##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB x
    
    Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003.
 o
    
    Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from 
to
 Commission file number: 0-32455 Far East Energy Corporation   Nevada
    
    88-0459590(State or Other Jurisdiction of
(Incorporation or Organization)
    
    (I.R.S. Employer
Identification Number)
 400 N. Sam Houston Parkway East, Suite 205, Houston, Texas 77060(Address of Principal Executive Offices) (Zip Code)
 (713) 586-1900(Issuers Telephone Number, Including Area Code)
 Securities registered under Section 12(g) of the Exchange Act: Title of Each ClassCommon Stock ($0.001 Par Value)
 Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x     No o Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB o. The issuers total consolidated revenues for the year ended December 31,
2003, were $19,000. Aggregate market value of the voting and non-voting share of Common Stock
held by non-affiliates was approximately $20,898,000, based on the closing
trading price for the common equity as of March 26, 2004. On March 26, 2004
the number of shares outstanding of the registrants Common Stock, $0.001 par
value, was 56,682,749. Transitional Small Business Disclosure Format: Yes o
    
    No x
 1




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TABLE OF CONTENTS  
 PART I
    
    
    
    
    
    
    
    3Item 1.
    
    Description of Business
    
    3Item 2.
    
    Description of Property
    
    9Item 3.
    
    Legal Proceedings
    
    10Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    10PART II
    
    
    
    
    
    
    
    10Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    10Item 6.
    
    Management's Discussion and Analysis & Plan of Operation
    
    12Item 7.
    
    Financial Statements
    
    21Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    22Item 8a.
    
    Controls and Procedures
    
    22PART III
    
    
    
    
    
    
    
    22Item 9.
    
    Directors & Executive Officers
    
    22Item 10.
    
    Executive Compensation
    
    26Item 11.
    
    Security Ownership of Certain Beneficial Owner And Management and Related Stockholder Matters
    
    29Item 12.
    
    Certain Relationships and Related Transactions
    
    30Item 13.
    
    Exhibits and Reports on Form 8-K
    
    30Item 14.
    
    Principal Accountant Fees and Services
    
    30Index to Exhibits
    
    30CERTIFICATIONS
    
    
    33McElwrath Employment AgreementMontana Merger AgreementSubsidiaries of RegistrantCertification of CEO Under Section 302Certification of CFO Under Section 302Certification Pursuant to 18 U.S.C. 1350Certification Pursuant to 18 U.S.C. 1350
  2




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PART I. 
 ITEM 1. DESCRIPTION OF BUSINESS As used herein, the terms Company, we, our or us refer to Far East
Energy Corporation, a Nevada corporation, and its subsidiaries and
predecessors, unless the context indicates otherwise. Our United States office
is located in Houston, Texas, and we have offices in Beijing and in Kunming,
Yunnan Province of the Peoples Republic of China (PRC). We have been in the development stage, and to date our activities have
mainly included initial organization, capital formation, acquisition of mineral
leases and/or production sharing contracts giving us the right to explore for,
develop, produce and sell oil and gas or coalbed methane, and, notably, we have
now drilled our first three wells in Yunnan to total depth. The drilling
program will continue as described hereinbelow. In October 2003, we drilled
our first well on the Enhong-Laochang coalbed methane block in the Yunnan
Province of the PRC. On January 8, 2004, we spudded our second well on the
Enhong-Laochang Block and the well reached total depth on February 18, 2004.
Our third well in China (the FCY-EH01well) was spudded on March 16, 2004. The
well is located on Far Easts Enhong Block in Yunnan Province near Shang
Sheshui Village. This is the third of five exploration wells which are expected
to be drilled and completed by the early summer of 2004. On January 25, 2002, we entered into a production sharing contract with
the China United Coal Bed Methane Corporation (CUCBM). The PRC has granted
CUCBM the exclusive authority to explore, develop, and produce coalbed methane
in cooperation with foreign enterprises. Our contract with CUCBM gives us
authority to jointly explore, develop, produce and sell coal bed methane (CBM)
gas in and from a total area of 1,072 square kilometers or 265,000 gross acres
(between 643.2 and 1072 net square kilometers or between 159,000 and 265,000
net acres for the Far East Energy share, depending upon the extent to which
CUCBM decides to participate) in the Enhong and Laochang areas of Yunnan
Province, PRC (whose closest cities are Qujing City and Kunming). The
production sharing contract was formally ratified by PRCs Ministry of Commerce
(formerly known as the Ministry of Foreign Trade and Economic Co-operation) on
December 30, 2002. Our contract commits us to drill five (5) exploration wells
and eight (8) pilot exploration wells in Yunnan province during an initial
three-year exploration and production period. Pilot exploration wells refer to
the drilling of wells aimed at evaluating, through pilot production of coalbed
methane, the potential commercial value of coalbed methane in a specific area.
This does not imply the existence of proved reserves. We have the right to
earn a minimum of 60% interest in the joint venture, with CUCBM retaining the
remaining 40%. In the event that CUCBM elects to participate at a level less
than 40%, their interest will be reduced proportionately, increasing our
participating interest. After completion of these exploration and pilot wells,
CUCBM has the right to contribute up to forty percent (40%) of further
expenditures in return for a 40% interest in the project. We have another production sharing contract with CUCBM covering the
Zhaotong area of Yunnan Province (closest city is Zhaotong City), which has not
yet received required government approval. Upon ratification of this contract,
we would have the right to earn a minimum 60% interest in the joint venture,
with CUCBM retaining the remaining 40%. In the event CUCBM elects to
participate at a level less than 40%, their interest will be reduced
proportionately, increasing our participating interest on a total of 200 square
kilometers or 49,000 gross acres (between 120 and 200 net square kilometers or
between 30,000 and 49,000 net acres based on CUCBMs level of participation).
CUCBM notified us on November 11, 3




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2003, that the Zhaotong production sharing contract has not yet been ratified
because the Ministry of Land and Resources of China has not yet received the
reply on the Yunnan Zhaotong project from the local governmental departments in
Zhaotong City. These responses from governmental departments in Zhaotong city
are needed before CUCBM can forward its recommendation for approval to the
Ministry of Commerce. CUCBM stated that it will continue to pursue the early
approval of the Ministry of Commerce to the Contract of Yunnan Zhaotong CBM
project as soon as CUCBM obtains the CBM exploration license of Zhaotong. The
Zhaotong contract specifies that we can commence an exploration program of two
(2) exploratory wells and four (4) pilot wells. If the contract is ratified in
early 2004, we believe that the first exploration well in the Zhaotong Block
can be spudded in late 2004. Our wholly owned subsidiary, Far East Montana, Inc. acquired Newark Valley
Oil & Gas Inc. (Newark), as of December 31, 2002, through a merger which was
completed on January 21, 2003. The original agreement terms of the merger
agreement, which was dated December 31, 2002, concerning payment and fund
raising was amended on June 19, 2003. The merger required that we raise
$2,000,000 in financing on or before June 21, 2003. In the Amended Plan of
Merger Agreement the requirement to raise $2 million was extended to December
31, 2003. The deadline for the raising of $2 million was extended because Far
East appeared unlikely to raise sufficient financing in time to meet the June
21, 2003 deadline. We satisfied this requirement by generating in excess of $5
million in financing through an accredited investors offering that closed on
October 7, 2003. As of December 31, 2003, all obligations related to the
Newark acquisition were satisfied. The aforementioned contingency required that the Company use its best
efforts to secure additional financing in the amount of $2,000,000 within 120
days from the date of closing (December 31, 2002). In the event such financing
was not secured within 120 days of Closing, the Company would have been in
default of this Agreement and the transaction would have been subject to
rescission. In the event of rescission, the Company would have transferred all
of the outstanding equity interests in Newark to North American. North American
would have returned to the company the 1,600,000 restricted common shares of
the Company. However, North American would have retained any monies tendered
pursuant to the Agreement. Due to the significance and uncertainty of this contingency the effect of
the transaction was not recorded by the Company until the contingency was
resolved in September of 2003. The results of operations of Newark have been
included in the consolidated financial statements from September 2003 forward. The aggregate acquisition price was $2,409,000, which included cash in the
amount of $600,000, assumption of liabilities of $375,000, ongoing payment of
annual lease expense and legal fees, and 1,600,000 share of the companys
common stock valued at $1,231,000. The value of the restricted stock was
determined based on the market price of the shares on the date of the
agreement. As a result of the merger with Newark, we now own undeveloped oil, gas and
mineral rights and interests in approximately 147,535.10 net acres (165,000
gross acres) in eastern Montana (Phillips and Valley Counties, Montana) and are
in the process of developing plans for an exploratory drilling program which it
is hoped will demonstrate the existence of gas in commercial quantities.
Between January 28, 2003 and September 30, 2003, the Company acquired an
additional 1,643 acres of oil and gas leases in eastern Montana in exchange
for our consideration of $ 15,690. These leases are contiguous or nearly
contiguous with the leases 4




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already acquired in the Newark Valley Oil & Gas merger. Revenue is not
expected to be generated from the Montana venture until 2005. Acquired acreage
is subject to royalty and overriding royalty interest ranging from 14 to 18%. In addition to the two production sharing contracts with CUCBM, on March
19, 2003, we entered into a Memorandum of Understanding (MOU) with a Conoco
Phillips subsidiary, Phillips China Inc., which sets forth the terms and
conditions of an agreement for our acquisition of a net undivided forty percent
(40%) of Phillips seventy percent (70%) interest in both the Shouyang PSC
(near Taiyuan City) and the Qinnan PSC (near Jincheng and Qinshui). On July
17, 2003, we signed two Farmout Agreements with Phillips on the Qinnan and
Shouyang CBM blocks in Shanxi Province, P.R.C. and also signed an Assignment
Agreement on the two blocks. These agreements formalized our acquisition of an
undivided forty percent (40%) working interest from Phillips (70%) interest,
with CUCBM retaining the remaining thirty percent (30%). The Assignment
Agreement and appropriate amendments to the PSCs, substituting Far East Energy
for Phillips China as the principal party and Operator was approved by CUCBM on
March 15, 2004 and final ratification was received from the PRCs Ministry of
Commerce on March 22, 2004. The Farmout Agreements require that we fracture stimulate and production
test three exploration wells that were drilled by Phillips China, and pay 100%
of the cost for these tests (we will later recover the other working interest
participants share of these costs if they elect to participate after the
completion of Phase 2 as described below). Upon the satisfactory completion of
the fracing and testing, which we expect to begin in June or July now that the
Ministry of Commerce has provided ratification, we have the option to extend
into the second phase of exploration by drilling three (3) additional wells.
We estimate the cost of drilling these wells to approximate $1.5 million if the
wells are vertical wells and $3 million if these wells are drilled
horizontally. Our best estimate for the cost of the average horizontal well,
assuming we eventually move into actual development, is about $800,000 per
well; but we have estimated the cost of these first three horizontal wells at
$1 million apiece to cover contingencies and problems that may arise as we
first employ horizontal technology in these fields. In the event we decide to
extend into the second phase, we will be responsible for 100% of the costs of
exploration and the drilling of three (3) second phase wells. In the event we
successfully complete the second phase, Phillips China will have the option to
elect to either retain its net undivided thirty percent (30%) participating
interest, or take a five percent (5%) overriding royalty interest (ORRI) on
the contractors overall Participating Interest share under the PSCs. The ORRI
will be capped at five percent (5%) of the current contractors seventy percent
(70%) Participating Interest, or a three and a half percent (3.5%) ORRI on a
one hundred percent (100%) interest basis. After the second phase, CUCBM will
also have the option to elect to participate as a working interest partner for
anywhere from a net undivided participating interest of zero to thirty percent
(30%). Under the terms of the Farmout Agreement, within thirty (30) days of
final approval of the Assignment by the Ministry of Commerce, we must post a
$1,000,000 bank guarantee or surety bond to act as a work performance guarantee
covering all aspects of the evaluation and work program to test the three
existing wells, which the Company is attempting to obtain now. We estimate the
cost of a surety bond to be in the range of $200,000. Alternatively, the
Company may place $1,000,000 in an interest-bearing escrow account in order to
avoid the unrecoverable expense of a surety bond. To generate revenue in China prior to the point at which production
reaches pipeline quantities, we may elect to construct liquefied natural gas
(LNG) facilities on our properties. However, we believe an LNG company may
decide to construct such facilities at their own cost. 5




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This would allow gas to be produced and sold in the period before we
achieve production in sufficient quantities to justify constructing short
connecting pipelines to the Shangjing II and West-East pipelines in the Shanxi
Province, or before a pipeline or other offtake facility is operational in the
Yunnan Province. A 100 ton/day LNG facility, which would absorb approximately
5 million cubic feet of gas per day, would cost $10-15 million to construct. A
1000 LNG ton/day facility capable of absorbing 50 million cubic feet of gas per
day would cost approximately $75 million. Again, while we may opt to construct
LNG facilities, it is quite possible that an LNG concern may decide to
construct such facilities near our properties at their own cost. We may
construct pipelines to move gas from our fields to either municipalities or
other pipelines. We estimate the cost to construct a pipeline in the Enhong
and Laochang areas to be approximately $28 million. Our farmout agreement from
ConocoPhillips provides us with rights to two separate blocks; the Shouyang
block, approximately 40 km south of the Shangjing II Pipeline to Beijing, and
the Qinnan block, approximately 10 km north of the West-East Pipeline to
Shanghai. We estimate the cost to construct pipeline connections from the
Shouyang and Qinnan blocks to the Shangjing II and West-East Pipelines,
respectively, to be approximate $63 million. We are delaying any decisions
regarding the construction of LNG facilities or pipelines until such time as
significant gas volumes are achieved. We believe this delay may allow us to
avoid construction costs to the extent other entities (attracted by our gas),
have constructed, are constructing or are planning to construct, such
facilities. Production of Coalbed Methane Gas Our primary focus is on the development of coalbed methane gas in China.
For reference purposes, it is noteworthy that eight to ten percent of all
current natural gas production in the United States comes from coal beds, or
underground coal seams. Natural gas is basically methane gas. In fact, coal
can contain 3-6 times the natural gas per ton of rock that a conventional
natural gas reservoir contains assuming that both reservoirs have comparable
pressures. Coalbed methane exploration and production involves drilling into a
known coal deposit and extracting the gas that is contained in the coal. Coal is formed from ancient environments rich in plant life such as
swamps, wetlands and marshes. Hundreds of millions of years ago, massive earth
movements and geologic events slowly covered up these environments. During the
time (millions of years) when the coal is formed (coalification), large amounts
of gas are also generated and trapped within the internal surfaces (pores) of
the coal. Many coal beds are at relatively shallow depths (less than 1,500
meters). Water permeates coal beds and creates enough pressure to seal the gas
within the pores. Drilling into the coal and dewatering (pumping out) the
coalbed allows the gas to escape and be gathered. Most coal beds contain gas. The gas adheres to the microscopic surfaces
of the coal. This is called adsorption (meaning on the surface, not to be
confused with absorption, which means to be inside of something). On a
molecular level, the gas molecules attach to the coals internal microscopic
pores. Since coal is also basically carbon, the attraction of the gas to the
solid is very natural. Even after a coalbed has been identified as containing a commercial
quantity of gas, a remaining crucial factor is to be able to retrieve the gas
from the coal. This requires that the coal have sufficient permeability, which
means that the gas can migrate, or flow, through the coal to the gas well that
has entered the coal seam. Permeability is based upon how many fractures, or 6




