS

NON-COMPETE PROVISIONS:

Upon execution of this letter, Taylor, its business associates, employees,
agents, brokers or other parties retained by Taylor, agrees that for a period
of one (1) year after January 21, 1998, it will not lease or purchase, or
"acquire", in any sense of the word, for its own account and/or for the
account of anyone else, any interest of any kind whatsoever without obtaining
the written approval of HPAI et al, within the following lands:

Wyoming:
--------
T52N through T58N, and
R74W through R77W, inclusive

Montana:
--------
T9S, R45E through R49E, and
T8S, R46E through R48E, and
T7S, R46E through R48E, inclusive

<PAGE>
Taylor Oil Properties
January 22, 1998
Page Four

Should HPAI et al not elect to purchase the entire North Powder Prospect on
March 7, 1998, then this non-compete provision shall expire at that time.

In the event litigation is required to enforce any provision of this
contract, the losing party shall reimburse the prevailing party for all costs
incurred in the preparation for and litigation of or other resolution of the
dispute. Interest on any sums which are not paid on the due date will accrue
at the rate of 18% per annum, compounded daily.

This agreement shall be binding on and inure to the benefit of the heirs,
successors and assigns of all parties hereto.

This agreement and the exhibits hereto contain the entire agreement between
the parties with respect to the matters thereto and supersedes all prior
arrangements or understandings with respect thereto.

Facsimile signatures shall be considered as original, and binding, by all
parties to this agreement.

Sincerely,

HIGH PLAINS ASSOCIATES, INC.

/s/ Louis A. Oswald, III /s/ Louis A. Oswald, III
- --------------------------------- -------------------------------------
Louis A. Oswald, III Louis A. Oswald, III, individually
President

/s/ Crystal H. Oswald
---------------------------------
Crystal H. Oswald, wife of
Louis A. Oswald, III

AGREED TO AND ACCEPTED THIS 23(rd) DAY OF JANUARY, 1998.

TAYLOR OIL PROPERTIES

By: /s/ Randall Taylor /s/ Randall Taylor
----------------------------- -----------------------------------
Randall Taylor Randall Taylor, individually

<PAGE>

ASSIGNMENT OF OPTION

THIS ASSIGNMENT OF OPTION is executed this 6(th) day of March, 1998, by HIGH
PLAINS ASSOCIATES, INC., LOUIS A. OSWALD, III, AND CRYSTAL H. OSWALD, wife of
Louis A. Oswald, III (hereinafter collectively referred to as "Assignors"),
and PENNACO ENERGY, INC., a Colorado corporation, whose address is 3651
Lydell Road, Suite A, Las Vegas, Nevada 89103, (hereinafter referred to as
"Pennaco").

WHEREAS, under the terms of an Agreement dated January 23, 1998, Assignors
acquired an option to purchase certain Oil and Gas Leases owned by Taylor Oil
Properties, located in Sheridan County, Wyoming, and Powder River County,
Montana. A true and correct copy of this Agreement is attached hereto as
EXHIBIT "A."

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is acknowledged and confessed, Assignors do herewith
assign unto Pennaco, all of its rights in and to the above described
Agreement attached hereto as Exhibit A, and in and to any and all oil and gas
leases set forth therein. This Assignment is made without a warranty of
title, either expressed or implied, or any warranty or representation of any
kind.

DATED the date first above written.

HIGH PLAINS ASSOCIATES, INC. CRYSTAL H. OSWALD

By: /s/ Louis A. Oswald, III Crystal H. Oswald
--------------------------------- -----------------------------
LOUIS A. OSWALD, III, as President
of High Plains Associates, Inc.,
and Individually

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

EXERCISE OF OPTION

PENNACO ENERGY, INC. does herewith exercise the option to purchase the North
Powder Prospect from RANDALL TAYLOR, individually, and d/b/a TAYLOR OIL
PROPERTIES (collectively "Taylor") as set forth in Paragraph 2 of the
Agreement attached hereto as EXHIBIT "A." Closing shall occur on May 20,
1998. Pennaco requests that:

1. The site of the closing, the offices of High Plains Associates, Inc.,
1557 Ogden, Suite 300, Denver, CO 80218, remain unchanged;
2. The Assignments be made into High Plains Associates, Inc., a Colorado
corporation, as now provided in the contract of the parties; and
3. Access should continue to be given to High Plains Associates on behalf of
Pennaco Energy, Inc. as provided in Paragraph 6 of the Agreement for title
review purposes.

PENNACO ENERGY, INC.

By: /s/ [ILLEGIBLE]
--------------------------
Its: Sr. Vice President
--------------------------

<PAGE>
AGREEMENT

This Agreement is entered into this __ day of March, 1998, between
PENNACO ENERGY. INC., whose address is 3651 Lydell Road, Suite A, Las Vegas,
Nevada 89103 (hereinafter referred to as "Pennaco"), and HIGH PLAINS
ASSOCIATES, INC., whose address is 1557 Ogden Street, Suite 300, Denver,
Colorado 80218 (hereinafter referred to as "High Plains").

RECITALS

1. Pennaco and High Plains entered into a Mineral Lease Purchase Agreement
dated February 23, 1998 (hereinafter referred to as "Mineral Lease Purchase
Agreement").

2. Louis A. Oswald, III, and Crystal H. Oswald (collectively, the "Oswalds")
and High Plains entered into an Agreement with Randall Taylor, d/b/a Taylor
Oil Properties dated January 23, 1998 (hereinafter referred to a the
"Taylor Agreement."). The Taylor Agreement is attached as Exhibit "A" to
Attachment I hereto.

3. Under the provisions of the Taylor Agreement, High Plains has an option
to acquire oil and gas leases in the North Powder Prospect, Sheridan
County, Wyoming, and Powder River County, Montana, pursuant to the terms
and provisions of the Taylor Agreement.

4. Pursuant to the terms of the Mineral Lease Purchase Agreement, Pennaco
desires to take an assignment of High Plains' option rights under the
Taylor Agreement, exercise the option, close the transaction, and receive
an assignment of the oil and gas leases which are subject to Taylor
Agreement.

Now, therefore, for an in consideration of this agreement, and the covenants
and provisions herein contained, Pennaco and High Plains agree as follows:

1. ASSIGNMENT OF OPTION. Oswalds and High Plains shall execute and
deliver to Pennaco the Assignment of Option and Exercise of Option attached
hereto as Attachment I. Pennaco shall execute that portion of this document
which exercises the option to purchase the leases subject to the Taylor
Agreement.

2. EXERCISE OF OPTION. On or before the option deadline 10:00 a.m. on
March 7, 1998, High Plains shall provide Taylor with a copy of the fully
executed copy of Attachment I. Pennaco agrees and understands that upon
delivering such document to Taylor, that Pennaco shall be contractually
obligated to close the purchase transaction contemplated by the Taylor
Agreement on the closing date of May 20, 1998, but subject to the terms and
provisions of the Taylor Agreement.

3. ASSUMPTION OF LIABILITY; INDEMNITY. Pennaco herewith assumes any and
all of the liabilities of High Plains and/or the Oswalds, and their
respective successors and assigns, under the Taylor Agreement. Pennaco
herewith agrees to indemnify and hold High Plains and the Oswalds harmless
from any costs, claims or liabilities arising under or related to the Taylor
Agreement,

<PAGE>

including any and all claims arising out of any alleged, asserted, or proven
breaches thereof by Pennaco, specifically including by way of example any
claims or damages relating to failure to close or failure to pay the full
consideration required for the assets. The foregoing assumption and indemnity
shall extend to court costs and reasonable attorneys' fees, and shall be
liberally construed so that the entirety of any legal risk associated with or
arising out of the buyers nonperformance under the Taylor Agreement is borne
solely by Pennaco.

4. ASSIGNMENTS. As contemplated by Attachment I, High Plains shall
continue to assist in closing the transaction with Taylor on behalf of
Pennaco, by providing land and/or title review due diligence services to
Pennaco at its normal billing rate. To the extent that Taylor allows, High
Plains shall assist in the preparation of assignment documents for closing
with Taylor. Assignments shall be made into the name of High Plains. Closing
funds shall be provided by Pennaco and paid directly to Taylor. The closing
settlement statement shall be approved by Pennaco. Upon taking possession of
the assignments at closing with Taylor and payment to High Plains of it out
of-pocket expenses and third party or contract fees and expenses at its
standard rates, High Plains shall assign, using appropriate state or federal
assignment forms, all of its right, title, and interest in and to the leases
acquired from Taylor pursuant to the Taylor Agreement, reserving in said
assignment, unto High Plains an overriding royalty interest as set forth in
Paragraph V.I. of the Mineral Lease Purchase Agreement.

5. EFFECT OF THIS AGREEMENT. The foregoing represents the entire
agreement of the parties as to Pennaco's participation in the acquisition of
the leases subject to the Taylor Agreement through High Plains. Except as
specifically modified herein, the Mineral Lease and Purchase Agreement shall
apply to the Taylor leases and the Taylor Agreement; provided, however the
provisions of Paragraphs VII.3 and VII.5 to the Mineral Lease Purchase
Agreement shall not apply to the transaction contemplated hereby. The sole
consideration to be paid to High Plains for the assignment of its rights
under the Taylor Agreement shall be overriding royalty interest which is
reserved to High Plains under paragraph 4, above, and the retention of High
Plains to provide land, title and due diligence services in connection with
this transaction.

DATED the date first above written.

HIGH PLAINS ASSOCIATES, INC.

By: /s/ Louis A. Oswald, III
------------------------------------
LOUIS A. OSWALD, III, as President

PENNACO ENERGY, INC.

By: /s/ [ILLEGIBLE]
------------------------------------
Its: Sr. Vice President
------------------------------------

<PAGE>

PENNACO ENERGY, INC.

1998 STOCK OPTION AND INCENTIVE PLAN

<PAGE>
PENNACO ENERGY, INC.

1998 STOCK OPTION AND INCENTIVE PLAN

<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I. PURPOSE........................................................ 1

II. DEFINITIONS.................................................... 1

III. EFFECTIVE DATE................................................. 3

IV. ADMINISTRATION................................................. 3

V. PARTICIPATION.................................................. 4

5.1 Eligibility............................................ 4
5.2 Ten Percent Shareholders............................... 4
5.3 Stock Ownership........................................ 4
5.4 Outstanding Stock...................................... 4

VI. STOCK SUBJECT TO THE PLAN...................................... 5

VII. OPTIONS........................................................ 5

7.1 Stock Option Agreements................................ 5
7.2 Number of Shares....................................... 5
7.3 Exercise Price......................................... 5
7.4 Medium and Time of Payment............................. 5
7.5 Term and Transferability of Options.................... 5
7.6 Modification, Extension, and Renewal of Options........ 6
7.7 Limitation on Grant of Incentive Stock Options......... 6
7.8 Other Provisions....................................... 6
7.9 Specific Awards Approved by the Shareholders........... 6

XIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS
AND BENEFICIARIES.............................................. 6

8.1 Employee Status........................................ 6
8.2 No Employment Contract................................. 6
8.3 No Transferability..................................... 6
8.4 Plan Not Funded........................................ 7
8.5 Adjustments upon Recapitalizations and Corporate Changes 7
8.6 Termination of Employment.............................. 7
8.7 Death of Participant................................... 8
8.8 Disability of Participant.............................. 8
8.9 Retirement of Participant.............................. 8
8.10 Rights as a Stockholder................................ 8
8.11 Deferral of Payments................................... 8
8.12 Acceleration of Awards................................. 8

IX. MISCELLANEOUS.................................................. 9

<PAGE>

9.1 Termination, Suspension and Amendment.................. 9
9.2 No Fractional Shares................................... 9
9.3 Tax Withholding........................................ 9
9.4 Restrictions of Elections Made by Participants......... 9
9.5 Limitations on the Corporation's Obligations........... 10
9.6 Compliance with Laws................................... 10
9.7 Governing Law.......................................... 10
9.8 Securities Law Requirements............................ 10
9.9 Execution.............................................. 11

</TABLE>

ii
<PAGE>

PENNACO ENERGY, INC.

1998 STOCK OPTION AND INCENTIVE PLAN

I. PURPOSE

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 Corporation, to encourage proprietary interest in
the Corporation, to encourage such key employees to remain in the employ of the
Corporation 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 Corporation.

II. DEFINITIONS.

2.1 "Award" shall mean an Option, which may be designated an Incentive
Stock Option or a Nonstatutory Stock Option, in each case as granted pursuant to
the Plan.

2.2 "Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing an Award.

2.3 "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified under the Plan in the event of a Participant's death.

2.4 "Board" shall mean the Board of Directors of the Corporation.

2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.

2.6 "Committee" shall mean the committee, if any, appointed by the Board
in accordance with Section 4 of the Plan, or the Board if no Committee has been
appointed.

2.7 "Common Stock" shall mean the Common Stock, $.001 par value, of the
Corporation.

2.8 "Corporation" shall mean Pennaco Energy, Inc., a Nevada corporation,
and its Subsidiaries.

2.9 "Disability" shall mean the condition of a Participant who is unable
to perform his or her substantial and material job duties due to injury or
sickness or such other condition as the Board or Committee may determine in its
sole discretion and/or engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.

2.10 "Effective Date" shall mean the date that the Plan was adopted by the
shareholders of the Company.

2.11 "Eligible Employee" shall mean an individual who is employed (within
the meaning of Code Section 3401 and the regulations thereunder) by the
Corporation. Additionally for purposes of this Plan, a Participant who is a
director or a consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary shall be deemed to be an Eligible
Employee, and service as a director, consultant, vendor, customer, or other
provider of significant services to the Corporation or a Subsidiary shall be
deemed to be employment, except that no Incentive Stock Option may be granted to
a non-employee director or non-employee consultant, vendor, customer, or other
provider of significant services to the Corporation or a Subsidiary.

2.12 "Event" shall mean any of the following:

(a) Any person or entity (or group of affiliated persons or entities)
acquires in one or more transactions, whether before or after the effective date
of the Plan, ownership of more than 50% of the outstanding shares of stock
entitled to vote in the election of directors of the Corporation; or

(b) The dissolution or liquidation of the Corporation or a
reorganization, merger or consolidation of the Corporation with one or more
entities, as a result of which the Corporation is not the surviving entity, or a
sale of all or substantially all of the assets of the Corporation as an entirety
to another entity.

1
<PAGE>

For purposes of this definition, ownership does not include ownership
(i) by a person owning such shares merely of record (such as a member of a
securities exchange, a nominee or a securities depository system), (ii) by a
person as a bona fide pledgee of shares prior to a default and determination
to exercise powers as an owner of the shares, (iii) by a person who is not
required to file statements on Schedule 13D by virtue of Rule 13d-1(b, or
(iv) by a person who owns or holds shares as an underwriter acquired in
connection with an underwritten offering pending and for purposes of resale.

2.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

2.14 "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Award may be exercised.

2.15 "Fair Market Value" shall mean the value of one Share of Common
Stock, determined as follows:

(i) If the Shares are traded on an exchange, the price at which
Shares traded at the close of business on the date of valuation; or

(ii) If the Shares are traded over-the-counter on the NASDAQ
System, the closing price if one is available, or the mean between the bid and
asked prices on said System at the close of business on the date of valuation;
or

(iii) If neither (i) nor (ii) above applies, the fair market
value as determined by the Board or the Committee in good faith. Such
determination shall be conclusive and binding on all persons.

2.16 "Incentive Stock Option" shall mean an option described in Section
422A(b) of the Code.

2.17 "Nonstatutory Stock Option" shall mean an option not described in
Section 422(b), 422A(b), 423(b) or 424(b) of the Code.

2.18 "Option" shall mean either an Incentive Stock Option or a Nonstatutory
Stock Option granted pursuant to the Plan.

2.19 "Participant" shall mean Eligible Employee who has received an Award
under the Plan.

2.20 "Plan" shall mean the Pennaco Energy, Inc. 1998 Stock Option and
Incentive Plan, as it may be amended from time to time.

2.21 "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Award is exercised.

2.22 "Restricted Stock Awards" shall mean any Award of shares of Common
Stock that may be subject to certain restrictions and to a risk of forfeiture.

2.23 "Retirement" shall mean the voluntary termination of employment by an
Employee upon the attainment of age 65 and the completion of not less than 20
years of service with the Corporation or a Subsidiary.

2.24 "Rule 16b" shall mean Rule 16b of the Securities and Exchange Act of
1934.

2.25 "Share" shall mean one share of Common Stock, adjusted in accordance
with Section 8.5 of the Plan (if applicable).

2.26 "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.

2.27 "Stock Appreciation Right" shall mean the right granted to a
Participant to be paid an amount measured by the appreciation in the Fair Market
Value of the Common Stock from the date of grant to the date of exercise of the
right, with payment to be made in cash, Common Stock, or property as specified
in the Award or determined by the Board or the Committee.

2.28 "Stock Option Agreements" shall mean an Award Agreement granting
Options under the Plan.

2.29 "Stock Purchase Agreement" shall mean an agreement to exercise Options
under the Plan.

2.30 "Subsidiary" shall mean any corporation at least 50% of the total
combined voting power of which is owned by the Corporation or by another
Subsidiary.

2
<PAGE>

2.31 "Tax Date" shall have the meaning set forth in Section 9.3 hereof.

III. EFFECTIVE DATE

The Plan was adopted by the Board on March 24, 1998, subject to the approval by
the Corporation's shareholders. The Plan is being submitted for shareholder
approval pursuant to a shareholder's action without a meeting in which holders
of a majority of the shares of Common Stock must approve of the adoption of the
Plan pursuant to the Corporations Bylaws and Nevada Corporate Law. The
effective date of the Plan shall be March 24, 1998 (the "Effective Date"),
provided that the Plan receives shareholder approval.

IV. ADMINISTRATION

The Plan shall be administered by the Board in compliance with Rule 16b-3,
or by a Committee appointed by the Board, which Committee shall be constituted
to permit the Plan to comply with Rule 16b-3, and which shall consist of not
less than two members. The Board shall appoint one of the members of the
Committee, if there be one, as Chairman of the Committee. If a Committee has
been appointed, the Committee shall hold meetings at such times and places as it
may determine. Acts of a majority of the Committee at which a quorum is
present, or acts reduced to or approved in writing by a majority of the members
of the Committee, shall be the valid acts of the Committee. The Board, or the
Committee if there be one, shall from time to time at its discretion select the
Eligible Employees and consultants who are 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. A member of the Board or a Committee member shall in no event
participate in any determination relating to Awards held by or to be granted to
such Board or Committee member; however, a member of the Board or a Committee
member shall be entitled to receive Awards which are duly approved in accordance
with the provisions of Rule 16b-3. The interpretation and construction by the
Board, or by the Committee if there be one, of any provision of the Plan or of
any Award granted thereunder shall be final. No member of the Board or of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Award granted thereunder. In addition to any
right of indemnification provided by the Articles of Incorporation or Bylaws of
the Corporation, such person shall be indemnified and held harmless by the
Corporation from any loss, cost, liability or expense that may be imposed upon
or reasonably incurred by him in connection with any claim, suit, action or
proceeding to which he may be a party by reason of any action or omission under
the Plan.

V. PARTICIPATION

5.1 Eligibility. Subject to the terms and conditions of Section 5.2
below, the Participants shall be such persons as the shareholders may approve or
as the Board or the Committee may select from among the following classes of
persons: (i) Employees of the Corporation or of a Subsidiary (who may be
officers, whether or not they are directors); and (ii) Consultants, vendors,
customers, and others expected to provide significant services to the
Corporation or a Subsidiary.

For purposes of this Plan, a Participant who is a director or a consultant,
vendor, customer, or other provider of significant services to the Corporation
or a Subsidiary shall be deemed to be an Eligible Employee, and service as a
director, consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary shall be deemed to be employment,
except that no Incentive Stock Option may be granted to a non-employee director
or non-employee consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary, and except that no Nonstatutory
Stock Option may be granted to a non-employee director or non-employee
consultant, vendor, customer, or other provider of significant services to the
Corporation or a Subsidiary other than upon a vote of a majority of
disinterested directors finding that the value of the services rendered or to be
rendered to the Corporation or a Subsidiary by such non-employee director or
non-employee consultant, vendor, customer, or other provider of services is at
least equal to the value of the Awards granted.

5.2 Ten-Percent Shareholders. An Eligible Employee who owns more than 10%
of the total combined voting power of all classes of outstanding stock of the
Corporation, its parent or any of its Subsidiaries shall not be eligible to
receive an Award for an Incentive Stock Option unless (i) the Exercise Price of
the Shares subject to such Award is at least 110% of the Fair Market Value of
such Shares on the date of grant; and (ii) such Award by its terms is not
exercisable after the expiration of 5 years from the date of grant.

5.3 Stock Ownership. For purposes of Section 5.2 above, in determining
stock ownership an Eligible Employee shall be considered as owning the stock
owned, directly or indirectly, by or for his brothers, sisters, spouses,
ancestors, and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate, or trust shall be considered as being
owned proportionately by or for its shareholders, partners, or beneficiaries.
Stock with respect to which such Eligible Employee holds an Award shall not be
counted.

3
<PAGE>

5.4 Outstanding Stock. For purposes of Section 5.2 above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant of the Award to the Participant. "Outstanding stock" shall not
include shares authorized for issue under outstanding Options or Purchase Rights
held by the Participant or by any other person.

VI. STOCK SUBJECT TO THE PLAN

The stock subject to Awards granted under the Plan shall be Shares of the
Corporation'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 shall not exceed 2,500,000 shares. The number of Shares
subject to unexercised Options (plus the number of Shares previously issued
under the Plan) shall not at any time exceed the number of Shares available for
issuance under the Plan. In the event that any unexercised Option, or any
portion thereof, for any reason expires or is terminated, the unexercised or
unvested Shares allocable to such Option may again be made subject to any Award.
Any Shares withheld by the Corporation pursuant to Section 9.3 shall not be
deemed to be issued. The number of withheld Shares shall be deducted from the
applicable Award and shall not entitle the Participant to receive additional
Shares. The limitations established by this Article VI shall be subject to
adjustment in the manner provided in Section 8.5 hereof upon the occurrence of
an event specified therein.

VII. OPTIONS

7.1 Stock Option Agreements. Options shall be evidenced by written Stock
Option Agreements in such form as the Board or the Committee shall from time to
time determine. Such agreements shall comply with and be subject to the terms
and conditions set forth below.

7.2 Type and Number of Shares. Each Option shall state the type of Award
and the number of Shares to which it pertains and shall provide for the
adjustment thereof in accordance with the provisions of Section 8.5 hereof.

7.3 Exercise Price. Each Option shall state the Exercise Price thereof.
The Exercise Price in the case of any Incentive Stock Option shall not be less
than the Fair Market Value on the date of grant and, in the case of any Option
granted to an Optionee described in Section 5.2 hereof, shall not be less than
110% of the Fair Market Value on the date of grant. The Exercise Price in the
case of any Nonstatutory Stock Option shall not be less than 85% of the Fair
Market Value on the date of grant.

7.4 Medium and Time of Payment. The Purchase Price shall be payable in
full in United States dollars upon the exercise of the Option; provided,
however, that if the applicable Stock Option Agreement so provides the Purchase
Price may be paid (i) by the surrender of Shares in good form for transfer,
owned by the Participant and having a Fair Market Value on the date of exercise
equal to the Purchase Price, or in any combination of cash and Shares, as long
as the sum of the cash so paid and the Fair Market Value of the Shares so
surrendered equal the Purchase Price, (ii) by cancellation of indebtedness owed
by the Corporation to the Participant, (iii) with a full recourse promissory
note executed by the Participant, or (iv) any combination of the foregoing. The
interest rate and other terms and conditions of such note shall be determined by
the Board of Directors. The Board of Directors may require that the Participant
pledge his or her Shares to the Corporation for the purpose of securing the
payment of such note. In no event shall the stock certificate(s) representing
such Shares be released to the Participant until such note is paid in full.

7.5 Term and Nontransferability of Options. Each Option shall state the
time or times which all or part thereof becomes exercisable. No Option shall be
exercisable after the expiration of 10 years from the date it was granted, and
no Option granted to a Participant described in Section 5.2 hereof shall be
exercisable after the expiration of five years from the date it was granted.
During the lifetime of the Participant, the Option shall be exercisable only by
the Participant and shall not be assignable or transferable. In the event of
the Participant's death, the Option shall not be transferable by the Participant
other than by will or the laws of descent and distribution.

7.6 Modification, Extension, and Renewal of Option. Within the
limitations of the Plan, the Board of Directors may modify, extend or renew
outstanding Options or accept the cancellation of outstanding Options (to the
extent not previously exercised) for the granting of new Options in substitution
therefor. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Participant, alter or impair any rights or
obligations under any Option previously granted.

7.7 Limitation on Grant of Incentive Stock Options. In the case of
Incentive Stock Options granted hereunder, the aggregate Fair Market Value
(determined as of the date of the grant thereof) of the Shares with respect to
which Incentive Stock Options become exercisable by any Participant for the
first time during any calendar year (under this Plan and all other Plans
maintained by the Corporation, its parent, or its Subsidiaries) shall not exceed
$100,000. The Board or Committee may, however, with the Participant's consent
authorize an amendment to the Incentive Stock Option which renders it a
Nonstatutory Stock Option.

7.8 Other Provisions. The Stock Option Agreements authorized under the
Plan may contain such other provisions not inconsistent with the terms of the
Plan (including, without limitation, restrictions upon the exercise of the
Option) as the Board of Directors shall deem advisable.

4
<PAGE>

7.9 Specific Awards Approved by the Shareholders. Subject to shareholder
approval and pursuant to the Board of Director's approval on March 24, 1998, the
individuals whose names are set forth in Exhibit "A," a copy of which is
attached hereto and incorporated herein by this reference, shall be deemed
granted Nonstatutory Stock Options as of the Effective Date, in the amounts and
for the exercise price specified by the Board of Directors, all in accordance
with the provisions set forth in this Article VII of the Plan. The provisions
of this Section 7.9 shall not be amended more than once every six months, other
than to comply with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder, and are intended to be
construed in accordance with the provisions pertaining to "formula awards" under
Paragraph (c)(2)(ii) of Rule 16b-3.

XIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS, AND BENEFICIARIES

8.1 Employee Status. Status as an Eligible Employee shall not be
construed as a commitment that any Award will be made under the Plan to an
Eligible Employee or to Eligible Employees generally.

8.2 No Employment Contract. Nothing contained in the Plan (or in the
Award Agreements or in any other documents related to the Plan or to Awards)
shall confer upon any Eligible Employee or any Participant any right to continue
in the employ of the Corporation or constitute any contract or agreement of
employment, or interfere in any way with the right of the Corporation to reduce
such person's compensation or to terminate the employment of such Eligible
Employee or Participant, with or without cause, but nothing contained in the
Plan or any document related thereto shall affect any other contractual right
of any Eligible Employee or Participant. Nothing contained in the Plan (or in
the Award Agreements or in any other documents related to the Plan or the
Awards) shall confer upon any director of the Corporation any right to continue
as a director of the Corporation.

8.3 No Transferability. Awards may be exercised only by, and amounts
payable or shares issuable pursuant to an Award shall be paid only to or
registered only in the name of, the Participant or, in the event of the
Participant's death, to the Participant's Beneficiary or, in the event of the
Participant's Disability, to the Participant's Personal Representative or, if
there is none, to the Participant. Other than by will or the laws of descent
and distribution, no right or benefit under the Plan or any Award, including,
without limitation, any Option or share of Restricted Stock that has not
vested, shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge and any such attempted
action shall be void and no such right or benefit shall be, in any manner,
liable for, or subject to, debts, contract, liabilities, engagements, or
torts of any Eligible Employee, Participant, or Beneficiary, in any case
except as may otherwise be expressly required by applicable law. The Board
or the Committee shall disregard any attempt at transfer, assignment, or
other alienation prohibited by the preceding sentence and shall pay or
deliver such cash or shares of Common Stock in accordance with the provisions
of the Plan. Notwithstanding the foregoing, the Board or the Committee may
authorize exercise by or transfers or payments to a third party in a specific
case or more generally; provided, however, with respect to any option or
similar right (including any Stock Appreciation Right), such discretion may
only be exercised to the extent that applicable rules under Section 16 of the
Exchange Act would so permit without disqualifying the Plan from certain
benefits thereunder.

8.4 Plan Not Funded. No Participant, Beneficiary, or other person
shall have any right, title, or interest in any fund or in any specific asset
(including shares of Common Stock) of the Corporation by reason of any Award
granted hereunder. There shall be no funding of any benefits which may
become payable hereunder. Neither the provisions of the Plan (or of any
documents related hereto), nor the creation or adoption of the Plan, nor any
action taken pursuant to the provisions of the Plan shall create, or be
construed to create, a trust of any kind or a fiduciary relationship between
the Corporation and any Participant, Beneficiary, or other person. To the
extent that a Participant, a Beneficiary, or other person acquires a right to
receive an Award hereunder, such right shall be no greater than the right of
any unsecured general creditor of the Corporation. Awards payable under the
Plan shall be paid in shares of Common Stock or from the general assets of
the Corporation, and no special or separate fund or deposit shall be
established and no segregation of assets or shares shall be made to assure
payment of such Awards.

8.5 Adjustment Upon Recapitalizations and Corporate Changes. If the
outstanding shares of Common Stock are changed into or exchanged for cash or
a different number or kind of shares or securities of the Corporation, or if
the outstanding shares of the Common Stock are increased, decreased,
exchanged for, or otherwise changed, or if additional shares or new or
different shares or securities are distributed with respect to the
outstanding shares of the Common Stock, through a reorganization or merger in
which the Corporation is the surviving entity or through a combination,
consolidation, recapitalization, reclassification, stock split, stock
dividend, reverse stock split, stock consolidation, or other capital change
or adjustment, an appropriate adjustment shall be made in the number and kind
of shares of other consideration that is subject to or may be delivered under
the Plan and pursuant to outstanding Awards. A corresponding adjustment to
the consideration payable with respect to Awards granted prior to any such
change and to the price, if any, to be paid in connection with Restricted
Stock Awards shall also be made as appropriate. Corresponding adjustments
shall be made with respect to Stock Appreciation Rights related to Options to
which they are related. In addition, the Board or the Committee may grant
such additional rights in the foregoing circumstances as the Board or the
Committee deems to be in the best interest of any Participant and the
Corporation in order to preserve for the Participant the benefits of an Award.

8.6 Termination of Employment, Except by Death, Disability, or
Retirement. If a Participant ceases to be an Employee for any reason other
than his or her death, Disability or Retirement, such Participant shall have
the right, subject to the restrictions of Section 8.3 above, to exercise any
Award at any time within three months after termination of employment, but
only to the extent that, at the date of termination of employment, the
Participant's right to exercise such

5
<PAGE>

Award had accrued pursuant to the terms of the applicable agreement and had
not previously been exercised; provided, however, that if the Participant was
terminated for cause (as defined in the applicable agreement), any Award not
exercised in full prior to such termination shall be canceled. For this
purpose, the employment relationship shall be treated as continuing intact
while the Participant is on military leave, sick leave, or other bona fide
leave of absence (to be determined in the sole discretion of the Board or the
Committee). The foregoing notwithstanding, in the case of an Incentive Stock
Option, employment shall not be deemed to continue beyond the 90th day after
the Participant's reemployment rights are guaranteed by statute or by
contract.

8.7 Death of Participant. If a Participant dies while an Employee, or
after ceasing to be an Employee but during the period while he or she could have
exercised the Award under this Section 8.7, and has not fully exercised the
Award, then the Award may be exercised in full at any time within 12 months
after the Participant's death (but not later than the date of termination fixed
in the applicable agreement), by the executors or administrators of his or her
estate or by any person or persons who have acquired the Award directly from the
Participant by bequest or inheritance, but only to the extent that, at the date
of death, the Participant's right to exercise such Award had accrued and had not
been forfeited pursuant to the terms of the applicable agreement and had not
previously been exercised.