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cleats, the coal has and how close they are to each other. The more
cleats coal has, the better the coals permeability. Gas within coal beds becomes mobile primarily through the flow mechanism
of the coal, which is from the cleats. Gas is stored in the micropores of the
coal. When the water in the coal seam is produced, the pressure in the coal
cleat is reduced; gas is released and diffuses into the cleats. Gas flows to
the well bore through the cleat system as well as any of the other cracks,
crevices and fractures that the coal bed has. The looser the particles and the
more spaces, fractures, cracks or air space a solid has the easier it is for
something to flow through it. Hence if a reservoir has a high permeability,
the better the production will be. Coal seams have many different characteristics. You could have an
unacceptably low permeability seam, but with enough thickness, the otherwise
deficient permeability would be overcome. In this case, the gas would flow out
slowly, but because the coal seam is thick, more of the slow flowing gas would
be produced since you have a thick area from which to collect the gas. Coal Ranking Methane or natural gas is contained in all ranks of coal. The most gas is
contained in the highest rank coal, which is called anthracite. Unfortunately
anthracite has very low permeability. Semi-anthracite coal typically has
higher quantities of gas than anthracite coal, but may still contain
significant cleats (fractures) as well, making it more permeable. Far East
Energys ConocoPhillips project is semi-anthracite coal that has a favorable
cleat structure, which should make the permeability favorable. The next lesser coal rank is bituminous coal that contains less gas per
ton but usually has a good cleat structure, which allows for better flow or
permeability of the gas through the coal. Far Easts other major projects,
Enhong and Laochang have bituminous and semi-anthracite coal. Isotherm Tests Isotherm tests are lab tests that identify how much gas can be released
from a ton of coal at various temperature and pressure levels. These tests
provide important information on the saturation level of the coal. All three
of Far Easts projects have produced favorable isotherm tests meaning
saturation levels are favorable. In fact, gas content from the Shanxi Project
on the Qinnan and Shouyang blocks in China compares favorably with that of
typical coal from the San Juan Basin and Black Warrior Basin  both prolific
U.S. CBM basins. Comparable Isotherm Tests Basin
    
    Cu. Ft. per Ton
    
    DepthSan Juan (New Mexico)
    
    
    300-700
    
    
    
    1900'Black Warrior (Alabama)
    
    
    250-500
    
    
    
    2,000'Far Easts Shanxi Project
    
    
    400-1000
    
    
    
    1,800'Far Easts Yunnan Enhong-Laochang Project
    
    
    200-500
    
    
    
    2,000'
 7




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Dewatering To produce methane from coalbeds, water must be removed from the coal
seams to decrease reservoir pressure and release the gas. After desorption
(from the coal matrix, the gas diffuses through the coalbeds cleats and
fractures toward the well bore. Substantial dewatering of the coalbed is
required initially. Water production declines as methane gas production
increases. Produced water disposal presents major economic and environmental
challenges for operators. These costs alone can determine the feasibility of
coalbed methane projects. Horizontal Drilling A potentially significant development is the ability to engage in
horizontal drilling. This would allow a well bore to be in contact with
hundreds of feet of coal since the drill stem, when it hits the coal seam, is
redirected from a downward angle to a horizontal plane and simply follows the
coal bed for hundreds of feet (sometimes 500 feet) in various directions. This
access would change the dynamics of the gas recovery dramatically. In a normal
well you would have to drill an 8-inch hole contacting and hollowing out a coal
seam 10 feet thick. With horizontal drilling, you could go directly along the
coal seam for hundreds of feet or more in many directions, increasing your
contact area thereby increasing efficiency by 10-20 times. Of course,
horizontal wells are more costly than traditional wells, but offer
significantly more potential in reduced surface facilities and increased
production rate. The benefits of horizontal drilling for coalbed methane are far more
profound than for conventional oil and gas wells because of the greater
exposure of the coalface to flow. This allows significantly more gas
production on a daily basis than can be achieved with conventional vertical
stimulation techniques. We will consider utilizing horizontal drilling if it
successfully concludes the exploratory phases of our contracts. Competition The Company will be operating in the competitive area of natural gas
exploration, development and production in China and Montana. The Companys
competitors include major integrated oil and gas companies and substantial
independent energy companies, many of which possess greater financial and other
resources than the Company. We conduct our operations in the competitive area
of natural gas exploration, development and production in China and Montana. Regulations The Companys operations will be subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment
in connection with drilling and production activities, limit or prohibit
drilling activities on certain lands lying within wilderness, wetlands and
other protected areas, and impose substantial liabilities for any pollution
resulting from the Companys operations. The cost of complying with these
environmental laws is expected to be $500 per well per year. 8




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Market for Gas In 2003 China became the worlds second largest user of petroleum (behind
the United States). With the vast natural resources, China is also becoming one
of the largest importers of oil and gas in the world. Demand is project to
outpace the rest of the world over the next decade. Our competitors include major integrated oil and gas companies and
substantial independent energy companies, many of which possess greater
financial and other resources. Any sales we secure could be adversely affected
by a sustained economic recession in China. As our operations and end user
markets are primarily in China, a sustained economic recession could result in
lower demand or lower prices for the natural gas to be produced by the Company.
However, with government mandates requiring reduced dependency on coal and
increased usage of natural gas, demand appears likely to grow steadily, at
least in the near term. Employees As of March 26, 2004, the Company had a total of sixteen (16) employees,
all of which were employed full-time. 
 ITEM 2. DESCRIPTION OF PROPERTY The Company office is located at 400 N. Sam Houston Parkway East, Suite
205, Houston, Texas 77060. The office, which consists of approximately 2,200
square feet, is leased through May 31, 2007 at a cost of $2900 per month. Undeveloped Lease Acreage As of December 31, 2003, we owned leasehold interests (or, in the case of
Chinese properties, had rights under production sharing contracts) covering the
following undeveloped lease acreage. United States: Gross Acres
    
    Net AcresPhillips & Valley Counties, Montana
    
    
    167,153
    
    
    
    149,419
 China: Net Acres (1)Gross Acres
    
    Maximum
    
    MinimumEnhong and Laochang Areas,
    
    
    265,000
    
    
    
    265,000
    
    
    
    159,000Yunnan ProvinceZhaotong Area, Yunnan Province (2)
    
    
    49,000
    
    
    
    49,000
    
    
    
    30,000Qinnan and Shouyang Blocks,
Shanxi Province
    
    
    1,058,000
    
    
    
    1,058,000
    
    
    
    423,200
 (1) Our rights to develop properties pursuant to production sharing contracts
on the above listed Chinese properties are subject to the right of CUCBM to
elect to participate in development. If they elect to participate, CUCBM, in
its discretion, may proportionally reduce our net acreage from the maximum
amount indicated above to the minimum levels shown. If 9




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they elect not to
participate at all (in Enhong, Laochang, and Zhaotong, CUCBM can elect to
participate at anywhere from 0 to 40%, and in Qinnan and Shouyang, anywhere
from 0 to 30%), our net acreage levels will be at the maximum shown above. (2) The Zhaotong Area contract has not yet been ratified by CUCBM, and if it is
not ratified we will have no right to develop this acreage. 
 ITEM 3. LEGAL PROCEEDINGS Jawarahlal Gondi, a director of the Company, has filed a claim against the
Company for unpaid compensation and expenses and an unpaid promissory note
incurred during 2003. The Company has denied his claims for compensation and
on the note, which total approximately $139,000. It has acknowledged some of
the expense claims and has paid them in part. At December 31, 2003, the unpaid
expense claims amounted to approximately $71,000, and the Company recorded a
liability of $71,000 on its financial statements for the claimed expenses at
December 31, 2003. After December 31, 2003, approximately $14,500 in expense
claims were paid, and the Company has acknowledged owing Mr. Gondi
approximately $44,000 in additional expenses claims. To the Companys
knowledge, as of the date of this report, no legal action has been filed
against the Company in respect of these claims. The Company has no knowledge of any other pending or threatened material
litigation, settlement of litigation, or other material claim involving the
Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Companys security
holders during the fourth quarter of 2003 that have not otherwise been
disclosed. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the OTC Bulletin Board under the symbol
FEEC. The table below sets forth the high and low sales prices for the
Companys common stock for 2002 and 2003. The quotations below reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions. All figures reflect an eighteen-for-one
(18-for-1) forward stock split that became effective on January 1, 2002. Year
    
    Quarter
    
    High
    
    Low2003
    
    
    First
    
    $
    4.30
    
    
    $
    2.80Second
    
    $
    2.70
    
    
    $
    0.40Third
    
    $
    2.34
    
    
    $
    0.69Fourth
    
    $
    3.62
    
    
    $
    1.352002
    
    
    First *
    
    $
    3.95
    
    
    $
    2.50Second
    
    $
    4.49
    
    
    $
    3.15Third
    
    $
    4.52
    
    
    $
    3.19Fourth
    
    $
    4.60
    
    
    $
    3.60
 10




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*Trading in our common stock on the OTC BB did not begin until
approximately January 31, 2002. Shareholders A total of 56,682,749 shares of common stock were outstanding as of March
26, 2004, held by approximately 860 beneficial owners. Dividends on the Common Stock We have never declared a cash dividend on our common stock and do not
anticipate the payment of future dividends. There are no restrictions that
limit our ability to pay dividends on our common stock other than those
generally imposed by applicable state law. Recent Sales of Unregistered Securities From April 30, 2003 through October 7, 2003, the Company effected private
placement sales of 8,935,960 investment units at $0.65 per unit to
approximately ninety-six (96) accredited investors, of whom twelve (12) reside
in the United States or are U.S. citizens. Each investment unit consists of
one share of common stock and a warrant to purchase one share of Common stock
at $1.00. The Warrants may be exercised immediately after issuance until the
earlier of (i) two (2) years from the date of the Warrant Agreement, or (ii)
the date upon which the Warrants are redeemed by the Company (which may occur
at $.01 per share in the event the Company provides at least 30 days prior
written notice, the average closing price of the common stock for the 15 days
prior to such written notice exceeds $2.00, and the Company limits its
redemption to 25% of the Warrant holders total purchasable shares per month). Total proceeds from the sale of these securities were $5,908,374. This
private placement was made pursuant to exemptions from registration under
Sections 3(b) and 4(2) of the Securities Act of 1933. A commission of ten
percent (10%) was paid to the brokers who introduced the Company to these
accredited investors, all of whom have had prior business relations with their
broker. Net of fees and sales commissions and through the close of the
offering on October 7, 2003, we received approximately $5,060,113. Since the
close of this offering on October 7, 2003, and subsequent to December 31, 2003,
we issued to forty-eight persons an aggregate of 1,637,964 shares of common
stock upon the exercise of warrants granted in the offering, upon our receipt
of an aggregate exercise price of $ 1,637,964. Subsequent to December 31, 2003 the Company initiated redemption of 25% of
warrants issued in the offering that closed October 7, 2003 pursuant to the
warrant agreement. The majority of the warrants exercised were in response to
this warrant call. On January 9, 2003, the Company sold 60,000 shares of its common stock at
$2.50 per share to one (1) offshore-accredited investor for total offering
proceeds of $150,000. After payment of a ten percent (10%) commission, or
$15,000, to the broker who introduced this offshore person to the Company, net
proceeds were $135,000. This sale was made pursuant to exemptions from
registration under the Securities Act of 1933 (the Act), including but not
limited to Sections 3(b) or 4(2). 11




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATION Forward-looking Information This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, should,
expects, plans, anticipates, believes, estimates, predicts,
potential or continue or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. There are a number of factors that could cause our
actual results to differ materially from those indicated by such
forward-looking statements. Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such forward-looking
statements. We are under no duty to update any of the forward- looking
statements after the date of this information statement to conform such
statements to actual results. The foregoing managements discussion and
analysis should be read in conjunction with our financial statements and the
notes herein. 2004 Plan of Operation Yunnan Province, China We spudded our first well on the Enhong-Laochang coalbed methane block in
Yunnan Province on October 26th, 2003. The FCY-LC01 reached total depth of 825
meters (2,722 feet) on November 30, 2003. A total of 15 mineable coal seams
were penetrated during the drilling of the well, with a total thickness of
29.40 meters (97 feet), which we consider to be excellent. The coring of the
coal samples showed a recovery rate of 94.8%. In addition, the drilling
revealed four targeted major coal seams with a total thickness of 16.30 meters
(54 feet), all within an interval of about 110 meters (363 feet), which we
believe are favorable for fracturing and production of CBM. Testing of 18
desorption samples from the well resulted in gas content estimates of
approximate 650 cubic feet per ton of coal. On February 18, 2004, we concluded drilling our second well in the
Enhong-Laochang Block and began conducting desorption testing. Total depth of
this second well reached 420 meters (1344 feet), penetrating 15 coal seams with
a thickness of 16.7 meters (53.4 feet). The total thickness of the coal seams
targeted for potential production was 6.6 meters with a recovery rate of 70%.
Estimated gas content, based on preliminary desorption results is approximately
10 cubic meters per ton of coal, or about 350 cubic feet per ton of coal. Despite the strong results from these first wells we still cannot provide
assurances that commercial viability will be achieved. Profitable production
from this well is subject to the following risks, among others:  
    
    Two CBM wells cannot produce enough gas to achieve commercially
viability. We must complete several more CBM wells in near proximity
to each other in order to make it feasible to begin production from any
of them. 12




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
    
    No gas pipeline, LNG plant, or other offtake candidate currently
exists to take gas from these wells, and it is not likely that any such
facilities will be built until favorable results are obtained from
several more wells.
    
    Actual production may vary materially from preliminary test
results. Actual production from the well may be at recovery rates and
gas quality materially worse than our first indications. Our third well in China (the FCY-EH01well) was spudded on March 16, 2004.
The well is located on Far Easts Enhong Block in Yunnan Province near Shang
Sheshui Village. This is the third of five exploration wells that are expected
to be drilled and completed by the early summer of 2004. Between March and May 2004, we expect to select the sites for the two
remaining required exploration wells and begin drilling them. If these wells
are traditional vertical wells, we anticipate that by the end of the summer
2004, all will be undergoing, or will have undergone, production testing. In
that case, full associated costs for the Enhong-Laochang project through the
third quarter of 2004 (including drilling and testing the first 5 wells, plus
associated CUCBM expenses) are expected to approximate $3.5 million. If it is
determined to drill these wells horizontally, then drilling operations may be
delayed until November or December 2004, provided weather will permit the rig
movement to these locations. In the event we pursue horizontal wells, we
anticipate that by the end of the Fall of 2005, the first five wells will
either be in the process of, or already completed, production testing. We
expect to fund these activities with our existing capital, the exercise of
warrants issued to investors in our recently completed offering, and funds to
be raised from the offering being conducted outside the US in the first half of
2004. Shanxi Province, China We have entered into farmout agreements and an assignment agreement with
Phillips China, Inc., a subsidiary of Conoco Phillips, Inc., in which we agreed
to acquire a net undivided 40% of Phillips Chinas 70% interest in two
production sharing contracts in Shanxi Province. As currently structured, we
have a 40% interest in the projects, Phillips China has a 30% interest and
CUCBM has a 30% interest. The Assignment Agreement and appropriate amendments
to the PSCs substituting Far East Energy for Phillips China as the principal
party and operator was approved by CUCBM on March 15, 2004 and final
ratification was granted by the PRCs Ministry of Commerce on March 22, 2004. The agreements obligate us, at our expense, to fracture stimulate and
production test three exploration wells that were drilled by Phillips China.
We anticipate the cost of these efforts to be $300,000 per well. We expect to
begin fracing and testing no later than late summer of 2004. If testing proves
satisfactory, we have the option to give notice to extend into the second phase
of exploration by drilling three (3) additional wells, also at our expense. If
we successfully complete the second phase, Phillips China will have the option
to elect to either retain its net undivided thirty percent (30%) participating
interest, or take an overriding royalty interest which will be capped at 3.5%
of the total revenue interest. In the first nine months of 2004, we expect to spend approximately
$1,800,000 to perform the required tests, cover costs related to CUCBM salary
fees, training fees, exploration fees and assistance fees required by the
production sharing contracts for these projects, and to pay ConocoPhillips
$76,052 for CBM equipment and materials associated with the project. 13