8.8 Disability of Participant. If a Participant ceases to be an Employee
by reason of Disability, such Participant shall have the right to exercise the
Award at any time within 12 months after termination of employment (but not
later than the termination date fixed in the applicable Agreement), but only to
the extent that, at the date of termination of employment, the Participant's
right to exercise such Award had accrued pursuant to the terms of the applicable
Award Agreement and had not previously been exercised.

8.9 Retirement of Participant. If a Participant ceases to be an Employee
by reason of Retirement, such Participant shall have the right to exercise the
Award at any time within three months after termination of employment (but not
later than the termination date fixed in the applicable Award Agreement), but
only to the extent that, at the date of termination of employment, the
Participant's right to exercise such Award had accrued pursuant to the terms of
the applicable Award Agreement and had not previously been exercised.

8.10 Rights as a Stockholder. A Participant, or a transferee of a
Participant, shall have no rights as a stockholder with respect to any Shares
covered by his or her Award until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities, or other property),
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 8.5 hereof.

8.11 Deferral of Payments. The Board or the Committee may approve the
deferral of any payments that may become due under the Plan. Such deferrals
shall be subject to any conditions, restrictions, or requirements as the Board
or the Committee may determine.

8.12 Acceleration of Awards. Immediately prior to the occurrence of an
Event, (i) each Option and Stock Appreciation Right under the Plan shall
become exercisable in full; (ii) Restricted Stock delivered under the Plan
shall immediately vest free of restrictions; and (iii) each other Award
outstanding under the Plan shall be fully vested or exercisable, unless,
prior to the Event, the Board or the Committee otherwise determines that
there shall be no such acceleration or vesting of an Award or otherwise
determines those Awards which shall be accelerated or vested and to the
extent to which they shall be accelerated or vested, or that an Award shall
terminate, or unless in connection with such Event the Board provides (A) for
the assumption of such Awards theretofore granted; or (B) for the
substitution for such Awards of new awards covering securities or obligations
(or any combination thereof) of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to number and kind of
shares and prices; or (C) for the payment of the fair market value of the
then outstanding Awards. In addition, the Board or the Committee may grant
such additional rights in the foregoing circumstances as the Board or the
Committee deems to be in the best interest of the Participant and the
Corporation in order to preserve for the Participant the benefits of an
Award. For purposes of this Section 8.12 only, Board shall mean the Board of
Directors of the Corporation as constituted immediately prior to the Event.
In addition, the Board may in its sole discretion accelerate the
exercisability or vesting of any or all Awards outstanding under the Plan in
circumstances under which the Board or the Committee determines such
acceleration appropriate.

IX. MISCELLANEOUS

9.1 Termination, Suspension, and Amendment. The Board or the Committee
may, at any time, suspend, amend, modify, or terminate the Plan (or any part
thereof) and may, with the consent of a Participant, authorize such
modifications of the terms and conditions of such Participant's Award as it
shall deem advisable; provided that, except as permitted under the provisions of
Section 8.5 hereof, no amendment or modification of the Plan may be adopted
without approval by a majority of the outstanding shares of Common Stock
pursuant to a shareholder's action taken without a meeting or by a majority of
the shares of the Common Stock represented (in person or by proxy) at a meeting
of stockholders at which a quorum is present and entitled to vote thereat, if
such amendment or modification would:

6
<PAGE>

(i) materially increase the benefits accruing to Participants
under the Plan or materially increase the aggregate number of shares which may
be delivered pursuant to Awards granted under the Plan if such action would
require of the Company's shareholders pursuant to Rule 16b-3 under the Exchange
Act or any successor provision; or

(ii) materially modify the requirements of eligibility for
participation in the Plan.

Neither adoption of the Plan nor the provisions hereof shall limit the authority
of the Board to adopt other Plans or to authorize other payments of compensation
and benefits under applicable law. No Awards under the Plan may be granted or
amended during any suspension of the Plan or after its termination. The
amendment, suspension or termination of the Plan shall not, without the consent
of the Participant, alter or impair any rights or obligations pertaining to any
Awards granted under the Plan prior to such amendment, suspension, or
termination.

9.2 No Fractional Shares. No Award or installment thereof shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded.

9.3 Tax Withholding. As required by law, federal, state, or local
taxes that are subject to the withholding of tax at the source shall be
withheld by the Corporation as necessary to satisfy such requirements. The
Corporation is entitled to require deduction from other compensation payable
to each Participant or, in the alternative: (i) the Corporation may require
the Participant to advance such sums; or (ii) if a Participant elects, the
Corporation may withhold (or require the return of) Shares having the Fair
Market Value equal to the sums required to be withheld. If the Participant
elects to advance such sums directly, written notice of that election shall
be delivered prior to such exercise and, whether pursuant to such election or
pursuant to a requirement imposed by the Corporation, payment in cash or by
check of such sums for taxes shall be delivered within 10 days after the
exercise date. If the Participant elects to have the Corporation withhold
Shares (or be entitled to the return of Shares) having a Fair Market Value
equal to the sums required to be withheld, the value of the Shares to be
withheld (or returned) will be equal to the Fair Market Value on the date the
amount of tax to be withheld (or subject to return) is to be determined (the
"Tax Date").

9.4 Restrictions on Elections Made by Participants. Elections by
Participants to have Shares withheld (or subject to return) for this purpose
will be subject to the following restrictions: (i) the election must be made
prior to the Tax Date; (ii) the election must be irrevocable; (iii) the
election will be subject to the Board's disapproval; and (iv) if the
Participant is an "officer" within the meaning of Section 16 of the Exchange
Act, the election shall be subject to such additional restrictions as the
Board or the Committee may impose in an effort to secure the benefits of any
regulations thereunder.

9.5 Limitations on the Corporation's Obligations. The Corporation
shall not be obligated to issue shares and/or distribute cash to the
Participant upon any Award exercise until such payment has been received or
Shares have been withheld, unless withholding (or offset against a cash
payment) as of or prior to the exercise date is sufficient to cover all such
sums due or which may be due with respect to such exercise. In addition, the
Board or the Committee may grant to a Participant a cash bonus in any amount
required by federal, state, or local tax law to be withheld with respect to
an Award.

9.6 Compliance with Laws. The Plan, the granting of Awards under the
Plan, the Stock Option Agreements and Stock Purchase Agreements and the
delivery of Options, Shares, and Awards (and/or the payment of money or
Common Stock) pursuant thereto and the extension of any loans hereunder are
subject to such additional requirements as the Board or the Committee may
impose to assure or facilitate compliance with all applicable federal and
state laws, rules and regulations (including, without limitation, securities
laws and margin requirements) and to such approvals by any regulatory or
governmental agency which may be necessary or advisable in connection
therewith. In connection with the administration of the Plan or the grant of
any Award, the Board or the Committee may impose such further limitations or
conditions as in its opinion may be required or advisable to satisfy, or
secure the benefits of, applicable regulatory requirements (including those
rules promulgated under Section 16 of the Exchange Act or those rules that
facilitate exemption from or compliance with the Securities Act or the
Exchange Act), the requirements of any stock exchange upon which such shares
or shares of the same class are then listed, and any blue sky or other
securities laws applicable to such shares.

9.7 Governing Laws. The Plan and all Awards granted under the
Plan and the documents evidencing Awards shall be governed by, and construed
in accordance with, the laws of the State of Nevada as the Corporation's
principle place of business.

9.8 Securities Law Requirements.

(a) Legality of Issuance. The issuance of any Shares upon the
exercise of any Option and the grant of any Option shall be contingent upon the
following:

(i) the Corporation and the Participant shall have taken all
actions required to register the Shares under the Securities Act of 1933, as
amended (the "Securities Act"), and to qualify the Option and the Shares under
any and all applicable state securities or "blue sky" laws or regulations, or to
perfect an exemption from the respective registration and qualification
requirements thereof;

7
<PAGE>

(ii) any applicable listing requirement of any stock exchange on
which the Common Stock is listed shall have been satisfied; and

(iii) any other applicable provision of state or Federal law
shall have been satisfied.

(b) Restrictions on Transfer. Regardless of whether the offering and
sale of Shares under the Plan has been registered under the Securities Act or
has been registered or qualified under the securities laws of any state, the
Corporation may impose restrictions on the sale, pledge, or other transfer of
such Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Corporation and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Securities Act, the securities laws of any state, or any other
law. In the event that the sale of Shares under the Plan is not registered under
the Securities Act but an exemption is available which required an investment
representation or other representation, each Participant shall be required to
represent that such Shares are being acquired for investment, and not with a
view to the sale or distribution thereof, and to make such other representations
as are deemed necessary or appropriate by the Corporation and its counsel. Any
determination by the Corporation and its counsel in connection with any of the
matters set forth in this Section 9.6(b) shall be conclusive and binding on all
persons. Stock certificates evidencing Shares acquired under the Plan pursuant
to an unregistered transaction shall bear the following restrictive legend and
such other restrictive legends as are required or deemed advisable under the
provisions of any applicable law:

THESE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED (THE "ACT"),
OR APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE
UPON EXEMPTIONS FROM SUCH REGISTRATION REQUIREMENTS. THESE SHARES OR
ANY INTEREST HEREIN MAY NOT, BE OFFERED, SOLD OR TRANSFERRED UNLESS
REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE
STATE SECURITIES LAWS IS AVAILABLE.

(c) Registration or Qualification of Securities. The Corporation
may, but shall not be obligated to register or qualify the issuance of Awards
and/or the sale of Shares under the Securities Act or any other applicable law.
The Corporation shall not be obligated to take any affirmative action in order
to cause the issuance of Awards or the sale of Shares under the Plan to comply
with any law.

(d) Exchange of Certificates. If, in the opinion of the Corporation
and its counsel, any legend placed on a stock certificate representing shares
issued under the Plan is no longer required, the holder of such certificate
shall be entitled to exchange such certificate for a certificate representing
the same number of Shares but lacking such legend.

9.9 Execution. To record the adoption of the Plan in the form set forth
above by the Board effective as of March 24, 1998, the Corporation has caused
this Plan to be executed in the name and on behalf of the Corporation where
provided below by an officer of the Corporation thereunto duly authorized.

PENNACO ENERGY, INC.

By:
------------------------------------
Jeffrey L. Taylor, President

ATTEST:

- ----------------------------------
Gregory V. Gibson, Vice President

8
<PAGE>

EXHIBIT "A"

PENNACO ENERGY, INC.

1998 STOCK OPTION AND INCENTIVE PLAN

SCHEDULE OF NONSTATUTORY STOCK OPTION AWARDS

<TABLE>
<CAPTION>
NAME POSITION WITH THE NUMBER OF SHARES EXERCISE PRICE
COMPANY
<S> <C> <C> <C>
Jeffrey L. Taylor President and 400,000 $1.25
Chairman of the
Board
Mark A. Erickson Senior Vice 250,000 $1.25
President,
Hydrocarbon
Development &
Engineering,
Director
Brian Hughes Vice President, 200,000 $1.25
Exploration
Gregory V. Gibson Vice President 100,000 $1.25
Legal, Secretary,
Director
David W. Lanza Director 50,000 $1.25

</TABLE>

All Nonstatutory Stock Options granted as set forth in the above schedule
vest on the effective date of grant unless further restricted as summarized
below:

OPTIONEE
BRIAN HUGHES

<TABLE>
<CAPTION>
OPTION PERIOD NUMBER OF EXERCISABLE OPTION SHARES
------------- -----------------------------------
<S> <C>
1. Exerciseable after the Company drills 50,000
125 net producing wells excluding any
stratigraphic test wells so long as
Hughes is employed by the Company
through the Terminal Date

2. Exerciseable after the Company drills 50,000
250 net producing wells excluding any
stratigraphic test wells so long as
Hughes is employed by the Company
through the Terminal Date

3. Exerciseable after the Company drills 50,000
375 net producing wells excluding any
stratigraphic test wells so long as
Hughes is employed by the Company
through the Terminal Date

4. Exerciseable after the Company drills 50,000
500 net producing wells excluding any
stratigraphic test wells so long as
Hughes is employed by the Company
through the Terminal Date
</TABLE>

OPTIONEE
MARK A. ERICKSON

<TABLE>
<CAPTION>
OPTION PERIOD NUMBER OF EXERCISABLE OPTION SHARES
- ------------- -----------------------------------
<S> <C>

<PAGE>

1. Exerciseable only after annual gross
production revenues net of royalties
and overides (net revenue interest)
(calculated during any previous four 50,000
quarter period) in the amount of
$5,000,000 are received by the Company,
so long as Erickson is in the
employment of the Company, through
the Terminal Date

2. Exerciseable only after annual gross
production revenues net of royalties and
overides (net revenue interest)
(calculated during any next four
quarter period and could include any of 75,000
the previous 3 quarters) in the amount
of $10,000,000 are received by the
Company, so long as Erickson is in the
employment of the Company, through the
Terminal Date

3. Exerciseable only after annual gross
production revenues net of royalties and
overides (net revenue interest)
(calculated during any next four
quarter period and could include any of 125,000
the previous 3 quarters) in the amount
of $20,000,000 are received by the
Company, so long as Erickson is in the
employment of the Company, through the
Terminal Date

</TABLE>

<PAGE>

WRITTEN CONSENT OF THE SHAREHOLDERS OF

PENNACO ENERGY, INC.

The undersigned, being the holders of in excess of the majority of the
outstanding shares of common stock of PENNACO ENERGY, INC., a Nevada corporation
(the "Company"), by this writing do hereby approve and adopt the following
resolutions and consent to this shareholders' action without a shareholders
meeting, pursuant to the Bylaws of the Company and Section 78.320 of the Nevada
Revised Statutes as of June 29, 1998:

RESOLVED, that the 1998 STOCK OPTION AND INCENTIVE PLAN (the "Plan")
be amended as follows:

Article VI shall be amended in its entirety to read as follows:

VI. STOCK SUBJECT TO THE PLAN The stock subject to Awards
granted under the Plan shall be Shares of the Corporation'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 shall not exceed
4,500,000 shares. The number of Shares subject to
unexercised Options (plus the number of Shares previously
issued under the Plan) shall not at any time exceed the
number of Shares available for issuance under the Plan. In
the event that any unexercised Option, or any portion
thereof, for any reason expires or is terminated, the
unexercised or unvested Shares allocable to such Option may
again be made subject to any Award. Any Shares withheld by
the Corporation pursuant to Section 9.3 shall not be deemed
to be issued. The number of withheld Shares shall be
deducted from the applicable Award and shall not entitle the
Participant to receive additional Shares. The limitations
established by this Article VI shall be subject to
adjustment in the manner provided in Section 8.5 hereof upon
the occurrence of an event specified therein.

Article VII Section 7.9 shall be amended in its entirety to read as
follows:

7.9 Specific Awards Approved by the Shareholders. Subject
to shareholder approval and pursuant to the Board of
Directors approval, the individuals whose names are set
forth in Exhibit "A," a copy of which is attached hereto and
incorporated herein by this reference, shall be deemed
granted Nonstatutory Stock Options as of the Effective Date,
in the amounts and for the exercise price specified by the
Board of Directors, and subject to shareholder approval, the
individuals whose names are set forth in Exhibit "A-1," a
copy of which is attached hereto and incorporated herein by
this reference, shall be deemed granted Nonstatutory Stock
Options, in the amounts, effective date, and for the
exercise price specified by the Board of Directors, all in
accordance with the provisions set forth in this Article VII
of the Plan. The provisions of this Section 7.9 with
respect to the grant of "formula awards" shall not be
amended more than once every six months, other than to
comply with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules
thereunder, and are intended to be construed in accordance
with the provisions pertaining to "formula awards" under
Paragraph (c)(2)(ii) of Rule 16b-3.

RESOLVED FURTHER, that the foregoing amendments to the Plan be and
they hereby are approved, adopted, and ratified in all respects;

FURTHER RESOLVED, that the specific awards, as set forth in all
exhibits attached to and incorporated by reference into the Plan and
attached hereto, made apart hereof, and designated as Exhibit "X," be
and they hereby are approved, adopted, and ratified in all respects;
and

FURTHER RESOLVED, that all the actions taken by the Board of Directors
and the officers of the Company with respect to awarding options and
the signing of individual option agreements pursuant to the Plan be
and they hereby are approved, adopted, and ratified in all respects.

APPROVED:

- ------------------------------
Signature

<PAGE>

- ------------------------------
Printed Name

- ------------------------------
Number of Shares

<PAGE>

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

1998 STOCK OPTION AND INCENTIVE PLAN
OF
PENNACO ENERGY, INC.

THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), is made as of
____________________________ (the "Effective Date") by and between PENNACO
ENERGY, INC. , a Nevada corporation, (the "COMPANY") and __________________
_________________ (the "EMPLOYEE"), residing at ___________________________
_________________, pursuant to the COMPANY's 1998 Stock Option and Incentive
Plan (the "Plan").

WHEREAS, the Board of Directors of the COMPANY has adopted the Plan as
of March 24, 1998 to which this Agreement and the option granted hereunder
("Option") are subject; and

WHEREAS, the Board of Directors of the COMPANY has determined that it is
to the advantage and in the best interest of the COMPANY and its shareholders
to grant the Option provided for herein to EMPLOYEE as an inducement to
remain in the employ of the COMPANY, and as an incentive for increased effort
during such service.

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

1. GRANT OF OPTION. The Company grants to EMPLOYEE the right and
option to purchase from the COMPANY, on the terms and conditions hereinafter
set forth, all or any part of an aggregate of __________ shares of the
authorized no par value common stock of the COMPANY, at the purchase price of
$2.00 per share (being not less than the fair market value per share of said
stock on the date hereof) as EMPLOYEE may from time to time elect,
exercisable on or after the Effective Date hereof for a period of 10 years
(the latter date hereinafter referred to as the "Terminal Date"), all in
accordance with the schedule attached hereto and marked Exhibit "A." No
partial exercise of such Option may be for less than 250 full shares, unless
the number purchased is the total number at the time purchasable under the
Option. In no event shall the COMPANY be required to transfer fractional
shares to EMPLOYEE. This Agreement and the Option granted hereunder are
subject to the Plan, a copy of which is attached hereto and incorporated
herein by reference as Exhibit "B."

2. METHOD OF EXERCISE. The Option granted hereunder shall be
exercisable, from Effective Date, as hereinabove provided, by written notice
which shall;

(a) state the election to exercise the Option, the number of
shares in respect of which it is being exercised, the person in whose name
the shares are to be issued (if the shares are issued to individuals), the
names, addresses and Social Security Numbers of such persons;

(b) contain such representations and agreements as to the holder's
investment intent with respect to such shares of Common Stock as are required
by law or as may be satisfactory to the COMPANY's counsel;

(c) be signed by the person or persons entitled to exercise the
Option and, if the Option is being exercised by any person or persons other
than the EMPLOYEE, be accompanied by proof, satisfactory to counsel for the
COMPANY, of the right of such person or persons to exercise the Option; and

(d) be accompanied by a payment for the purchase price of those
shares with respect to which the Option is being exercised in the form of
cash or check.

3. ISSUING OF STOCK CERTIFICATES. The certificate or certificates for
shares of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the Option. The
COMPANY shall not be required to transfer or deliver any certificate or
certificates for the shares purchased upon exercise of the Option granted
hereunder until (a) compliance with the terms of this Agreement, (b)
compliance with all then applicable requirements of law; and (c) admission of
such shares for trading privileges on any stock exchange on which the stock
may then be listed.

4. STOCK SUBJECT TO THE OPTION. The COMPANY shall set aside the
number of shares of Common Stock of the COMPANY subject to be granted upon
exercise of this Option which it now holds as authorized and unissued shares.
If the Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject
thereto shall be free from any restrictions occasioned by this Option
Agreement. If the COMPANY has been listed on a stock exchange, the COMPANY
will not be required to issue or deliver any certificate or certificates for
shares to be issued

1
<PAGE>

hereunder until such shares have been listed (or authorized for listing upon
official notice of issuance) upon each stock exchange on which outstanding
shares of the same class may then be listed and until the COMPANY has taken
such steps as may, in the opinion of counsel for the COMPANY, be required by
law and applicable regulations, including the rules and regulations of the
Securities and Exchange Commission, and state blue sky laws and regulations,
in connection with the issuance or sale of such shares, and the listing of
such shares on each such exchange. The COMPANY will use its best efforts to
comply with any such requirements forthwith upon the exercise of the Option.

5. TERMINATION OF OPTION. The Option and all rights granted hereunder
to the extent such rights shall not have been exercised, shall terminate and
become null and void on the Terminal Date or sooner if EMPLOYEE ceases to be
in the continuous employ of the COMPANY (whether by resignation, retirement,
dismissal, or otherwise), except that: (a) in the event of termination of
such employment for any reason other than the permanent disability of
EMPLOYEE, as defined in Section 22(e)(3) of the Internal Revenue Code, as
amended and as presently in effect (the "Code"), EMPLOYEE may at any time
within a period of three months thereafter exercise the Option granted
hereunder to the extent such Option was exercisable by EMPLOYEE on the date
of the termination of such employment; and (b) in the event of the permanent
disability of EMPLOYEE while in the employ of the COMPANY, the Option granted
hereunder, to the extent that EMPLOYEE was entitled to exercise such Option
on the date of EMPLOYEE's disability, may be exercised within one year after
such termination as a result of disability by EMPLOYEE or the person or
persons to whom EMPLOYEE's rights under the Option granted hereby shall pass
by will or by the applicable laws of descent and distribution.
Notwithstanding anything herein to the contrary, however, the Option and all
rights herein granted shall in all events terminate and become null and void
10 years from the date of this Agreement.

6. LIMITATION UPON TRANSFER. During the lifetime of EMPLOYEE, the
Option and all rights granted hereunder shall be exercisable only by
EMPLOYEE, and except as in paragraph 4 otherwise provided, the Option and all
rights granted hereunder shall not be transferred, assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of
such Option or of such rights contrary to the provisions hereof, or upon the
levy of any attachment or similar process upon such Option or such rights,
such Option and such rights shall immediately become null and void.

7. CONDITION OF EMPLOYMENT. In order to be entitled to exercise the
Option granted hereunder as to the first increment of shares as shown in
Exhibit "A," EMPLOYEE must remain in the continuous employ of the COMPANY for
the period of at least six months from the date hereof.

8. STOCK AS INVESTMENT. By accepting this Option, the EMPLOYEE
acknowledges for EMPLOYEE or any heirs and legatees, that any and all shares
purchased hereunder shall be acquired for investment and not for
distribution, and upon the transfer of any or all of the shares subject to
the Option granted hereunder, the EMPLOYEE, or heirs or legatees receiving
such shares, shall deliver to the COMPANY a representation in writing that
such shares are being acquired in good faith for investment and not for
distribution. The EMPLOYEE shall not dispose (whether by sale, exchange,
gift, or any other transfer) of any shares of stock acquired pursuant to the
exercise of the Option granted hereunder, within two years after the grant of
this Option or one year after the transfer of such shares to him upon his
exercise of such Option. EMPLOYEE further recognizes that any disposition
(whether a sale, exchange, gift, or any other transfer) of any shares of
stock prior to the aforementioned periods will not only be a breach of this
Agreement, but will also disqualify the Option as a incentive stock Option
under Section 422A of the Code.

9. RECLASSIFICATION, CONSOLIDATION, OR MERGER. In the event of any
change in the common stock of the COMPANY subject to the Option granted
hereunder, through merger, consolidation, reorganization, recapitalization,
stock split, stock dividend, or other change in the corporate structure,
appropriate adjustment shall be made by the COMPANY in the number of shares
subject to such Option and the price per share; provided, however, that in
accordance with the provisions of Section 425(a) of the Code, a new Option
may be substituted for the Option granted hereunder or such Option may be
assumed by an employer corporation, or a parent or subsidiary of such
corporation, in connection with any transaction to which such Section is
applicable. Upon the dissolution or liquidation of the COMPANY other than in
connection with a transaction to which such Section is applicable, the Option
granted hereunder shall terminate and become null and void, but EMPLOYEE
shall have the right immediately prior to such dissolution or liquidation to
exercise the Option granted hereunder to the full extent not before exercised.

10. RIGHT AS SHAREHOLDER. Neither EMPLOYEE nor his executors,
administrators, heirs or legatees, shall be or have any rights or privileges
of a stock holder of the COMPANY in respect of the shares transferable upon
exercise of the Option granted hereunder, unless and until certificates
representing such shares shall have been endorsed, transferred, and delivered
and the transferee has caused his name to be entered as the shareholder of
record on the books of the COMPANY.

11. NOTICES. Any notice to be given under the terms of this Agreement
shall be addressed to the COMPANY in care of its Secretary at the main
offices for the transaction of its business, and any notice to be given to
EMPLOYEE shall be addressed to EMPLOYEE at the address set forth above, or at
such other place as either party may hereafter designate in writing to the
other. Any such notice shall be deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as herein required, certified
and deposited (postage and certification prepaid) in a post office regularly
maintained by the United States Government.

2
<PAGE>

12. BENEFITS OF AGREEMENT. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the EMPLOYEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the EMPLOYEE's heirs, legal representatives,
and successors. This Agreement shall be the sole and exclusive source of any
and all rights which the EMPLOYEE, EMPLOYEE's heirs, legal representatives,
or successors may have in respect to the Plan or any options or Common Stock
granted or issued thereunder, whether to EMPLOYEE, or to any other person.

13. INTERNAL REVENUE CODE. All Options granted hereunder are granted
pursuant to the Internal Revenue Code, as amended, as it is in force and
effect at the date of grant.

3
<PAGE>

14. RESOLUTION OF DISPUTES. Any dispute or disagreement which should
arise under, or as a result of, or in any way relate to, the interpretation,
construction or application of this Agreement will be determined by the Board
of Directors of the COMPANY. Any determination made hereunder shall be
final, binding, and conclusive for all purposes.

IN WITNESS WHEREOF, the COMPANY has caused these presents to be executed
on its behalf by its President, to be sealed by its corporate seal, and
attested by its Secretary, and EMPLOYEE has hereunto set his hand the date
and year first above written, which is the time of the granting of the Option
hereunder.

"COMPANY" "EMPLOYEE"
PENNACO ENERGY, INC.
a Nevada corporation

By:
---------------------------------- -----------------------------------
Jeffrey L. Taylor, PRESIDENT
-----------------------------------

Corporate Seal

ATTEST:

By: ----------------------------------
Gregory V. Gibson, Secretary

4
<PAGE>
EXHIBIT "A"

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

1998 INCENTIVE STOCK OPTION AND INCENTIVE PLAN
OF
PENNACO ENERGY, INC.

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

EXERCISE SCHEDULE

<TABLE>
<CAPTION>
Option Period Number of Exercisable Option Shares
------------- -----------------------------------
<S> <C>
1. On or after the Effective Date
through Terminal Date

</TABLE>

<PAGE>

NONSTATUTORY STOCK OPTION AGREEMENT

PURSUANT TO THE

1998 STOCK OPTION AND INCENTIVE PLAN
OF
PENNACO ENERGY, INC.

THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "Agreement"), is made as of
March 24, 1998 (the "Effective Date") by and between PENNACO ENERGY, INC., a
Nevada corporation, (the "COMPANY") and JEFFREY L. TAYLOR (the "OPTIONEE"),
pursuant to the COMPANY's 1998 Stock Option and Incentive Plan (the "Plan").

WHEREAS, the Board of Directors of the COMPANY has adopted the Plan as of
March 24, 1998, subject to Shareholders approval, to which this Agreement and
the Option granted hereunder are subject; and

WHEREAS, the Board of Directors of the COMPANY has determined that it is to
the advantage and in the best interest of the COMPANY and its shareholders to
grant the Option provided for herein to OPTIONEE to afford additional incentive
to consultants, vendors, customers, and others to increase their efforts in
providing significant services to the COMPANY.

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

1. GRANT OF OPTION. The Company grants to OPTIONEE the right and Option
to purchase from the COMPANY, on the terms and conditions hereinafter set forth,
all or any part of an aggregate of 400,000 shares of the authorized $.001 par
value common stock of the COMPANY, at the purchase price of $1.25 per share
(being not less than the fair market value per share of said stock on the date
hereof) as OPTIONEE may from time to time elect, exercisable on or after the
Effective Date hereof for a period of 10 years (the latter date hereinafter
referred to as the "Terminal Date"), all in accordance with the schedule
attached hereto and marked Exhibit "A." No partial exercise of such Option may
be for less than 100 full shares, unless the number purchased is the total
number at the time purchasable under the option. In no event shall the COMPANY
be required to transfer fractional shares to OPTIONEE. This Agreement and the
Option granted hereunder are subject to the Plan, a copy of which is attached
hereto and incorporated herein by reference as Exhibit "B."

2. METHOD OF EXERCISE. The Option granted hereunder shall be
exercisable, from time to time, as hereinabove provided, by written notice which
shall;

(a) state the election to exercise the Option, the number of shares
in respect of which it is being exercised, the person in whose name the shares
are to be issued (if the shares are issued to individuals), the names, addresses
and Social Security Numbers of such persons;

(b) contain such representations and agreements as to the holder's
investment intent with respect to such shares of Common Stock as are required by
law dor as may be satisfactory to the COMPANY's counsel;

(c) be signed by the person or persons entitled to exercise the
Option and, if the Option is being exercised by any person or persons other than
the OPTIONEE, be accompanied by proof, satisfactory to counsel for the COMPANY,
of the right of such person or persons to exercise the Option; and

(d) be accompanied by a payment for the purchase price of those
shares with respect to which the Option is being exercised in the form of cash
or check or the purchase price may be paid (i) by the surrender of Shares in
good form for transfer, owned by the OPTIONEE and having a Fair Market Value on
the date of exercise equal to the purchase price, or in any combination of cash
and Shares, as long as the sum of the cash so paid and the Fair Market Value of
the Shares so surrendered equal the purchase price, (ii) by cancellation of
indebtedness owed by the Company to the OPTIONEE, (iii) with a full recourse
promissory note executed by the OPTIONEE, or (iv) any combination of the
foregoing. The interest rate and other terms and conditions of such note shall
be determined by the Board or the Committee. The OPTIONEE shall pledge his
Shares to the Company for the purpose of securing the payment of such note.

3. ISSUING OF STOCK CERTIFICATES. The certificate or certificates for
shares of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the Option. The
COMPANY shall not be required to transfer or deliver any certificate or
certificates for the shares purchased upon exercise of the Option granted
hereunder until (a) compliance with the terms of this Agreement, (b) compliance
with all then applicable requirements of law; and (c) admission of such shares
for trading privileges on any stock exchange on which the stock may then be
listed.

<PAGE>

4. TERMINATION OF OPTION. The Option and all rights granted hereunder to
the extent such rights shall not have been exercised, shall terminate and become
null and void on the Terminal Date.

5. TRANSFERABILITY OF OPTION. This Option may be transferred by will or
the laws of descent or distribution and may be exercised during the lifetime of
the OPTIONEE or by an assignee of the OPTIONEE pursuant to the terms of Sections
7.5 and 8.3 of the Plan.