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If the test results for the three existing wells are favorable, we expect
that approximately $7.5 million will be required to drill and test the next
seven wells on these properties. It is possible that these funds could be
utilized as early as the last half of 2004. This anticipates that most, if not
all, of these wells will be horizontal wells, and does include the cost of
fracing and testing as well as drilling. Our agreements with ConocoPhillips require us to post a $1,000,000 bank
guarantee or surety bond within 30 days of Ministry of Commerce approval, to
guarantee performance of the evaluation and work program to test the three
existing wells. We estimate that securing this surety bond will cost between
$150,000-250,000, although we may elect or have to place $1 million into escrow
to satisfy this bond. An additional $900,000 bond will be required if we enter
the second drilling phase. The cost of the additional bond is expected to be
similar to the first bond. We have the option to escrow the full amount of
each required guarantee in lieu of a bond. Required funding for these
activities is expected to come from a combination of existing capital, the
exercise of warrants issued to investors in our recently completed offering,
and funds to be raised in outside the US. China Pipeline Access In the Qinnan Block the West-East pipeline has the capacity of 1,000
MMcfpd. The Shanjing II pipeline is a 40 line which would also have a 1,000
MMcfpd capacity and will run just north of our Shouyang Block. In the Qinnan
and Shouyang areas we estimate that we will eventually expend approximately $63
million for two short connecting pipelines with 850 MMcfpd of capacity to the
Shanjing II and West-East pipelines (about 30 miles in total for the two
connecting pipelines). In the Yunnan area we have included a cost of $28 million for a 30-mile
pipeline with a capacity of 350 MMcfpd. At the present time there are no
pipelines to move gas for any great distance in the Yunnan Province, and gas
will have to be sold to the local communities. Gas sales in these China blocks can also be achieved through development
of LNG. A 100-ton per day LNG plant will cost about $10 million to develop and
take about 2 years for construction. A 1000-ton per day LNG plant would cost
about $75 million with construction time close to 2 years. These costs may be
carried by an LNG company that would build the plants for the gas. It is very
possible that first gas sales from our China property will be through the
development of LNG plants close to our property. Eastern Montana Through our wholly owned subsidiary Newark Valley Oil & Gas, Inc., we are
developing plans for an exploratory drilling program on our Montana leases,
which we hope will demonstrate the existence of gas in commercial quantities.
However, our first priority is to complete our exploration obligations in China
because our properties in China clearly represent our greatest opportunity for
strong return on investment. We expect to expend approximately $250,000 in
the first half of 2004 to pay lease rentals in Montana and to conduct the
necessary evaluations and planning for a drilling program. These funds will
come from existing capital and/or the exercise of warrants issued in a
financing concluded in October 2003. The projected drilling program for China
(Yunnan and Shanxi) outlined above is anticipated to be financed through
funding generated through a current offering being made outside the US, plus
cash-on-hand and the exercise of warrants issued to investors in our recently
completed offering. Should 14




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we succeed in raising more than $8 million in a current offering, the excess
above $8 million will be applied primarily to increased activities in Montana
and some enhancements to our drilling program in China. Specifically, in
Montana, should such funds be available, we would expend between $1.5 and $2
million to drill ten shallow wells as well as stimulate and construct a
gathering system. Assuming good results for the first ten well program, we may
then proceed to drill an additional 20 to 30 wells in 2005 to evaluate the
potential of constructing a pipeline to gain greater access to gas markets on
the Northern Border Pipeline. The cost of constructing a pipeline is estimated
at $5 to $6 million. Continued development of this property could accelerate
once a pipeline is constructed and reach a pace of 50 to 75 wells per year for
a period of four to five years, at a cost of $8.5 to $12.7 million per year. Montana Pipeline Access We can get into the Bitter Creek Gathering System which has a capacity of
about 2,000 Mcfpd at the present time. If development were to continue and
Bitter Creek were unable to move all the available FEEC gas it is possible to
lay a 8 to 10 line to Northern Border Pipeline which is approx 25 to 30 miles
north of our acreage at a cost of about $4 to $6 million. Capital Commitments, Resources and Liquidity We believe that we have sufficient cash to fund operating needs and
financial obligations through the end of the second quarter of 2004. We
anticipate incurring approximately $4 to 5 million in exploration and
development expenses in the first half of 2004. This figure could be as high as
$6 million if we elect to post cash reserves in lieu of performance bonds as
required by the ConocoPhillips agreements in Shanxi (See, 2004 Plan of
Operation  Shanxi Province, China). Our ability to continue as a going concern depends on our ability to raise
substantial funds for our development activities and to fund general and
operating expenses. We do not expect to receive significant revenues from
operations in China until at least late 2006. If we elect to pursue a drilling
program in Montana in the last half of 2004, we could generate revenues during
2005, although we have not resolved to pursue drilling in Montana as of April
1, 2004. To generate revenue in China, we may need to construct a liquefied
natural gas (LNG) facility in Yunnan, and in Shanxi we will need to construct
short pipelines to connect to the Shangjing II and West-East Pipelines. These
facilities, their potential cost, and the possibility that other parties may
construct LNG facilities is set forth above in our Description of Business. We are currently seeking to raise approximately $16 to $20 million in an
equity offering outside the US. The offering is being made in reliance on the
exemption from registration requirements of the Securities Act contained in
Regulation S promulgated by the Securities and Exchange Commission. If this
offering is fully subscribed, management believes that we will meet all of our
contractual obligations in China and Montana for 2004, and also be able to
undertake a drilling program much more robust than required by the minimal
obligations of our PSCs. We project that such a program would include:  
    
    Drill up to twelve more exploratory wells on the Enhong and
Laochang blocks in Yunnan, in addition to the well drilled in 2003;
    
    Frac and test the three existing wells in Shanxi as provided in the
agreements with Phillips China; 15




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
    
    Drill and test up to seven additional exploration wells in Shanxi; and
    
    Drill and test up to twenty wells and construct a gathering system in Montana. We estimate the total costs for the above activities inclusive of our
contractual minimum obligations in Yunnan and Shanxi Provinces, China, and in
Montana, and for general and administrative expenses, will be from $15 to $30
million. Results of Operation The following discussion should be read in conjunction with the audited
financial statements and notes thereto included in the Companys annual report
on Form 10-KSB for the fiscal year ended December 31, 2002; and should further
be read in conjunction with the financial statements included in this report.
Comparisons made between reporting periods herein are for the year ended
December 31, 2003 as compared to the year ended December 31, 2002. Year Ended December 31, 2003 Compared To Year Ended December 31, 2002 The Company had no operating revenue for the year ended December 31, 2003
and no revenue for the same period in 2002 The Companys total expenses for
the year ended December 31, 2003 increased by 70% to $3,665,000 as compared to
$2,144,000 for the same period in 2002. The expenses we incurred in 2003 as
compared to 2002 are set forth in the table below. Percentage increaseExpenses *
    
    2003
    
    2002
    
    (+) or decrease (-)Geologic & Engineering Services
    
    
    179,000
    
    
    
    380,000
    
    
    
    (-) 53%Other Consulting &
Professional Services
    
    
    235,000
    
    
    
    296,000
    
    
    
    (-) 21%Compensation
    
    
    829,000
    
    
    
    596,000
    
    
    
    (+) 39%Travel
    
    
    334,000
    
    
    
    575,000
    
    
    
    (-) 42%Legal & Accounting
    
    
    411,000
    
    
    
    66,000
    
    
    
    (+) 522%General & Administrative
    
    
    667,000
    
    
    
    231,000
    
    
    
    (+) 188%Total
    
    $
    3,665,000
    
    
    $
    2,144,000
    
    
    
    (+) 70%
 * Note that these expenses may not represent all actual expenditures in the
above categories as a result of our ability to capitalize certain expenditures. Geologic and engineering services decreased by approximately $201,000 or
53% from $380,000 in 2002. The Company spudded its first exploratory well in
2003 and capitalized related geologic and engineering expenses of approximately
$135,000. Additionally, the Company reduced its dependence out outside
consultants and employed in-house geologists. Other consulting and professional services decreased by approximately
$61,000 or 21% from $296,000 in 2002 due to increased dependence on employees
and a related reduction in monthly retainer fees paid for fundraising. Compensation increased approximately $233,000 or 39% due to hiring certain
individuals who provided consulting services in 2002 and also due to severance
expenses resulting from changes in senior management during 2003. Travel costs decreased approximately $241,000 or 42% from $575,000 in
2002. During 2002 the Company incurred significantly more overseas travel by
US personnel as management 16




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and consultants pursued several potential foreign concessions and actively
promoted investment in the Company. During 2003 travel costs decreased as the
Company focused on planning a development program of concessions won during
2002. Legal and accounting expenses increased approximately $345,000 or 522%
from $66,000 in 2002. During 2002, approximately $90,000 was capitalized as
acquisition costs of properties and foreign concessions. The increase in the
Companys planning and development of properties and expanded operations during
2003 increased the professional fees required to comply with SEC reporting
requirements. Further costs were incurred to address the SECs investigation
regarding ownership of the Companys stock, to respond to related SEC subpoenas
and to address other ongoing legal matters related to the threatened litigation
discussed elsewhere within this 10K-SB. Finally, the Company incurred costs
related to its private placement offering of stock to investors outside of the
United States. General and administrative expense increased approximately $436,000 or
188% from $231,000 in 2002. Included in this increase is $248,000 for
assistance, training and professional fees paid to CUCBM pursuant to the
production sharing contracts ratified on December 31, 2002. Additionally, the
Company temporarily engaged management and accounting personnel on a contract
basis. Finally, the Company incurred increased overhead expenditures as it
established and expanded operations in China. These increased expenses resulted in our operating loss increasing to $
3,721,000 for the year ended December 31, 2003, as compared to $2,130,000 for
the same period of 2002. As is the case with our increased expenses, our
increased operating loss is also attributable to our increased efforts to
explore, develop, extract and sell coalbed methane gas in China. Liquidity and Capital Resources Year Ended December 31, 2003 Compared to Year Ended December 31, 2002. As of December 31, 2003, our primary source of liquidity was from sales of
8,935,960 investment units at $0.65 per unit to a group of accredited investors
which resulted in our net proceeds of $5,060,113. Although there was a net loss from our operating activities, our cash
resources increased. Net cash provided from financing activities increased to
$5,416,000 for the year ended December 31, 2003 from $3,052,000 for the same
period in 2002. Our current cash position is expected to satisfy our operating needs and
financial obligations through mid-2004. We anticipate incurring expenses of
approximately $2 million during the first half of 2004 associated with
exploration and development activities. It is anticipated that significant
equipment will be purchased. Additionally in the second quarter of 2004, we
expect to (i) provide a $1,000,000 surety bond to ConocoPhillips in connection
with the joint exploration and development by the Company and ConocoPhillips of
coalbed methane projects in the Shanxi Province in China as well as (ii) incur
expenses of approximately $250,000 for the Montana leases. We intend to continue financing efforts to support our current and
proposed business operations in China and Montana. The ability of the Company
to continue as a going concern is dependent upon its ability to raise
substantial funds for use in development activities, and upon 17




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the success of the Companys planned exploration and development activities.
Since there can be no guarantee of future fundraising success, and since the
success of exploratory drilling can never, by definition, be guaranteed, it
must be stated that there is substantial doubt about the Companys ability to
continue as a going concern. However, management believes that the Company
will continue to be successful in raising the funds necessary to explore for
gas and, assuming success in those exploratory efforts, to raise the funds
necessary for production and development. Management believes that, in the near
term, the Company will be able to raise funds sufficient to assure satisfaction
of its operating capital needs and financial obligations through December 31,
2004. These funds are anticipated to be raised through a combination of the
exercise of warrants issued to investors in conjunction with the recently
completed private offering and an additional accredited investors offering in
the first quarter of 2004 being conducted outside the US. U.S. Securities and Exchange Commission Trading Investigation In December 2003, we learned that the Company is the subject of an
investigation by the U.S. Securities and Exchange Commission. We understand
that the Commission is investigating whether anyone has issued false or
misleading statements in an attempt to manipulate the price of our common
stock, whether anyone has profited from selling stock at artificially high
prices due to the manipulative statements, and whether any individual or group
has failed to file ownership reports with the Commission as required for 10% or
more stockholders under Section 16 of the Securities Exchange Act of 1934 or
failed to file ownership reports with the Commission as required for 5% or more
stockholders under Section 13 of the Securities Exchange Act of 1934.
Management does not know of any acquisitions in excess of 5% of its outstanding
shares, except for those described in previous 13D filings with the SEC. We
have supplied information to the Commission in response to their information
requests and intend to cooperate with their investigation. We do not know what
the outcome of their investigation may be. The Exchange Act and SEC rules require that a person or group of persons
who acquire more than 5% of a class of equity securities that are registered
under the Exchange Act must report their holdings in a Schedule 13D filing with
the SEC within 10 days after they become 5% shareholders, and must thereafter
report changes in their ownership of the securities. In addition, Section
16(a) of the Exchange Act generally requires that owners of more than 10% of a
class of stock that is registered under the Exchange Act, must report changes
in their holdings within 48 hours of an acquisition or disposition of the
securities. If a person or group owns a large block of stock of a publicly traded
company, particularly if that stock is not subject to restrictions on its
purchase and sale on the open market, there is a risk that the person or group
could sufficiently control the market for the stock to drive the stocks
trading price stock up or down, and thereby the undisclosed control group could
reap trading profits at the expense of other public investors. In addition,
Schedule 13D requires owners of a control group of stock to disclose their
intentions with respect to management or control of the company. Far East is
making this announcement to alert the public that an undisclosed control group
might exist. Critical Accounting Policies Managements discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in 18




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accordance with accounting principles generally accepted in the United States
(GAAP). GAAP represents a comprehensive set of accounting and disclosure rules
and requirements, the application of which requires management judgments and
estimates including, in certain circumstances, choices between acceptable GAAP
alternatives. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, if any, at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. We base our
estimates on historical experience and various other assumptions that are
believed to be reasonable under the circumstances. Actual results could differ
from these estimates under different assumptions or conditions. Note 1 to our
consolidated financial statements included elsewhere in this Form 10-KSB,
contains a comprehensive summary of our significant accounting policies. The
following is a discussion of our most critical accounting policies, judgments
and uncertainties that are inherent in our application of GAAP: Accounting for Oil and Gas Properties.Under the successful efforts
method of accounting, we capitalize all costs related to property acquisitions
and successful exploratory wells, all development costs and the costs of
support equipment and facilities. Certain costs of exploratory wells are
capitalized pending determination that proved reserves have been found. Such
determination is dependent upon the results of planned additional wells and the
cost of required capital expenditures to produce the reserves found. All costs
related to unsuccessful exploratory wells are expensed when such wells are
determined to be non-productive; other exploration costs, including geological
and geophysical costs, are expensed as incurred. We recognize gains or losses
on the sale of properties on a field basis. The application of the successful efforts method of accounting requires
managements judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
accounting treatment of the costs incurred. The results from a drilling
operation can take considerable time to analyze, and the determination that
commercial reserves have been discovered requires both judgment and application
of industry experience. Wells may be completed that are assumed to be
productive and actually deliver oil and gas in quantities insufficient to be
economic, which may result in the abandonment of the wells at a later date.
Seismic costs incurred to select development locations within a productive oil
and gas field are typically treated as development costs and capitalized.
Judgment is required to determine when the seismic programs are not within
proved reserve areas and therefore would be charged to expense as exploratory.
The evaluation of oil and gas leasehold acquisition costs requires managements
judgment to estimate the fair value of exploratory costs related to drilling
activity in a given area. Drilling activities in an area by other companies may
also effectively condemn leasehold positions. The successful efforts method of accounting can have a significant impact
on the operational results reported when we enter a new exploratory area in
hopes of finding oil and gas reserves. Seismic costs can be substantial which
will result in additional exploration expenses when incurred. The initial
exploratory wells may be unsuccessful and the associated costs will then be
expensed as dry hole costs and any associated leasehold costs may be impaired. Impairment of unproved oil and gas properties.Unproved leasehold costs
and exploratory drilling in progress are capitalized and are reviewed
periodically for impairment. Costs related to impaired prospects or
unsuccessful exploratory drilling are charged to expense. Our assessment of the
results of exploration activities, commodity price outlooks, planned future 19




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sales or expiration of all or a portion of such leaseholds impacts the
amount and timing of impairment provisions. An impairment expense could result
if oil and gas prices decline in the future, as it may not be economic to
develop some of these unproved properties. As of December 31, 2003, we had
total unproved oil and gas property costs of approximately $2.9 million
consisting of undeveloped leasehold costs of $2.4 million in Montana and
unevaluated exploratory drilling costs of $497,000 incurred in China. Estimates of future dismantlement, restoration, and abandonment costs.
The accounting for future development and abandonment costs changed on January
1, 2003, with the adoption of SFAS 143. SFAS No. 143 requires the fair value of
a liability for an asset retirement obligation to be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The accrual is based on estimates of these
costs for each of our properties based upon the type of production structure,
reservoir characteristics, depth of the reservoir, market demand for equipment,
currently available procedures and consultations with construction and
engineering consultants. Because these costs typically extend many years into
the future, estimating these future costs is difficult and requires management
to make estimates and judgments that are subject to future revisions based on
numerous factors, including changing technology, the political and regulatory
environment and, beginning in 2003, estimates as to the proper discount rate to
use and timing of abandonment. The Company has not acquired any assets that
result in a material future abandonment cost. Therefore, there is no provision
in the accompanying consolidated financial statements. Income taxes.We provide deferred income taxes on transactions which are
recognized in different periods for financial and tax reporting purposes. We
also have deferred tax assets related to operating loss carryforwards. We
periodically assess the probability of recovery of recorded deferred tax assets
based on our assessment of future earnings outlooks by tax jurisdiction and
record valuation allowances when this assessment results in a determination
that recoverability is not likely. Such estimates and determinations are
inherently imprecise because many assumptions are utilized in the assessments
that may prove to be incorrect in the future. At December 31, 2003, we have
recorded a valuation allowance for the full amount of net deferred tax assets. Assessments of functional currencies.Our Chinese operations use the
Chinese Yuan as their functional currency. Management determines the
functional currencies of our subsidiaries based on an assessment of the
currency of the economic environment in which a subsidiary primarily realizes
and expends its operating revenues, costs and expenses. The assessment of
functional currencies can have a significant impact on periodic results of
operations and financial position. We have also adopted SFAS No. 52, Foreign Currency Translation, which
requires that the translation of the applicable foreign currency into U.S.
dollars be performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses resulting
from such translation are included in the consolidated statements of
stockholders equity and comprehensive income. We apply SFAS No. 128, Earnings Per Share, for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common 20




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shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in our earnings. We also apply APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for our stock option plan and have
adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No.
148, Accounting for Stock-Based Compensation. Compensation cost for stock
options granted has been recognized for certain options granted at an exercise
price below market value. Other options granted had an exercise price equal to
or greater than the market value of the underlying common stock on the day of
grant. 
 ITEM 7. FINANCIAL STATEMENTS The Companys financial statements for the fiscal year ended December 31,
2003 are attached hereto beginning on page F-1. 21




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FAR EAST ENERGY CORPORATION
AND SUBSIDIARIES Consolidated Financial Statements December 31, 2003 and 2002
(With Independent Auditors Report Thereon) F-1




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Independent Auditors Report The Board of Directors
Far East Energy Corporation and Subsidiaries We have audited the accompanying consolidated balance sheet of Far East Energy
Corporation and Subsidiaries (a development stage Company) as of December 31,
2003 and 2002 and the related consolidated statements of operations, changes in
stockholders equity and cash flows for the years then ended and for the period
from the date of incorporation on February 4, 2000 to December 31, 2003. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Far
East Energy Corporation and Subsidiaries as of December 31, 2003 and 2002, and
the results of its operations and its cash flows for the years then ended and
for the period from the date of incorporation on February 4, 2000 to December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. F-2




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##### Table of Contents



The Board of Directors
Far East Energy Corporation and Subsidiaries
Page 2 The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has incurred net losses
since its inception and has no established source of revenues. Those
conditions raise substantial doubt about its ability to continue as a going
concern. Managements plans regarding those matters are described in Note 1.
The consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence. As described in Note 17 to the consolidated financial statements, the Company
has restated its December 31, 2002 financial statements to correct the recorded
amount of investment in joint venture and related liabilities. March 12, 2004 Payne Falkner Smith & Jones, P.C. Dallas, Texas F-3




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly EZfoodstop.com) (A Development Stage Company) Consolidated Balance Sheet December 31, 2003 and 2002 20022003
    
    (Restated)ASSETSCurrent:Cash and cash equivalents
    
    $
    2,326,000
    
    
    $
    1,008,000Prepaids and other current assets
    
    
    4,000
    
    
    
    1,000Total current assets
    
    
    2,330,000
    
    
    
    1,009,000Property and equipment, net:
    
    
    3,026,000
    
    
    
    101,000Intangible asset
    
    
    217,000
    
    
    
    175,000Investment in joint venture
    
    
    
    
    
    
    22,000Other
    
    
    
    
    
    
    143,000$
    5,573,000
    
    
    $
    1,450,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    664,000
    
    
    $
    253,000Other liabilities
    
    
    106,000
    
    
    
    250,000Outstanding stock options
    
    
    930,000
    
    
    
    Note payable
    
    
    100,000
    
    
    
    Total current liabilities
    
    
    1,800,000
    
    
    
    503,000Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value, 300,000,000 shares authorized,
56,071,461 and 45,750,500 issued and outstanding at
December 31, 2003 and 2002, respectively
    
    
    57,000
    
    
    
    45,000Additional paid in capital
    
    
    9,595,000
    
    
    
    3,060,000Deficit accumulated during the development stage
    
    
    (5,877,000
    )
    
    
    (2,156,000
    )Accumulated other comprehensive loss
    
    
    (2,000
    )
    
    
    (2,000
    )Total stockholders equity
    
    
    3,773,000
    
    
    
    947,000$
    5,573,000
    
    
    $
    1,450,000
 See accompanying notes to consolidated financial statements. F-4




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly EZfoodstop.com) (A Development Stage Company) Consolidated Statement of Operations For the Years Ended December 31, 2003 and 2002 CumulativeDuringDevelopmentStage
    
    2003
    
    2002Revenues:Interest income
    
    $
    19,000
    
    
    $
    6,000
    
    
    $
    13,000Foreign currency exchange (loss) gain
    
    
    (1,000
    )
    
    
    (2,000
    )
    
    
    1,000Total revenues
    
    
    18,000
    
    
    
    4,000
    
    
    
    14,000Expenses:Geologic and engineering services
    
    
    559,000
    
    
    
    179,000
    
    
    
    380,000Other consulting and professional services
    
    
    531,000
    
    
    
    235,000
    
    
    
    296,000Compensation
    
    
    1,425,000
    
    
    
    829,000
    
    
    
    596,000Stock compensation
    
    
    930,000
    
    
    
    930,000
    
    
    
    Travel
    
    
    909,000
    
    
    
    334,000
    
    
    
    575,000Legal and accounting
    
    
    482,000
    
    
    
    411,000
    
    
    
    66,000Mineral lease rent
    
    
    60,000
    
    
    
    60,000
    
    
    
    Loss on investment in joint venture
    
    
    22,000
    
    
    
    22,000
    
    
    
    Amortization of contract rights
    
    
    58,000
    
    
    
    58,000
    
    
    
    General and administrative
    
    
    919,000
    
    
    
    667,000
    
    
    
    231,000Total expenses
    
    
    5,895,000
    
    
    
    3,725,000
    
    
    
    2,144,000Loss before income taxes
    
    
    (5,877,000
    )
    
    
    (3,721,000
    )
    
    
    (2,130,000
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (5,877,000
    )
    
    
    (3,721,000
    )
    
    
    (2,130,000
    )Deficit-beginning of period
    
    
    
    
    
    
    (2,156,000
    )
    
    
    (26,000
    )Accumulated deficit-end of period
    
    $
    (5,877,000
    )
    
    $
    (5,877,000
    )
    
    $
    (2,156,000
    )Earnings per share-Basic
    
    
    
    
    
    $
    (0.07
    )
    
    $
    (0.05
    )Earnings per share-Diluted
    
    
    
    
    
    $
    (0.06
    )
    
    $
    (0.05
    )
 See accompanying notes to consolidated financial statements. F-5




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly EZFoodstop.com) (A Development Stage Company) Consolidated Statement of Stockholders Deficit For the years ended December 31, 2003, 2002, 2001 and 2000 Par ValueCommon Stock
    
    
    
    
    
    Accumulated
    
    AccumulatedAdditional
    
    During the
    
    Other
    
    
    
    
    
    TotalDate of
    
    Number of
    
    Par
    
    Paid-in
    
    Development
    
    Comprehensive
    
    Comprehensive
    
    StockholdersTransaction
    
    Shares
    
    Value
    
    Capital
    
    Stage
    
    Loss
    
    Loss
    
    EquityShares issued
    
    
    4/00 - 8/00
    
    
    
    2,250,000
    
    
    $
    2,000
    
    
    $
    51,000
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    53,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,000
    )
    
    
    
    
    
    $
    (11,000
    )
    
    
    (11,000
    )Balance December 31, 2000
    
    
    
    
    
    
    2,250,000
    
    
    
    2,000
    
    
    
    51,000
    
    
    
    (11,000
    )
    
    
    
    
    
    
    
    
    
    
    42,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,000
    )
    
    
    
    
    
    $
    (15,000
    )
    
    
    (15,000
    )Balance December 31, 2001
    
    
    
    
    
    
    2,250,000
    
    
    
    2,000
    
    
    
    51,000
    
    
    
    (26,000
    )
    
    
    
    
    
    
    
    
    
    
    27,00018 for 1 Stock Split
    
    
    1/1/2002
    
    
    
    38,250,000
    
    
    
    38,000
    
    
    
    (38,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of stock for cash
    
    
    1/24 - 4/1/02
    
    
    
    5,250,500
    
    
    
    5,000
    
    
    
    3,047,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,052,000Stock issued in connection with acquisition in process
    
    
    12/30/2002
    
    
    
    1,600,000
    
    
    
    2,000
    
    
    
    6,718,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,720,000Stock issued subject to acquisition completion
    
    
    
    
    
    
    (1,600,000
    )
    
    
    (2,000
    )
    
    
    (6,718,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,720,000
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,130,000
    )
    
    
    
    
    
    $
    (2,130,000
    )
    
    
    (2,130,000
    )Other comprehensive loss, net of tax:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000
    )
    
    
    (2,000
    )
    
    
    (2,000
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,132,000
    )
    
    
    Balance December 31, 2002
    
    
    
    
    
    
    45,750,500
    
    
    
    45,000
    
    
    
    3,060,000
    
    
    
    (2,156,000
    )
    
    
    (2,000
    )
    
    
    
    
    
    
    947,000Sales of stock for cash
    
    
    2/12/2003
    
    
    
    60,000
    
    
    
    1,000
    
    
    
    134,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,0004/30 - 10/7/03
    
    
    
    8,628,269
    
    
    
    9,000
    
    
    
    4,939,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,948,000Warrants exercised
    
    
    11/26, 12/4, 12/29/03
    
    
    
    32,692
    
    
    
    
    
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000Conversion of notes payable
    
    
    10/6/2003
    
    
    
    307,692
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Stock issued in completion of
acquisition in process
    
    
    9/30/2003
    
    
    
    1,600,000
    
    
    
    2,000
    
    
    
    1,229,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231,000Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721,000
    )
    
    
    
    
    
    $
    (3,721,000
    )
    
    
    (3,721,000
    )Other comprehensive loss, net of tax:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,721,000
    )Balance December 31, 2003
    
    
    
    
    
    
    56,379,153
    
    
    $
    57,000
    
    
    $
    9,595,000
    
    
    $
    (5,877,000
    )
    
    $
    (2,000
    )
    
    
    
    
    
    $
    3,773,000
 See accompanying notes to consolidated financial statements F-6




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) Consolidated Statement of Cash Flows For the Years Ended December 31, 2003 and 2002 CumulativeDuringDevelopmentStage
    
    2003
    
    2002Cash flows from operating activities:Net loss
    
    $
    (5,877,000
    )
    
    $
    (3,721,000
    )
    
    $
    (2,130,000
    )Adjustments to reconcile net loss to cash
used in operations:Depreciation and amortization
    
    
    84,000
    
    
    
    77,000
    
    
    
    7,000Stock option compensation
    
    
    930,000
    
    
    
    930,000
    
    
    
    Loss on investment in joint venture
    
    
    22,000
    
    
    
    22,000
    
    
    
    Increase in prepaid expense
    
    
    (4,000
    )
    
    
    (3,000
    )
    
    
    (1,000
    )Increase in accounts payable
    
    
    664,000
    
    
    
    411,000
    
    
    
    253,000Increase in other liabilities
    
    
    106,000
    
    
    
    106,000
    
    
    
    Net cash used in operations
    
    
    (4,075,000
    )
    
    
    (2,178,000
    )
    
    
    (1,871,000
    )Cash flows from investing activities:Net acquisitions of intangibles
    
    
    (275,000
    )
    
    
    (207,000
    )
    
    
    (90,000
    )Investment in joint venture
    
    
    (22,000
    )
    
    
    
    
    
    
    Investments in unproved oil and gas properties
    
    
    (1,675,000
    )
    
    
    (1,675,000
    )
    
    
    Investments in property and equipment
    
    
    (146,000
    )
    
    
    (38,000
    )
    
    
    (108,000
    )Net cash used in investing activities
    
    
    (2,118,000
    )
    
    
    (1,920,000
    )
    
    
    (198,000
    )Cash flows from financing activities:Net proceeds from the issuance of notes payable
    
    
    300,000
    
    
    
    300,000
    
    
    
    Proceeds from the sale of common stock
    
    
    8,188,000
    
    
    
    5,083,000
    
    
    
    3,052,000Proceeds from the exercise of warrants
    
    
    33,000
    
    
    
    33,000
    
    
    
    8,521,000
    
    
    
    5,416,000
    
    
    
    3,052,000Effect of exchange rate changes on cash
    
    
    (2,000
    )
    
    
    
    
    
    
    (2,000
    )Increase in cash and cash equivalents
    
    
    2,326,000
    
    
    
    1,318,000
    
    
    
    981,000Cash and
cash equivalents - beginning of period
    
    
    
    
    
    
    1,008,000
    
    
    
    27,000Cash and
cash equivalents - end of period
    
    $
    2,326,000
    
    
    $
    2,326,000
    
    
    $
    1,008,000
 See accompanying notes to
consolidated financial statements. F-7




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) Notes to Consolidated Financial Statements December 31, 2003 and 2002 1. Summary of Significant Accounting Policies Basis of Presentation The financial statements include the accounts of Far East and its wholly owned
subsidiaries, Newark Valley Oil & Gas, Inc. (Newark), Yunnan Huayi Eco-Tech
Consulting Co. Ltd. (Eco Tech), Far East (BVI), Inc. (Far East BVI) and its
Chinese joint venture entity, Guihzou Far East Panjiang Chemical Co. Ltd.
(GFEPC). Far East is organized under the laws of the State of Nevada. Newark
is organized under the laws of the State of Nevada. Far East BVI is organized
under the laws of the British Virgin Islands. Eco Tech is a Chinese company.
GFEPC is a Chinese joint venture. All significant intercompany balances and
transactions have been eliminated in consolidation. The following is a summary of the significant accounting policies used by Far
East Energy Corporation and Subsidiaries (together referred to as the Company)
in the preparation of its financial statements. These accounting policies
conform to generally accepted accounting principles and practices generally
followed within the mining and extraction industries. A description of the
more significant of these policies follows. Business The Company was incorporated as Egoonline.com in the State of Nevada, United
States of America on February 4, 2000 under the Nevada Revised Statutes,
Chapter 78, Private Companies, and changed its name to EZfoodstop.com on April
26, 2000. EZFoodstop.com changed its name to Far East Energy Corporation on
January 10, 2002. The Company is in its development stage and to date its activities have been
limited to initial organization, capital formation, acquisition of assets
(assets being defined as mineral leases and/or production sharing contracts
giving the Company the right to explore for, develop, produce and sell oil and
gas or coalbed methane (CBM)), CBM well drill planning, gas well drilling
program planning and drilling its first exploratory well in the fourth quarter
of 2003. Its current operations are principally focused on developing its coal
bed methane projects located in the Guizhou and Yunnan Provinces of China. F-8