6. STOCK SUBJECT TO THE OPTION. The COMPANY shall set aside the number
of shares of Common Stock of the COMPANY subject to be granted upon exercise of
this Option which it now holds as authorized and unissued shares. If the Option
should expire or become unexercisable for any reason without having been
exercised in full, the unpurchased shares which were subject thereto shall be
free from any restrictions occasioned by this Option Agreement. If the COMPANY
has been listed on a stock exchange, the COMPANY will not be required to issue
or deliver any certificate or certificates for shares to be issued hereunder
until such shares have been listed (or authorized for listing upon official
notice of issuance) upon each stock exchange on which outstanding shares of the
same class may then be listed and until the COMPANY has taken such steps as may,
in the opinion of counsel for the COMPANY, be required by law and applicable
regulations, including the rules and regulations of the Securities and Exchange
Commission, and state blue sky laws and regulations, in connection with the
issuance or sale of such shares, and the listing of such shares on each such
exchange. The COMPANY will use its best efforts to comply with any such
requirements forthwith upon the exercise of the Option.

7. RECLASSIFICATION, CONSOLIDATION, OR MERGER. In the event of any
change in the common stock of the COMPANY subject to the Option granted
hereunder, through merger, consolidation, reorganization, recapitalization,
stock split, stock dividend, or other change in the corporate structure,
appropriate adjustment shall be made by the COMPANY in the number of shares
subject to such Option and the price per share; provided, however, that in
accordance with the provisions of Section 425(a) of the Code, a new Option may
be substituted for the Option granted hereunder or such Option may be assumed by
an employer corporation, or a parent or subsidiary of such corporation, in
connection with any transaction to which such Section is applicable. Upon the
dissolution or liquidation of the COMPANY other than in connection with a
transaction to which such Section is applicable, the Option granted hereunder
shall terminate and become null and void, but OPTIONEE shall have the right
immediately prior to such dissolution or liquidation to exercise the Option
granted hereunder to the full extent not before exercised.

8. RIGHT AS SHAREHOLDER. Neither OPTIONEE nor his executors,
administrators, heirs or legatees, shall be or have any rights or privileges of
a stock holder of the COMPANY in respect of the shares transferable upon
exercise of the Option granted hereunder, unless and until certificates
representing such shares shall have been endorsed, transferred, and delivered
and the transferee has caused his name to be entered as the shareholder of
record on the books of the COMPANY.

9. NOTICES. Any notice to be given under the terms of this Agreement
shall be addressed to the COMPANY in care of its Secretary at the main offices
for the transaction of its business, and any notice to be given to OPTIONEE
shall be addressed to OPTIONEE at his current residential address set forth
above, or at such other place as either party may hereafter designate in writing
to the other. Any such notice shall be deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as herein required, certified and
deposited (postage and certification prepaid) in a post office regularly
maintained by the United States Government.

10. BENEFITS OF AGREEMENT. This Agreement shall inure to the benefit of
and be binding upon each successor of the COMPANY. All obligations imposed upon
the OPTIONEE and all rights granted to the COMPANY under this Agreement shall be
binding upon the OPTIONEE's heirs, legal representatives, and successors. This
Agreement shall be the sole and exclusive source of any and all rights which the
OPTIONEE, OPTIONEE's heirs, legal representatives, or successors may have in
respect to the Plan or any options or Common Stock granted or issued thereunder,
whether to OPTIONEE, or to any other person.

11. RESOLUTION OF DISPUTES. Any dispute or disagreement which should
arise under, or as a result of, or in any way relate to, the interpretation,
construction or application of this Agreement will be determined by the Board of
Directors of the COMPANY. Any determination made hereunder shall be final,
binding, and conclusive for all purposes.

IN WITNESS WHEREOF, the COMPANY has caused these presents to be
executed on its behalf by its President and attested by its Secretary, and
OPTIONEE has hereunto set his hand the date and year first above written, which
is the time of the granting of the Option hereunder.

"COMPANY" "OPTIONEE"
PENNACO ENERGY, INC.
a Nevada corporation

<PAGE>

By:
-------------------------------- ---------------------------------------
Jeffrey L. Taylor, PRESIDENT Jeffrey L. Taylor

ATTEST:

By:
--------------------------------
Gregory V. Gibson, SECRETARY

<PAGE>

EXHIBIT "A"

NONSTATUTORY STOCK OPTION AGREEMENT

PURSUANT TO THE

1998 STOCK OPTION AND INCENTIVE PLAN
OF
PENNACO ENERGY, INC.

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

EXERCISE SCHEDULE

Option Period Number of Exercisable Option Shares
------------- -----------------------------------
<S> <C>
1. On or after the Effective Date 400,000
through the Terminal Date

</TABLE>

<PAGE>

PENNACO ENERGY, INC.
EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of this 10th day of June, 1998 by and between
PAUL M. RADY, residing at 990 East Briarwood Circle North, Littleton, Colorado
80122 ("Executive"), and PENNACO ENERGY, INC., a Nevada corporation, with
offices at 1050 17th Street, Suite 700, Denver, Colorado 80265 (the "Company"),
for the purpose of setting forth the terms and conditions of Executive's
employment by the Company and to protect the Company's knowledge, expertise,
customer relationships and the confidential information the Company has
developed regarding clients, customers, shareholders, option holders, employees,
products, business operations and services. As of the Effective Date, this
Agreement supersedes any prior understandings or agreements between Executive
and the Company or any of the Company's subsidiaries or affiliates.

RECITALS:

WHEREAS, the Board desires to provide for the continued employment of
Executive and to make certain changes in Executive's employment arrangements
with the Company which the Board has determined will reinforce and encourage the
continued attention and dedication to the Company of Executive as a member of
the Company's management, in the best interest of the Company and its
shareholders. Executive is willing to commit himself to continue to serve the
Company, on the terms and conditions herein provided, although this Agreement
may be amended at any time by written agreement among the parties; and

WHEREAS, in order to effect the foregoing, the Company and Executive wish
to enter into an employment agreement on the terms and conditions set forth
below;

NOW THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

1. TIME AND EFFORTS

1.1 Executive shall be employed as the Company's President and Chief
Executive Officer and shall devote his full-time attention to the duties and
responsibilities of President and Chief Executive Officer in furtherance of the
Company's business. Subject to consultation with and the direction of the Board
of Directors, Executive shall have full responsibility for, and authority over,
the business of the Company.

1.2 In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its officers and employees generally and its President and Chief
Executive Officer specifically. Executive shall report to the Board of
Directors.

1.3 The Company shall use its best efforts to cause Executive to be
elected a member of the Company's Board of Directors during the Term of this
Agreement (as defined in Section 2 below). In addition, Executive shall be able
to nominate a reasonably-qualified candidate for membership on the Board of
Directors, and the Company shall use reasonable efforts to cause such nominee to
be elected. The authorized number of members of the Board of Directors is not

Page 1 of Fourteen
<PAGE>

anticipated to exceed five; however, if the authorized number of members of the
Board of Directors is increased to seven, then Executive shall be able to
nominate two reasonably-qualified candidates for membership on the Board of
Directors.

1.4 Without the prior express authorization of the Board, Executive shall
not, directly or indirectly, during the Term of this Agreement engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner or independent contractor, or as an officer, director, or employee
of any other corporation. This Agreement shall not be interpreted to prohibit
Executive from making passive personal investments, conducting private business
affairs, or engaging in educational or charitable activities, if those
activities do not materially interfere with the services required hereunder.
Subject to the reasonable prior approval of the Board, Executive may act as a
director of any profit or non-profit corporation or other business entity, if
such activity is not inconsistent with the business of the Company.

1.5 In order to induce the Company to enter into this Agreement, Executive
represents and warrants to the Company that (i) Executive is not a party or
subject to any employment agreement or arrangement with any other person, firm,
company, corporation or other business entity; and (ii) Executive is subject to
no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair Executive's right or ability to enter the employ of the Company or to
perform fully his duties and obligations pursuant to this Agreement.

1.6 Without first obtaining the written permission of the Board in each
instance, Executive will not authorize or permit the Company to engage the
services, of, or engage in any business activity with, or provide any financial
or other benefit to, any affiliate of Executive. The phrase "affiliate of
Executive" as used in this Agreement shall mean and include Executive's family
by blood or marriage (including, without limitation, parents, spouse, siblings,
children and in-laws), and any business or business entity which is directly or
indirectly owned or controlled by Executive or any member of Executive's family
or in which Executive or any member of Executive's family has any direct or
indirect financial interest whatsoever.

2. TERM

The initial Term of this Agreement is from June 1, 1998 (the "Effective
Date") until June 30, 2002; however on each anniversary of the Effective Date
after June 1, 2001, this Agreement shall be automatically renewed for a new
two-year Term from such anniversary date unless the Company notifies
Executive in writing 90 days prior to the anniversary of the Effective Date
that the Company will not be renewing this Agreement on the next anniversary
of the Effective Date, or unless sooner terminated pursuant to Section 4.
References hereinafter to the "Term" of this Agreement shall refer to both
the initial term and any extended term of Executive's employment hereunder.

3. COMPANY'S AUTHORITY

Executive agrees to observe and comply with the reasonable rules and
regulations of Company as adopted by the Board of Directors of the Company or
committee of the Board of Directors respecting performance of Executive's duties
and to carry out and perform orders, directions, and policies of Company as they
may be, from time-to-time, stated to Executive either verbally or in writing.

4. TERMINATION

Page 2 of Fourteen
<PAGE>

This Agreement shall be terminated upon the happening of any of the
following events:

4.1 Upon the death of Executive.

4.2 Whenever the Company and Executive shall mutually agree to
termination.

4.3 At the option of the Company, upon written notice by the Company to
Executive, for Cause. "Cause" shall exist for such termination if Executive (i)
pleads or is found guilty of a felony involving an act of dishonesty or moral
turpitude by a court of competent jurisdiction; (ii) has engaged in serious
misconduct, materially and demonstratively injurious to the company; (iii) has
made any material misrepresentation or omission to the Company under Section 1.5
hereof; (iv) has committed an unexcused material breach of his duty in the
course of Executive's employment; (v) has been guilty of habitual neglect of his
duties; (vi) has usurped a corporate opportunity, is guilty of fraudulent
embezzlement of property or funds of the Company, or committed any act of fraud
or intentional misrepresentation, moral turpitude, dishonesty or other
misconduct that would constitute a felony; or (vii) has committed a material,
unexcused breach of this Agreement.

4.4 The Company may terminate Executive's employment under this Agreement
at any time without Cause, subject to provisions for payment of compensation as
specified under Section 5.5 of this Agreement. Should the Company demote the
Executive below the status of President without Cause, this Agreement shall
terminate subject to provisions for payment of compensation as specified under
Section 5.5 of this Agreement.

4.5 At the option of Executive, upon 90 days written notice by Executive
to the Company.

4.6 If as a result of Executive's incapacity due to physical or mental
illness, Executive shall have been absent from his duties hereunder on a
full-time basis for the entire period of three consecutive months, and within
30 days after written notice of termination is given (which may occur before
or after the end of such three-month period) shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate Executive's employment hereunder.

4.7 Upon the expiration of the Term of this Agreement, or any extension or
renewal thereof.

5. CURRENT COMPENSATION

5.1 ANNUAL SALARY. For all services rendered by Executive under this
Agreement, the Company shall pay or cause to be paid to Executive, and Executive
shall accept the annual Salary and Incentive Compensation, if any, all in
accordance with the subject to the terms of this Agreement. For purposes of
this Agreement, the term "Compensation" shall mean the Annual Salary and Bonus
Compensation, if any. Executive shall be entitled to receive as current
compensation an annual salary in an amount of not less than $120,000 per annum
(hereinafter referred to as the "Annual Salary"). References in this Agreement
to "annual" or "per annum" or "Annual" and similar phrases shall mean the
twelve-month period commencing on May 1st of each year during the Term of this
Agreement unless otherwise indicated.

Page 3 of Fourteen
<PAGE>

5.2 BONUS COMPENSATION. Executive shall also be entitled to annual
incentive compensation ("Bonus Compensation") equal to 2% of the sum of the
Company's net after-tax earnings as reported in the Company's audited year-end
financial statements plus interest expense, deferred taxes, depletion expenses,
depreciation expenses, amortization expenses, and exploration expenses (which
sum is hereinafter referred to as "cash flow"). The parties agree that
exploration expenses would be deducted from net after-tax earning only if the
Company has elected the "successful-efforts" accounting method; if the Company
has elected the "full-cost" accounting method, exploration expenses would
already be deducted in the computation of the Company's net after-tax earnings,
subject to the additional provisions forth in Sections 5.2.1 and 5.2.2 below.

5.2.1 The parties agree that Bonus Compensation payments are
intended to be based on cash flow from undrilled Company-owned properties as
of the date of this Agreement and undrilled properties acquired by the
Company subsequent to the date of this Agreement. Should the Company acquire
proven-producing properties with existing cash flows, net income less the
hypothetical income tax due thereon plus interest expense, deferred taxes,
depletion expenses, depreciation expenses, amortization expenses, and
exploration expenses (which exploration expenses would only be added if the
Company has elected the "successful-efforts" accounting method) attributable
to the acquired, proven-producing properties shall be deducted from the base
amount upon which the cash flow is derived.

5.2.2 Should the Company acquire proven-producing properties with
existing cash flows, the parties agree to negotiate in good faith with respect
to the development of a schedule of the declining production profile of such
properties. The parties agree that the amount derived by multiplying the
proven-production stream, as set forth in the schedule, by the corresponding
sales price, less corresponding production costs shall be subtracted from the
cash flow upon which Bonus Compensation is based.

5.2.3 Bonus Compensation payments due hereunder shall be made
within 15 days after the Company has received the signed audit report covering
the year-end financial statements. No Bonus Compensation shall be earned until
the fiscal year end of each fiscal year during the this Agreement except as
allowed in Section 5.5 hereof.

5.3 401(k) PLAN. Executive shall be entitled to participate in the
Company's 401(k) or other similar retirement benefit plan. The Company agrees
to implement a 401(k) or other similar retirement benefit plan as soon as it is
reasonably feasible, based on the size of the Company and its financial
condition.

5.4 PAYMENTS OF CURRENT COMPENSATION. The payment of Executive's Annual
Salary shall be made in semi-monthly installments on the then prevailing paydays
of the Company. Any payment for Incentive Compensation will be made in
accordance with the Executive Incentive Compensation Plan, and payment will be
made in one lump sum concurrently with payments made to others in senior
management. All payments are subject to the customary withholding tax and other
employment taxes as required with respect to compensation paid to an employee.

5.5 PAYMENT OF COMPENSATION ON TERMINATION.

Page 4 of Fourteen
<PAGE>

5.5.1 Upon termination of Executive's employment prior to the
expiration of this Agreement, if such termination is pursuant to Section 4.1,
4.2, 4.5, 4.6, or 4.7 hereof, Executive shall be entitled to any Annual Salary,
Bonus Compensation, and vacation accrued but unpaid through the date of
termination of employment, payable on the date of termination. Executive shall
also be entitled to exercise any vested options for a period of 90 days
following the termination of his employment hereunder.

5.5.2 Upon termination of Executive's employment prior to the
expiration of this Agreement, if such termination is pursuant to Section 4.4
hereof, Executive shall be entitled to any Annual Salary, Bonus Compensation,
and vacation accrued but unpaid through the date of termination of employment,
payable on the date of termination. In addition, in the case of termination
pursuant to Section 4.4, the payment of $2,000,000 in cash if terminated prior
to the first anniversary of the Effective Date, and $3,000,000 in cash if
terminated pursuant to Section 4.4 after the first anniversary of the Effective
Date, which additional payments shall be made in quarterly installments.
Executive shall also be entitled to exercise any vested options for a period of
90 days following the termination of his employment hereunder. The provisions
of this Section 5.5.2 shall apply throughout the Term of this Agreement,
including any period of extension in accordance with the provisions of Section 2
above.

5.5.3 In the event that Executive is not serving as the President
and Chief Executive Officer during the term of this Agreement or is terminated
as a result of a change of control (as hereafter defined), Executive shall be
entitled to any Annual Salary, Bonus Compensation, and vacation accrued but
unpaid through the date of termination of employment, payable on the date of
termination. Upon termination as a result of a change of control, Executive
shall also be entitled to receive the payment set forth in Section 5.5.2, except
that in all circumstances the amount of the payment shall be $3,000,000, and
shall be entitled to exercise all granted stock options for a period of 180 days
following the termination of his employment hereunder.