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. The Company has been in the
development stage since its formation on February 4, 2000. The Company has
incurred net losses since its inception and has not established a source of
revenue. In view of these matters, realization of a major portion of the
assets in the accompanying consolidated balance sheet is dependent upon
continued operations of the Company, which in turn is dependent upon the
Companys ability to meet its financing requirements, and the success of its
future operations. Management believes that actions presently being taken to
revise the Companys operating and financial requirements provide the
opportunity for the Company to continue as a going concern. These factors
raise substantial
doubt about the Companys ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Property and Equipment The Company follows the successful efforts method of accounting. Under this
method, the Company capitalizes all costs related to property acquisitions and
successful exploratory wells, all development costs and the costs of support
equipment and facilities. Certain costs of exploratory wells are capitalized
pending determination that proved reserves have been found. All costs related
to unsuccessful exploratory wells are expensed when such wells are determined
to be non-productive; other exploration costs, including geological and
geophysical costs, are expensed as incurred. The Company recognizes gain or
losses on the sale of properties on a field basis. Unproved leasehold costs are capitalized and reviewed periodically for
impairment on a property-by-property basis, considering factors such as
drilling and exploitation plans and lease terms. Costs related to impaired
prospects are charged to expense. An impairment expense could result if oil
and gas prices decline in the future or if downward reserves revisions are
recorded, as it may not be economic to develop some of these unproved
properties. F-9




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) Costs of proved leaseholds are amortized on the unit-of-production method based
on proved reserves on a field basis. The depreciation of capitalized
production equipment and drilling costs is based on the unit-of-production
method using proved developed reserves on a field basis. The cost of unproved properties not being amortized is assessed quarterly to
determine whether such properties have been impaired. In determining whether
such costs should be impaired, we evaluate current drilling results, lease
expiration dates, current oil and gas industry conditions, international
economic conditions, capital availability, foreign currency exchange rates,
political stability in the countries in which the Company has an investment,
and available geological and geophysical information. Any impairment assessed
is charged to expense. Intangible Assets During 2002, the Company fully implemented the provisions of Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142) which, among other things, eliminated the amortization of
goodwill and required at a minimum the Company to perform an annual impairment
test for goodwill. SFAS No. 142 also requires that intangible assets, with a finite life be
amortized over their estimated useful life and be recorded separate and apart
from Goodwill. Intangible assets on the accompanying consolidated financial
statements represent contract rights to explore foreign oil concessions for
coalbed methane (CBM) and are being amortized over three years. Advertising The Company incurred no advertising costs in 2003 or 2002. Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. Environmental Matters Environmental costs are expensed or capitalized depending on their future
economic benefit. Costs that relate to an existing condition caused by past
operations with no future economic benefit are expensed. Liabilities for future
expenditures of a non-capital nature are recorded when future environmental
expenditures and/or remediation are deemed probable and the costs can be F-10




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) reasonably estimated. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value. Net Loss Per Share The Company applies SFAS No. 128, Earnings Per Share for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of the Company. Common stock equivalents are not included in the diluted earnings per share
calculation when their effect is antidilutive. Stock Options The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock option plan and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) as
amended by Statement of Financial Accounting Standards Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of FASB
Statement No. 123 (SFAS No.148). Had compensation cost for these plans been determined consistent with the
provisions of SFAS No. 123, the Companys stock-based compensation expense, net
loss and loss per share would have been adjusted to the following pro forma
amounts: 2003
    
    2002Net loss:As reported
    
    $
    (3,721,000
    )
    
    $
    (2,130,000
    )Deducts: Total stock-based
employee compensation expense
determined under intrinsic
value method for all awards,
net of tax
    
    
    (2,792,000
    )
    
    
    (252,000
    )Pro forma net loss
    
    $
    (6,513,000
    )
    
    $
    (2,382,000
    )Basic loss per share:As reported
    
    $
    0.07
    
    
    $
    0.05Pro forma
    
    
    0.13
    
    
    
    0.05Diluted loss per share:As reported
    
    $
    0.06
    
    
    $
    0.05Pro forma
    
    
    0.11
    
    
    
    0.05
 F-11




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) The Company estimated the fair value of each stock award in 2003 and 2002 at
the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield at 0%; expected
volatility of approximately 50%; risk-free interest rate of 0.9% to 1.4% and
expected lives of five to six years for the options. Foreign Currency Translation Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. The functional currency for the Companys foreign
operations is the applicable foreign currency. The translation of the
applicable foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. The gains or losses resulting from such translation are included in
the consolidated statements of stockholders equity and comprehensive income. There was no aggregate foreign currency translation gain or loss in 2003.
Foreign currency translation resulted in an aggregate loss of $2,000 in 2002. Fair Values of Financial Instruments The following table presents the carrying amounts and estimated fair values of
the Companys financial instruments at December 31, 2003 and 2002. 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In Thousands)Cash and cash equivalents
    
    $
    2,326
    
    
    $
    2,326
    
    
    $
    1,008
    
    
    $
    1,008Other liabilities
    
    
    100
    
    
    
    100
    
    
    
    250
    
    
    
    250Outstanding Stock options
    
    
    930
    
    
    
    930
    
    
    
    
    
    
    
    Notes payable
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    
 The following methods and assumptions were used to estimate the fair value of
the financial instruments summarized in the table above. The carrying values of
accounts receivable, other assets, accounts payable and accrued expenses
included in the accompanying consolidated balance sheets approximated fair
market value at December 31, 2003 and 2002. F-12




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) Cash and cash equivalents The carrying amounts approximate fair value due to the short-term maturity of
the instruments. Notes payable and stock options The carrying amounts of notes payable and stock options approximated their fair
value due to the short-term maturity of the instruments. Other Liabilities and Commitments The fair value of other liabilities and commitments is the present value of
amounts to be paid determined at appropriate current interest rates for
long-term liabilities. Comprehensive Income Comprehensive income is included in the consolidated statement of changes in
stockholders equity and reported for all periods. Comprehensive income
includes both net income and other comprehensive income, which includes the
foreign currency translation adjustments. Reclassification Certain amounts previously reported have been reclassified to conform to the
current format. 2. Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement applies to intangibles and goodwill acquired after June
30, 2001, as well as goodwill and intangibles previously acquired. Under this
statement, goodwill as well as other intangibles determined to have an infinite
life will no longer be amortized; however, these assets will be reviewed for
impairment on a periodic basis. This statement is effective for the Company for
the first quarter in the fiscal year ending December 31, 2002. The adoption of
this statement did not have a material effect on the Companys financial
statements. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of this statement did not have a material effect
on the Companys financial statements. F-13




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) In December 2002, the FASB issued Statement No. 148 (FAS 148), Accounting for
Stock-Based Compensation-Transition and Disclosure. FAS 148 amends FASB
Statement No. 123, Accounting for Stock-Based Compensation to provide three
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
Additionally, it requires more prominent disclosure about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The provisions of FAS 148 are generally effective for fiscal
years ending after December 15, 2003. Management does not believe that the
effects of FAS 148 will have a material impact on its financial statements In April 2003, the FASB issued Statement No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FAS Statement No.133, Accounting for Derivative Instruments and Hedging
Activities. The provisions of FAS 149 did not have a material impact on its
financial statements. In May 2003, the FASB issued Statement No. 150 (FAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which such instruments were previously
classified as equity. The provisions of FAS 150 became generally effective June
15, 2003. The effects of FAS 150 did not have a material impact on its
financial statements. In December 2003, the FASB revised Statement No. 132 (FAS 132), Employers
Disclosures about Pensions and Other Postretirement Benefits. This Statement
improves financial disclosures for defined benefit plans. The change replaces
existing FASB disclosure requirements for pensions. The standard requires that
companies provide more details about their plan assets, benefit obligations,
cash flows, benefit costs and other relevant information. The provisions are
effective for fiscal years ending after December 15, 2003, and for quarters
beginning after December 15, 2003. The effects of the revised FAS 132 did not
have a material impact on its financial statement. 3. Going Concern The Companys financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and the liquidation of liabilities in the normal course
of business. The Company currently has no source of revenue. Management intends to continue financing efforts to support the current and
proposed business operations in China and Montana. The ability of the Company
to continue as a going concern is F-14




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) dependent upon its ability to raise substantial funds for use in development
activities and upon the success of the Companys planned exploration and
development activities. There can be no guarantee of future fundraising
success. The success of exploratory drilling is uncertain.
However, management believes that the Company will continue to be successful in raising the funds
necessary to explore for gas and, assuming success in those exploratory
efforts, to raise the funds necessary for production and development. Management believes that the Company will be able to raise funds sufficient to
assure satisfaction of its operating capital needs/plans and financial
obligations through December 31, 2005. These funds are anticipated to be raised
through private offerings to accredited investors through early 2004. If
Management is not successful in raising the required monies, the Company may
not be able to continue as a going concern. Because the company has acquired an undeveloped natural resource that will
require substantial exploration and development, management does not expect to
generate meaningful revenues until at least 2005. Expenses for the second half
of 2004 will have to be financed through cash flow, which may not yet be
available if production and sales of coalbed methane gas are not significant,
or through future financings of equity and/or debt. 4. Statement of Cash Flows The Company uses the indirect method to present cash flows from operating
activities. Other supplemental cash flow information for the years ended
December 31, 2003 and 2002 is presented as follows: 2003
    
    2002Cash transactions:Cash paid for interest
    
    $
    5,000
    
    
    $
    Cash paid for income taxes
    
    $
    
    
    
    $
    Noncash transactions:Acquisition of contract rights
    
    $
    
    
    
    $
    150,000Net acquisition of mineral leases
    
    $
    1,231,000
    
    
    $
    Issuance of common stock in acquisition
    
    $
    1,231,000
    
    
    $
    Increase in outstanding stock options
    
    $
    930,000
    
    
    $
    Conversion of notes payable to common stock
    
    $
    200,000
    
    
    $
    
 F-15




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) 5. Acquisition Effective December 31, 2002, the Company entered into an agreement to acquire a
significant amount of assets when its wholly owned subsidiary, Far East
Montana, Inc., executed a Plan of Merger (Agreement) with Newark Valley Oil &
Gas, Inc, a Nevada corporation (Newark) wholly owned by North American Oil and
Gas, Inc., (North American). Newark survived the merger and became a wholly
owned subsidiary of the Company. Pursuant to the Agreement, in exchange for
one hundred percent (100%) of the outstanding equity of Newark , the Company
has issued: 1,600,000 restricted common shares and agreed to pay $600,000 in
cash ($100,000 paid at closing, $200,000 to be paid five (5) months after
closing and $300,000 to be paid twelve (12) months after closing), and assumed
liabilities with a fair value of $375,000. As a result of the agreement, the Company will acquire certain undeveloped oil,
gas and mineral rights and interests in approximately 147,535.10 net acres
located in the eastern portion of the state of Montana. Of the total net acres,
approximately 134,530.16 acres constitute federal leases, approximately
5,141.80 acres constitute state of Montana leases, and approximately 7,863.14
acres constitute freehold leases. This acquisition will be accounted for as a
purchase. As such, acquired assets and liabilities will be recorded at their
fair value at the date of acquisition. The agreement contained a contingency that the Company use its best efforts to
secure additional financing in the amount of $2,000,000 within 120 days from
the date of closing (December 31, 2002). In the event such financing was not
secured within 120 days of Closing, the Company would have been in default of
this Agreement and the transaction would have been subject to rescission. In
the event of rescission, the Company would have transferred all of the
outstanding equity interests in Newark to North American. North American would
have returned to the company the 1,600,000 restricted common shares of the
Company. However, North American would have retained any monies tendered
pursuant to the Agreement. Due to the significance and uncertainty of this contingency the effect of the
transaction was not recorded by the Company until the contingency was resolved
in September of 2003. Accordingly, the statement of stockholders equity as of
December 31, 2002 reflects both the issuance of stock and the effect of the
potential contingency. The results of operations of Newark have been included
in the accompanying consolidated financial statements from September 2003
forward. The aggregate acquisition price was $2,409,000, which included cash in the
amount of $600,000, assumption of liabilities of $375,000, ongoing payment of
annual lease expense and legal fees, and 1,600,000 share of the companys
common stock valued at $1,231,000. The value of the restricted stock was
determined based on the market price of the shares on the date of the
agreement. F-16




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) Following is a condensed balance sheet showing the fair values of the assets
acquired and the liabilities assumed as of the date of acquisition: Property and equipment
    
    $
    2,409,000Current liabilities
    
    
    535,000Net assets acquired
    
    $
    1,874,000
 The following pro forma information is based on the assumption that the
acquisition took place as of January 1, 2002: 2003
    
    2002Net Sales
    
    $
    
    
    
    $
    Income before
extraordinary items
    
    $
    (3,881,000
    )
    
    $
    (2,332,000
    )Net income
    
    $
    (3,881,000
    )
    
    $
    (2,332,000
    )Basic Earnings per
share: Income before
extraordinary items
    
    $
    (0.08
    )
    
    $
    (0.05
    )Net income
    
    $
    (0.08
    )
    
    $
    (0.05
    )Diluted earnings per
share: Income before
extraordinary items
    
    $
    (0.06
    )
    
    $
    (0.05
    )Net income
    
    $
    (0.06
    )
    
    $
    (0.05
    )
 F-17




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) 6. Property and Equipment Property and equipment includes the following: 2003
    
    2002Unproven oil and gas properties
    
    $
    2,906,000
    
    
    $
    Furniture and equipment
    
    
    146,000
    
    
    
    108,0003,052,000
    
    
    
    108,000Accumulated depreciation
    
    
    (26,000
    )
    
    
    (7,000
    )$
    3,026,000
    
    
    $
    101,000
 Depreciation expense for the years ended December 31, 2003 and 2002 was
approximately $19,000 and $7,000. 7. Intangible Asset Intangible assets consist of mineral exploration rights acquired during 2002
pursuant to a Production Sharing Contract with the China United Coal Bed
Methane Corporation (CUCBM) and are being amortized over three years. Assigned costs and accumulated amortization at December 31, 2003 and 2002 were
as follows: 2003
    
    2002Gross amounts
    
    $
    275,000
    
    
    $
    175,000Less accumulated amortization
    
    
    58,000
    
    
    
    $
    217,000
    
    
    $
    175,000
 Amortization expense for the year ended December 30, 2003 amounted to
approximately $58,000. There was no amortization expense in 2002 due to the
contract ratification occurring December 31, 2002. Estimated amortization
expense for the next three years is $91,000, $91,000 and $35,000. On January 25, 2002, the Company entered into a Production Sharing Contract
with the China United Coal Bed Methane Corporation (CUCBM), which has exclusive
legal authority over all coal bed methane gas in the Peoples Republic of China
(PRC). Pursuant to the Production Sharing Contract, the Company received the
authority from CUCBM to jointly explore, develop, F-18




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) produce and sell coal bed methane gas in and from a total area of 1,072
unevaluated square kilometers in the Enhong and Laochang areas of Yunnan
Province, PRC. The Production Sharing Contract was subject to formal
ratification by PRCs Ministry of Foreign Trade and Economic Cooperation
(MOFTEC). On December 30, 2002, MOFTEC ratified this Production Sharing
Contract. The contract required the Company to pay $150,000 to CUCBM upon
ratification and an annual payment of $100,000 on the anniversary date for two
subsequent years. The Company has the right to earn a minimum of 60% interest in the joint
venture, with CUCBM retaining the remaining 40%. In the event CUCBM elects to
participate at a level less than 40%, their interest will be reduced
proportionately, increasing the Companys participating interest. As a result of MOFTECs ratification and approval of the Production Sharing
Contract concerning the Enhong and Laochang areas, the Company can commence its
exploration program, which initially involves the drilling of five (5)
exploratory wells and eight (8) pilot development wells. The Company has another Production Sharing Contract of the same date with CUCBM
in the Zhaotong area of Yunnan Province which has not yet been ratified. 8. Investment in Joint Venture On June 5, 2002, the Company executed a Sino-Foreign Joint Venture Contract
(the Contract) with Panjiang Coal-Electricity (Group) Co. Ltd. (Panjiang) to
establish a joint venture limited liability Company (Joint Venture) in the PRC
to extract and use coalmine methane gas from six (6) operating Panjiang
coalmines which cover an area of 120 square kilometers. This contract was
entered into by the Company through its wholly owned subsidiary, Far East BVI. In accordance with certain provisions of the contract during 2003, the Company
notified Panjiang of its intention to withdraw from the project, which
effectively eliminates all assets and obligations associated with the project.
If the Company had withdrawn from the project in 2002 the total assets,
stockholders equity and net income in the accompanying consolidated financial
statements would have been decreased by approximately $22,000. 9. Other Assets Other assets consist of acquisition costs on Newark Valley Oil and Gas. This
included the initial $100,000 paid at closing and initial acquisition costs of
approximately $43,000. These costs are classified as undeveloped oil and gas
properties at December, 31, 2003, and were classified as other assets at
December 31, 2002 pending the outcome of the contingency related to the merger
agreement as more fully described in Note 4. F-19