5.5.4 For all purposes of this Agreement, a "change of control"
shall mean and shall be deemed to have occurred if: (i) there shall be
consummated (x) any consolidation or merger of the Company with another
corporation or entity and as a result of such consolidation or merger less than
50% of the outstanding voting securities of the surviving or resulting
corporation or entity shall be owned in the aggregate by the stockholders of the
Company, other than "affiliates," as defined in the Securities Exchange Act of
1934, as amended (the "Exchange Act"), of any party to such consolidation or
merger, as the same shall have existed immediately prior to such consolidation
or merger, or (Y) any sale, lease, exchange or other transfer (or in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company; (ii) the stockholders of the Company shall have
approved any plan or proposal for the liquidation or dissolution of the Company;
(iii) any "person" (as such term is used in the Section 13(d) and 14(d) (2) of
the Exchange Act) shall have become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of 50% or more of the Company's outstanding
common stock, without the prior approval of the Board; (iv) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the entire Board of Directors shall have ceased for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new Director was approved by
vote of at least two-thirds of the Directors then still in office who were
Directors at the beginning of the period; (v) a change of control of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Exchange Act shall have occurred; (vi)
any consolidation or merger of the Company with another corporation or entity
and as a result of such consolidation or merger Executive is not retained by the
Board of Directors as the President and Chief Executive Officer of the Company.

6. DETERMINATION OF DISABILITY; PAYMENT OF DISABILITY INSURANCE PREMIUMS

Page 5 of Fourteen
<PAGE>

6.1 In the event Executive's disability, as defined in Section 4.6, is in
question, and after written request by the Company, Executive refuses to be
examined by his regularly attending physician or if the regularly attending
physician fails to submit a report within 30 days after the examination has been
requested by the Company, the determination of disability shall be made by the
Company.

6.2 Executive shall be entitled to the disability benefits available to
all executive employees of the Company.

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<PAGE>

7. MISCELLANEOUS BENEFITS

7.1 MEDICAL INSURANCE. Executive and his family shall be entitled to
participate in any medical, dental, vision, life, long-term disability, other
insurance or employee benefit program instituted or maintained by the Company
for the benefit of its executive employees. It is the intent of the Company to
establish a medical and dental insurance program as soon practicable.

7.2 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT. If Executive's
employment with the Company is terminated, Executive shall be entitled to
maintain his employee benefits in accordance with his maximum COBRA rights.

7.3 BUSINESS EXPENSES. Executive shall be reimbursed for all reasonable
expenses incurred by Executive in connection with Executive's attendance of
business meetings and promotion of Company business upon presentation by
Executive to the Company of an expense report and adequate records or other
documentation substantiating the expenditures, not less frequently than monthly.
Any such amounts disallowed as a business expense for federal or state income
tax purposes shall be deemed additional salary to Executive. The fact that the
Company may not reimburse Executive for an expense is not an indication that the
Company determined that the expense was not incurred on its behalf or in
connection with the Company's business.

7.4 ADDITIONAL BENEFITS. Executive shall be entitled to participate in
all programs, rights and benefits for which executive is otherwise entitled to
any bonus plan, incentive plan, participation plan or extra compensation plan,
pension plan, profit sharing plan, life, medical, dental, disability or other
insurance plan or policy or other plan or benefit the Company may provide for
senior executives or for employees of the Company generally from time to time in
effect during the term of this Agreement. For the avoidance of doubt, the
rights granted or afforded to Executive under any such plans shall be not less
than the most favorable rights and highest amounts granted to employees of
similar or lower position with the Company and on terms at least as favorable.

8. VACATION

During each calendar year of the Term of this Agreement, Executive shall be
entitled three weeks of paid vacation, earned ratably over the Term of each
calendar year during the Term of this Agreement. Executive shall be entitled to
receive payment for accrued vacation not taken during each calendar year during
the Term of this Agreement or may accrue such vacation for use in a subsequent
calendar year; however Executive shall be subject to a maximum of six weeks of
accrued vacation.

9. RESTRICTIVE COVENANTS

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<PAGE>

data, formulae, information and supplier, client and customer lists and all
papers, resumes, and records (including computer records) of the documents
containing such Confidential Information. Executive agrees to deliver or
return to the Company, at the Company's request at any time or upon
termination or expiration of his employment, or as soon thereafter as
possible, all documents, computer tapes and disks, records, lists, data,
drawings, prints, notes and written information (and all copies thereof)
furnished by the Company or any of its subsidiaries affiliates or prepared by
Executive during the Term of his employment by the Company. The obligations
hereof shall not apply to any information which is or becomes public or in
the public domain by action of the Company or through no fault of Executive.

9.2 BUSINESS DIVERSION. During the term and for 30 months thereafter,
Executive shall not, directly or indirectly, influence or attempt to influence
customers or suppliers of the Company or any of its subsidiaries or affiliates
to divert their business to any competitor of the Company, to the exclusion of
the Company. However, Executive may contract with the same customers and
suppliers after the Term hereof so long as it is not to the exclusion of the
Company's relationships with such customers and suppliers.

9.3 NON-SOLICITATION. Executive recognizes that he will possess
confidential information about other employees of the Company and its
subsidiaries and affiliates relating to, among other things, their education,
experience, skills, abilities, compensation and benefits, and interpersonal
relationships with suppliers and customers of the Company. Executive recognizes
that the information he will possess about these other employees is not
generally known, is of substantial value to the Company, and will be acquired by
him because of his business position with the Company. Executive agrees that,
during the Term and for 12 months thereafter, he will not, directly or
indirectly, solicit or recruit any employee of the Company, its subsidiaries or
affiliates for the purpose of being employed by him or by any other person on
whose behalf he is acting as an agent, representative or employee and that he
will not convey any such confidential information or trade secrets about other
employees of the Company, including its subsidiaries or affiliates, to any other
person. However, if Executive's employment is terminated in accordance with the
provisions of Section 4.4, nothing herein shall prevent Executive from
soliciting or recruiting, directly or indirectly, any employee of the Company
recruited to the Company by Executive.

9.4 If Executive breaches, or threatens to commit a breach of, any of the
provisions of Section 9 (the "Restrictive Covenants"), the Company and its
subsidiaries shall have the right to the following:

9.4.1 SPECIFIC PERFORMANCE. The right and remedy to have the
Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company or its
subsidiaries and that money damages would not provide an adequate remedy to the
Company or its subsidiaries.

9.4.2 ACCOUNTING. The right and remedy to require Executive to
account for and pay over to the Company or its subsidiaries, as the case may be,
all compensation, profits, monies, accruals, increments or other benefits
derived or received by Executive as a result of any transaction constituting a
breach of the Restrictive Covenants.

9.4.3 SEVERABILITY OF RESTRICTIVE COVENANTS. Executive
acknowledges and agrees that the Restrictive Covenants are reasonable and valid
in geographic and temporal scope and in all other respects. If any court
determines at any of the Restrictive Covenants, or any part thereof, is invalid
or unenforceable, the remainder of the Restrictive Covenants shall not thereby
be affected and shall be given full effect without regard to the invalid
provisions.

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<PAGE>

9.4.4 BLUE PENCILING. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope or such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall not be enforceable.

9.4.5 ENFORCEABILITY OF JURISDICTIONS. The obligations in this
Section 9 shall survive the termination of Executive's employment or expiration
of this Agreement and shall be fully enforceable thereafter. Executive intends
to and hereby confers jurisdiction to enforce the Restrictive Covenants upon the
courts of any jurisdiction within the geographic scope of such Restrictive
Covenants. If the courts of any one or more of such jurisdictions hold the
Restrictive Covenants unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of Executive that such determination not bar or
in any way affect the right of the Company or its subsidiaries to the relief
provided above in the courts of any other jurisdiction within the geographic
scope of such Restrictive Covenants, as to breaches of such Restrictive
Covenants in such other respective jurisdictions, such Restrictive Covenants as
they relate to each jurisdiction being, for this purpose, severable into diverse
and independent Restrictive Covenants.

10. PARTICIPATION IN STOCK AND OPTION EXECUTIVE COMPENSATION PLAN

10.1 Executive shall be granted (i) options (the "$2.50 Options") to
purchase 400,000 shares of Common Stock of the Company pursuant to the terms
and conditions contained in the Company's Stock and Option and Incentive
Award Plan, (the "Plan") at an exercise price equal to $2.50 per share; and
(ii) options (the "$5.00 Options") to purchase 400,000 shares of Common Stock
of the Company pursuant to the terms and conditions contained in the Plan at
an exercise price equal to $5.00 per share. The $2.50 Options and the $5.00
Options shall vest ratably over a four-year period on each anniversary of the
Effective Date.

10.2 Executive shall be granted options (the "Additional Options") to
purchase such number of shares of Common Stock of the Company that equals 1%
of the number of shares of Common Stock issued by the Company during the term
of this Agreement pursuant to capital-raising, merger, or acquisition
activities of the Company pursuant to which the Company issues any equity
securities, other than the Company's current placement of shares of Common
Stock at $3.25 per share. Additional Options will be granted pursuant to the
terms and conditions contained in the Plan at an exercise price equal to the
price of the shares of Common Stock issued by the Company in any such
transaction. The Additional Options shall be granted as of the closing of any
such transaction, shall vest 18 months from the date of grant, and shall
expire 48 months from the date of grant.

10.3 Executive shall be considered for additional grants of options,
stock appreciation rights, phantom stock rights, and any similar option or
securities or equity compensation when and as such grants are considered for
other executives or employees of the Company.

10.4 In the event of termination of Executive's employment pursuant to
a change in control, Executive shall be entitled to exercise all of the $2.50
Options, $5.00 Options, and any Additional Options that have been granted.
In the event of termination of Executive's employment pursuant to Section
4.4, the $2.50 Options, $5.00 Options, and any Additional Options that have
been granted but have not yet vested in accordance with their terms shall
vest as follows:

<TABLE>
<CAPTION>
Percentage of
Time of Termination Options to Vest
------------------- ---------------
<S> <C>
June 1, 1998 to May 31, 1999 25% of total

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<PAGE>

June 1, 1999 to May 31, 2000 50% of total
June 1, 2000 to May 31, 2001 75% of total
June 1, 2001 to May 31, 2002 100% of total
</TABLE>

10.5 In the event of termination of Executive's employment, the
Executive shall have the right for 180 days after such termination date to
sell any of Executive's shares of Common Stock, and the Company shall be
obligated to buy any of such shares of Common Stock, at the market price of
the Company's Common Stock. Executive agrees to grant the Company a right of
first refusal for a 30-day period to purchase any shares of Common Stock
owned by Executive offered to anyone other than the Company and agrees that
the Company has the right to assign its rights to purchase Executive's shares
pursuant to the terms hereof.

10.6 Any shares of Common Stock issued pursuant to the exercise of
stock options granted under the terms of this Section 10 shall bear a legend
indicating that such shares of Common Stock are subject to repurchase by the
Company, or its assignee, in accordance with the terms of this Agreement.

11. DISPUTE RESOLUTION

The parties agree that any dispute that may arise in connection with,
arising out of or relating to this Agreement, or any dispute that relates in
any way, in whole or in part, to Executive's employment with the Company, the
termination of that employment, or any other dispute by and among the parties
or their successors, assigns or affiliates, shall be submitted to binding
arbitration in Orange County, California according to the Employment Dispute
Resolution Rules and Procedures of the American Arbitration Association. This
arbitration obligation extends to any and all claims that may arise by and
between the parties or their successors, assigns or affiliates, and expressly
extends to, without limitation, claims or cause of action for wrongful
termination, impairment of ability to compete in the open labor market,
breach or an express or implied contract, breach of the covenant of good
faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation,
defamation, slander, infliction of emotional distress, disability, loss of
future earnings, and claims under the applicable state constitution, the
United States Constitution, and applicable state fair employment laws,
federal equal employment opportunity laws, and federal and state labor
statutes and regulations, including, but not limited to, the Civil Rights Act
of 1964, as amended, the Labor-Management Relations Act, as amended, the
Worker Retraining and Notification Act of 1988, the Americans With
Disabilities Act of 1990, the Rehabilitation Act of 1973, as amended, the
Employee Retirement Income Security Act of 1974, as amended, the Age
Discrimination in Employment Act of 1967, as amended, and the California Fair
Employment and Housing Act, as amended.

12. ASSIGNMENT

This Agreement is a personal contract, and the rights, interests and
obligations of Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. Executive shall not under any circumstances
have any option or right to require payment hereunder otherwise than in
accordance with the terms hereof. Except as otherwise expressly provided
herein, Executive shall not have any power of anticipation, alienation or
assignment of payments contemplated hereunder, and all rights and benefits of
Executive shall be for the sole personal benefit of Executive, and no other
person shall acquire any right, title or interest hereunder by reason of any
sale, assignment, transfer, claim or judgment or bankruptcy proceedings
against Executive; provided, however, that in the event of Executive's death,
Executive's estate, legal representatives or beneficiaries (as the case may
be) shall have the right to receive all of the benefits that accrued to
Executive pursuant to, and in accordance with, the terms of this Agreement.

13. SUCCESSOR

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<PAGE>

This Agreement may be assigned by the Company to any successor interest to
its business. This Agreement shall bind and inure to the benefit of the
Company's successors and assigns as well.

14. NOTICES

All notices, requests and demands hereunder shall be in writing and
delivered by hand, by mail, or by telegram, and shall be deemed given if by hand
delivery, upon such delivery, and if by mail, 48 hours after deposit in the
United States mail, first class, registered or certified mail, postage prepaid
and properly addressed to the party at the address set forth at the beginning of
this Agreement. Any party may change its address for purposes of this paragraph
by giving the other party written notice of the new address in the manner set
forth above.

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<PAGE>

15. INVALID PROVISIONS

Invalidity or unenforceability of any particular provision of this
Agreement shall not affect the other provisions hereof, and this Agreement shall
be construed in all respects as if such invalid or unenforceable provision were
omitted.

16. AMENDMENT, MODIFICATION OR REVOCATION

This Agreement may be amended, modified or revoked in whole or in part, but
only by a written instrument which specifically refers to this Agreement and
expressly states that it constitutes an amendment, modification or revocation
hereof, as the case may be, and only if such written instrument has been signed
by each of the parties to this Agreement.

17. HEADINGS

The headings in this Agreement are inserted for convenience only and are
not to be considered in construction of the provisions hereof.

18. ENTIRE AGREEMENT

This Agreement contains the entire understanding among the parties and
supersedes any prior written or verbal agreements between them respecting the
subject matter hereof, including, without limitation, any prior verbal or
written employment agreement between Executive and the Company. Upon the
effectiveness hereof, any such prior verbal or written agreements shall
terminate.

No representations or warranties of any kind or nature relating to the
Company or its affiliates or their respective businesses, assets, liabilities,
operations, future plans or prospects have been made by or on behalf of the
Company to Executive; nor have any representations or warranties of any kind or
nature been made by Executive to the Company, except as expressly set forth in
this Agreement.

19. ATTORNEYS' FEES

20. FURTHER ASSURANCES

The parties shall execute such documents and take such other action as is
necessary or appropriate to effectuate the provisions of this Agreement.

21. CONTROLLING LAW

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<PAGE>

This Agreement shall be governed by the laws of the State of Nevada.

22. WAIVER

A waiver by either party of any of the terms and conditions hereof shall
not be construed as a general waiver by such party, and such party shall be free
to reinstate such part or clause, with or without notice to the other party.

23. INDEMNIFICATION

To the fullest extent permitted by law and the Company's Certificate of
Incorporation and Bylaws, the Company shall indemnify, defend, and hold harmless
the Executive for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses, including reasonable
attorneys fees, incurred or paid by Executive in connection with any action,
proceeding, suit or investigation arising out of or relating to the performance
by Executive of services for, or acting as, an officer or employee of the
Company or any subsidiary thereof. The Company agrees to use its best efforts
to maintain directors' and officers' liability insurance, but the failure of the
Company to Maintain such insurance or any portion thereof shall not negate nor
diminish Company's obligations as set forth in this paragraph.

24. PERIODIC REVIEWS

During January of each year during the term hereof, the Board of Directors
of the Company shall review Executive's Annual Salary, bonus, stock options, and
additional benefits then being provided to Executive. Following each such
review, the Company may in its discretion increase the Annual Salary, bonus,
stock options, and benefits; however, the Company shall not decrease such items
during the period Executive serves as an employee of the Company. Prior to
February 28th of each year during the term hereof, the Board of Directors of the
Company shall communicate in writing the results of such review to Executive.

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<PAGE>

IN WITNESS WHEREOF, the parties have entered into this Agreement on June
10, 1998.

THE COMPANY: EXECUTIVE:

PENNACO ENERGY, INC.

By:
-------------------------------- ------------------------------
Jeffrey L. Taylor, President PAUL M. RADY

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<PAGE>

PENNACO ENERGY, INC.
EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of this ________ day of July, 1998 by and
between GLEN C. WARREN, JR., residing at 321 West 90th Street, New York, NY
10024 ("Executive"), and PENNACO ENERGY, INC., a Nevada corporation, with
offices at 1050 17th Street, Suite 700, Denver, Colorado 80265 (the
"Company"), for the purpose of setting forth the terms and conditions of
Executive's employment by the Company and to protect the Company's knowledge,
expertise, customer relationships and the confidential information the
Company has developed regarding clients, customers, shareholders, option
holders, employees, products, business operations and services. As of the
Effective Date, this Agreement supersedes any prior understandings or
agreements between Executive and the Company or any of the Company's
subsidiaries or affiliates.

RECITALS:

WHEREAS, the Board desires to employ Executive and to provide Executive
with certain arrangements with the Company which the Board has determined will
reinforce and encourage the continued attention and dedication to the Company of
Executive as a member of the Company's management, in the best interest of the
Company and its shareholders. Executive is willing to commit himself to serve
the Company, on the terms and conditions herein provided, although this
Agreement may be amended at any time by written agreement among the parties; and

WHEREAS, in order to effect the foregoing, the Company and Executive wish
to enter into an employment agreement on the terms and conditions set forth
below;

NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

1. TIME AND EFFORTS

1.1 Executive shall be employed as the Company's Chief Financial Officer
and Executive Vice President and, subject to Section 1.4 hereof, shall devote
his full-time attention to the duties and responsibilities of Chief Financial
Officer and Executive Vice President in furtherance of the Company's business.
Subject to consultation with and the direction of the President and the Board of
Directors , Executive shall have responsibility for, and authority over, all
financial related matters concerning the Company and other duties and
responsibilities delegated by the President and the Board of Directors of the
Company, which are consistent with Executive's position and status as Chief
Financial Officer.

1.2 In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its officers and employees generally and its Chief Financial
Officer and Executive Vice President specifically, Executive shall be furnished
copies of the Company's policies, rules, and regulations as they are
implemented. Executive shall report to the President of the Company.

Page 1 of Thirteen
<PAGE>

1.3 The President shall use his best efforts, pursuant to his terms of
employment with the Company to designate a Board of Directors Member, to cause
Executive to be elected a member of the Company's Board of Directors during the
Term of this Agreement, likewise the Company shall pursuant to the terms of the
President's employment use its best efforts to cause Executive to be elected a
member of the Company's Board of Directors during the Term of this Agreement (as
defined in Section 2 below).

1.4 Without the prior express authorization of the Board, Executive shall
not, directly or indirectly, during the Term of this Agreement engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner or independent contractor, or as an officer, director, or employee
of any other corporation. This Agreement shall not be interpreted to prohibit
Executive from making passive personal investments, conducting private business
affairs, or engaging in educational, civic, or charitable activities, if those
activities do not materially interfere with the services required hereunder.
Subject to the reasonable prior approval of the Board, Executive may act as a
director of any profit or non-profit corporation or other business entity, if
such activity is not inconsistent with the business of the Company.

2. TERM

The initial Term of this Agreement is from July 1, 1998 (the "Effective
Date") until June 30, 2002; on each anniversary of the Effective Date after July
1, 2002, this Agreement shall be automatically renewed for a new one-year Term
from such anniversary date unless the Board of Directors notifies Executive in
writing 90 days prior to the anniversary of the Effective Date that the Company
will not be renewing this Agreement on the next anniversary of the Effective
Date, or unless sooner terminated pursuant to Section 4. References hereinafter
to the "Term" of this Agreement shall refer to both the initial term and any
extended term of Executive's employment hereunder.

3. COMPANY'S AUTHORITY

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<PAGE>

4. TERMINATION

This Agreement shall be terminated upon the happening of any of the
following events:

4.1 Upon the death of Executive.

4.2 Whenever the Company and Executive shall mutually agree to
termination.

4.3 At the option of the Company, upon 15 days written notice by the
Board of Directors to Executive, for Cause. "Cause" shall exist for such
termination if Executive (i) pleads or is found guilty of a felony involving
an act of dishonesty or moral turpitude by a court of competent jurisdiction;
(ii) has engaged in serious misconduct, materially and demonstratively
causing injury to the Company. As used herein, "misconduct" means (a)
continued failure by Executive to substantially perform his duties with the
Company (other than any such failure resulting from Executive's incapacity
due to physical illness, after a written demand for substantial performance
is delivered to Executive by the Board, which demand specifically identifies
the manner in which the Board believes that Executive has not substantially
performed his duties, or (b) engaging by Executive in conduct which is
demonstrably and materially injurious to the Company, monetarily or
otherwise. Notwithstanding the forgoing Executive shall not be deemed to
have been terminated for Misconduct unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the affirmative
vote of not less than two-thirds of the entire membership of the Board at a
meeting of the Board called and held for such purpose, finding that in the
good faith opinion of the Board Executive was guilty of conduct set forth
above and specifying the particulars thereof in detail; (iii) has made any
material misrepresentation or omission to the Company under Section 1.5
hereof as determined by an affirmative vote of two-thirds of the Board of
Directors; (iv) has committed an unexcused material breach of his duty in the
course of Executive's employment as determined by an affirmative vote of
two-thirds of the Board of Directors; (v) has been guilty of habitual neglect
of his duties as determined by an affirmative vote of two-thirds of the Board
of Directors; (vi) has usurped a corporate opportunity, is guilty of
fraudulent embezzlement of property or funds of the Company, or committed any
act of fraud or intentional misrepresentation, moral turpitude, dishonesty or
other misconduct that would constitute a felony as determined by an
affirmative vote of two-thirds of the Board of Directors; or (vii) has
committed a material, unexcused breach of this Agreement as determined by an
affirmative vote of two-thirds of the Board of Directors.

4.4 The Company may terminate Executive's employment under this Agreement
at any time without Cause, subject to provisions for payment of compensation as
specified under Section 5.5 of this Agreement. Should the Company demote the
Executive below the status of Chief Financial Officer without Cause, this
Agreement shall terminate subject to provisions for payment of compensation as
specified under Section 5.5 of this Agreement.

4.5 At the option of Executive, upon 30 days written notice by Executive
to the Company.

4.6 If as a result of Executive's incapacity due to physical or mental
illness, Executive shall have begun to receive benefits under an insured long
term disability plan of the Company, and within 30 days after written notice of
termination is given shall not have returned to the performance of his duties
hereunder on a full-time basis, the Board of Directors may terminate
Executive's employment hereunder.

4.7 Upon the expiration of the Term of this Agreement, or any extension or
renewal thereof.

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<PAGE>

4.8 Any termination of employment by the Board of Directors or by
Executive shall be communicated by written notice of termination to
the other party hereto. For purposes of this Agreement a "Notice of
Termination" shall mean a notice which shall set forth in reasonable
detail the reason for termination of the Executive's employment, or in
the case of resignation, said notice must specify in reasonable detail
the basis for such resignation.

5. CURRENT COMPENSATION

5.1 ANNUAL SALARY. For all services rendered by Executive under this
Agreement, the Company shall pay or cause to be paid to Executive, and Executive
shall accept the annual Salary and Incentive Compensation, if any, all in
accordance with the subject to the terms of this Agreement. For purposes of
this Agreement, the term "Compensation" shall mean the Annual Salary and Bonus
Compensation, if any. Executive shall be entitled to receive as current
compensation an annual salary in an amount of not less than $100,000 per annum
(hereinafter referred to as the "Annual Salary"). Such Annual Salary shall be
reviewed at least annually by the Board of Directors and maybe increased as it
deems appropriate. Such Annual Salary may not be decreased during the term of
this Agreement. References in this Agreement to "annual" or "per annum" or
"Annual" and similar phrases shall mean the twelve-month period commencing on
July 1st of each year during the Term of this Agreement unless otherwise
indicated.

5.2 BONUS COMPENSATION. Executive shall be entitled to a single, one
time bonus of $150,000 payable within 15 days after the Company has received
the signed audit report covering the year-end financial statements for fiscal
1999 ("Single Bonus"). Executive shall also be entitled, beginning in the
Company's fiscal year 2000, to annual incentive compensation ("Bonus
Compensation") equal to 1% of the sum of the Company's net after-tax earnings
as reported in the Company's audited year-end financial statements plus
interest expense, deferred taxes, depletion expenses, depreciation expenses,
amortization expenses, and exploration expenses (which sum is hereinafter
referred to as "cash flow"). The parties agree that exploration expenses
would be deducted from net after-tax earning only if the Company has elected
the "successful-efforts" accounting method; if the Company has elected the
"full-cost" accounting method, exploration expenses would already be deducted
in the computation of the Company's net after-tax earnings, subject to the
additional provisions forth in Sections 5.2.1 and 5.2.2 below.

5.2.2 Should the Company acquire proven-producing properties
with existing cash flows, the parties agree to negotiate in good faith with
respect to the development of a schedule of the declining production profile
of such properties. The parties agree that the amount derived by multiplying
the proven-production stream, as set forth in the schedule, by the
corresponding sales price, less corresponding production costs shall be
subtracted from the cash flow upon which Bonus Compensation is based.

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<PAGE>
5.2.3 Bonus Compensation payments due hereunder shall be made
within 15 days after the Company has received the signed audit report
covering the year-end financial statements. No Bonus Compensation shall be
earned until the fiscal year end of each fiscal year during the this
Agreement except as allowed in Section 5.5 hereof.

5.5 PAYMENT OF COMPENSATION ON TERMINATION.

5.5.1 Upon termination of Executive's employment prior to the
expiration of this Agreement, if such termination is pursuant to Section 4.1,
4.2, 4.3, 4.5, 4.6, or 4.7 hereof, Executive shall be entitled, within 30
days of termination, to any Annual Salary, Single Bonus, Bonus Compensation,
and vacation accrued but unpaid through the date of termination of
employment, payable on the date of termination. Executive shall also be
entitled to exercise any vested options for a period of 90 days following the
termination of his employment hereunder.

5.5.2 Upon termination of Executive's employment prior to the
expiration of this Agreement, if such termination is pursuant to Section 4.4
hereof, Executive shall be entitled to any Annual Salary, Single Bonus, Bonus
Compensation, and vacation accrued but unpaid through the date of termination
of employment, payable on the date of termination. In addition, in the case
of termination pursuant to Section 4.4, the payment of $400,000 in cash,
within 30 days of termination, if terminated prior to the first anniversary
of the Effective Date, $750,000 in cash, within thirty days of termination,
if terminated pursuant to Section 4.4 after the first anniversary of the
Effective Date but prior to the 2nd anniversary of the Effective Date, and
$1,250,000 in cash if terminated pursuant to Section 4.4 after the 2nd
anniversary of the Effective Date with said additional payment made in
quarterly installments with the first said installment made within 30 days of
termination. Executive shall also be entitled to exercise any vested options
for a period of 90 days following the termination of his employment
hereunder. The provisions of this Section 5.5.2 shall apply throughout the
Term of this Agreement, including any period of extension in accordance with
the provisions of Section 2 above.

5.5.3 In the event that Executive is not serving as the Chief
Financial Officer during the term of this Agreement as a result of a change
of control (as hereafter defined), or is terminated as a result of a change
of control Executive shall be entitled to any Annual Salary, Single Bonus,
Bonus Compensation, and vacation accrued but unpaid through the date of
termination of employment, payable on the date of termination. Upon
termination as a result of a change of control, Executive shall also be
entitled to receive the payment set forth in Section 5.5.2, except that in
all circumstances the amount of the payment shall be $1,500,000, and shall be
entitled to exercise all granted stock options for a period of 180 days
following the termination of his employment hereunder.

Page 5 of Thirteen
<PAGE>

5.5.4 For all purposes of this Agreement, a "change of control"
shall mean and shall be deemed to have occurred if: (i) there shall be
consummated (x) any consolidation or merger of the Company with another
corporation or entity and as a result of such consolidation or merger less
than 50% of the outstanding voting securities of the surviving or resulting
corporation or entity shall be owned in the aggregate by the stockholders of
the Company, other than "affiliates," as defined in the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), of any party to such
consolidation or merger, as the same shall have existed immediately prior to
such consolidation or merger, or (Y) any sale, lease, exchange or other
transfer (or in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company; or (ii) the stockholders
of the Company shall have approved any plan or proposal for the liquidation
or dissolution of the Company; or (iii) any "person" (as such term is used in
the Section 13(d) and 14(d) (2) of the Exchange Act) shall have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
50% or more of the Company's outstanding common stock, without the prior
approval of the Board; or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
of Directors shall have ceased for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by vote of at least
two-thirds of the Directors then still in office who were Directors at the
beginning of the period; (v) a change of control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act shall have occurred; (vi)
any consolidation or merger of the Company with another corporation or entity
and as a result of such consolidation or merger Executive is not retained by
the Board of Directors as the Chief Financial Officer of the Company.

6. DETERMINATION OF DISABILITY; PAYMENT OF DISABILITY INSURANCE PREMIUMS

6.2 Executive shall be entitled to the disability benefits available to
all executive employees of the Company.

7. MISCELLANEOUS BENEFITS

Page 6 of Thirteen
<PAGE>

income tax purposes shall be deemed additional salary to Executive. The fact
that the Company may not reimburse Executive for an expense is not an
indication that the Company determined that the expense was not incurred on
its behalf or in connection with the Company's business.

7.5 MOVING EXPENSES. The company will pay for reimbursement of all of
Executive's reasonable moving expenses that occur prior to December 31, 1999,
including up to two separate shipments.

8. VACATION

9. RESTRICTIVE COVENANTS

9.1 CONFIDENTIAL INFORMATION. Executive acknowledges that in his
employment hereunder he occupies a position of trust and confidence. During
the Term , and thereafter in accordance with the provisions of this
Agreement, Executive shall not, except as may be required to perform his
duties hereunder as required by applicable law, and except for information
which is or becomes publicly available other than as a result of a breach by
Executive of the provisions hereof, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential
Information" shall mean information about the Company, its subsidiaries and
affiliates, and their respective suppliers, clients and customers that is not
disclosed by the Company for financial reporting purposes and that was
learned by Executive in the course of his employment hereunder, including
(without limitation) proprietary knowledge, trade secrets, market research,
data, formulae, information and supplier, client and customer lists and all
papers, resumes, and records (including computer records) of the documents
containing such Confidential Information. Executive agrees to deliver or
return to the Company, at the Company's request at any time or upon
termination or expiration of his employment, or as soon thereafter as
possible, all documents, computer tapes and disks, records, lists, data,
drawings, prints, notes and written information (and all copies thereof)
furnished by the Company or any of its subsidiaries affiliates or prepared by
Executive during the Term of his employment by the Company. The obligations
hereof shall not apply to any information which is or becomes public or in
the public domain by action of the Company or through no fault of Executive.

Page 7 of Thirteen
<PAGE>

the Company. However, Executive may contract with the same customers and
suppliers after the Term hereof so long as it is not to the exclusion of the
Company's relationships with such customers and suppliers.