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES(formerly Ezfoodstop.com) (A Development Stage Company) 10. Notes Payable A loan of $25,000 was made to the company by one of its former Directors,
Ramesh Kalluri on May 1, 2003. The loan was due and payable on May 1, 2004. The
interest rate of the loan was 10% with the accrued interest payable in four
installments on August 1, 2003, on November 1, 2003, on February 1, 2004 and on
May 1, 2004. The Company repaid the loan principal in December 2003. On June 12, 2003, the Company received a loan from Professional Trading
Services in the amount of $100,000. Maturity was on demand, at the option of
the lender, repayable in cash with accrued interest. Interest on the loan was
five (5) percent per year. The loan had a Conversion Privilege, at the
exclusive option of the lender. The lender exercised the conversion feature on
October 6, 2003. The lender received 153,846 restricted shares of common stock
at $0.65 per share and one full warrant exercisable at $1.00. The stock is
restricted for two years from the date of conversion. On July 23, 2003, the Company signed a Loan Agreement with Clarion Finanz AG.
The principle amount of the loan is $200,000. Maturity is on demand, at the option of the lender,
repayable in cash with accrued interest. Interest on the loan is five (5) percent per year.
The loan has a Conversion Privilege, at the exclusive option of the lender. The loan balance
is convertible into FEEC stock at $0.65 per share of common stock and one full warrant for one common share
exercisable at $1.00. Interest payments will be made yearly at the annual maturity date, unless repaid earlier in full.
The lender exercised the conversion feature on October 6, 2003 with regard to $100,000 of the
outstanding balance of the loan. The lender received 153,846 restricted shares of common stock at $0.65 per
share and one full warrant exercisable at $1.00. The stock is restricted for two years from the date of conversion. F-20




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) 11. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Companys deferred tax assets and liabilities as of December 31, 2003
and 2002 are as follows: 2003
    
    2002Deferred tax assets:Net operating loss
    
    $
    1,696,000
    
    
    $
    762,000Intangibles
    
    
    16,000
    
    
    
    Stock compensation
    
    
    316,000
    
    
    
    Total deferred tax assets
    
    
    2,028,000
    
    
    
    762,000Deferred tax liabilities:Bank premises and equipment
    
    
    9,000
    
    
    
    1,000Net deferred tax asset
    
    
    2,019,000
    
    
    
    761,000Less valuation allowance
    
    
    (2,019,000
    )
    
    
    (761,000
    )$
    
    
    
    $
    
 At December 31, 2003 and 2002, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $4,988,000 and $2,240,000,
respectively, which will expire beginning in 2016. At December 31, 2003 and
2002, management believed that the above indicated valuation allowance was
necessary in order to comply with the provisions of Statement of Financial
Accounting Standard No. 109, as discussed in Note 1. Income taxes for financial reporting purposes differed from the amounts
computed by applying the statutory federal income tax rates due to the
recording of the valuation allowance. The net change in the valuation
allowance for the years ended December 31, 2003 and 2002 was an increase of
$1,258,000 and $757,000, respectively. 12. Commitments and Contingencies The Company is periodically involved in legal actions arising from normal
business activities. Management believes that these actions are without merit
or that the ultimate liability, if any, resulting from them will not materially
affect the financial position or results of operations of the Company. The
Company does not anticipate any material losses as a result of commitments and
contingent liabilities. F-21




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) Rent expense for the years ended December 31, 2003 and 2002 was approximately
$36,000 and $49,000, respectively. There are no noncancelable leases with
remaining terms in excess of one year. CUCBM Minimum Exploration Work Commitment Agreement In conjunction with the Production Sharing Agreements, the Company entered into
a Minimum Exploration Work Commitment agreement with CUCBM that requires the
Company to drill five (5) exploratory wells on the Enhong and Laochang fields.
The Company will also be required to drill two (2) exploratory wells on the
Zhaotong field upon ratification of that Production Sharing Contract. When the
Company completes the exploratory wells (Phase I of the Minimum Exploration
Work Commitment Agreement) Management may decide to begin Phase Two wherein the
Company will be required to drill eight (8) pilot development wells on the
Enhong and Laochang fields and four (4) pilot development wells on the Zhaotong
field if that Production Sharing Contract is ratified. The Company had drilled
one exploratory well as of December 31, 2003. Conoco Phillips Memorandum of Understanding On March 19, 2003, the Company entered into a Memorandum of Understanding
(MOU) with a Conoco Phillips subsidiary, Phillips China Inc. (Phillips),
which sets forth the terms and conditions of an agreement for the Company to
acquire a net undivided forty percent (40%) of Phillips seventy percent (70%)
interest in both the Shouyang PSC (near Taiyuan City) and the Qinnan PSC (near
Jincheng and Qinshui). On July 17, 2003, Far East and Phillips signed two
Farmout Agreements on the Qinnan and Shouyang CBM blocks in Shanxi Province,
P.R.C. and also signed an Assignment Agreement on the two blocks. These
agreements formalized the Companys acquisition of an undivided forty percent
(40%) working interest from Phillips (70%) interest. The breakdown is Far East
forty percent (40%), Phillips thirty percent (30%) and CUCBM thirty percent
(30%). Subsequent to December 31, 2003, CUCBM approved the assignment and
forwarded it to the Ministry of Commerce for approval. The Farmout Agreements obligate Far East to fracture stimulate and production
test three exploration wells that were drilled by Phillips with Far East paying
100% of the cost for these tests. Upon the satisfactory completion of the
testing, which will begin if and when Ministry of Commerce ratification is
provided, Far East shall have the option to give notice to extend into the second phase of exploration by drilling three (3) additional wells. The Company
will be responsible for 100% of the costs of the second phase of exploration
and the drilling of three (3) wells. Upon Far East successfully completing the
second phase, Phillips will have the option to elect to either retain its net
undivided thirty percent (30%) participating interest, or take a five percent
(5%) overriding royalty interest (ORRI) on the contractors overall
Participating Interest share under the PSCs. The ORRI will be capped at five
percent (5%) of the current contractors seventy percent (70%) Participating
Interest, or a three and a half percent (3.5%) F-22




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) ORRI on a one hundred percent
(100%) interest basis. Under the terms of the Farmout Agreement, within thirty
(30) days of final approval of the Assignment by the Ministry of Commerce, the
Company must post a $1,000,000 surety bond to act as a work performance
guarantee covering all aspects of the evaluation and work program to test the
three existing wells, which the Company is attempting to obtain now. In the
first six months of 2004, approximately $750,000 is expected to be utilized to
fracture and test the gas flows from the three (3) wells
drilled by ConocoPhillips, cover costs related to CUCBM Joint Management
Committee salary fees, training fees, exploration fees and assistance fees as
outlined in the Production Sharing Contract, and to pay ConocoPhillips $76,052
for CBM equipment and materials associated with the project. Threatened legal actions The Company has received notification that a Director of the Company is
contemplating initiating legal action against the Company for non-payment of
certain expenses, compensation claims and claims of being owed a note payable.
Management does not believe the compensation and note payable claims are valid.
The expenses claimed were approximately $71,000 at December 31, 2003 and are
recorded in the accompanying consolidated financial statements. Securities and Exchange Commission Subpoena The company received a subpoena from the Securities and Exchange Commission
dated September 25, 2003. The SEC has requested documentation relating to Far
Easts board and shareholder meetings, the identities and contact information
of parties related to Far East including its financial institutional
relationships, the recent equity offering conducted by Far East, the MOU with
ConcoPhillips, and the acquisition of property in Montana. On December 16, 2003, the Company received another subpoena from the SEC,
requesting documents relating to the preliminary results of its exploratory
well in the Laochang Block, Yunnan Province, China. The SEC also requested
various documents related to the companys communications with InvesTrend, a
provider of financial intelligence programs. Subsequently, the Company learned from the SEC that the SEC is investigating
whether certain persons or entities from at least January 1, 2000 through
the present may have violated federal securities laws in connection with their
ownership and trading of securities in Far East Energy. The SEC noted that these certain persons or entities may have acquired more
than 5% of common stock in Far East Energy without making this transaction
public in a Schedule 13D filing with the SEC within 10 days after the purchase
is made as required by federal securities laws. The SEC is also looking into
whether anyone may have acquired more than 10% of Far East Energys outstanding
common stock and failed to file reports of purchases and sales as required by
Section 16(a) of the Securities Exchange Act of 1934. In addition, the SEC is F-23




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FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) investigating whether certain persons or entities may have communicated false
and misleading information about Far East Energy. Management does not know of
any acquisitions in excess of 5% of its outstanding shares, except for those
described in previous 13D filings with the SEC. 13. Related Party Transactions In the ordinary course of business, the Company has had transactions, including
borrowings, with its employees, officers, directors and their affiliates. In
the opinion of management, such transactions are on the same terms as for
comparable transactions with unaffiliated persons. Management does not
anticipate such transactions in the future. Through May of 2003, the Company leased its Houston office from an entity owned
in part by an officer and stockholder of the Company. The lease was classified
as an operating lease and
provided for minimum monthly rentals of $3,000 through May 2003. Subsequent
to May 2003 the Company leased office space from an unaffiliated party. 14. Executive Officer Transactions On October 13, 2003, the Company entered into a five-year employment agreement
with Micheal R. McElwrath which was approved by the Board of Directors. Under
the terms of the agreement, Mr. McElwraths annual base salary shall be no less
than $225,000. Mr. McElwrath is also eligible to receive performance bonuses
semi-annually in the amount of not less than $20,000 subject to determination
of specific performance criteria. Mr. McElwrath received a $56,250 signing
bonus and is entitled to participate in all Company benefit plans that are
offered. In addition, Mr. McElwrath received 1,200,000 stock options that vest
over four years, 240,000 of which vest upon the effective date of this
employment agreement. The stock options have an exercise price of $0.65 which
was $0.65 below fair market value on the effective date of the contract.
Accordingly, additional compensation cost of $156,000 has been recognized in
the accompanying consolidated financial statements. The employment agreement
provides for a separation or severance payment of $100,000 if terminated by the
company without cause as defined by the agreement. Either party may provide
thirty-day written notice to terminate this contract. Should the Company
terminate this agreement without cause, Mr. McElwrath is entitled to any shares
which have not yet vested but are scheduled to vest within thirty days of the
written notice of termination. F-24




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) 15. Stockholders Equity Earnings per Share The following table sets forth the computation of basic and diluted loss
per share: 2003
    
    2002(In Thousands, Except Per Share Data)Numerator:Net loss from continuing operations
    
    $
    3,721
    
    
    $
    2,130Numerator for basic
loss per share  loss
available to common stockholders
    
    $
    3,721
    
    
    $
    2,130Numerator for dilutive loss per
share  loss available
to common stockholders
after assumed conversions
    
    $
    3,721
    
    
    $
    2,130Denominator:Denominator for basic loss per
share  weighted average shares
    
    
    50,614
    
    
    
    44,810Effect of dilutive securities:Stock options
    
    
    4,598
    
    
    
    657Warrants
    
    
    4,762
    
    
    
    Convertible notes payable
    
    
    72
    
    
    
    Dilutive potential common shares
    
    
    9,432
    
    
    
    657Denominator for diluted
loss per share  adjusted weighted
average shares and
assumed conversion
    
    
    60,046
    
    
    
    45,467Basic loss per common share
    
    $
    0.07
    
    
    $
    0.05Diluted loss per common share
    
    $
    0.06
    
    
    $
    0.05
 For the years ended December 31, 2003 and 2002 all common stock equivalents
were included in the computation of diluted earnings per share. F-25




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) Stock Split On January 1, 2002, the Board of Directors authorized an 18 for 1 stock split
of the Companys $0.001 par value common stock. As a result of the split,
38,250,000 additional shares were issued, and additional paid-in capital was
reduced by $38,000. All references in the accompanying
financial statements to the number of common shares and per-share amounts since
inception have been restated to reflect the stock split. Private Placement Offerings of Common Stock The Company engaged in an accredited investors offering (Offering) of shares of
its common stock, $0.001 par value (Common Stock), at sixty-five cents ($0.65)
per share. The offering was made pursuant to exemption from registration under
Section 4(2) of the Securities Act of 1933. Beginning January 24, 2002 and concluding on March 19, 2002, pursuant to Rule
506 of the Securities Act of 1933, Common Stock shares of 5,250,500 were sold
to a group of 22 accredited foreign investors and two accredited United States
individuals for a total offering price of $3,412,825. A commission of 11% was
paid to the broker and escrow agent utilized to affect the European sales. The
proceeds from the US investors were not subject to a commission. In February 2003, the Company sold 60,000 common shares to an accredited
investor for $2.50 per share. Net proceeds were $135,000 after a 10%
commission paid to a broker who had an existing relationship with the investor. Beginning April 30, 2003 and concluding on October 7, 2003, the Company
effected private placement sales of 8,628,269 investment units at $0.65 per
unit to approximately ninety-six (96) accredited investors, of whom twelve (12)
reside in the United States or are U.S. citizens. Each investment unit
consists of one share of common stock and a warrant to purchase one share of
common stock at $1.00, over the next two years. The Warrants may be exercised
immediately after issuance until the earlier of (i) two (2) years from the date
of the Warrant Agreement, or (ii) the date upon which the Warrants are redeemed
by the Company (which may occur at $0.01 per share in the event the Company
provides at least thirty days prior written notice, the average closing price
of the common stock for the fifteen days prior to such written notice exceeds
$2.00, and the Company limits its redemption to 25% of the Warrant holders
total purchasable shares per month). Proceeds of $4,948,000 were received net of 10% commissions and broker expenses
of $659,000. Additionally, purchasers exercised 32,692 warrants resulting in
additional proceeds of $32,692. Proceeds from exercise of warrants are not
subject to commissions. This private placement was made pursuant to exemptions from registration under
Sections 3(b) and 4(2) of the Securities Act of 1933 and require the purchaser
hold the stock for one year from the date of purchase. F-26




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) On October 6, 2003 certain lenders exercised their option to covert $200,000 of
their total notes payable of $300,000 to common stock. The lenders received
307,693 restricted shares of common stock at $0.65 per share and one full
warrant exercisable at $1.00. The stock is restricted for two years from the
date of conversion. 16. Stock Options and Warrants On January 29, 2002, the Board of Directors issued non-qualified stock options
to purchase up to 3,990,000 shares of the common stock of the Company. The
vesting schedule is 20% per year
beginning July 29, 2002 and continuing at 20% per year on each January 29. The
options expire January 29, 2009. The options were issued in conjunction with
the recipients entering into a three-year lock-up agreement whereby the
securities cannot be sold or encumbered for three years from the date of the
option grant. The options granted in 2002 were granted to key employees at not less than the
market price of the Companys common stock on the date of grant. The purpose of
the options is to reward directors and key personnel for joining the Company
and to give them an incentive to remain with the Company. At December 31, 2003 and 2002 the Company had outstanding stock options of
5,990,000 and 3,990,000, respectively, including 2,600,000 granted to employees
and directors of the Company in 2003 and 3,390,000 in 2002 at an exercise price
of $0.65. During the year ended December 31, 2003, the Board of Directors granted options
to three employees to purchase up to an additional 2,600,000 shares of the
common stock of the Company. The vesting schedule for the first employee is
20% per year beginning August 8, 2003 and continuing at 20% per year on each
January 29. The options expire January 29, 2009. The vesting schedule for the
second employee is 20% per year beginning October 13, 2003 and continuing at
20% per year on each January 29 or fully vesting upon disability or death. The
options expire January 29, 2009. The third employee is 20% per year beginning
October 13, 2003 and continuing at 20% per year on each October 13. The
options expire October 13, 2013. F-27




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) A summary of option transactions during the years ended December 31, 2003 and
2002 is as follows: 2003
    
    2002Shares Under
    
    Option Price
    
    Shares Under
    
    Option PriceOption
    
    Per Share
    
    Option
    
    Per ShareOutstanding at beginning of year
    
    
    3,990,000
    
    
    $
    0.65
    
    
    
    
    
    
    $
    Granted
    
    
    2,600,000
    
    
    
    0.65
    
    
    
    3,990,000
    
    
    
    0.65Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forefeited
    
    
    (600,000
    )
    
    
    0.65
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    5,990,000
    
    
    
    0.65
    
    
    
    3,990,000
    
    
    
    0.65Options exercisable
    
    
    3,076,000
    
    
    
    
    
    
    
    798,000Weighted average per share
fair value of options granted
during the period with fair
value exercise price at grant
    
    $
    0.65
    
    
    
    
    
    
    $
    0.65Weighted average per share
exercise price of options granted
during the period for less than
fair value
    
    $
    0.65
    
    
    
    
    
    
    
    N/AWeighted average per share
fair value of options granted
during the period at an exercise
price less than fair value
    
    $
    1.51
    
    
    
    
    
    
    
    N/A
 A summary of options outstanding as of December 31, 2003 is as follows: WeightedExercise
    
    Number of Options
    
    Average Remaining
    
    Number of OptionsPrice
    
    Outstanding
    
    Contractual Life
    
    Exercisable$0.65
    
    
    5,990,000
    
    
    5.9 years
    
    
    3,076,000
 F-28




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) All the outstanding options are exercisable at various times in years 2004
through 2013. Stock options granted in 2003 have an exercise price below fair
value at date of grant. The difference between the exercise and fair value at
date of grant is included in the accompanying consolidated financial statements
as stock compensation. In 2002, all non-qualified stock options were granted
at or greater than fair value on the date of grant. Generally, options granted have a seven-year term and
provide for vesting over four years. Warrants From April 30, 2003 through October 7, 2003, the Company effected private
placement sales of 8,628,269 investment units at $0.65 per unit. Each
investment unit consists of one share of common stock and a warrant to purchase
one share of Common stock at $1.00, over the next two years. The Warrants may
be exercised immediately after issuance until the earlier of (i) two (2) years
from the date of the Warrant Agreement, or (ii) the date upon which the
Warrants are redeemed by the Company (which may occur at $.01 per share in the
event the Company provides at least 30 days prior written notice, the average
closing price of the common stock for the 15 days prior to such written notice
exceeds $2.00, and the Company limits its redemption to 25% of the Warrant
holders total purchasable shares per month). On October 6, 2003 lenders exercised their option to covert $200,000 of their
total notes payable of $300,000 to stock. The lender received 307,693
restricted shares of common stock at $0.65 per share and one full warrant
exercisable at $1.00. At December 31, 2003, the Company had outstanding warrants to purchase
8,903,270 shares of the Companys common stock at $0.65 per share. The
warrants become exercisable immediately and expire at two years from the date
of issuance. There were no warrants issued in 2002. 17. Restatement of Financial Statements For the year ended December 31, 2002, the Company recorded an investment in
joint venture of $3,300,000 and related current liabilities of $300,000 and
long-term liabilities of $3,000,000. This represented the amount to be paid to
obtain the right to explore and extract coalbed methane gas under a
Sino-Foreign Joint Venture Contract. The Company has determined that only the
amount that has been paid at December 31, 2002 should be recorded. Therefore,
the asset and related liabilities have been removed from the balance sheet as
of December 31, 2002. This restatement had no effect on the net loss and
related earnings per share. F-29




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##### Table of Contents



FAR EAST ENERGY CORPORATION AND SUBSIDIARIES (formerly Ezfoodstop.com) (A Development Stage Company) 18. Subsequent Events Subsequent to December 31, 2003 certain shareholders exercised an additional
26,000 warrants at an exercise price of $1.00 for 26,000 shares of common
stock. Subsequent to December 31, 2003 the Company began drilling its second
exploratory well. Subsequent to December 31, 2003 the Company initiated redemption of 25% of
warrants issued in the offering that closed October 7, 2003 pursuant to the
warrant agreement. Warrant holders must exercise these warrants by April 10,
2004 when these warrants terminate. Subsequent to December 31, 2003 Clarion Finanz exercised the conversion feature
to convert the remaining $100,000 principal due under the note payable dated
June 23, 2003 to common stock. The lender received 153,846 restricted shares
of common stock at $0.65 per share and one full warrant exercisable at $1.00.
The stock is restricted for two years from the date of conversion. F-30




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##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 10, 2002, the board of directors of the Company appointed Payne,
Falkner, Smith & Jones, and P.C. as the Companys independent auditor for the
fiscal year ended December 31, 2002. This appointment represented a change in
the Companys auditor from De Visser & Gray. This change was prompted by the
move of the Companys principal executive office from Vancouver, B.C., Canada
to Houston, Texas. De Visser & Grays report on the Companys financial
statements for the fiscal years ended 2000 and 2001 did not contain an adverse
opinion or disclaimer of opinion, and had not been modified as to uncertainty,
audit scope, or accounting principles. There were no disagreements with De
Visser & Gray on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. 
 ITEM 8A. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the company carried
out an evaluation under the supervision and with the participation of the
Companys management, including the companys Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosures controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the evaluation, The Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls are effective in
timely alerting them to material information relating to the company (including
its consolidated subsidiaries) required to be included in the Companys
periodic SEC filings. There have been no significant changes in the Companys
internal controls or in other factors which could significantly affect internal
controls subsequent to the date the Company conducted its evaluation. 
 PART III 
 ITEM 9. DIRECTORS & EXECUTIVE OFFICERS Directors, Executive Officers and Control Persons: Name
    
    Age
    
    Position(s) and Office(s)Michael McElwrath
    
    
    52
    
    
    Chairman, Chief Executive Officer, President, Secretary and TreasurerTun Aye Sai
    
    
    57
    
    
    Director, Senior Vice President and Director of China OperationsJawaharlal (Lal) Gondi
    
    
    62
    
    
    DirectorTom Williams
    
    
    51
    
    
    DirectorMark Schaftlein
    
    
    46
    
    
    Chief Financial OfficerAlex Yang
    
    
    58
    
    
    Senior Vice President, Exploration and ProductionGarry Ward
    
    
    46
    
    
    Senior Vice President, Engineering
 Michael McElwrathwas appointed Chief Executive Officer and a director of
the Company on October 9, 2003. On October 17, 2003, Mr. McElwrath was
appointed Chairman of the Board, as well as Secretary and Treasurer. Mr.
McElwrath served 22




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previously as a member of the Board of Advisors. He served as Vice President
of TMP/Hudson Global Resources from 1999 until joining Far East Energy. TMP is
the parent company of Monster.com. He served as Acting Assistant Secretary of
Energy in the first Bush Administration, charged with development of the
nations coal, oil, and gas policies and with management of $2.1 Billion in
programs including the Clean Coal Program, the National Oil and Gas Research
Program, and the Strategic Petroleum Reserve. He served as Deputy Assistant
Secretary for policy for the U.S. Department of Interior in the last year of
the Reagan Administration. Upon leaving the Bush Administration he had stints
as Director of the National Institute for Petroleum and Energy Research and
Director of British Petroleums outsourced exploration and production lab for
the Americas. Mr. McElwrath holds a J.D. from the University of Texas School
of Law, as well as a B.A Honors Program. Tun Aye Saiwas appointed the Director of China Operations and a director
of the Company on December 31, 2001. Mr. Sai has over 30 years of international
mining and exploration experience. He has extensive experience in developing
and managing mining projects in China and Southeast Asia. Mr. Sai has served as
a director and consultant for Golden Pacific Resources since May 1994. He holds
a Bachelor of Engineering degree in mining from Rangoon Institute of
Technology, Rangoon, Burma and a postgraduate diploma in management and
administration from Institute of Economics, Rangoon, Burma. Jawaharlal (Lal) Gondiserved as the Chief Executive Officer and Chairman
of the Company from December 31, 2001 to May 19, 2003, and continues to serve
as a director of the Company. Mr. Gondi is a geologist with an extensive
financial background. He has eleven years of diverse mineral exploration
experience and twenty-three years of corporate finance and investment knowledge
of capital markets. He has served as director, senior officer or principal of a
number of brokerage firms both in Canada & Europe. Mr. Gondi served as senior
executive director of Union Capital, UK, a brokerage firm, from March 1993 to
May 1997. He was self-employed from May 1997 to January 2001 trading public
securities. Mr. Gondi has served on the board of directors and as the president
of BPI Industries since January 2001, became its chairman in August 2001, and
continued to serve in these positions until November 2001. He holds a Masters
of Science degree in applied geology from Andhra University, Waltair, India and
completed several advanced courses in geology and finance in North America. Tom Williamswas appointed as a Director on February 24, 2004. Prior to
this, since February 2001, Mr. Williams was vice president of Noble
Corporation, managing an energy services division. From January 1999 to
February 2001, he was vice president of Maurer Engineering, focusing on
business development for this technology services entity until Maurer
Engineering was acquired by Noble. He also focused on business development for
Westport Technology, a subsidiary of Halliburton, where he served vice
president from 1995 to 1999. Mr. Williams held Senior Executive positions at
the U.S. Department of Energy and Interior under the previous Bush (41)
Administration and has over 24 years of experience in the energy business. He
has a BS in Business from Campbellsville College (1974). Mark Schaftleinwas appointed Interim Chief Financial Officer of the
Company on November 10, 2003. Mr. Schaftlein has been in the consulting and
financial services business for the past 20 years. Mr. Schaftlein is a Managing
Director at the financial consulting firm Ocean Avenue Advisors. He has been
with Ocean Avenue since 2000. He 23




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##### Table of Contents



is a principal in Capital Consulting, Inc. a privately held consulting firm. He
served as Interim Chief Financial Officer at Speedcom Wireless Corporation for
the past 22 months. Mr. Schaftlein has provided consulting and restructuring
advice to clients in a variety of industries with both public and private
companies. Prior to that, he was in the financial services business with a
concentration in mortgage banking for 17 years, eight of which where initially
spent at Citigroup. He is a 1980 graduate of Western Kentucky University with a
degree in business administration. Alex Yangwas appointed as our Senior Vice President, Exploration and
Production in 2002. Dr. Yang was among the pioneers in introducing CBM
exploration and production to China, and assisted CUCBM in its early stages of
formation. During 1993 to 2001, he worked as Chief Geologist and Senior
Consultant for Amoco/Arco/BP CBM projects in the Ordos and Qinshui Basins in
North China, and played a leading role in developing their projects and
operations. He received his Ph.D in Geology from Texas A&M University. Dr. Yang
has 22 years of working experience in Chinas energy industry and universities
(teaching and research). Also, Dr. Yang has established personal/business
relationships with numerous key people in the Chinese government and energy
industry (CUCBM, PetroChina, Sinopec, China Univ. of Mining & Tech., and China
National Administration of Coal Geology), which greatly benefits our project
execution and business development in China. Garry Wardwas appointed as our Senior Vice President, Engineering on
February 1, 2004. Mr. Ward has 23 years work experience in the energy business
evaluating oil and gas properties throughout the United States. Mr. Ward
served as the Reservoir Manager for 3TEC Energy between 1999 and 2003. Between
1986 and 1999, Mr. Ward worked for Floyd Oil Company eventually becoming its
Vice President of Engineering and Production. Floyd Oil was an acquisition
company primarily focused in purchasing and exploiting oil and gas properties
which sold its managed assets to 3TEC Energy in 1999. Mr. Wards experience in
coalbed methane began in 1992 evaluating CBM prospects in the San Juan basin.
In addition to the San Juan Basin CBM properties, Mr. Ward also has been
involved in the Power River CBM since 2003. Mr. Wards experience in developing
and exploiting gas properties should benefit of our China CBM operations. Mr.
Ward has over 20 years of experience in petroleum software development and has
written numerous programs for use in the evaluation of oil and gas assets. Mr.
Ward is a registered professional engineer in the State of Texas, Society of
Petroleum Evaluation Engineers and has been a member of the Society of
Petroleum Engineers since 1978. Mr. Ward holds a M.S. degree in Petroleum
Engineering from the University of Houston and a B.S. degree from the
University of Missouri- Rolla. BOARD OF ADVISORS The following persons serve on our Board of Advisors: Don Gunther Mr. Gunther serves as Executive Consultant to the Board of Directors and
Board of Advisors. He currently sits on the Board of Directors for Williams
Energy Partners, (NYSE:WEG), which is principally owned by Williams Companies,
Inc. (NYSE:WMB). Mr. Gunther has formerly served as Vice Chairman for the
Bechtel Group of companies, served on Bechtels Executive Committee, and served
on Bechtels Board of Directors. 24




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Mr. Gunther was formerly President of Bechtel Petroleum  Chemical and
Industrial Company, and President of Europe, Africa, Middle East, and Southwest
Asia regions. Ben L. Malek Mr. Malek is currently Executive Vice President of Lauren Engineers and
Constructors. Mr. Malek is one of the most highly recognized Process Engineers
in the U.S. Petroleum and Chemical Industry. He has held Executive Management
positions with PCI Engineers, Inc., The Pace Company-Consultants and Engineers
and the Dow Chemical Company. He has been involved in excess of 750 process and
chemicals assignments worldwide. He currently holds patents in a cryogenic
process for recovery of liquid products from off-gases, gasoline vapor emission
recovery and the catalytic reforming of Naphtha. Mr. Malek holds a B.Sc. in
Chemical Engineering from the University of Texas. Professor Wang Wenqian Professor Wang Wenqian has 40 years of experience in mineral processing,
specializing in coal and minerals in China with a specific focus on Yunnan
Province. Professor Wang was a research fellow at the University of British
Columbia in the Mineral Processing Department from 1983 to 1989. He has served
as Vice Director of the Kunming Metallurgical Research Institute in Kunming,
Yunnan Province and currently consults to the Institute on a wide array of
projects. Professor Wang is also Emeritus Professor/Senior Engineer of Kunming
Metallurgy R/D Institute and Kunming University of Science& Tech China
Northeast University. Adam Parkin Adam Parkin has over 25 years of experience in international finance and
investment, also serving as director and fund manager with a number of leading
City of London institutions: American Express Bank, Foreign &Colonial, Govett
and Edmond de Rothschild. He has run award-winning funds and been a leading
innovator in the managed futures industry. Trained as an economist, he holds an
M.Phil. from the University of Oxford and a BA (hons) from the University of
Warwick. He is currently the director of Integra International Limited, an
investment consultancy firm. Compliance with Section 16(a) of the Exchange Act Based solely upon a review of forms 3, 4 and 5 furnished to the Company,
the Company is not aware of any person who at any time during the fiscal year
ended December 31, 2003, was a director, officer, or beneficial owner of more
than ten percent of the Common Stock of the Company, and who failed to file, on
a timely basis, reports required by Section 16(a) of the Securities Exchange
Act of 1934 during such fiscal year, except for Jawaharlal Gondi who purchased
230,000 shares of Common Stock on June 26, 2003, which was reported on a late
Form 4 filing, and Alex Yang who became Senior Vice President of Exploration
and Production in August 2003 and it was reported on a late Form 3 filing. Joe
Coopers estate has not yet filed an updated statement of his ownership,
required as a result of option vesting upon his death in October 2003. This
statement is expected to be filed as soon as possible. We did not have an audit committee in 2002 and 2003 because we did not
have 25