Page 8 of Thirteen
<PAGE>

right of the Company or its subsidiaries to the relief provided above in
the courts of any other jurisdiction within the geographic scope of such
Restrictive Covenants, as to breaches of such Restrictive Covenants in such
other respective jurisdictions, such Restrictive Covenants as they relate to
each jurisdiction being, for this purpose, severable into diverse and
independent Restrictive Covenants.

10. PARTICIPATION IN STOCK AND OPTION EXECUTIVE COMPENSATION PLAN

10.1 Executive shall be granted within 30 days of Effective Date (i)
options (the "$2.50 Options") to purchase 200,000 shares of Common Stock of
the Company pursuant to the terms and conditions contained in the Company's
Stock and Option and Incentive Award Plan, (the "Plan") at an exercise price
equal to $2.50 per share; (ii) options (the "$3.25 Options") to purchase
100,000 shares of Common Stock of the Company pursuant to the terms and
conditions contained in the Plan at an exercise price equal to $3.25 per
share; and (iii) options (the "$5.00 Options") to purchase 200,000 shares of
Common Stock of the Company pursuant to the terms and conditions contained in
the Plan at an exercise price equal to $5.00 per share. The $2.50 Options,
the $3.25 Options, and the $5.00 Options shall vest ratably over a four-year
period on each anniversary of the Effective Date.

10.2 Executive shall be granted options (the "Additional Options") to
purchase such number of shares of Common Stock of the Company that equals 1%
of the number of shares of Common Stock and/or the number of shares
represented by share purchase warrants or convertible securities issued by
the Company during the term of this Agreement pursuant to capital-raising,
merger, or acquisition activities of the Company pursuant to which the
Company issues any equity securities, including the Company's current
placement of shares of Common Stock at $3.25 per share. Additional Options
will be granted pursuant to the terms and conditions contained in the Plan at
an exercise price equal to the price of the shares of Common Stock issued by
the Company in any such transaction. The Additional Options shall be
granted as of the closing of any such transaction, shall vest 18 months from
the date of grant, and shall expire 48 months from the date of grant.

10.4 In the event of termination of Executive's employment pursuant to
a change in control, Executive shall be entitled to exercise all of the $2.50
Options, $3.25 Options, $5.00 Options, and any Additional Options that have
been granted. In the event of termination of Executive's employment pursuant
to Section 4.4, the $2.50 Options, $3.25 Options, $5.00 Options, and any
Additional Options that have been granted but have not yet vested in
accordance with their terms shall vest as follows:

<TABLE>
<CAPTION>
Percentage of
Time of Termination Options to Vest
------------------- ---------------
<S> <C>
July 1, 1998 to June 30, 1999 25% of total
July 1, 1999 to June 30, 2000 50% of total
July 1, 2000 to June 30, 2001 75% of total
July 1, 2001 to June 30, 2002 100% of total
</TABLE>

Page 9 of Thirteen
<PAGE>

Common Stock. Executive agrees to grant the Company a right of first refusal
for a 30-day period to purchase any shares of Common Stock owned by Executive
offered to anyone other than the Company and agrees that the Company has the
right to assign its rights to purchase Executive's shares pursuant to the
terms hereof.

10.6 Any shares of Common Stock issued pursuant to the exercise of stock
options granted under the terms of this Section 10 shall bear a legend
indicating that such shares of Common Stock are subject to repurchase by the
Company, or its assignee, in accordance with the terms of this Agreement.

11. DISPUTE RESOLUTION

The parties agree that any dispute that may arise in connection with,
arising out of or relating to this Agreement, or any dispute that relates in any
way, in whole or in part, to Executive's employment with the Company, the
termination of that employment, or any other dispute by and among the parties or
their successors, assigns or affiliates, shall be submitted to binding
arbitration in Denver, Colorado according to the Employment Dispute Resolution
Rules and Procedures of the American Arbitration Association. This arbitration
obligation extends to any and all claims that may arise by and between the
parties or their successors, assigns or affiliates, and expressly extends to,
without limitation, claims or cause of action for wrongful termination,
impairment of ability to compete in the open labor market, breach or an express
or implied contract, breach of the covenant of good faith and fair dealing,
breach of fiduciary duty, fraud, misrepresentation, defamation, slander,
infliction of emotional distress, disability, loss of future earnings, and
claims under the applicable state constitution, the United States Constitution,
and applicable state fair employment laws, federal equal employment opportunity
laws, and federal and state labor statutes and regulations, including, but not
limited to, the Civil Rights Act of 1964, as amended, the Labor-Management
Relations Act, as amended, the Worker Adjustment and Retraining and Notification
Act of 1988, the Americans With Disabilities Act of 1990, the Rehabilitation Act
of 1973, as amended, the Employee Retirement Income Security Act of 1974, as
amended, the Age Discrimination in Employment Act of 1967, as amended.

12. ASSIGNMENT

This Agreement is a personal contract, and the rights, interests and
obligations of Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. Executive shall not under any circumstances have
any option or right to require payment hereunder otherwise than in accordance
with the terms hereof. Except as otherwise expressly provided herein, Executive
shall not have any power of anticipation, alienation or assignment of payments
contemplated hereunder, and all rights and benefits of Executive shall be for
the sole personal benefit of Executive, and no other person shall acquire any
right, title or interest hereunder by reason of any sale, assignment, transfer,
claim or judgment or bankruptcy proceedings against Executive; provided,
however, that in the event of Executive's death, Executive's estate, legal
representatives or beneficiaries (as the case may be) shall have the right to
receive all of the benefits that accrued to Executive pursuant to, and in
accordance with, the terms of this Agreement.

13. SUCCESSOR

This Agreement may be assigned by the Company to any successor interest to
its business. This Agreement shall bind and inure to the benefit of the
Company's successors and assigns as well.

14. NOTICES

Page 10 of Thirteen
<PAGE>

15. INVALID PROVISIONS

16. AMENDMENT, MODIFICATION OR REVOCATION

17. HEADINGS

The headings in this Agreement are inserted for convenience only and are
not to be considered in construction of the provisions hereof.

18. ENTIRE AGREEMENT

19. ATTORNEYS' FEES

If any legal action is necessary to enforce the terms and conditions of
this Agreement, the prevailing party in such action shall be entitled to recover
all costs of suit and reasonable attorneys' fees as determined by the
arbitrator. The Company shall pay reasonable attorney's fees charged by
Executive's attorney to review this Agreement.

Page 11 of Thirteen
<PAGE>

20. FURTHER ASSURANCES

The parties shall execute such documents and take such other action as is
necessary or appropriate to effectuate the provisions of this Agreement.

21. CONTROLLING LAW

This Agreement shall be governed by the laws of the State of Nevada.

22. WAIVER

23. INDEMNIFICATION

24. PERIODIC REVIEWS

Page 12 of Thirteen
<PAGE>

IN WITNESS WHEREOF, the parties have entered into this Agreement on
July __, 1998.

THE COMPANY: EXECUTIVE:

PENNACO ENERGY, INC.

By:
------------------------------ ---------------------------------
Paul A. Rady, President GLEN C. WARREN, JR.

Page 13 of Thirteen

<PAGE>
SECURED PROMISSORY NOTE

$4,161,750 August 13, 1998

FOR VALUE RECEIVED, the undersigned, PENNACO ENERGY, INC, a Nevada
Corporation ("Payor"), promises to pay to, Venture Capital Sourcing, SA or
holder ("Payee"), the principal sum of Four Million one hundred sixty one
thousand seven hundred and fifty Dollars ($4,161,750), together with interest of
forty one thousand nine hundred and ninety-six dollars ($41,996). This is a
secured promissory note ("Note") secured by Payor's agreement with Payee as more
fully set forth by the terms of a Security Agreement by and between Payor and
Payee dated the 15th day of May 1998 and amended by an agreement between Payor
and Payee dated July 14, 1998 and August 13, 1998, both the original agreement
and said amendments are attached hereto as Exhibit "A." An amount equal to all
principal and interest payments in the aggregate amount of four million two
hundred and three thousand seven hundred and forty-six dollars ($4,203,746)
shall be paid by Payor to Payee in its entirety on September 4, 1998. This
Secured Promissory Note is a rewriting of and takes the place of the Secured
Promissory Note which the Payor executed on July 14, 1998 in favor of the Payee
for the payment of $4,100,000 plus interest (the "July 14, 1998 Note"). This
note is not a valid until the July 14, 1998 Note is cancelled and made
completely invalid by the Payee.

A default ("Event of Default") shall occur on this Note upon (i) Maker's
failure to make the payment required on this Note; (ii) the filing of a petition
in bankruptcy by Maker which is not dismissed within sixty (60) days; or (iii)
the appointment of a receiver for Maker; (iv) an assignment for the benefit of
creditors. In the case of an Event of Default, the Payee shall have the right
to declare the entire principal and accrued but unpaid interest on this Note
immediately due and payable.

In the event of default under this Note which is not cured within thirty
(30) days after a notice of default has been sent in writing to Payor, the terms
and conditions set forth in the Security Agreement shall prevail and Payee shall
be entitled to the benefits thereunder.

Payee shall be entitled to collect a reasonable attorneys' fee from the
Payor, as well as other costs, charges, and expenses reasonably incurred, in
curing any default or attempting collection of the payment due on this Note,
whether or not litigation or any proceeding to enforce this Note is commenced.

This Note may not be prepaid.

If any term or provision of this Note, or any portion of any such term or
provision, shall be held invalid or against public policy, or if the application
of the same to any person or circumstance is held invalid or against public
policy, then, the remainder of this Note (or the remainder of such term or
provision) and the application thereof to other persons or circumstances shall
not be affected thereby and shall remain valid and in full force and effect to
the fullest extent permitted by law.

This Note shall be governed by and construed solely in accordance with the
laws of the State of Nevada.

IN WITNESS WHEREOF, Payor has executed this Promissory Note as of the day
first hereinabove written at San Diego, California.

"PAYOR"
PENNACO ENERGY, INC.

BY:
--------------------------------------------
JEFFREY L. TAYLOR, CHAIRMAN

<PAGE>

SECOND AMENDMENT TO

SECURITY AGREEMENT

THIS AGREEMENT is dated this 13(TH) day of August, 1998, by and between
Pennaco Energy, Inc. a Nevada corporation ("Pennaco"), and Venture Capital
Sourcing, S.A., a corporation ("VCS") is the second amendment to the Security
Agreement entered into by the parties May 15, 1998 (the "May Agreement").

NOW THEREFORE, in consideration of their mutual promises and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree to amend the May Agreement in its entirety
as follows:

RECITALS:

WHEREAS, the parties hereto have entered into that certain Promissory Note
dated August 13, 1998 (the "Note"), to which this Agreement is Exhibit "A"
pursuant to which Pennaco is obligated to pay to VCS principal and interest in
the aggregate of $4,203,746 (the "Obligation"); and

WHEREAS, as security for the Obligation, Pennaco has agreed to grant VCS a
security interest in certain of the mineral interests to which Pennaco is
entitled.

NOW THEREFORE, in consideration of their mutual promises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:

1. GRANT OF SECURITY INTEREST.

To secure payment to VCS by Pennaco of the Obligation, Pennaco hereby
assigns and grants to VCS a security interest in the collateral described in
Paragraph 2 (the "Collateral").

2. THE COLLATERAL.

The Collateral shall consist of (a all the mineral interests to which
Pennaco is entitled pursuant to an agreement entered into with High Plains
Associates, attached hereto and made apart hereof and designated as Exhibit
"A.1" hereto, and an agreement entered into with the Taylor group attached
hereto and made apart hereof and designated as Exhibit "B.1" hereto (b) any
additional properties or sums deriving from the Collateral, which are to be held
as Collateral pursuant to this paragraph; and (c) any and all additional
proceeds of the foregoing Collateral. For purposes of this Agreement, the term
"proceeds" includes whatever is receivable or received when any part of the
Collateral is sold or otherwise disposed of, whether such disposition is
voluntary or involuntary, and includes all rights to payment with respect to the
Collateral. Upon the dissolution of Pennaco, any sums paid with respect to the
Collateral shall be appropriately assigned and delivered to VCS to be held as
part of the Collateral.

-1-
<PAGE>

3. COVENANTS OF PENNACO.

Pennaco hereby agrees, until the Obligation has been fully paid:

(a) To execute and deliver from time to time any endorsements,
assignments and other writings reasonably deemed necessary or appropriate by VCS
to perfect, maintain and protect its security interest in the Collateral;

(b) Not to sell, encumber or otherwise dispose of or transfer
any Collateral, except to VCS and in accordance with the terms of the Agreement;
and

(c) To immediately deliver all Collateral to VCS, as
appropriate, it being understood that until so delivered all Collateral shall be
held by Pennaco in trust for VCS under the terms of this Agreement.

4. RIGHTS UPON DEFAULT.

If Pennaco shall default in the performance of any of his obligations
under the Obligation or this Agreement, VCS may exercise any and all rights with
respect to the Collateral which it may have as a secured creditor under
applicable provisions of the California Uniform Commercial Code or any other
applicable law.

5. FURTHER ACTIONS.

Each party agrees that after the delivery of this Agreement such party
will execute and deliver such further documents and do such further acts and
things as the other party may reasonably request in order to carry out the terms
of this Agreement.

6. ENTIRE AGREEMENT.

This Agreement, together with the Obligation, contains the entire
agreement between the parties, and supersedes all prior agreements,
representations and understandings of the parties, relating to the subject
matter of this Agreement.

7. AMENDMENTS.

No supplement or amendment of this Agreement will be binding unless
executed in writing by both the parties.

8. WAIVERS.

-2-
<PAGE>

Any term or provision of this Agreement may be waived at any time by
the party entitled to its benefit by a written instrument executed by the party
or by a duly authorized officer of the party. No waiver of any of the provision
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether or not similar, nor will any waiver constitute a continuing
waiver.

9. SUCCESSOR AND ASSIGNS.

This Agreement will be binding on, and will inure to the benefit of,
the parties and their respective heirs, legal representatives, successors and
assigns.

10. ATTORNEYS' FEES.

If any legal action or other proceeding is brought in connection with
any of the provisions of this Agreement, the successful or prevailing party will
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which that party
may be entitled.

11. GOVERNING LAW.

All questions with respect to the construction of this Agreement, and
the rights and liabilities of the parties under this Agreement, will be governed
by the laws of the State of California.

12. COUNTERPARTS.

This Agreement may be executed in one or more counterparts, each of
which will be deemed a valid, original agreement, but all of which together will
constitute one and the same instrument.

13. SEVERABILITY.

If any provision of this Agreement is held to be unenforceable or
invalid by any court of competent jurisdiction, the validity and enforceability
of the remaining provisions shall not be affected thereby.

14. NOTICES.

Any notice or the delivery of any item to be delivered by a party
hereto shall be delivered personally, by U.S. mail, return receipt requested, or
by Federal Express, next-day delivery. Any personal delivery made shall be
deemed to have been made upon the execution of a receipt for the item to be
delivered by the party to whom delivery is made. Delivery by U.S. mail or
Federal Express shall be deemed to have been made when delivered by Federal
Express to the party

-3-
<PAGE>

to whom addressed. All such deliveries shall be made to the following
addresses, or such other addresses as the parties may have instructed the
others in accordance with the provisions of this Paragraph:

(a) If to VCS:

Serco Management
65 Main Street
P.O. Box 3463
Road Town, Tortola
British Virgin Islands

(b) If to Pennaco :

Jeffrey L. Taylor
Chairman
1050 17th Street, Suite 700
Denver, CO 80265

-4-
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement, which amends
for the second time the Security Agreement executed on May 15, 1998 between the
parties, as of the first date set forth in the first paragraph.

PENNACO:
Pennaco Energy, Inc.

By:
--------------------------------------
Jeffrey L. Taylor, Chairman

VCS:

Venture Capital Sourcing, S.A.

By: Serco Management

- ------------------------------------------
Authorized Signature

-5-

<PAGE>

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

As an independent public accountant, I hereby consent to the use of my
report (and to all references made to my firm) included in or made a part of
this Form 10-SB.

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

August 5, 1998
Las Vegas, Nevada