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##### Table of Contents



any independent directors. While we now do have one independent director, we
are in the process of searching for additional independent directors, as well
as an audit committee financial expert. We have not yet adopted a Code of Ethics for Business Conduct but expect
to do so in the very short term. 
 ITEM 10. EXECUTIVE COMPENSATION The following table provides summary information for the years 2003, 2002
and 2001 concerning cash and noncash compensation paid or accrued by the
Company to or on behalf of the Companys chief executive officers during 2003. SUMMARY COMPENSATION TABLES Name and
    
    
    
    
    
    Annual Compensation
    
    Other AnnualPrincipal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    Compensation ($)Michael McElwrath
Chief Executive Officer
    
    
    2003
    
    
    $
    40,312
    
    
    $
    56,250
    
    
    $
    1,500Joe Cooper
President
    
    
    2003
    
    
    $
    128,760
    
    
    $
    25,000
    
    
    $
    2,640Joe Cooper
Vice President
    
    
    2002
    
    
    $
    97,777.94
    
    
    $
    50,000
    
    
    $
    0Bill Jackson
Chief Executive Officer
    
    
    2003
    
    
    $
    102,600
    
    
    
    - 0 -
    
    
    $
    34,831Bill Jackson
President
    
    
    2002
    
    
    $
    88,280.26
    
    
    $
    20,000
    
    
    $
    0Jawaharlal Gondi
Chief Executive Officer
    
    
    2003
    
    
    $
    33,800
    
    
    
    - 0 -
    
    
    $
    2,568Jawaharlal Gondi
Chief Executive Officer
    
    
    2002
    
    
    $
    60,000
    
    
    
    - 0 -
    
    
    
    5,343
 Long Term CompensationAwards
    
    PayoutsLTIP
    
    All OtherName and Principal
    
    
    
    
    
    Restricted Stock
    
    Securities Underlying
    
    Payouts
    
    CompensationPosition
    
    Year
    
    Award(s)($)
    
    Options/SARs(#)
    
    ($)
    
    ($)Michael McElwrath
Chief Executive
Officer
    
    
    2003
    
    
    
    - 0 -
    
    
    
    1,200,000
    (1)
    
    
    - 0 -
    
    
    
    - 0 -Joe Cooper
President
    
    
    2003
    
    
    
    - 0 -
    
    
    
    1,200,000
    (2)
    
    
    - 0 -
    
    
    
    - 0 -
 26




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##### Table of Contents



Joe Cooper
Vice President
    
    
    2002
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -Bill Jackson
Chief Executive
Officer
    
    
    2003
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -Bill Jackson
President
    
    
    2002
    
    
    
    - 0 -
    
    
    
    1,000,000
    (3)
    
    
    - 0 -
    
    
    
    - 0 -Jawaharlal Gondi
Chief Executive
Officer
    
    
    2003
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -
    
    
    
    - 0 -Jawaharlal Gondi
Chief Executive
Officer
    
    
    2002
    
    
    
    - 0 -
    
    
    
    1,000,000
    (3)
    
    
    - 0 -
    
    
    
    - 0 -
  (1)
    
    Represents shares underlying options granted to Mike McElwrath on October
13, 2003 pursuant to his Employment Agreement. These options vest in five
(5) equal allotments with twenty percent (20%) vesting and being
exercisable on October 13, 2003, and the remaining eighty percent (80%)
vesting and being exercisable in four (4) equal annual increments
beginning on October 13, 2004 and continuing until October 13, 2007. All
of these options are exercisable until and expire on October 13, 2013.(2)
    
    Represents shares underlying options granted to Joe Cooper on October 7,
2003 pursuant to an Option Agreement in consideration of his services to
the Company beginning on January 29, 2002. This Option Agreement amended,
replaced and superseded all prior stock option agreements between the
Company and Joe Cooper, including the non-qualified options granted to him
on January 29, 2002. These options were to vest in five (5) equal
allotments. Twenty percent (20%) of the options vested on July 29, 2002,
another 20% vested on January 29, 2003, and the remaining options vested
on Mr. Coopers death on October 29, 2003. These options belong to his
estate.(3)
    
    Represents shares underlying options granted on January 29, 2002. These
options vest in five (5) equal allotments with twenty percent (20%) having
vested on July 29, 2002, another 20% vested on January 29, 2003, and the
remaining sixty percent (60%) vesting and being exercisable in three (3)
equal annual increments beginning on January 29, 2004 and continuing until
January 29, 2006. All of these options are exercisable until and expire
on January 29, 2009. Because these options and the shares underlying
these options were provided as motivation to the optionee individually,
both the option and the underlying shares may not be sold, transferred,
assigned, pledged for a loan, margined, hypothecated or exchanged, except
pursuant to the laws of descent, for a period of two (2) years from the
date of grant. Option/SAR Grants in Last Fiscal Year(Individual Grants)Number of
    
    Percent of TotalSecurities
    
    Options/SARsUnderlying
    
    Granted to
    
    Exercise ofOptions/SARs
    
    Employees In
    
    Base PriceName
    
    Granted
    
    Fiscal Year
    
    ($/Sh)
    
    Expiration DateJoe Cooper
    
    
    1,200,000
    (1)
    
    
    37.5
    %
    
    $0.65/Share
    
    January 29, 2009Mike McElwrath
    
    
    1,200,000
    (2)
    
    
    37.5
    %
    
    $0.65/Share
    
    October 13, 2013
 27




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(1) For more information on these options, see footnote 2 to the above Summary Compensation Table. (2) For more information on these options, see footnote 1 to the above Summary Compensation Table. Number ofUnexercised
    
    Value ofSecurities
    
    UnexercisedUnderlying
    
    In-The-MoneyShares
    
    
    
    Options/SARs At
    
    Option/SARs Atacquired on
    
    
    
    FY-End (#)
    
    FY-End ($)Exercise
    
    Value Realized
    
    Exercisable/
    
    Exercisable/Name
    
    (#)
    
    ($)
    
    Unexercisable
    
    Unexercisable (1)Michael McElwrath
    
    
    
    
    
    
    
    $529,200/CEO
    
    - 0 -
    
    - 0 -
    
    280,000/1,020,000
    
    $1,927,800Joe Cooper
    
    
    
    
    
    
    
    $2,268,000/President
    
    - 0 -
    
    - 0 -
    
    1,200,000/0
    
    $0Bill Jackson
    
    
    
    
    
    
    
    $756,000/CEO
    
    - 0 -
    
    - 0 -
    
    400,000/0
    
    $0Jawaharlal Gondi
    
    
    
    
    
    
    
    $756,000/CEO
    
    - 0 -
    
    - 0 -
    
    400,000/600,000
    
    $1,134,000
 (1) Based upon the closing price of our common stock on April 8, 2004. Employment Agreements and Changes in Chief Executive Officer In 2002, Bill Jackson and Joe Cooper entered into employment agreements to
become our President/Chief Operating Officer and Vice President, respectively. On May 19, 2003, Lal Gondi resigned as Chairman of the Board of Directors,
and as Chief Executive Officer and accepted the honorary title of Chairman
Emeritus. Bill Jackson became our Chief Executive Officer as well as
continuing to serve as our President. On August 18, 2003, Bill Jackson
resigned as Chief Executive Officer, President and a Director of the Company in
order to pursue other business opportunities. In resigning Mr. Jackson did not
express any disagreement with the Company on any matter relating to the
Companys operations, policies or practices. Joe Cooper replaced Jackson as
President. On October 9, 2003, the Board of Directors appointed Michael McElwrath as
our Chief Executive Officer and as a member of the Board of Directors. His
appointment as Chief Executive Officer and a member of the Board was confirmed
during the Annual Meeting of the Shareholders on October 14, 2003. On October
14, 2003, the Board of Directors accepted the resignation of Joe Cooper as
President due to his deteriorating health and Michael McElwrath was appointed
President in his stead. On October 17, 2003, the Board of Directors appointed
McElwrath as Chairman of the Board. McElwrath has an employment agreement with
a five-year term, running through October 13, 2008, for cash compensation and
stock options. On October 29, 2003, Joe Cooper passed away after a courageous battle
against cancer. Joe Coopers leadership and dedication to the Company, as well
as his pivotal 28




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##### Table of Contents



role in procuring its agreement with Conoco Phillips, will always be valued. He
was a true professional and an exceptional man, and he will be missed. Director Compensation The Companys directors are not compensated for attendance at board
meetings, except for appropriate travel expenses. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information concerning the
ownership of the Companys Common Stock as of March 26, 2004, with respect to:
(i) each person known to the Company to be the beneficial owner of more than
five percent of the Companys Common Stock; (ii) all directors; and (iii)
directors and executive officers of the Company as a group. The number of
shares listed as beneficially owned in the following table reflect the forward
stock split of eighteen-for-one (18-for-1) of the Companys issued and
outstanding common stock which became effective on January 1, 2002. As of March
26, 2004, there were 56,682,749 shares of Common Stock issued and outstanding. Amount andNature ofName and Address of
    
    Beneficial
    
    Percent of ClassTitle of Class
    
    Beneficial Owner
    
    Ownership (2)
    
    (3)Executive Officers
and DirectorsCommon Stock
($0.001 par value)
    
    Michael McElwrath
CEO, President, and
Chairman of the
Board
    
    
    280,100
    (4)
    
    <1%Common Stock
($0.001 par value)
    
    Mark Schaftlein
CFO
    
    
    0
    
    
    
    n/aCommon Stock
($0.001 par value)
    
    Tun Aye Sai
Director of China
Operations, Director
    
    
    1,180,000
    (5)
    
    
    2
    %Common Stock
($0.001 par value)
    
    Alex Yang
Sr. VP Exploration
and Production
    
    
    320,000
    (6)
    
    <1%Common Stock
($0.001 par value)
    
    Garry Ward
Sr. VP of Engineering
    
    
    100,000
    (7)
    
    <1%Common Stock
($0.001 par value)
    
    Tom Williams
Director
    
    
    100,000
    (8)
    
    <1%Common Stock
($0.001 par value)
    
    Jawaharlal Gondi
Director
    
    
    7,830,000
    (9)
    
    
    13.8
    %Common Stock
($0.001 par value)
    
    Directors and
Executive Officers
and a Group
(7) individuals
    
    
    9,830,100
    
    
    
    17.4
    %
  (1)
    
    The address of each beneficial is 400 N. Sam Houston Pkwy E.
Suite 205, Houston, Texas 77060.(2)
    
    The number of shares and the percentage of the class
beneficially owned by the 29




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entities above is determined under rules promulgated by the SEC and
the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power
or investment power and also any shares which the individual has the
right to acquire within 60 days through the exercise of any stock
option or other right. The inclusion herein of such shares, however,
does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting
power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as
beneficially owned by such person or entity.(3)
    
    Percentages are based upon the total 56,682,749 outstanding
shares of Common Stock combined with the number of shares of Common
Stock beneficially owned by each person or entity.(4)
    
    Includes 280,000 shares that underlie non-qualified options
that may currently be exercised.(5)
    
    Includes 180,000 shares that underlie non-qualified options
that may currently be exercised.(6)
    
    Includes 320,000 shares that underlie non-qualified options
that may currently be exercised.(7)
    
    Includes 100,000 shares that underlie non-qualified options
that may currently be exercised.(8)
    
    Includes 100,000 shares that underlie non-qualified options
that may currently be exercised.(9)
    
    Includes 4,000,000 shares of Common Stock owned by the Arthi
Trust of which he is the principal beneficial owner of 100% of the
voting stock, and 830,000 shares that underlie non-qualified options
that may currently be exercised. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company formerly sublet its office space in Houston from December 31,
2001, through May 22, 2003, from a related party on terms as good as could have
been obtained from an unrelated third party. The Company has no plans to engage
in future related party transactions. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibits required to be attached by Item 601 of Regulation
S-B are listed in the Index to Exhibits beginning on page 33 of this Form
10-K, which is incorporated herein by reference. (b) Reports on Form 8-K Form 8-K/A was filed on December 24, 2003 announcing the acquisition
of a significant amount of assets when its wholly owned subsidiary, Far
East Montana, Inc., executed a Plan of Merger with Newark Valley Oil &
Gas. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The aggregate fees billed by Payne Falkner Smith & Jones, PC for
professional services rendered for the audit of the Companys annual financial
statements for the fiscal years ended December 31, 2003 and 2002 and for the
reviews of the financial statements 30




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included in the Companys Quarterly Reports on Form 10-QSB for those
fiscal years were $94,432 and $36,062, respectively. Audit-Related Fees Payne Falkner Smith & Jones, PC did not render any professional services
for information technology services relating to financial information systems
design and implementation for the fiscal years ended December 31, 2003 and
December 31, 2002. Tax Fees Payne Falkner Smith & Jones, PC did not render any professional services
for tax compliance, tax advice, or tax planning during 2003. The fees
associated for the preparation of the 2003 and 2002 corporate tax returns were
approximately $7,000, and $6,000 respectively. All Other Fees The aggregate fees billed by Payne Falkner Smith & Jones, PC for services
rendered to the Company, other that the services described under Audit Fees
and Audit-Related Fees and tax fees amount to $0 and $0 for the fiscal years
December 31, 2003 and 2002, respectively. In discharging its oversight
responsibility with respect to the audit process, the Audit Committee of the
Board of Directors obtained from the independent auditors a formal written
statement describing all relationships between the auditors and the Company
that might bear on the auditors independence consistent with Independence
Standards Board Standard No.1, Independence Discussions with Audit
Committees, discussed with the auditors any relationships that may impact
their objectivity and independence and satisfied itself as to the auditors
independence. The Committee also discussed with management and the independent
auditors the quality and adequacy of the Companys internal controls and the
outsourced audit functions, responsibilities, budgeting and staffing. The
Committee reviewed with the independent auditors their audit plans, audit scope
and identification of audit risks. The Committee discussed and reviewed with
the independent auditors all communications required by auditing standards
generally accepted in the United States of America, including those described
in Statement on Auditing Standards No. 61, as amended, Communication with
Audit Committees, and discussed and reviewed the results of the independent
auditors audit of the financial statements. The Committee also discussed the
results of the internal audit examinations. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, this 14th day of April 2004. 31




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##### Table of Contents



Far East Energy Corporation
/s/ Michael R. McElwrath
Michael R. McElwrath, Chief Executive Officer,
President and Chairman of the Board of Directors In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated. Signature
    
    Title
    
    Date/s/ Michael R. McElwrath
Michael R. McElwrath
    
    Chief Executive Officer,
President & Chairman of the Board
of Directors
    
    April 14, 2004Jawaharlal Gondi
    
    Director/s/ Tun Aye Sai
Tun Aye Sai
    
    Director of China Operations
and Director
    
    April 14, 2004/s/ Tom Williams
Tom Williams
    
    Director
    
    April 14, 2004/s/ Mark Schaftlein
Mark Schaftlein
    
    Chief Financial Officer
    
    April 14, 2004
 32




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INDEX TO EXHIBITS EXHIBIT
    
    PAGENO.
    
    NO.
    
    DESCRIPTION3(i)
    
    *
    
    Articles of Incorporation of the Company. (Incorporated by
reference from the Companys Form 10-SB12G, file
number 000-32455, filed on March 16, 2001.)3(ii)
    
    *
    
    Bylaws of the Company. (Incorporated by reference from the Companys
Form 10SB12G, file number 000-32455, filed on March 16, 2001)10(i)
    
    
    
    McElwrath Employment Agreement10(ii)
    
    
    
    List each of the China products sharing contracts and the Conoco Phillips MOU. They may be incorporated by
reference if they have already been filed as part of another filing;
otherwise they must be attached. Montana Merger Agreement (incorporate by
reference).21
    
    
    
    Subsidiaries of Registrant.31(i)
    
    
    
    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.31(ii)
    
    
    
    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.32(i)
    
    
    
    Certification of Chief Executive Officer of Far East Energy Corporation Pursuant to 18 U.S.C. §1350.32(ii)
    
    
    
    Certification of Chief Financial Officer of Far East Energy Corporation Pursuant to 18 U.S.C. §1350.
 * Previously filed as indicated and incorporated herein by reference from the
referenced filings previously made by the Company. 33